<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File No. 0-17810
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2961376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Franklin Street, 25th Floor
Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 261-9000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
No voting stock is held by nonaffiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Page 1 of pages (including exhibits). Exhibit Index on Page .
<PAGE>
PART I
ITEM 1. BUSINESS.
Copley Realty Income Partners 2; A Limited Partnership (the
"Partnership") was organized under the Uniform Limited Partnership Act of the
Commonwealth of Massachusetts on January 16, 1987, to invest primarily in
newly constructed and existing income-producing real properties.
The Partnership was initially capitalized with contributions of $2,000 in
the aggregate from Second Income Corp. (the "Managing General Partner") and
ECOP Associates Limited Partnership (the "Associate General Partner")
(collectively, the "General Partners") and $10,000 from Copley Real Estate
Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a
Registration Statement on Form S-11 (the "Registration Statement") with the
Securities and Exchange Commission on January 26, 1987, with respect to a
public offering of 40,000 units of limited partnership interest at a purchase
price of $1,000 per unit (the "Units") with an option to sell up to an
additional 60,000 Units (an aggregate of $100,000,000). The Registration
Statement was declared effective on April 13, 1987.
The first sale of Units occurred on October 15, 1987, at which time the
Initial Limited Partner withdrew its contribution from the Partnership.
Investors were admitted to the Partnership thereafter at monthly closings;
the offering terminated, and the last group of initial investors was admitted
to the Partnership on April 26, 1988. As of April 26, 1988, a total of 32,997
Units had been sold, a total of 2,206 investors had been admitted as limited
partners (the "Limited Partners") and a total of $32,756,650 had been
contributed to the capital of the Partnership. The remaining 67,003 Units
were de-registered on June 30, 1988.
As of December 31, 1996, the Partnership is invested in three real
property investments. In addition, as described in C. below, a fourth
investment was transferred by a deed in lieu of foreclosure in 1994. The
Partnership has no current plan to renovate, improve or further develop any
of its real property. In the opinion of the Managing General Partner of the
Partnership, the properties are adequately covered by insurance.
The partnership has no employees. Services are performed for the
Partnership by the Managing General Partner and affiliates of the Managing
General Partner.
A. Research and Development Building in La Mirada, California ("La
Mirada") and Research and Development Building in Rancho Dominguez,
California ("Rancho Dominguez").
On November 12, 1987, the Partnership acquired a 70% interest in a joint
venture formed with an affiliate of The Muller Company (the "Developer"). On
November 2, 1988, the Partnership increased its maximum commitment from
$15,850,000 to $20,465,000, all of which the Partnership had contributed to
the capital of the joint venture. As of January 1, 1991, because of the
Developer's inability to fund its share of capital contributions, the
Partnership assumed 100% ownership of the joint venture's assets.
As successor in interest to the joint venture, the Partnership owns
approximately 7.02 acres of land in La Mirada, California and a 135,269
square foot research and development building located thereon. Genisco
Technology Corporation ("Genisco") had initially leased the entire building
for a term of ten years. In the third quarter of 1990, Genisco abandoned the
property, ceased making lease payments, and the joint venture terminated the
lease. The building is now 100% leased to Babcock Engineering, which executed
a lease for 74% of the building in June 1994. The lease was amended in
January 1995 to include the entire facility.
As successor in interest to the joint venture, the Partnership also owns
approximately 6.06 acres of land in Rancho Dominguez, California and a
research and development facility located thereon containing approximately
100,325 square feet, which the joint venture acquired from Genisco. The
entire building is currently leased by Engineered Magnetics, Inc. In 1995,
the lease was amended to include a deferral of rent in exchange for a
two-year extension of the term through April 2004. In the second quarter of
1996, the
<PAGE>
Partnership further amended the lease by shortening the term to eighteen
months, through November 1997, at a reduced rental rate. The Partnership has
the option to terminate the lease with a ninety day notice. In consideration,
the tenant agreed to pay the Partnership a total of $1,600,000, of which
$350,000 remains unpaid at December 31, 1996.
At the time this building was acquired from Genisco, the property
contained hazardous materials and Genisco entered into a contractual
obligation with the joint venture to remediate the environmental
contamination. Genisco breached its contractual obligation to remediate, the
cost of which the Partnership initially estimated to range between $500,000
to $750,000. Based on a revised engineering estimate in 1995, the remediation
cost is now expected to total $267,000, all of which has been recorded in the
Partnership's financial statements.
As part of the two acquisitions, the joint venture also assumed Genisco's
lease obligations related to a 57,000 square foot research and development
building in Cypress, California. When Genisco defaulted under its lease
obligations at the La Mirada property, the joint venture ceased to make rent
payments on behalf of Genisco for the Cypress property. As part of the
settlement described below, the Partnership, as successor in interest to the
joint venture, has no further obligations with respect to this property.
On July 25, 1990, the joint venture filed a lawsuit against Genisco in
the Superior Court of the State of California for the County of Los Angeles.
The joint venture made claims against Genisco for, among other things, breach
of its lease obligations and breach of its obligations to remediate the
environmental problems at the Rancho Dominguez property. The joint venture
succeeded in obtaining a pre-judgment attachment of all of Genisco's assets.
As a result, Sanwa Bank, Genisco's secured lender, reduced its loan to
Genisco by capitalizing a substantial portion of debt and agreed, together
with Genisco, to a settlement agreement as of September 30, 1991. The terms
of the agreement, effective February 3, 1992, are summarized below. The
lawsuit filed against Genisco was dismissed on February 7, 1992.
Under the terms of the settlement, the Partnership, as successor in
interest to the joint venture, received 3,850,000 shares of Series B
Convertible Preferred Stock of Genisco and 350,000 shares of Series C
Convertible Preferred Stock of Genisco. All such preferred stock is
convertible at the Partnership's election to 2,100,000 shares of voting
Common Stock of Genisco. In exchange for this stock, the Partnership released
claims of approximately $1.4 million for the lease default and estimated
claims of $700,000 for environmental damages.
Sanwa Bank agreed to exchange $4.0 million of Genisco's debt for
8,000,000 shares of Series A Convertible Preferred Stock of Genisco. This
preferred stock is convertible at Sanwa Bank's election to 4,000,000 shares
of voting Common Stock of Genisco and, except as explained below, holds a
senior repayment priority to the Series B and C Preferred Stock of Genisco in
the event the assets of Genisco are liquidated. All series of preferred
stock, i.e. Series A, B and C, are otherwise treated identically with respect
to stock rights and preferences, such as those in connection with dividends,
stock splits, reverse stock splits, stock dividends, etc. The Series C
Preferred Stock automatically converts to unsecured subordinated debt of
Genisco upon any default by Genisco in the payment of the remaining $5.0
million of secured debt to Sanwa Bank. The Partnership believes the stock
currently has nominal, if any, value due to the Chapter 11 bankruptcy filing
by Genisco as further discussed below.
With respect to environmental claims, Genisco agreed, in exchange for a
release by the Partnership of such claims, to permit the Partnership to use
Genisco's Environmental Protection Agency identification number for the
purpose of disposing of any contamination and to sign other documentation
requested by the Partnership. If the Partnership (or its successors or
assigns) is ever the subject of any demand, claim or lawsuit by any
regulatory agency or private party, other than Genisco, with respect to these
environmental conditions, Genisco agreed to reimburse the Partnership on
demand for environmental expenses and costs as follows:
<PAGE>
(1) First, a credit against such expenses of the Partnership equal to
the greater of $150,000 or the then fair market value of 800,000
shares of Common Stock of Genisco.
(2) Second, $150,000 in cash.
(3) Third, the next $700,000, two-thirds in cash and one-third in
shares of Common Stock of Genisco based upon the then fair market
value of such shares; and in case there is no public market for
such Common Stock, all in cash.
(4) Fourth, any additional environmental expenses, all in cash.
Payment by Genisco is subject to Sanwa Bank's approval if the loan is
then outstanding.
In September, 1994, Sanwa Bank filed a complaint against Genisco for
breach of promissory note and possession of collateral. Sanwa obtained a
stipulated judgment in its favor on this matter. On February 15, 1995, Sanwa
Bank moved to enforce the stipulated judgment and to liquidate the assets of
Genisco. On February 17, 1995, Genisco filed for protection pursuant to
Chapter 11 of the Bankruptcy Code. The Partnership filed a Proof of Claim
with the Central District Court of California in October 1995 and will
continue to monitor the bankruptcy proceedings. The likelihood of the
Partnership receiving a settlement is low since the liquidation value of
Genisco appears to be significantly less than the amount owed its secured
creditor, Sanwa Bank. The Partnership is also attempting to negotiate an out
of court settlement.
B. Service Center/Industrial Buildings in Atlanta, Georgia ("Medlock
Oaks").
On December 4, 1987, the Partnership acquired a 25.8% interest in a joint
venture formed with Copley Realty Income Partners I; A Limited Partnership,
an affiliate of the Partnership (the "Affiliate") which had a 34.2% interest,
and an affiliate of Hill Properties, Inc. ("Hill"). Effective January 1,
1990, the joint venture agreement was amended to increase the Partnership's
ownership interest in the joint venture to 28.81% and the Affiliate's
interest to 38.19%. As of September 3, 1991, as a result of Hill's inability
to fund its share of capital contributions, the Partnership and the Affiliate
assumed 100% ownership of the property with the Partnership having a 43%
interest. As of December 31, 1996, the Partnership had contributed $1,457,700
to the capital of the joint venture. The joint venture agreement, as amended,
entitles the Partnership and the Affiliate to receive a preferred return on
their respective invested capital at the rate of 10.25% per annum. The joint
venture agreement also entitles the Partnership to receive 43% of cash flow
following payment of the preferred return and 43% of the net proceeds of
sales and financings following return of the Partnership's and the
Affiliate's capital contribution.
The Partnership also committed to make a loan to the joint venture in
the maximum amount of $3,487,300. On October 4, 1989, the Partnership
increased its maximum commitment to $3,745,300, of which $3,658,843 had been
funded as of December 31, 1996. The loan has a term of ten years and is
secured by a first mortgage on the land and buildings. Interest only is
payable monthly at the rate of 10.25% per annum. The loan is prepayable at
any time, subject to payment of a premium designed to give the Partnership
the equivalent yield as if the loan had been outstanding until maturity. The
Affiliate also committed to make a loan to the joint venture in the maximum
amount of $4,622,700, increased to $4,964,700 on October 4, 1989, of which
$4,850,094 had been funded as of December 31, 1996. This loan has the same
terms and conditions as the loan from the Partnership and is pari passu with
the loan from the Partnership.
The Partnership and the Affiliate own approximately 14.9 acres of land in
the Medlock Oaks Business Park in Atlanta, Georgia and five service center
buildings containing 173,916 square feet of space located thereon. As of
December 31, 1996 the five buildings were 97% leased. On February 4, 1997,
the joint venture entered into a contract for sale of this investment at a
price which exceeded the carrying value.
<PAGE>
C. Industrial Buildings in Sacramento, California ("Horn Road").
On February 17, 1988, the Partnership acquired a 60% interest in a joint
venture formed with an affiliate of The Sammis Company (the "Developer") to
purchase approximately 12.26 acres of land improved with eleven industrial
buildings totaling approximately 200,000 square feet in Sacramento,
California. The Partnership fully funded its original commitment of
$3,000,000 to the capital of the joint venture. On September 28, 1990, the
Partnership committed to make an additional contribution of $250,000 to the
joint venture, of which $203,830 was funded as of December 31, 1994. The
Developer did not fund its pro rata share which resulted in the Partnership
making a deficit loan contribution of $40,505 in January, 1993.
On May 11, 1988, the joint venture obtained a $4,600,000 loan from The
First National Bank of Chicago. The loan had an original term of two years,
with a maturity date of May 1, 1990, which was first extended to May 1, 1992
and then to August 1, 1994. The loan amount was reduced to $4,150,000 and the
interest rate was amended so that interest only was payable monthly at the
corporate base rate as announced from time to time by the lender plus .75%.
