<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, 1998
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 62110
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>
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.
At December 31, 1998, the Partnership is invested in one real property
investment described below. The Partnership has no current plan to renovate,
improve or further develop its real property. In the opinion of the Managing
General Partner of the Partnership, the property is adequately covered by
insurance. The Partnership has sold two other real estate investments in 1997,
and a fourth investment was transferred by a deed in lieu of foreclosure in
1994. The principal terms of the sales of the Partnership's investments are set
forth in the following table:
<TABLE>
<CAPTION>
Investment Month/Year of Sale Net Sale Proceeds Distribution/Unit Distribution
Month/Year
<S> <C> <C> <C> <C>
Investment Two 5/97 $3,958,248 $120.00 5/97
Investment Three 12/97 $3,260,761 $ 99.00 12/97
</TABLE>
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
<PAGE>
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
owned 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 was 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 Partnership further
amended the lease by shortening the term to eighteen months, through November
1997, at a reduced rental rate. The Partnership had the option to terminate the
lease with a ninety day notice. In consideration of the lease amendment, the
tenant agreed to pay the Partnership a total of $1,600,000, all of which was
paid prior to December 31, 1997.
At the time the Rancho Dominguez 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 was then expected
to total $267,000, all of which has been recorded in the Partnership's financial
statements. As a result of the December 15, 1997 sale of the property and an
independent environmental inspection, the Partnership has no remaining
contractual obligations with respect to the remediation costs.
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
<PAGE>
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:
(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. On July 11, 1997, the
bankruptcy proceedings were concluded and the settlement amount was fixed at
$175,000. The likelihood of the Partnership receiving this settlement is low
since the liquidation value of Genisco appears to be significantly less than the
amount owed its secured creditor, Sanwa Bank.
As stated above, the Partnership sold the Rancho Dominguez building on
December 15, 1997.
<PAGE>
Item 2. Properties.
The following table sets forth the annual realty taxes for the
Partnership's remaining property and information regarding the sole tenant
which occupies 100% of the gross leasable area (GLA) of the property:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Annual
1998 Contract
Annual Number of Rent
Property Taxes Tenants with 10% Name(s) of Square Feet of Per
or More of GLA Tenant (s) Each Tenant Sq. Ft.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R & D Building in La Mirada, CA $64,494 1 Babcock Engineering 135,269 $5.25
- ------------------------------------------------------------------------------------------------------------------------------------
Lease Expirations Renewal Line of Business
Options of Principal Tenants
- ------------------------------------------------------------------------------------------------------------------------------------
5/2004 2-5 Year Aerospace, Electronics
Options Manufacturer
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth for each of the last five years the
gross leasable area, occupancy rates, rental revenue and net effective
rent for the Partnership's remaining property:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Property Gross Rental Net
Leaseable Year-End Revenue Effective
Area Occupancy Recognized Rent
($/sf/yr)*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R & D Building in La Mirada, CA
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
1997 135,269 100% $810,195 $5.99
1998 135,269 100% $809,646 $5.99
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Net Effective Rent calculation is based on average occupancy for the
respective year.
(1) Includes adjustment for property tax reimbursements.
Set forth below is a schedule of lease expirations for each of the next
ten years for the Partnership's remaining property based on the annual contract
rent in effect at December 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TENANT AGING REPORT
- --------------------------------------------------------------------------------
Property # of Lease Total Total Percentage
of
Expirations Square Annual Gross
Feet Contract Annual
Rental Rental*
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R & D Building in La Mirada, CA
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 $710,162 100%
2005 0 0 $0 0%
2006 0 0 $0 0%
2007 0 0 $0 0%
2008 0 0 $0 0%
- --------------------------------------------------------------------------------
</TABLE>
* Does not include expenses paid by tenant.
<PAGE>
The following table sets forth for the Partnership's remaining property
the: (i) federal tax basis, (ii) rate of depreciation, (iii) method of
depreciation, (iv) life claimed and (v) accumulated depreciation, with respect
to each component thereof for purposes of depreciation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Depreciable Assets
Rate of Life Accumulated
Entity / Property Tax Basis Depreciation Method in years Depreciation
La Mirada
- ---------------------------------
Building & Improvements $5,835,876 3.17% SL 31.5 $1,925,990
Building 1,277,266 2.56% SL 39 139,012
---------- -------
Total Depreciable Assets $7,113,142 $2,065,002
============ ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SL = Straight Line
Following is information regarding the competitive market conditions
for the Partnership's remaining property. 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:
Research and Development Building in La Mirada, California
This property is located in the La Mirada sub-market, which is part of
the Mid-Counties market in the Greater Los Angeles metropolitan area. The
Mid-Counties market consisted of approximately 103 million square feet of
industrial space at year-end 1998, including approximately 2.5 million square
feet of new supply recorded in 1998. During 1998, the Mid-Counties industrial
market experienced approximately 6.7 million square feet of gross leasing
activity. Industrial vacancy in the region at year-end 1998 was 6.1% compared to
5.2% for the same period last year. The La Mirada sub-market is comprised of 172
buildings consisting of 11.6 million square feet. The La Mirada property was
sold for gross proceeds of $7,150,000 on February 26, 1999.