The loan was secured by a first mortgage of the property. The Partnership
provided a guarantee for a $300,000 paydown of the loan in addition to a
completion guarantee of $4.00 per vacant square foot.
On November 18, 1994, ownership of this property was transferred to the
lender. In conjunction with the transfer, the Partnership paid $395,526 to be
released from the repayment and completion guarantees.
<PAGE>
ITEM 2. PROPERTIES.
The following table sets forth the annual realty taxes for the
Partnership's properties and information regarding tenants who occupy 10% or
more of gross leasable area (GLA) in the Partnership's properties:
<TABLE>
<CAPTION>
ANNUAL
ESTIMATED NUMBER OF SQUARE CONTRACT
1997 TENANTS FEET RENT
ANNUAL WITH 10% OF PER
REALTY OR MORE NAME(S) OF EACH SQ. LEASE RENEWAL
PROPERTY TAXES OF GLA TENANT(S) TENANT FT. EXPIRATIONS OPTIONS
- --------------- ----------- ----------------------- ----------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
R & D Building
in Rancho
Dominguez, CA $ 59,045 1 Engineered 100,325 $ 6.00 11/97 None
Magnetics, Inc.
R & D Building
in La Mirada, Babcock 2-5 Year
CA $ 89,421 1 Engineering 135,269 $ 5.24 5/2004 Options
Service Center/
Industrial
Buildings in
Atlanta, GA $ 88,464 2 Valmet-Sentrol, Ltd. 22,727 $ 7.40 11/1998 None
Allen-Bradley Co. 22,679 $ 7.27 7/1998 None
<CAPTION>
LINE OF
BUSINESS
OF PRINCIPAL
PROPERTY TENANTS
- --------------- ---------------
<S> <C>
R & D Building Aerospace,
in Rancho Electronics
Dominguez, CA Manufacturer
R & D Building Aerospace,
in La Mirada, Electronics
CA Manufacturer
Service Center/ Engineering
Industrial industry
Buildings in measurements &
Atlanta, GA controls
Industrial
automation
products
</TABLE>
<PAGE>
The following table sets forth for each of the last five years the gross
leasable area, occupancy rates, rental revenue and net effective rent for the
Partnership's properties:
<TABLE>
<CAPTION>
NET
GROSS RENTAL EFFECTIVE
LEASEABLE YEAR-END REVENUE RENT
PROPERTY AREA OCCUPANCY RECOGNIZED ($/SF/YR)*
- ---------------------------------------------------------------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
R & D Building in Rancho Dominguez, CA
1992 100,325 100% $1,162,343 $ 11.59
1993 100,325 100% $1,155,131 $ 11.51
1994 100,325 100% $1,171,287 $ 11.67
1995 100,325 100% $1,061,986 $ 10.59
1996 100,325 100% $ 713,135 $ 7.11
R & D Building in La Mirada, CA
1992 135,269 0% $ 0 $ 0.00
1993 135,269 0% $ 0 $ 0.00
1994 135,269 74% $ 454,453 $ 5.76
1995(1) 135,269 100% $ 876,246 $ 6.48
1996 135,269 100% $ 796,736 $ 5.89
Service Center Buildings in Atlanta, GA
1992 173,916 88% $1,044,485 $ 6.71
1993 173,916 98% $1,025,068 $ 6.44
1994 173,916 100% $1,087,696 $ 6.30
1995 173,916 95% $1,101,894 $ 6.63
1996 173,916 97% $1,165,073 $ 6.91
</TABLE>
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* Net Effective Rent calculation is based on average occupancy for the
respective year.
(1) Includes adjustment for property tax reimbursements.
<PAGE>
Set forth below is a schedule of lease expirations for each of the next ten
years for the Partnership's properties based on the annual contract rent in
effect at December 31, 1996:
TENANT AGING REPORT
<TABLE>
<CAPTION>
PERCENTAGE
TOTAL OF
# OF LEASE TOTAL ANNUAL CONTRACT GROSS ANNUAL
PROPERTY EXPIRATIONS SQUARE FEET RENTAL RENTAL*
- -------------------------------------------------------- ------------- ----------------- --------------- ------------
<S> <C> <C> <C> <C>
R & D Building in Rancho Dominguez, CA
1997 1 100,325 $ 601,950 100%
1998 0 0 $ 0 0%
1999 0 0 $ 0 0%
2000 0 0 $ 0 0%
2001 0 0 $ 0 0%
2002 0 0 $ 0 0%
2003 0 0 $ 0 0%
2004 0 0 $ 0 0%
2005 0 0 $ 0 0%
2006 0 0 $ 0 0%
R & D Building in La Mirada, CA
1997 0 0 $ 0 0%
1998 0 0 $ 0 0%
1999 0 0 $ 0 0%
2000 0 0 $ 0 0%
2001 0 0 $ 0 0%
2002 0 0 $ 0 0%
2003 0 0 $ 0 0%
2004 1 135,269 $ 666,960 100%
2005 0 0 $ 0 0%
2006 0 0 $ 0 0%
Service Center Buildings in Atlanta, GA
1997 7 51,498 $ 379,428 31%
1998 6 70,012 $ 514,428 42%
1999 7 41,301 $ 266,520 22%
2000 1 6,073 $ 53,568 5%
2001 0 0 $ 0 0%
2002 0 0 $ 0 0%
2003 0 0 $ 0 0%
2004 0 0 $ 0 0%
2005 0 0 $ 0 0%
2006 0 0 $ 0 0%
</TABLE>
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* Does not include expenses paid by tenant.
<PAGE>
The following table sets forth for each of the Partnership's properties the:
(i) federal tax basis, (ii) rate of depreciation, (iii) method of depreciation,
(iv) life claimed and (v) accumulated depreciation, with respect to each
property or component thereof for purposes of depreciation.
<TABLE>
<CAPTION>
DEPRECIABLE ASSETS
RATE OF LIFE ACCUMULATED
ENTITY / PROPERTY TAX BASIS DEPRECIATION METHOD IN YEARS DEPRECIATION
- --------------------------------------------------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Medlock Oaks
- --------------------------------------------------
Building........................................... $ 5,431,792 5.26% SL 19 $ 2,591,971
Tenant Improvements................................ 209,361 2.56% SL 39 9,979
Tenant Improvements................................ 3,041,330 3.17% SL 31.5 603,853
------------- -----------
Total Depreciable Assets........................... 8,682,483 3,205,803
------------- -----------
La Mirada/Rancho Dominguez
- --------------------------------------------------
Building & Improvements............................ 11,742,575 3.17% SL 31.5 2,830,805
Building........................................... 255,011 2.56% SL 39 19,890
------------- -----------
Total Depreciable Assets........................... 11,997,586 2,850,695
Total Depreciable Assets........................... $ 20,680,069 $ 6,056,498
------------- -----------
------------- -----------
</TABLE>
SL = Straight Line
<PAGE>
Following is information regarding the competitive market conditions for
each of the Partnership's properties. This information has been gathered from
sources deemed reliable. However, the Partnership has not independently verified
the information and, as such, cannot guarantee its accuracy or completeness:
A. Research and Development Building in La Mirada, California
This property is located in Los Angeles County in the city of La Mirada. The
Los Angeles County Industrial Market is the largest industrial market in the
country with a total inventory of 956 million square feet at September 30, 1996.
Overall vacancy was 8.5%, which reflects a decline from the September 30, 1995
and 1994 levels of 8.6% and 10.4%, respectively. La Mirada is part of the
Mid-Counties sub market which contains 97.5 million square feet of industrial
space or 10.2% of the total Los Angeles market. The Mid-Counties inventory
climbed by approximately 775,000 square feet reflecting new build-to-suit and
speculative construction. Submarket vacancy was approximately 7% as of September
30, 1996, up slightly from the 5.7% vacancy recorded as of September 30, 1995,
but still lower than the overall county average.
B. Research and Development Building in Rancho Dominguez, California
This property is located in Los Angeles County in the city of Rancho
Dominguez. The Los Angeles County Industrial Market is the largest industrial
market in the country with a total inventory of 956 million square feet at
September 30, 1996. Overall vacancy was 8.5%, which reflects a decline from the
September 30, 1995 and 1994 levels of 8.6% and 10.4%, respectively. Rancho
Dominguez is part of the South Bay industrial market, the second largest
submarket in Los Angeles, with an inventory of approximately 194 million square
feet of industrial space. As of September 30, 1996, South Bay vacancy was 9.3%,
down from the September 30, 1995 and 1994 levels of 9.5% and 10.9%,
respectively. While the property is currently improved as an R&D facility,
industrial market statistics are appropriate since the building competes with
other industrial buildings given current market conditions. During the past few
years, demand for industrial space in both the R&D and industrial markets has
been soft, due in large part to the consolidation and downsizing by major
defense companies and aerospace related businesses. However, with limited new
speculative construction in 1996, demand is expected to improve.
C. Service Center/Warehouse Building in Atlanta, Georgia
This investment is located in the Metropolitan Atlanta Industrial market
which totaled 294 million square feet at September 30, 1996, an increase of more
than nine million square feet from December 31, 1995, including approximately
6.7 million square feet from speculative constructon. Overall vacancy was
6% at September 30, 1996, a slight increase from the 5.4% recorded at year end
1995. The Northeast/I-85 submarket had a total inventory of approximately 82.5
million square feet, which represents an increase of 4.3 million square feet
from year end 1995. Submarket vacancy increased during the first three quarters
of the year from 4.4% to 5.4% at September 30, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Partnership is not a party to, nor are any of its properties subject to,
any material pending legal proceedings. As described in Item 1 hereof, the
Partnership is a stockholder of Genisco Technology Corporation, which has filed
for protection pursuant to Chapter 11 of the Bankruptcy Code.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no active market for the Units. Trading in the Units is sporadic
and occurs solely through private transactions.
As of December 31, 1996, there were 2,228 holders of Units.
The Partnership's Amended and Restated Agreement of Limited Partnership
dated October 15, 1987, as amended to date (the "Partnership Agreement"),
requires that any Distributable Cash (as defined therein) be distributed
quarterly to the Partners in specified proportions and priorities. There are no
restrictions on the Partnership's present or future ability to make
distributions of Distributable Cash. Cash distributions paid in 1996, or
distributed after year end with respect to 1996, to the Limited Partners as a
group totaled $1,231,800. No cash distributions were paid with respect to 1995.
Cash distributions exceeded net income in 1996 and, therefore, resulted in a
reduction of partners' capital. Cash distributions, however, were significantly
less than cash provided by operations in 1996. Reference is made to the
Partnership's Statement of Changes in Partners' Capital (Deficit) and Statement
of Cash Flows in Item 8 hereof.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR YEAR FOR YEAR FOR YEAR
ENDED FOR YEAR ENDED ENDED FOR YEAR
OR AS OF ENDED OR AS OF OR AS OF ENDED
12/31/96 OR AS OF 12/31/94 12/31/93 OR AS OF
(3) 12/31/95 (2) (1) 12/31/92
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 3,571,724 $ 2,265,542 $ 1,933,320 $ 1,055,619 $ 935,851
Net Income (Loss).................... $ (911,331) $ 1,309,989 $ (481,123) $(4,531,836) $(222,637)
Net Income (Loss) per Limited
Partnership Unit................... $(27.47) $ 39.48 $ (14.50) $(136.49) $(6.71)
Total Assets......................... $ 19,387,293 $ 21,124,057 $ 19,810,159 $ 21,175,621 $ 25,592,080
Total Cash Distributions per Limited
Partnership Unit, including amounts
distributed after year end with
respect to the previous year....... $ 37.50 $ 0.00 $ 7.50 $ 15.00 $ 0.00
</TABLE>
- ------------------------
(1) Net Loss in 1993 includes investment valuation allowances totaling
$4,400,000.
(2) Net Loss in 1994 includes an investment valuation allowance of $1,865,248,
and an extraordinary item--gain from extinguishment of joint venture debt of
$665,248.
(3) Net Loss in 1996 includes investment valuation allowances totaling
$3,350,000 and a lease termination fee of $1,600,000.
<PAGE>
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Partnership completed its offering of units of limited partnership
interest in April 1988, and a total of 32,997 units were sold. The
Partnership received proceeds of $29,379,522, net of selling commissions and
other offering costs, which have been invested in real estate, used to pay
related acquisition costs or retained as working capital reserves. The
Partnership's real estate investments are described in Item 1 hereof.
At December 31, 1996, the Partnership had $5,622,351 in cash, cash
equivalents and short-term investments, of which $414,747 was used for cash
distributions to partners on January 30, 1997; the remainder is being
retained for working capital reserves. The Managing General Partner suspended
operating cash distributions as of the second quarter of 1994 as a result of
the uncertainty concerning the Partnership's future cash flow from the Rancho
Dominguez investment. After the attainment of an adequate level of cash
reserves and the restructuring of the Rancho Dominguez lease during the
second quarter of 1996, the Managing General Partner resumed distributions of
cash from operations, as of the second quarter, at an annualized rate of 5.0%
on a capital contribution of $1,000 per unit. The source of future liquidity
and cash distributions to partners will primarily be cash generated by the
Partnership's real estate and short-term investments.
The Partnership maintains a fund for the purpose of repurchasing limited
partnership units. Two percent of cash flow, as defined, is designated for
this fund which had a balance of approximately $10,087 and $600 at December
31, 1996 and 1995, respectively. Through December 31, 1996, the Partnership
repurchased and retired 179 limited partnership units for an aggregate cost
of $153,771.
The carrying value of real estate investments in the financial statements
at December 31, 1996 is at depreciated cost, or if the investment's carrying
value is determined not to be recoverable through expected undiscounted
future cash flows, the carrying value is reduced to estimated fair market
value. The fair market value of such investments is further reduced by the
estimated cost of sale for properties held for sale. Carrying value may be
greater or less than current appraised value. The appraised value of two of
the Partnership's investments approximated their carrying value at December
31, 1996 after giving effect to 1996 valuation allowances. The appraised
value of the third investment was $300,000 less than its carrying value. The
current appraised value of real estate investments has been estimated by the
Managing General Partner and is generally based on a combination of
traditional appraisal approaches performed by the Partnership's advisor and
independent appraisers. Because of the subjectivity inherent in the valuation
process, the current appraised value may differ significantly from that which
could be realized if the real estate were actually offered for sale in the
marketplace.
Results of Operations
Form of Real Estate Investments
The Rancho Dominguez and La Mirada investments are wholly-owned by the
Partnership. The Medlock Oaks investment is structured as a joint venture
with an affiliate of the Partnership. The Horn Road investment was also
structured as a joint venture.
Operating Factors
At Medlock Oaks, occupancy was 97%, 95% and 100% at December 31, 1996,
1995 and 1994, respectively. In the first quarter of 1996, the Managing
General Partner determined that the Partnership would be unable to recover
the carrying value of this investment and, accordingly, the carrying value
was reduced by $350,000 through a charge to operations. The property is now
under contract for sale, which is expected to
<PAGE>
close in the second quarter of 1997 at an expected sales price, net of sales
costs, which will exceed the carrying value.
The Rancho Dominguez property is 100% leased to a single tenant. During
the second quarter of 1994, the tenant notified the Partnership that it was
experiencing financial difficulty and desired to restructure its lease. A
lease amendment was executed during 1995 which provided for a two-year
extension of the lease and the deferral of 1995 rental payments totaling
$400,000. The deferred amount would be payable based upon the tenant's
achieving a specified level of operating revenues. Since this threshold was
not achieved, the deferral was permanently abated. In December 1995, the
tenant's former parent company, which had guaranteed the lease, paid the
Partnership $275,000 in full satisfaction of its obligations under the
guarantee, which was recorded as rental revenue in 1995. The tenant paid rent
based on the reduced rate through June 30, 1996.
During the second quarter of 1996, the Partnership further amended the
lease. The remaining lease term was shortened to eighteen months (along with
an option for the Partnership to terminate the lease with a ninety day
notice) and the rental rate was reduced, in consideration for which the
tenant agreed to pay two lump sum amounts: one of $1,250,000 which was
received July 1996, and another of $350,000 at the termination of the lease.
The final payment is secured by a letter of credit issued by a California
bank. The lease termination fee has been recognized as revenue in 1996. The
Partnership is actively marketing the building for re-lease. As a result of
new lease terms and current market conditions, the Managing General Partner
determined that the carrying value of the Rancho Dominguez property was
impaired. Accordingly, the carrying value was reduced to estimated fair
market value with an investment valuation allowance of $3,000,000 which was
also recognized in 1996. Environmental remediation continues at this property
due to contamination by a former tenant. The remediation is expected to be
completed during early 1997, the cost of which has been previously accrued.
The La Mirada investment had been vacant from August 1990 through January
1994, and has been fully occupied under a long term lease since January 1,
1995. As a result of the protracted vacancy period and weakness in the local
market which had depressed rental rates, the Managing General Partner
determined in 1993 that the carrying value of the La Mirada building exceeded
its net realizable value. The carrying value was reduced by $3,000,000 in
1993. Due to a further deterioration in market conditions, the carrying value
was further reduced by $1,200,000 in 1994.
In 1992, the Partnership negotiated a two-year extension agreement with
the Horn Road construction lender. As a condition of this extension, the
Partnership agreed to fund any costs associated with leasing vacant space in
excess of remaining funds available from the loan. It also agreed that all
cash flow generated by property operations be used to pay down the loan
balance, with the Partnership providing a guarantee of a $300,000 paydown by
the maturity date. With the approaching maturity on August 1, 1994 and the
increased likelihood that the loan would not be extended on the favorable
terms necessary to preserve the viability of the project, the carrying value
of the investment was reduced to zero at December 31, 1993. In addition, the
Partnership accrued approximately $350,000 for the estimated obligations
under the guarantees. Upon granting a deed in lieu of foreclosure in 1994,
the Partnership reduced the carrying value of its investment to its estimated
market value, which was less than the balance of non-recourse debt and
related guarantees. This resulted in an investment valuation allowance of
$665,248. The Partnership then recognized a gain on the early extinguishment
of the debt of the same amount, which is reported as an extraordinary item in
the Statement of Operations. The Partnership transferred the property to the
lender on November 18, 1994 and paid the guarantee obligations.
The tenants in the La Mirada and Rancho Dominguez properties each
contributed more than 10% from the rental revenue from the Partnership's
investments (collectively 75%) for 1996. The tenants were current with regard
to lease payments at December 31, 1996. Management is not aware of any
impairment in the La Mirada tenant's ability to perform in accordance with
the terms of its lease.
<PAGE>
Investment Results
Excluding the impact of the valuation allowances and the lease
termination fee, investment income was $1,068,825, $1,428,575 and $895,059
for the years ended December 31, 1996, 1995 and 1994, respectively.
Results of operations for the wholly-owned properties declined by
approximately $494,000 in 1996 compared to 1995, primarily due to significant
rental reductions at Rancho Dominguez in 1996, as well as the aforementioned
environmental accrual adjustment in 1995. These decreases were partially
offset by lower depreciation and amortization expenses as a result of the
reduction in carrying value of the real estate assets. Rental revenue at La
Mirada also decreased by approximately $80,000, primarily due to adjustments
to property tax reimbursements in 1995. Operating income generated by the
wholly-owned properties increased by approximately $560,000 in 1995 as
compared to 1994. Rental revenues improved by $359,000 as an increase from
the La Mirada lease-up was partially offset by the lease restructuring at
Rancho Dominguez. Operating expenses declined by approximately $357,000,
primarily due to the environmental accrual adjustment. In addition, 1994
operating expenses included significant charges related to the preparation of
the La Mirada space for occupancy. Depreciation and amortization increased
approximately $156,000 from 1994 to 1995 primarily due to the amortization of
new tenant improvements at the La Mirada building.
Joint venture earnings were $210,976, $180,667 and $203,530 for the years
ended December 31, 1996, 1995 and 1994, respectively, all related to the
Medlock Oaks investment. The increase in 1996 compared to 1995 is primarily
due to increase in the average occupancy rate, in addition to improved rental
rates. The decrease in 1995 compared to 1994 is primarily the result of a
decrease in average occupancy, as well as the write-off of abandoned tenant
improvements during the year.
Interest on cash equivalents and short-term investments increased
approximately $104,000 in 1996 compared to 1995 as a result of an increase in
average investment balances from the receipt of the lump sum termination
payment ($1,250,000) in the third quarter of 1996, partially offset by a
decrease in interest rates. Interest income increased approximately $43,000
in 1995 as compared to 1994 as a result of an increase in the average
investment balance, consistent with the Partnership's objective of increasing
working capital reserves, as well as an increase in short-term rates.
Exclusive of the lease termination payment from Rancho Dominguez,
operating cash flow decreased by approximately $182,000 in 1996 compared to
1995, primarily due to the lease restructuring at Rancho Dominguez, partially
offset by decreases in working capital and distributions from Medlock Oaks.
Cash flow from operations increased approximately $1,500,000 in 1995 compared
to 1994. In addition to the improvement in operating results, this is
primarily due to the payment in 1994 of nearly $650,000 in commissions in
connection with the lease up of La Mirada, and approximately $400,000 in
guarantees associated with the Horn Road loan.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and investor servicing agent fees.
These expenses decreased approximately $11,000 or 10% in 1996 compared to
1995 primarily due to lower professional and legal fees. General and
administrative expenses increased 13% between 1994 and 1995, primarily due to
increased professional fees. The Partnership management fee is 9% of
distributable cash flow from operations after any increase or decrease in
working capital reserves as determined by the Managing General Partner. The
management fee in 1996 resulted from the resumption of operating cash
distributions as of the second quarter. There was no management fee in 1995
since no cash distributions were made to the partners. The management fee
incurred in 1994 relates to cash distributions for the first quarter of 1994.
<PAGE>
Inflation
By their nature, real estate investments tend not to be adversely
affected by inflation. Inflation may result in appreciation in the value of
the Partnership's real estate investments over time, if rental rates and
replacement costs increase. Declines in real property values during the
period of Partnership operations, due to market and economic conditions, have
overshadowed the overall positive effect inflation may have on the value of
the Partnership's investments.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
See the Financial Statements of the Partnership included as a part of
this Annual Report on Form 10-K.
Item 9. Disagreements on Accounting and Financial Disclosure.
The Partnership has had no disagreements with its accountants on any
matters of accounting principles or practices or financial statement
disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) and (b) Identification of Directors and Executive Officers.
The following table sets forth the names of the directors and executive
officers of the Managing General Partner and the age and position held by
each of them as of December 31, 1996, as well as subsequent changes through
January 24, 1997.
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE MANAGING GENERAL PARTNER Age
- ---- --------------------------------------------- ---
<S> <C> <C>
Joseph W. O'Connor President, Chief Executive Officer and Director 50
Daniel J. Coughlin Managing Director and Director 44
Peter P. Twining (1) Managing Director, General Counsel and Director 50
Wesley M. Gardiner, Jr. Vice President 38
Daniel C. Mackowiak Principal Financial and Accounting Officer 45
James J. Finnegan (2) Managing Director, General Counsel and Director 36
</TABLE>
- ------------------
(1) Through January 24, 1997 only
(2) As of January 25, 1997
Mr. O'Connor and Mr. Coughlin have served in an executive capacity since
the organization of the Managing General Partner on January 16, 1987. Mr.
Gardiner and Mr. Twining have served in their capacities since June 1994, and
Mr. Mackowiak has served in his capacity since January 1, 1996. All of these
individuals will continue to serve in such capacities until their successors
are elected and qualify.
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationships.
None.
(e) Business Experience.
The Managing General Partner was incorporated in Massachusetts on
January 16, 1987. The background and experience of the executive officers and
directors of the Managing General Partner are as follows:
<PAGE>
Joseph W. O'Connor has been President, Chief Executive Officer and a
Director of AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley
Real Estate Advisors, Inc., since January, 1982. He was a Principal of AEW
from 1985 to 1987 and has been a Managing Director of AEW since January 1,
1988. He has been active in real estate for 28 years. From June, 1967, until
December, 1981, he was employed by New England Mutual Life Insurance Company
("The New England"), which has been merged with and into Metropolitan Life
Insurance Company, most recently as a Vice President in which position he was
responsible for The New England's real estate portfolio. He received a B.A.
from Holy Cross College and an M.B.A. from Harvard Business School.
Daniel J. Coughlin was a Principal of AEW from 1985 to 1987 and has been
a Managing Director of AEW since January 1, 1988 and a Director of AEW since
July 1994. Mr. Coughlin has been active in financial management and control
for 22 years. From June, 1974 to December, 1981, he was Real Estate
Administration Officer in the Investment Real Estate Department at The New
England. Since January, 1982, he has been in charge of the asset management
division of AEW. Mr. Coughlin is a Certified Property Manager and a licensed
real estate broker. He received a B.A. from Stonehill College and an M.B.A.
from Boston University.
Peter P. Twining was a Managing Director and General Counsel of AEW. As
such, he was responsible for general legal oversight and policy with respect
to AEW and its investment portfolios. Before being promoted to this position
in January 1994, he was a Vice President/Principal and senior lawyer
responsible for assisting in the oversight and management of AEW's legal
operations. Before joining AEW in 1987, he was a senior member of the Law
Department at The New England and was associated with the Boston law firm,
Ropes and Gray. Mr. Twining is a graduate of Harvard College and received his
J.D. in 1979 from Northeastern University.
Wesley M. Gardiner, Jr. joined AEW in 1990 and has been a Vice President
at AEW since January, 1994. From 1982 to 1990, he was employed by Metric
Realty, a nationally-known real estate investment advisor and syndication
firm, as a portfolio manager responsible for several public and private
limited partnerships. His career at AEW has included asset management
responsibility for the company's Georgia and Texas holdings. Presently, as a
Vice President and Team Leader, Mr. Gardiner has overall responsibility for
all the partnerships advised by AEW whose securities are registered under the
Securities and Exchange Act of 1934. He received a B.A. in Economics from the
University of California at San Diego.
Daniel C. Mackowiak has been a Vice President of AEW since January 1989
and has been a Vice President and the Principal Financial and Accounting
Officer of the Managing General Partner since January 1996. Mr. Mackowiak
previously held the offices of Chief Accounting Officer of AEW from January
1989 through April 1994 and Vice President and Principal Financial and
Accounting Officer of the Managing General Partner between January 1989 and
May 1994. From 1975 until joining AEW, he was employed by the public
accounting firm of Price Waterhouse, most recently as a Senior Audit Manager.
He is a certified public accountant and has been active in the field of
accounting his entire business career. He received a B.S. from Nichols
College and an M.B.A. from Cornell University.
James J. Finnegan is the Assistant General Counsel of AEW Capital
Management, L.P. ("AEW Capital Management") and has succeeded Peter Twining
as Managing Director, General Counsel and Director of AEW, a subsidiary of
AEW Capital Management. Mr. Finnegan served as Vice President and Assistant
General Counsel of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW
Capital Management. Mr. Finnegan has over ten years of experience in real
estate law, including seven years of experience in private practice with
major New York City and Boston law firms. Mr. Finnegan also serves as the
firm's securities and regulatory compliance officer. Mr. Finnegan is a
graduate of the University of Vermont (B.A.) and Fordham University School of
Law (J.D.).
<PAGE>
Mr. O'Connor is a director of Evans Withycombe Residential, Inc., a
Maryland corporation organized as a real estate investment trust which is
listed for trading on the New York Stock Exchange. None of the other
directors of the Managing General Partner is a director of a company with a
class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934. All of the directors and officers of the Managing
General Partner also serve as directors and officers of one or more
corporations which serve as general partners of publicly-traded real estate
limited partnerships which are affiliated with the Managing General Partner.
(f) Involvement in Certain Legal Proceedings.
None.
Item 11. Executive Compensation.
Under the Partnership Agreement, the General Partners and their
affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense
reimbursements from the Partnership. See Notes 1 and 6 of Notes to the
Financial Statements.
The following table sets forth the amounts of the fees and reimbursements
of out-of-pocket expenses which the Partnership paid to or accrued for the
account of the General Partners and their affiliates for the year ended
December 31, 1996. Cash distributions to General Partners include amounts
distributed after year-end with respect to 1996.
<TABLE>
<CAPTION>
AMOUNT OF
COMPENSATION AND
RECEIVING ENTITY TYPE OF COMPENSATION REIMBURSEMENT
- ---------------------------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
AEW Real Estate Advisors, Inc. (formerly known Management Fees and Reimbursement of Expenses
as Copley Real Estate Advisors, Inc.) $ 140,057
General Partners Share of Distributable Cash 12,441
New England Securities Corporation Servicing Fee and Reimbursement of Expenses 3,524
-----------
TOTAL $ 156,022
-----------
-----------
</TABLE>
For the year ended December 31, 1996, the Partnership allocated $21,005
of taxable income to the General Partners. See Note 1 of Notes to Financial
Statements for additional information about transactions between the
Partnership and the General Partners and their affiliates.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
No person or group is known by the Partnership to be the beneficial owner
of more than 5% of the outstanding Units at December 31, 1996. Under the
Partnership Agreement, the voting rights of the Limited Partners are limited
and, in some circumstances, are subject to the prior receipt of certain
opinions of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the right to
manage the business of the Partnership is vested exclusively in the Managing
General Partner.
(b) Security Ownership of Management.
The General Partners of the Partnership owned no Units at December 31,
1996.
(c) Changes in Control.
There exists no arrangement known to the Partnership the operation of
which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions.
The Partnership has no relationships or transactions to report other than
as reported in Item 11, above.
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on the
accompanying Index to Financial Statements and Schedule and Financial
Statements Index No. 2 are filed as part of this Annual Report.
(2) Financial Statement Schedule--The Financial Statement Schedule
listed on the accompanying Index to Financial Statements and Schedule is
filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit Index
are filed as a part of this Annual Report and incorporated in this Annual
Report as set forth in said Index.
(b) Reports on Form 8-K. During the last quarter of the year ended
December 31, 1996, the Partnership filed no Current Reports on Form 8-K.
<PAGE>
Copley Realty Income Partners 2;
A Limited Partnership
FINANCIAL STATEMENTS
* * * * * * *
December 31, 1996
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page #
Report of Independent Accountants............
Financial Statements:
Balance Sheet--December 31, 1996 and 1995....
Statement of Operations--For the Years Ended
December 31, 1996, 1995 and 1994...........
Statement of Changes in Partners' Capital
(Deficit)--For the Years Ended December 31,
1996, 1995 and 1994........................
Statement of Cash Flows--For the Years Ended
December 31, 1996, 1995 and 1994...........
Notes to Financial Statements................
Financial Statement Schedule:
Schedule III--Real Estate and Accumulated
Depreciation at December 31, 1996..........
<PAGE>
Report of Independent Accountants
To the Partners
Copley Realty Income Partners 2;
A Limited Partnership
In our opinion, based upon our audits and the reports of other auditors
for the years ended December 31, 1996, 1995 and 1994, the financial
statements listed in the accompanying index present fairly, in all material
respects, the financial position of Copley Realty Income Partners 2; A
Limited Partnership (the "Partnership") at December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Second Income Corp., the Managing General Partner of the Partnership; our
responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of the Partnership's
Medlock Oaks joint venture investee for the years ended December 31, 1996,
1995 and 1994 which results of operations are recorded using the equity
method of accounting in the Partnership's financial statements. Equity in
joint venture income for Medlock Oaks was $210,976, $180,667 and $203,530 for
the years ended December 31, 1996, 1995 and 1994, respectively. We also did
not audit the financial statements of MCV III, a wholly-owned property, for
the years ended December 31, 1996 and 1995, which statements reflect
operating income of $1,295,352 and $1,898,876, respectively. Those statements
were audited by other auditors whose reports thereon have been furnished to
us, and our opinion expressed herein, insofar as it relates to the amounts
included for the equity in joint venture income for Medlock Oaks for the
years ended December 31, 1996, 1995 and 1994, and for the operating income
for MCV III for the years ended December 31, 1996 and 1995, is based solely
on the reports of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by the Managing General
Partner, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors for the years ended
December 31, 1996, 1995 and 1994 provide a reasonable basis for the opinion
expressed above.
As discussed in Note 2 to the financial statements, the Partnership changed
its method of accounting for impaired long-lived assets and for long-lived
assets to be disposed of effective January 1, 1995 in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.''
/s/ Price Waterhouse LLP
- ------------------------
Boston, Massachusetts
March 24, 1997
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Assets
Real estate investments:
Property, net.................................................. $ 10,221,007 $ 13,422,112
Joint ventures................................................. 3,543,935 4,085,073
------------- -------------
13,764,942 17,507,185
Cash and cash equivalents...................................... 3,560,038 1,934,364
Short-term investments......................................... 2,062,313 1,682,508
------------- -------------
$ 19,387,293 $ 21,124,057
------------- -------------
------------- -------------
Liabilities and Partners' Capital
Accounts payable............................................... $ 51,224 $ 70,332
Accrued management fee......................................... 41,019 --
------------- -------------
Total liabilities.............................................. 92,243 70,332
------------- -------------
Partners' capital (deficit):
Limited partners ($l,000 per unit, 100,000 units authorized;
32,818 and 32,848 units, respectively, issued and
outstanding)................................................. 19,392,367 21,133,635
General partners............................................... (97,317) (79,910)
------------- -------------
Total partners' capital........................................ 19,295,050 21,053,725
------------- -------------
$ 19,387,293 $ 21,124,057
------------- -------------
------------- -------------
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Investment Activity
Property rentals........................................................ $ 1,509,871 $ 1,938,231 $ 1,579,543
Depreciation and amortization........................................... (688,380) (797,612) (641,549)
Property operating expenses............................................. (214,519) (39,355) (396,712)
------------ ------------ ------------
606,972 1,101,264 541,282
Joint venture earnings.................................................. 210,976 180,667 203,530
Lease termination fee................................................... 1,600,000
Investment valuation allowances......................................... (3,350,000) -- (1,865,248)
------------ ------------ ------------
Total real estate operations............................................ (932,052) 1,281,931 (1,120,436)
Interest on cash equivalents and short-term investments................. 250,877 146,644 104,050
------------ ------------ ------------
Total investment activity............................................... (681,175) 1,428,575 (1,016,386)
------------ ------------ ------------
Portfolio Expenses
General and administrative.............................................. 107,099 118,586 105,363
Management fee.......................................................... 123,057 -- 24,622
------------ ------------ ------------
230,156 118,586 129,985
------------ ------------ ------------
Income (loss) before extraordinary item................................. (911,331) 1,309,989 (1,146,371)
Extraordinary item-
Gain from extinguishment of joint venture debt.......................... -- -- 665,248
------------ ------------ ------------
Net Income (Loss)....................................................... $ (911,331) $ 1,309,989 $ (481,123)
------------ ------------ ------------
------------ ------------ ------------
Per unit amounts:
Income (loss) before extraordinary item................................. $ (27.47) $ 39.48 $ (34.55)
Extraordinary item- Gain from extinguishment of joint venture debt...... -- -- 20.05
------------ ------------ ------------
Net income (loss)....................................................... $ (27.47) $ 39.48 $ (14.50)
------------ ------------ ------------
------------ ------------ ------------
Cash distributions per limited partnership unit outstanding for the
entire year........................................................... $ 25.00 $ -- $ 15.00
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of limited partnership units outstanding........ 32,848 32,848 32,853
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
GENERAL LIMITED GENERAL LIMITED GENERAL LIMITED
PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS PARTNERS
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year............. $ (79,910) $ 21,133,635 $ (93,010) $ 19,836,746 $ (83,219) $ 20,816,114
Cash distributions....................... (8,294) (821,200) -- -- (4,980) (492,990)
Repurchase of limited partnership
units.................................. -- (17,850) -- -- -- (10,066)
Net income (loss)........................ (9,113) (902,218) 13,100 1,296,889 (4,811) (476,312)
---------- ------------- ---------- ------------- ---------- -------------
Balance at end of year................... $ (97,317) $ 19,392,367 $ (79,910) $ 21,133,635 $ (93,010) $ 19,836,746
---------- ------------- ---------- ------------- ---------- -------------
---------- ------------- ---------- ------------- ---------- -------------
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ (911,331) $ 1,309,989 $ (481,123)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 688,380 797,612 641,549
Gain from extinguishment of joint venture debt.......................... -- -- (665,248)
Investment valuation allowances......................................... 3,350,000 -- 1,865,248
Decrease in estimated obligations under debt guarantees................. -- -- (349,329)
Equity in joint venture net income...................................... (210,976) (180,667) (203,530)
Cash distributions from joint ventures.................................. 396,881 319,499 297,494
Decrease (increase) in investment income receivable..................... 3,355 (18,703) 7,051
Increase in deferred leasing costs...................................... -- (34,618) (645,619)
Increase (decrease) in operating liabilities............................ 21,912 3,909 (26,974)
Increase in property working capital.................................... (482,043) (408,517) (180,504)
------------ ------------ -----------
Net cash provided by operating activities............................... 2,856,178 1,788,504 259,015
------------ ------------ -----------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net...................... (383,160) (1,200,110) 1,641,457
Investment in property.................................................. -- (214,903) (1,129,385)
------------ ------------ -----------
Net cash provided by (used in) investing activities..................... (383,160) (1,415,013) 512,072
------------ ------------ -----------
Cash flows from financing activities:
Distributions to partners............................................... (829,494) -- (497,970)
Repurchase of limited partnership units................................. (17,850) -- (10,066)
------------ ------------ -----------
Net cash used in financing activities................................... (847,344) -- (508,036)
------------ ------------ -----------
Net increase in cash and cash equivalents............................... 1,625,674 373,491 263,051
Cash and cash equivalents:
Beginning of year....................................................... 1,934,364 1,560,873 1,297,822
------------ ------------ -----------
End of year............................................................. $ 3,560,038 $ 1,934,364 $ 1,560,873
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS
GENERAL
Copley Realty Income Partners 2; A Limited Partnership (the "Partnership")
is a Massachusetts limited partnership organized for the purpose of investing
primarily in newly constructed and existing income-producing real properties.
The Partnership commenced operations in October 1987, and acquired the three
real estate investments it currently owns prior to the end of 1988. The
Partnership intended to dispose of its investments within nine years of their
acquisition, and then liquidate; however, the Managing General Partner expects
to extend the investment period at least into 1998, having determined it to be
in the best interest of the limited partners.
The Managing General Partner of the Partnership is Second Income Corp., a
wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly
known as Copley Real Estate Advisors, Inc. (Copley). The associate general
partner is ECOP Associates Limited Partnership, a Massachusetts limited
partnership, the general partners of which are managing directors of AEW and/or
officers of the Managing General Partner. Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by AEW
pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment Companies,
Limited Partnership ("NEIC"), a publicly traded master limited partnership,
acquired certain assets subject to then existing liabilities from Aldrich
Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW
operations"). Simultaneously, a new entity, AEW Captital Management L.P., was
formed into which NEIC contributed its interest in Copley and its affiliates. As
a result, the AEW operations were combined with Copley to form the business
operations of AEW Capital Management, L.P. This transaction is not expected to
have a material effect on the operations of the Partnership.
Prior to August 30, 1996, New England Mutual Life Insurance Company ("The
New England") was NEIC's principal unit holder and owner of all of the
outstanding stock of NEIC's general partner. On August 30, 1996, The New England
merged with and into Metropolitan Life Insurance Company ("Met Life"). Met Life
is the surviving entity and, therefore, through a wholly-owned subsidiary,
became the owner of the units of partnership interest previously owned by The
New England and of the stock of NEIC's general partner. This transaction is not
expected to have a material effect on the operations of the Partnership.
MANAGEMENT
AEW, as advisor, is entitled to receive stipulated fees from the Partnership
in consideration of services performed in connection with the management of the
Partnership and acquisition and disposition of Partnership investments in real
property. Partnership management fees are 9% of distributable cash from
operations, as defined, before deducting such fees. AEW is also reimbursed for
expenses incurred in connection with administering the Partnership ($17,000 in
1996, $18,938 in 1995, and $9,277 in 1994). Acquisition fees were based on 3% of
the gross proceeds from the offering and were paid at the time commitments were
initially funded. Disposition fees are generally 3% of the selling price of the
property, but are subject to the prior receipt by the limited partners of their
capital contributions plus a stipulated return thereon.
New England Securities Corporation, an indirect subsidiary of Met Life, is
engaged by the Partnership to act as its unit holder servicing agent. Fees and
out-of-pocket expenses for such services totaled $3,524, $3,171 and $4,456 in
1996, 1995 and 1994, respectively.
<PAGE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Managing General Partner to make
estimates affecting the reported amounts of assets and liabilities, and of
revenues and expenses. In the Partnership's business, certain estimates require
an assessment of factors not within management's control, such as the ability of
tenants to perform under long-term leases and the ability of the properties to
sustain their occupancies in changing markets. Actual results, therefore, could
differ from those estimates.
REAL ESTATE JOINT VENTURES
Investments in joint ventures, including loans made to joint ventures, which
are in substance real estate investments, are stated at cost plus (minus) equity
in undistributed joint venture income (losses). Allocations of joint venture
income (losses) were made to the Partnership's venture partners as long as they
had substantial economic equity in the project. Economic equity is measured by
the excess of the appraised value of the property over the Partnership's total
cash investment plus accrued preferential returns and interest thereon. For its
one remaining joint venture investment, the Partnership records its ownership
share of the operating results, after the elimination of all inter-entity
transactions, since its venture partner, an affiliate of the Partnership, has
substantial economic equity in the project. Joint ventures are consolidated with
the accounts of the Partnership if, and when, the venture partner no longer
shares in the control of the business.
PROPERTY
Property includes land, buildings and improvements, which are stated at cost
less accumulated depreciation, plus other operating net assets. The
Partnership's initial carrying value of a property previously owned by a joint
venture equals the Partnership's carrying value of the predecessor investment on
the conversion date.
CAPITALIZED COSTS, DEPRECIATION AND AMORTIZATION
Maintenance and repair costs are expensed as incurred; significant
improvements and renewals are capitalized. Depreciation is computed using the
straight-line method based on the estimated useful lives of the buildings and
improvements. Leasing costs are also capitalized and amortized over the related
lease terms.
Acquisition fees have been capitalized as part of the cost of real estate
investments. Amounts not related to land are being amortized using the
straight-line method over the estimated useful lives of the underlying real
property.
Certain tenant leases provide for rent concessions at the beginning of the
lease terms and for rental increases over the lease terms. Rental revenue is
being recognized on a straight-line basis over the lease terms.
<PAGE>
REALIZABILITY OF REAL ESTATE INVESTMENTS
The Partnership considers a real estate investment to be impaired when it
determines the carrying value of the investment is not recoverable through
expected undiscounted cash flows from the operations and disposition of the
property. The impairment loss is based on the excess of the investment's
carrying value over its estimated fair market value. For investments being
held for sale, the impairment loss also includes estimated costs of sale.
Property held for sale is not depreciated during the holding period. Prior to
the adoption of Statement of Financial Accounting Standards No.121 as of
January 1, 1995, the reduction in the investment carrying value was to
estimated net realizable value.
The carrying value of an investment may be more or less than its current
appraised value. At December 31, 1996, the appraised values of two investments
approximated their respective carrying values after giving effect to 1996
valuation allowances. The appraised value of the third investment was $300,000
less than its carrying value. At December 31, 1995, the aggregate carrying value
of all of the Partnership's investments exceeded their aggregate appraised value
by $1,700,000.
The current appraised value of real estate investments has been determined
by the Managing General Partner and is generally based on a combination of
traditional appraisal approaches performed by the Partnership's advisor and
independent appraisers. Because of the subjectivity inherent in the valuation
process, the current appraised value may differ significantly from that which
could be realized if the real estate were actually offered for sale in the
marketplace.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are stated at cost, plus accrued interest. The Partnership
considers all highly liquid debt instruments purchased with a maturity of ninety
days or less to be cash equivalents; otherwise, they are classified as
short-term investments.
The Partnership has the positive intent and ability to hold all short-term
investments to maturity; therefore, short-term investments are carried at cost,
plus accrued interest, which approximates market value. At December 31, 1996 and
1995, all investments are in commercial paper with less than three months and
four months, respectively, remaining to maturity.
INCOME TAXES
A partnership is not liable for income taxes and, therefore, no provision
for income taxes is made in the financial statements of the Partnership. A
proportionate share of the Partnership's income is reportable on each partner's
tax return.
PER UNIT COMPUTATIONS
Per unit computations are based on the weighted average number of units of
limited partnership interest outstanding during the year. The actual per unit
amount will vary by partner depending on the date of admission to, or withdrawal
from, the Partnership.
<PAGE>
NOTE 3--INVESTMENT IN PROPERTY
On November 12, 1987, the Partnership entered into a joint venture agreement
with an affiliate of The Muller Company. The venture acquired an industrial
building (Rancho Dominguez, California) and a research and development building
(La Mirada, California). The Partnership contributed $20,465,000 to the venture.
Effective June 30, 1991, the investment was restructured to a wholly-owned
property as a result of the venture partner's inability to proportionately fund
cash deficits.
THE FOLLOWING IS A SUMMARY OF THE PARTNERSHIP'S INVESTMENT IN PROPERTY:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Land........................................................... $ 7,339,344 $ 7,339,344
Buildings and improvements..................................... 12,235,440 12,235,440
Accrued lease termination fee.................................. 350,000 --
Accumulated depreciation....................................... (3,466,160) (2,971,596)
Investment valuation allowance................................. (7,200,000) (4,200,000)
------------- -------------
9,258,624 12,403,188
Other net assets............................................... 1,040,472 1,181,139
Accrued environmental clean-up costs........................... (78,089) (162,215)
------------- -------------
$ 10,221,007 $ 13,422,112
------------- -------------
------------- -------------
</TABLE>
The buildings are being depreciated over 30 years. Tenant improvements are
being depreciated over the life of the underlying leases. Aggregate minimum
future rental payments for the two properties are as follows: 1997- $1,342,516,
1998- $709,728, 1999- $760,429, 2000- $796,644, 2001- $801,879, thereafter -
$2,077,038.
As a result of the protracted vacancy period and reduced expectations for
rental rates over the Partnership's investment horizon, the Managing General
Partner determined during 1993, and further in 1994, that the carrying value of
the La Mirada investment exceeded its estimated net realizable value.
Consequently, the carrying value was reduced by $3,000,000 and $1,200,000,
respectively.
The tenant in the Rancho Dominguez building has been experiencing financial
difficulty, as a result of which the Partnership granted a rent abatement of
$400,000 in 1995. In December 1995, the tenant's former parent company paid the
Partnership $275,000 pursuant to its guarantee of a portion of the lease
obligation. In the second quarter of 1996, the Partnership amended the lease.
The remaining lease term was shortened to eighteen months (along with an option
for the Partnership to terminate the lease with a ninety day notice) and the
rental rate was reduced, in consideration for which the tenant agreed to pay two
lump sum amounts: one for $1,250,000, which was received in July 1996, and
another for $350,000 at the termination of the lease. The final payment is
secured by a letter of credit issued by a California bank. This lease
termination fee has been recognized as revenue in 1996. As a result of the new
lease terms and current market conditions, the Managing General Partner
determined that the carrying value of the Rancho Dominguez property was
impaired. Accordingly, the carrying value was reduced to estimated fair market
value with an investment valuation allowance of $3,000,000 which was also
recognized in 1996.
An environmental remediation project has been ongoing at the Rancho
Dominguez building, due to contamination caused by a former tenant. The
Partnership had taken a charge to operations in prior years totaling $500,000
relating to this matter. During 1995, based on a revised engineering
estimate, the Partnership reduced its accrual for future costs by $200,000
which was recorded as a credit to property operating expenses. At December
31, 1996, the Managing General Partner considers the remaining accrual of
$78,089 to be a reasonable estimate of the remaining cost of the remediation,
which is expected to be completed in 1997.
<PAGE>
NOTE 4--REAL ESTATE JOINT VENTURES
The Partnership had invested in two real estate joint ventures, organized as
general partnerships with a real estate management/development firm and, in one
case, with an affiliate of the Partnership. It made capital contributions to the
ventures, which are subject to preferential cash distributions at a specified
rate and to priority distributions with respect to sale or refinancing proceeds.
The Partnership also made loans to these ventures, which have been accounted for
as real estate investments due to the attendant risks of ownership. The joint
venture agreements provide for the funding of cash flow deficits by the venture
partners in proportion to ownership interests, and for the dilution of ownership
share in the event a venture partner does not contribute proportionately.
The respective real estate management/development firm is responsible for
day-to-day development and operating activities, although overall authority and
responsibility for the business is shared by the ventures. The real estate
management/development firms, or their affiliates, also provide various services
to the joint ventures for a fee.
MEDLOCK OAKS
On December 4, 1987, the Partnership entered into a joint venture agreement
with an affiliate of the Partnership and with an affiliate of Hill Properties,
Ltd., to construct and operate five warehouse and service center buildings
located in Atlanta, Georgia. The Partnership made a capital contribution of
$1,457,700 to the venture which is subject to preferential returns of 10.25% per
annum. In addition, the Partnership made a construction/permanent mortgage loan
to the venture of $3,658,843, which bears interest at 10.25% per annum.
On September 3, 1991, ownership of the investment was restructured as a
result of the management/ development firm's decision not to contribute its
required proportionate share of capital to fund operating deficits. Its
ownership interest was assigned pro rata to the Partnership and its affiliate.
As a result, the Partnership's ownership interest increased from 28.81% to 43%.
The aggregate minimum rents due to the venture under non-cancelable leases
are $950,240, $679,580, $206,515 and $60,062 in 1997 through 2000, respectively.
During the first quarter of 1996, the Managing General Partner determined
that the Partnership would be unable to recover the carrying value of this
investment and, accordingly, the carrying value was reduced by $350,000 through
a charge to investment valuation allowances. The property is now under contract
for sale, which is expected to close in the second quarter of 1997. The selling
price will exceed the investment carrying value of $3,543,935 at December 31,
1996. For the year then ended, the Partnership's share of joint venture earnings
was $210,976.
HORN ROAD
On February 17, 1988, the Partnership entered into a joint venture agreement
with an affiliate of the Sammis Company to complete construction and operate
eleven industrial buildings located in Sacramento, California. The Partnership
contributed capital of $3,000,000 and also made two loans to the venture of
$203,830 and $40,505.
The property owned by the joint venture was subject to a mortgage loan from
a bank which matured on August 1, 1994. Since the market value of this property
was significantly less than the outstanding loan balance, the Managing General
Partner determined that it was in the best interest of the Partnership to
transfer the property to the lender, in partial satisfaction of its obligation.
Under the terms of the loan agreement, the Partnership was obligated to fund
costs associated with the lease-up of vacant space, as well as provide a minimum
loan paydown. The Partnership granted the lender a deed in lieu of foreclosure
on November 18, 1994 at which time the Partnership also paid $395,526 in final
settlement of loan guarantees.
During 1993, as a result of poor market conditions and the likelihood of the
Partnership transferring ownership of the property to the lender, the
Partnership reduced the carrying value of this investment (by $1,050,000) to
equal the balance of its non-recourse debt. The Partnership also accrued
estimated obligations of approximately $350,000 pursuant to the loan guarantees
described above. Upon granting the deed in lieu of foreclosure, the Partnership
reduced the carrying value of its investment to its estimated market value,
which was
<PAGE>
less than the balance of non-recourse debt and related guarantees,
resulting in an investment valuation allowance of $665,248. The Partnership then
recognized a gain on the early extinguishment of the debt in the same amount,
which is reported as an extraordinary item in the Statement of Operations.
SUMMARIZED FINANCIAL INFORMATION
The following summarized financial information is presented in the aggregate
for the joint ventures. Revenue and expenses in 1994 do not include operations
of Horn Road since the investment valuation allowances recognized by the
Partnership included an estimate of operating losses to be incurred during its
projected holding period. The valuation allowances and extraordinary item
related to Horn Road are also excluded from joint venture results of operations.
ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Assets
Real property, at cost less accumulated depreciation of $2,821,679
and $2,425,096.................................................. $ 7,702,658 $ 8,103,524
Other............................................................. 288,149 270,575
------------ ------------
7,990,807 8,374,099
Liabilities....................................................... 86,084 49,817
------------ ------------
Net assets........................................................ $ 7,904,723 $ 8,324,282
------------ ------------
------------ ------------
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenue
Rental income........................................................... $ 1,165,073 $ 1,101,894 $ 1,087,696
Other................................................................... 114,609 108,338 109,407
------------ ------------ ------------
1,279,682 1,210,232 1,197,103
------------ ------------ ------------
Expenses
Depreciation and amortization........................................... 454,305 447,470 427,073
Operating expenses...................................................... 321,958 329,830 283,929
------------ ------------ ------------
776,263 777,300 711,002
------------ ------------ ------------
Net income.............................................................. $ 503,419 $ 432,932 $ 486,101
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and its affiliate on behalf of their various financing arrangements
with the joint venture.
<PAGE>
NOTE 5--INCOME TAXES
The Partnership's income (loss) for federal income tax purposes differs from
that reported in the accompanying statement of operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net income (loss) per financial statements............................... $ (911,331) $ 1,309,989 $ (481,123)
Timing differences:
Joint venture earnings.................................................. (106,138) (84,982) (247,286)
Rental revenue.......................................................... (394,752) (683,600) (227,840)
Expenses................................................................ 2,485 1,570 --
Depreciation and amortization........................................... 160,195 322,653 138,908
Valuation allowances.................................................... 3,350,000 -- 161,821
------------ ------------ -----------
Taxable income (loss).................................................... $ 2,100,459 $ 865,630 $ (655,520)
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
NOTE 6--PARTNERS' CAPITAL
The Partnership maintains a repurchase fund for the purpose of repurchasing
limited partnership units, pursuant to the terms and conditions set forth in the
Partnership Agreement. Two percent of cash flow, as defined, is designated for
the repurchase fund which had a balance of approximately $10,087 and $600 at
December 31, 1996 and 1995, respectively. Through December 31, 1996, the
Partnership repurchased and retired 179 limited partnership units for an
aggregate cost of $153,771.
Allocation of net income (losses) from operations and distributions of
distributable cash from operations, as defined, are in the ratio of 99% to the
limited partners and 1% to the general partners. Cash distributions to partners
were suspended as of the second quarter of 1994. Since their reinstatement as of
the second quarter of 1996, cash distributions have been made quarterly.
Net sale proceeds and financing proceeds will be allocated first to the
limited partners to the extent of their contributed capital plus a stipulated
return thereon, as defined, second to pay disposition fees, and then 85% to the
limited partners and 15% to the general partners. Income from sales will be
allocated in proportion to the distribution of related proceeds, provided that
the general partners are allocated at least 1%. Income or losses from sales, if
there are no residual proceeds after the repayment of the related debt, will be
allocated 99% to the limited partners and 1% to the general partners.
NOTE 7--SUBSEQUENT EVENT
Distributions of cash from operations relating to the quarter ended December
31, 1996 were made on January 30, 1997 in the aggregate amount of $414,747
($12.50 per limited partnership unit).
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
INITIAL COST TO COSTS CAPITALIZED
THE PARTNERSHIP SUBSEQUENT TO ACQUISITION
------------------------------------------ ---------------------------------------
ENCUM - BUILDINGS & OTHER CARRYING ADDITIONS
DESCRIPTION BRANCES LAND IMPROVEMENTS (NET) COSTS (DISPOSITIONS) OTHER
- ------------------------------ ------------ ------------ ------------- ------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
An industrial and an R & D Note A $7,339,344 $10,665,340 $144,934 $0 $2,250,336 $959,672
building (235,594 sq.ft) on
13.08 acres of land in Rancho
Dominguez and La Mirada,
California.
---------- ----------- -------- ------ ---------- --------
Total Wholly-Owned $7,339,344 $10,665,340 $144,934 $0 $2,250,336 $959,672
---------- ----------- -------- ------ ---------- --------
---------- ----------- -------- ------ ---------- --------
43% interest in Medlock Oaks ---------------------------------------------See Note B--------------------------------------
Associates. Owners of five
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia.
60% interest in Sammis Horn --------------------------------------------- Transferred to Lender 11/18/94 ------------------
Road Associates. Owners of
eleven one-story industrial
buildings (200,000 square feet)
on 12.26 acres of land in
Sacramento, California.
Total Joint Ventures
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
----------------------------------------------------------------------
ACCUMULATED
INVESTMENT DEPRECIATION
BUILDINGS & VALUATION &
DESCRIPTION LAND IMPROVEMENTS OTHER ALLOWANCES TOTAL AMORTIZATION
- -------------------------------- ------------ ------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
An industrial and an R & D $ 7,339,344 $ 12,915,676 $ 1,104,606 ($ 7,200,000) $ 14,159,626 $ 3,938,619
building (235,594 sq.ft) on
13.08 acres of land in Rancho
Dominguez and La Mirada,
California.
------------ ------------- ------------ -------------- ------------- ------------
Total Wholly-Owned $ 7,339,344 $ 12,915,676 $ 1,104,606 ($ 7,200,000) $ 14,159,626 $ 3,938,619
------------ ------------- ------------ -------------- ------------- ------------
------------ ------------- ------------ -------------- ------------- ------------
43% interest in Medlock Oaks
Associates. Owners of five
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia. $ 3,543,935 N/A
-------------
-------------
60% interest in Sammis Horn $ 0 N/A
Road Associates. Owners of
eleven one-story industrial
buildings (200,000 square feet)
on 12.26 acres of land in
Sacramento, California.
-------------
Total Joint Ventures $ 3,543,935
-------------
-------------
<CAPTION>
DATE OF DATE DEPRECIABLE
DESCRIPTION CONSTRUCTION ACQUIRED LIFE
- -------------------------------- ------------ --------- -----------
<S> <C> <C> <C>
An industrial and an R & D 1962 & 1987 11/12/87 30 Years
building (235,594 sq.ft) on
13.08 acres of land in Rancho
Dominguez and La Mirada,
California.
Total Wholly-Owned
43% interest in Medlock Oaks Phase I-1987
Associates. Owners of five Phase II-1990 12/4/87 30/15 Yrs
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia.
60% interest in Sammis Horn 1986 2/17/88 30 Yrs
Road Associates. Owners of
eleven one-story industrial
buildings (200,000 square feet)
on 12.26 acres of land in
Sacramento, California.
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2
NOTE A TO SCHEDULE III
<TABLE>
<CAPTION>
1996 1996 ACCUMULATED ACCUMULATED
INCREASE INCREASE AMORTIZATION 1996 AMORTIZATION
RECONCILIATION 1996 IN IN 1996 & AMORTIZATION &
OF REAL COST INVESTMENT DEFERRED PROPERTY INVESTMENT COST DEPRECIATION & DEPRECIATION 12/31/96
ESTATE OWNED AS OF IN LEASING WORKING VALUATION BALANCE AT AS OF DEPRECIATION AS OF PROPERTY
DESCRIPTION 12/31/95 PROPERTY COSTS CAPITAL ALLOWANCE 12/31/96 12/31/95 EXPENSE 12/31/96 NET
- -------------- ----------- ---------- -------- -------- ---------- ---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rancho
Dominguez,
California
& La
Mirada,
California $16,677,583 $0 $0 $482,043 ($3,000,000) $14,159,626 $3,255,472 $683,147 $3,938,619 $10,221,007
- -------------- ----------- ---------- -------- -------- ---------- ---------- ------------ ------------ ------------ -----------
- -------------- ----------- ---------- -------- -------- ---------- ---------- ------------ ------------ ------------ -----------
</TABLE>
COPLEY REALTY INCOME PARTNERS 2
NOTE B TO SCHEDULE III
<TABLE>
<CAPTION> 1996
1996 CASH 1996 1996
EQUITY 1996 RECEIVED AMORTIZATION AMORTIZATION
PERCENT BALANCE 1996 IN INVESTMENT FROM OF OF BALANCE
OF AS OF INVESTMENT INCOME VALUATION JOINT ACQUISITION DEFERRED AS OF
DESCRIPTION OWNERSHIP 12/31/95 IN PROPERTY (LOSS) ALLOWANCE VENTURES FEES INTEREST 12/31/96
- ----------- --------- ---------- ----------- ------ ---------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medlock
Oaks 43% $4,085,073 $0 $209,076 ($350,000) ($396,881) ($5,233) $1,900 $3,543,935
---------- ---------- -------- --------- --------- ------- ------ ----------
$4,085,073 $0 $209,076 ($350,000) ($396,881) ($5,233) $1,900 $3,543,935
---------- ---------- -------- --------- --------- ------- ------ ----------
---------- ---------- -------- --------- --------- ------- ------ ----------
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
INDEX NO. 2
Independent Auditor's Report and Financial Statements
of Medlock Oaks Associates
Page #
------
Independent Auditor's Report of Habif, Arogeti and Wynne, P.C...........
Balance Sheets--December 31, 1996 and 1995..............................
Statements of Operations--For the Years Ended
December 31, 1996, 1995 and 1994......................................
Statements of Changes in Venturers' Deficit--For the Years Ended
December 31, 1996, 1995 and 1994......................................
Statements of Cash Flows--For the Years Ended
December 31, 1996, 1995 and 1994......................................
Notes to Financial Statements...........................................
<PAGE>
MEDLOCK OAKS ASSOCIATES
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
<PAGE>
MEDLOCK OAKS ASSOCIATES
TABLE OF CONTENTS
PAGE
------
Independent auditors' report 1
Financial statements:
Balance sheets 2
Statements of operations 3
Statements of changes in venturers' deficit 4
Statements of cash flows 5-6
Notes to financial statements 7-10
<PAGE>
Habif, Arogeti & Wynne, P.C.
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Venturers of
Medlock Oaks Associates
We have audited the accompanying balance sheets of MEDLOCK OAKS ASSOCIATES
[a joint venture] as of December 31, 1996 and 1995 and the related statements of
operations, changes in venturers' deficit, and cash flows for the years ended
December 31, 1996, 1995, and 1994. These financial statements are the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MEDLOCK OAKS ASSOCIATES as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995, and 1994 in conformity with
generally accepted accounting principles.
/s/ Habif, Arogeti & Wynne, P.C.
ATLANTA, GEORGIA
January 17, 1997
<TABLE>
<CAPTION>
MEMBERS
<S> <C> <C>
AICPA DIVISION FOR CPA FIRMS
GEORGIA SOCIETY OF AMERICAN INSTITUTE OF PRIVATE COMPANIES PRACTICE SECTION
CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS SEC PRACTICE SECTION
-----------------------------------------------------------------------------------
1073 West Peachtree Street, N.E. * Atlanta, Georgia 30309-3837 * (404) 892-9651 * Fax (404) 876-3913
</TABLE>
<PAGE>
MEDLOCK OAKS ASSOCIATES
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Property, at cost, pledged as collateral
Land............................................................ $ 2,083,500 $ 2,083,500
Buildings and improvements...................................... 5,771,252 5,762,432
Tenant improvements............................................. 3,072,584 3,085,687
------------ ------------
10,927,336 10,931,619
Allowance for depreciation.................................... (2,952,906) (2,539,128)
------------ ------------
7,974,430 8,392,491
------------ ------------
Cash.............................................................. 151,694 103,194
------------ ------------
Other assets
Receivables, net of allowance for doubtful accounts of $12,000 for
1996 and $17,000 for 1995..................................... 77,125 84,391
Deferred lease commissions, net of accumulated amortization of
$185,876 for 1996 and $149,545 for 1995....................... 59,330 82,990
------------ ------------
136,455 167,381
------------ ------------
$ 8,262,579 $ 8,663,066
------------ ------------
------------ ------------
<CAPTION>
LIABILITIES AND VENTURERS' DEFICIT
<S> <C> <C>
Liabilities
Accounts payable and accrued expenses........................... $ 22,421 $ 2,267
Notes payable................................................... 8,508,937 8,508,937
Guaranteed payments to venturers................................ 2,171,719 1,824,244
Prepaid rent.................................................... 17,839 -0-
Security deposits............................................... 45,824 47,550
Accrued interest payable........................................ 1,886,865 1,662,684
------------ ------------
12,653,605 12,045,682
------------ ------------
Venturers' deficit
Copley Realty Income Partners 1................................. (2,502,887) (1,928,093)
Copley Realty Income Partners 2................................. (1,888,139) (1,454,523)
------------ ------------
(4,391,026) (3,382,616)
------------ ------------
$ 8,262,579 $ 8,663,066
------------ ------------
------------ ------------
</TABLE>
See auditors' report and accompanying notes
2
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Rental............................................................... $ 1,165,073 $ 1,101,894 $ 1,087,696
Other................................................................ 112,479 104,650 105,351
------------ ------------ ------------
1,277,552 1,206,544 1,193,047
------------ ------------ ------------
Expenses
Amortization......................................................... 40,303 45,634 51,428
Bad debts............................................................ 6,693 5,000 13,624
Depreciation......................................................... 431,197 419,031 392,840
General operating.................................................... 56,385 44,650 41,342
Insurance............................................................ 4,152 4,440 4,489
Landscaping and grounds.............................................. 29,249 24,867 14,475
Management fees...................................................... 39,260 36,075 36,225
Professional fees.................................................... 12,421 16,143 12,992
Property taxes....................................................... 85,062 87,665 87,665
Repairs and maintenance.............................................. 18,379 25,928 20,767
Utilities............................................................ 39,686 43,270 52,350
------------ ------------ ------------
762,787 752,703 728,197
------------ ------------ ------------
Income from operations............................................. 514,765 453,841 464,850
------------ ------------ ------------
Other income [expense]
Loss on abandonment of tenant improvements........................... [30,671] [41,792] -0-
Interest income...................................................... 2,130 3,688 4,056
Interest expense..................................................... [1,147,159] [1,086,792] [1,032,237]
------------ ------------ ------------
[1,175,700] [1,124,896] [1,028,181]
------------ ------------ ------------
Net loss........................................................... $ [660,935] $ [671,055] $ [563,331]
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See auditors' report and accompanying notes
3
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF CHANGES IN VENTURERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
COPLEY COPLEY
REALTY REALTY
INCOME INCOME
PARTNERS 1 PARTNERS 2 TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balances, January 1, 1994.......................................... $ [828,371] $ [624,909] $ [1,453,280]
Net loss......................................................... [321,099] [242,232] [563,331]
Guaranteed payments.............................................. [198,061] [149,414] [347,475]
------------- ------------- -------------
Balances, December 31, 1994........................................ [1,347,531] [1,016,555] [2,364,086]
Net loss......................................................... [382,501] [288,554] [671,055]
Guaranteed payments.............................................. [198,061] [149,414] [347,475]
------------- ------------- -------------
Balances, December 31, 1995........................................ [1,928,093] [1,454,523] [3,382,616]
Net loss......................................................... [376,733] [284,202] [660,935]
Guaranteed payments.............................................. [198,061] [149,414] [347,475]
------------- ------------- -------------
Balances, December 31, 1996........................................ $ [2,502,887] $ [1,888,139] $ [4,391,026]
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See auditors' report and accompanying notes
4
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Increase [Decrease] In Cash
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.............................................................. $ [660,935] $ [671,055] $ [563,331]
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by operating
activities
Depreciation and amortization....................................... 471,500 464,665 444,267
Provision for allowance for doubtful accounts....................... [5,000] 5,000 [5,500]
Loss on abandonment of tenant improvements.......................... 30,671 41,792 -0-
Changes in assets and liabilities
Decrease in receivables........................................... 12,266 9,826 82,407
Decrease [Increase] in prepaid expenses........................... -0- 2,400 [312]
Increase in deferred lease commissions............................ [16,644] [24,190] [29,373]
Increase [Decrease] in accounts payable and accrued expense....... 20,154 [27,171] [164,553]
Increase [Decrease] in prepaid rent............................... 17,839 [9,593] [33,693]
Decrease in security deposits..................................... [1,726] [8,062] [4,582]
Increase in accrued interest...................................... 224,181 343,772 340,390
------------ ------------ ------------
Total adjustments............................................... 753,241 798,439 629,051
------------ ------------ ------------
Net cash provided by operating activities..................... 92,306 127,384 65,720
------------ ------------ ------------
Cash flows from investing activities
Acquisition of property............................................... [43,806] [118,669] [45,551]
------------ ------------ ------------
Net increase in cash................................................ 48,500 8,715 20,169
Cash, beginning of year................................................. 103,194 94,479 74,310
------------ ------------ ------------
Cash, end of year................................................... $ 151,694 $ 103,194 $ 94,479
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See auditors' report and accompanying notes
5
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF CASH FLOWS [CONTINUED]
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for
Interest................................... $ 922,978 $ 743,020 $ 691,847
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
Increases in accrued guaranteed payments of $347,475 are reflected as a
reduction in venturers' equity for the years ended December 31, 1996, 1995,
and 1994.
During 1995, $188,956 of fully amortized deferred leasing commissions were
retired.
See auditors' report and accompanying notes
6
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
TERMS OF THE JOINT VENTURE AGREEMENT:
MEDLOCK OAKS ASSOCIATES, a Georgia joint venture, was formed December 4,
1987 under an agreement between Copley Realty Income Partners 1 and 2 [CRIP 1
and CRIP 2], two Massachusetts limited partnerships, and Hill Limited #10
[Hill], a Georgia limited partnership, with initial ownership interests of
34.2%, 25.8% and 40%, respectively. Effective January 1, 1990, the respective
interests of the Venturers were: CRIP 1--38.19%; CRIP 2 - 28.81%; and
Hill's--33%. On September 3, 1991, the Joint Venture entered into an agreement
for the transfer and assignment of Hill's 33% Joint Venture interest to CRIP 1
and CRIP 2. Upon execution of the agreement, CRIP 1 and CRIP 2's partnership
interests increased to 57% and 43%, respectively. Under this agreement, Hill has
no rights or entitlements to any future allocations and distributions or to any
amounts accrued as of the date of the transfer.
The purpose of the Venture is to own and operate Medlock Oaks Business
Center located in Gwinnett County, Georgia. The Project consists of two phases.
Phase I consists of three office/warehouse buildings with approximately 114,900
rentable square feet and was completed in December 1987. Phase II consists of
two office/warehouse buildings with approximately 60,200 rentable square feet
and was completed in May 1990.
CRIP 1 and CRIP 2 initially contributed $1,932,300 and $1,457,700 to the
Joint Venture. Except as provided in the Joint Venture Agreement, the Venturers
will not be required to make any further capital contributions.
The operating cash flow, as defined in the Joint Venture Agreement, must be
distributed in the following order of priority:
- To CRIP 1 and 2, pro rata, based on their respective amounts of invested
capital, in payment of any monthly guaranteed payments.
- To CRIP 1 and 2, pro rata, based on their respective amounts of invested
capital, in payment of any outstanding accrued monthly guaranteed
payments.
- To the Venturers in payment of their default priority returns.
- To the Venturers in payment of their deficit preferred returns.
- To the Venturers in accordance with their respective interests.
7
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Capitalization:
All costs related to planning, development, and construction of the
buildings have been capitalized as construction costs. Costs incurred to form
the Joint Venture, obtain financing, and promote the development have also been
capitalized.
Interest incurred on the notes was capitalized during the 1990 construction
and lease up periods.
Property:
Property is carried at cost. Expenditures for maintenance and repairs are
expensed currently, while renewals and betterments that materially extend the
life of an asset are capitalized. The cost of assets sold, retired, or otherwise
disposed of, and the related allowance for depreciation, are eliminated from the
accounts, and any resulting gain or loss is included in operations.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which are as follows:
Buildings and improvements 30 years
Tenant improvements 15 years
Amortization:
Deferred lease commissions costs were capitalized and are being amortized on
a straight-line basis over the term of the related lease.
Leasing Revenue:
Income from operating leases, which includes scheduled increases over the
lease term, is recognized on a straight-line basis. For the years ended December
31, 1996, 1995, and 1994, income recognized on a straight-line basis was less
than income which would have accrued in accordance with the lease by
approximately $8,000, $5,000, and $90,000, respectively. Receivables which
resulted from recognizing income on a straight-line basis totaled $69,930 at
December 31, 1996 and $80,670 at December 31, 1995.
8
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Receivables:
The Venture provides warehouse and office space to tenants located in the
metropolitan Atlanta area. Credit is issued based upon the size of the company,
its past history, and other factors. Tenants are approved by all venturers. If
any defaults occur, the accounting loss would be the value of receivables owed
by the tenant, any unamortized leasing commissions and, possibly, tenant
improvements provided to the tenant by the Venture.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
Income Taxes:
No provision has been made for income taxes because each venturer's
proportionate share of the Joint Venture income or loss is passed through to be
included in the individual tax return of the venturer.
B. NOTES PAYABLE:
Under the notes payable to CRIP 1 and CRIP 2, as amended effective January
1, 1990, the Joint Venture may borrow up to $8,710,000 ($4,964,700 from CRIP 1
and $3,745,300 from CRIP 2) at 10.25% per annum for the construction of Phase I
tenant improvements, the Phase II building shell and Phase II tenant
improvements. The notes bear interest at an annual rate of 10.25% per annum
which is payable monthly through December 4, 1997, at which date all outstanding
principal and accrued interest is due. The notes are secured by a first mortgage
on the land and buildings as well as an assignment of all leases and rental
income. Total principal due under these notes at December 31, 1996 and 1995 was
$4,850,094 to CRIP 1 and $3,658,843 to CRIP 2.
Accrued interest of $1,033,002 and $1,083,815 relating to those notes has
been included in the accompanying balance sheets at December 31, 1996 and 1995,
respectively. The Joint Venture paid $922,978, $743,020, and $691,847 in
interest in 1996, 1995, and 1994, respectively.
C. GUARANTEED PAYMENTS:
The Venture is required to make monthly guaranteed payments to CRIP 1 and 2
based on the amount of invested capital outstanding in CRIP 1 and 2's capital
accounts for each month during the year. The guaranteed payments accrue at the
rate of 10.25% per annum and unpaid guaranteed payments accrue at 10.25% per
annum. Guaranteed payments totaled $198,061 for CRIP 1 and $149,414 for CRIP 2
in each of the last three years. Amounts accrued but unpaid are $2,171,719 and
$1,824,244 at December 31, 1996 and 1995, respectively. Accrued interest related
to the unpaid guaranteed payments totaled $853,863 and $578,869 at December 31,
1996 and 1995, respectively.
9
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995, AND 1994
D. LEASE RENTALS:
At present, the Joint Venture has approximately 19 tenants. Future minimum
rentals to be received under the existing leases at December 31, 1996, which are
classified and accounted for as operating leases, are as follows:
DECEMBER 31, LEASE REVENUES
--------------- --------------
1997 $ 950,240
1998 679,580
1999 206,515
2000 60,062
------------
$ 1,896,397
------------
------------
E. MATTERS AFFECTING OPERATIONS:
The Joint Venture has incurred operating losses since inception and
currently projects operating losses and cash flow deficits for the next year
in excess of committed borrowing capacity. Therefore, the ability of the Joint
Venture to continue as a going concern is dependent upon obtaining additional
financing, or funding from CRIP 1 and CRIP 2, since the success of future
operations cannot be determined at this time.
The management of CRIP 1 and CRIP 2 has indicated its intentions to
provide the additional financing as needed by deferring payments of interest
and making capital contributions or loans to provide for continued operations
of the Joint Venture through at least January 1, 1998.
10
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
- -------- ------
10A. MCV III Associates ("MCV") General Partnership Agreement *
dated as of November 12, 1987 between Tri-Partners,
the Partnership.
10B. Lease agreement dated as of September 28, 1987 and Addendum *
dated as of October 12, 1987 by which MCV agrees to lease
to Genisco Technology Corporation ("Genisco") 7.02 acres of
land and a research and development building located thereon
in La Mirada, California.
10C. Lease Agreement dated as of November 12, 1987 by which MCV *
agrees to lease an industrial building located in Rancho
Dominguez, California to Engineering Magnetics.
10D. Agreement regarding Assignment and Assumption of Lease by and *
between MCV and Genisco dated as of November 12, 1987.
10E. Medlock Oaks Associates ("Medlock Oaks") Joint Venture *
Agreement dated as of December 4, 1987 by and between the
Partnership and Copley Realty Income Partners 1, a Limited
Partnership (collectively, the "Affiliates") and Hill Limited
#10, a Georgia limited partnership ("Hill").
10F. Promissory Note dated December 4, 1987 from Medlock Oaks to *
the Affiliates.
10G. Deed to Secure Debt and Security Agreement dated as of *
December 4, 1987 between Medlock Oaks and the Affiliates.
10H. Loan Agreement dated as of December 4, 1987 between Medlock *
Oaks and Affiliates.
10I. Assignment of Lease Agreements dated as of December 4, 1987 *
by between Hill and Medlock Oaks.
10J. Joint Venture Agreement of Sammis Horn Road Associates dated *
as of February 17, 1988 by and between the Registrant and
Sammis Rancho Cordova Associates.
10K. Construction Loan Agreement dated as of May 11, 1988 by and *
between Sammis Horn Road Associates, Borrower, and The First
National Bank of Chicago, Lender.
10L. Secured Promissory Note dated May 11, 1988 in the principal *
amount of $4,600,000 by Sammis Horn Road Associates to
The First National Bank of Chicago.
- --------------------------------
* Previously filed and incorporated herein by reference.
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
- -------- ------
10M. Deed of Trust and Assignment of Rents dated as of May 11, *
1988 by and among Sammis Horn Road Associates (Trustor),
Stewart Title Guaranty Company (Trustee), and The First
National Bank of Chicago (Beneficiary).
10N. Assignment of Rents, Leases, Income and Profits dated as *
of May 11, 1988 by Sammis Horn Road Associates (Assignor)
to The First National Bank of Chicago (Assignee).
10P. Second Amendment to General Partnership Agreement of MCV III *
Associates by and between the Registrant and Tri-Partners.
10Q. Second Amendment to Joint Venture Agreement of Medlock Oaks *
Associates ("Medlock Oaks"), dated as of January 1, 1990,
by and among the Registrant, Copley Realty Income Partners 1,
A Limited Partnership (collectively, the "Affiliates") and
Hill Limited #10, a Georgia limited partnership ("Hill").
10R. Amended and Restated Promissory Note dated as of January 1, *
1990, from Medlock Oaks to the Affiliates.
10S. First Amendment to Deed to Secure Debt and Security Agreement *
dated as of January 1, 1990 between Medlock Oaks and the
Affiliates.
10T. First Amendment to Loan Agreement dated as of January 1, 1990 *
between Medlock Oaks and the Affiliates.
10U. Second Amendment to Joint Venture Agreement of Sammis Horn *
Road Associates effective as of April 1, 1989 by and between
the Registrant and Sammis Rancho Cordova Associates.
10V. Agreement for Dissolution, Distribution and Winding-Up of *
MCV III Associates dated May 31, 1991 by and between
TRI-Partners, a California general partnership and the
Registrant.
10W. Transfer and Assignment of Joint Venture Interest in Medlock *
Oaks Associates made and entered into as of September 3, 1991
by and between Hill Limited #10, a Georgia limited partnership,
and Copley Realty Income Partners 1; A Limited Partnership, a
Massachusetts limited partnership and the Registrant.
10X. Incentive Property Management Agreement effective as of May *
31, 1991 by and between TRI-Partners, a California general
partnership, and the Registrant.
- --------------------------------
* Previously filed and incorporated herein by reference.
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
- -------- ------
10Y. Agreement of Purchase and Sale and Joint Escrow Instructions *
made and entered into as of May 17, 1991 by and between
Sammis Horn Road Associates, a California general partnership
("Seller"), and Rico's Draperies, Inc. ("Buyer").
10Z. Second Amendment to Loan Documents dated as of August 1, *
1992 by and between Sammis Horn Road Associates and The First
National Bank of Chicago.
10AA. Second Amendment to Deed of Trust, Assignment of Rents and *
Other Security Documents dated as of August 1, 1992 by and
between Sammis Horn Road Associates, as Trustor, and The
First National Bank of Chicago, as Beneficiary.
10BB. Repayment Guaranty dated August 1, 1992 by the Registrant *
(the "Guarantor") The First National Bank of Chicago
(the "Holder").
10CC. Completion Guaranty dated August 1, 1992 by the Registrant *
and CRIP2 Pool (collectively, the "Guarantors") in favor of
The First National Bank of Chicago (the "Holder").
10DD. First Amended and Completely Restated Joint Venture Agreement *
of Sammis Horn Road Associates, effective as of July 31, 1992
by and among the Registrant, CRIP 2 Pool, and Sammis Rancho
Cordova Associates.
10EE. Settlement Agreement dated October 24, 1994 by and between *
Sammis Horn Road Associates, the Registrant, CRIP 2 Pool,
Lee C. Sammis, Samuel G. Lindsay, John S. Hagestad, Carl F.
Willgeroth, "Guarantors", and The First National Bank of
Chicago and SCI Properties, "Transferee".
10FF. Lease dated February, 1994 by and between the Registrant, *
"Lessor", and Babcock, Inc., "Lessee".
10GG. First Amendment of Lease dated March 22, 1994 by and
between the Registrant, "Lessor", and Babcock, Inc., "Lessee".
10HH. Second Amendment of Lease dated December 30, 1994 by and *
between the Registrant, "Lessor", and Babcock, Inc., "Lessee".
10II Third Amendment of Lease dated January 17, 1995 by and *
between the Registrant, "Lessor", and Babcock, Inc., "Lessee".
- ------------------------
* Previously filed and incorporated herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
Date: March 31, 1997 By: /s/ Joseph W. O'Connor
-----------------------------
Joseph W. O'Connor
President of the
Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------
President, Principal
Executive Officer and
Director of the
/s/ Joseph W. O'Connor Managing General Partner March 31, 1997
- ------------------------
Joseph W. O'Connor
Principal Financial and
Accounting Officer of the
/s/ Daniel C. Mackowiak Managing General Partner March 31, 1997
- ------------------------
Daniel C. Mackowiak
Director of the
/s/ Daniel J. Coughlin Managing General Partner March 31, 1997
- ------------------------
Daniel J. Coughlin
Director of the
/s/ James J. Finnegan Managing General Partner March 31, 1997
- ------------------------
James J. Finnegan
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,560,038
<SECURITIES> 2,062,313
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,622,351
<PP&E> 13,764,942
<DEPRECIATION> 3,466,160
<TOTAL-ASSETS> 19,387,293
<CURRENT-LIABILITIES> 92,243
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,295,050
<TOTAL-LIABILITY-AND-EQUITY> 19,387,293
<SALES> 3,320,847
<TOTAL-REVENUES> 3,571,724
<CGS> 214,519
<TOTAL-COSTS> 214,519
<OTHER-EXPENSES> 918,536
<LOSS-PROVISION> 3,350,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (911,331)
<INCOME-TAX> 0
<INCOME-CONTINUING> (911,331)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (911,331)
<EPS-PRIMARY> (27.47)
<EPS-DILUTED> (27.47)
</TABLE>