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 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, 1998, there were 2,195 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 1998, or
distributed after year-end with respect to 1998, to the Limited Partners as a
group totaled $1,427,314, including a special operating cash distribution in the
amount of $913,544 on October 28, 1998. Cash distributions paid in 1997, or
distributed after year end with respect to 1997, to the Limited Partners as a
group totaled $12,244,369, including $7,182,093 ($219 per limited partnership
unit), representing proceeds from the sales of two properties. 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.
Largely due to the capital distributions mentioned above, total cash
distributions exceeded net income in 1998 and reduced partners' capital
accordingly. Regular cash distributions from operations were slightly higher
than cash provided by operations in 1998. Reference is made to the Partnership's
Statement of Partners' Capital (Deficit) and Statement of Cash Flows in Item 8
hereof.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
For Year For Year For Year For Year For Year
Ended or Ended or Ended or Ended or Ended or
As of : As of : As of : As of : As of :
12/31/98 12/31/97 (1) 12/31/96 (2) 12/31/95 12/31/94 (3)
--------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $916,698 $1,741,986 $3,571,724 $2,265,542 $1,933,320
Net Income (Loss) $396,766 $1,042,339 $(911,331) $1,309,989 $(481,123)
Net Income (Loss)
per weighted average
Limited Partnership $11.99 $31.46 $(27.47) $39.48 $(14.50)
Unit
Total Assets $6,743,112 $8,202,897 $19,387,293 $21,124,057 $19,810,159
Total Cash
Distributions
per Limited
Partnership
Unit, including
amounts distributed
after year end with
respect to such
year.
$48.41 $373.38 $37.50 $0.00 $7.50
------ ------- ------ ----- -----
</TABLE>
(1) Net Income in 1997 includes gains from the sales of two properties
totaling $517,693. Cash distributions include returns of
capital totaling $219.00 per Limited Partnership Unit.
(2) Net Loss in 1996 includes investment valuation allowances totaling
$3,350,000 and a lease termination fee of $1,600,000.
(3) 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.
<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.
On May 2, 1997, the Medlock Oaks buildings, which were owned by the
Partnership (43%) and an affiliate (57%), were sold for a total sales price of
$9,402,779. The Partnership received its 43% share of the net proceeds in the
amount of $3,958,248, after closing costs, and recognized a gain of $387,990
($11.70 per limited partnership unit) on the sale. A disposition fee of $121,260
was accrued but not paid to AEW Real Estate Advisors, Inc. ("AEW"). On May 29,
1997, the Partnership made a capital distribution of $3,938,160 ($120 per
limited partnership unit) from the proceeds of the sale. The distribution
reduced the adjusted capital contribution to $880 per unit.
On December 15, 1997, the Rancho Dominguez building was sold for
$3,486,000. The Partnership received net proceeds of $3,260,761, after closing
costs, and recognized a gain of $129,703 ($3.96 per limited partnership unit). A
disposition fee of $104,580 was accrued but not paid to AEW. On December 30,
1997, the Partnership made a capital distribution of $3,243,933 ($99 per limited
partnership unit) from the proceeds. The distribution reduced the adjusted
capital contribution to $781 per unit.
At December 31, 1998, the Partnership had $518,094 in cash, cash
equivalents and short-term investments, of which $129,413 was used for cash
distributions to partners on January 28, 1999; 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, the Managing General
Partner resumed distributions of cash from operations as of the second quarter
of 1996, at an annualized rate of 5.0% on a capital contribution of $1,000 per
unit. The first quarter 1997 distribution included $1,137,359 related to the
first installment of a lease termination fee which was received in 1996 and
retained previously in working capital reserves. The second quarter 1997
distribution was based on the weighted average adjusted capital contribution.
The distribution rate remained at 5.0% through the second quarter of 1997. The
third and fourth quarter 1997 distributions were made at an annualized rate of
4.0% on the adjusted capital contribution of $880. The fourth quarter 1997
distribution includes $2,581,879 comprised of the final portion of the
aforementioned lease termination fee, and Partnership reserves. The distribution
rate was decreased during the third quarter of 1997 due to the sale of Medlock
Oaks. The annualized distribution rate relating to all four quarters of 1998 was
2.0% on the adjusted capital contribution of $781. Also, a special distribution
of operating cash was distributed in the fourth quarter of 1998 in the amount of
$922,772.
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 $73,208 and $41,551 at December 31, 1998
and 1997, respectively. Through December 31, 1997, the Partnership had
repurchased and retired 230 limited partnership units for an aggregate cost of
$177,945.
The carrying value of real estate investments in the financial
statements at December 31, 1998 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. At December 31, 1998, the appraised value of the
La Mirada investment exceeded its carrying value by $975,000. The current
appraised value of real estate investments has been estimated by the Managing
General Partner and is generally based on a combination of
<PAGE>
traditional appraisal approaches performed by AEW 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.
Year 2000 Disclosure
The Year 2000 Issue is a result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business operations.
The Partnership relies on AEW Capital Management L.P. ("AEW Capital
Management"), the parent of AEW Real Estate Advisors, Inc., to generate
financial information and to provide other services which are dependent on the
use of computers. The Partnership has obtained assurances from AEW Capital
Management that:
o AEW Capital Management has developed a Year 2000 Plan (the "Plan")
consisting of five phases: inventory, assessment, testing,
remediation/repair and certification.
o As of September 30, 1998, AEW Capital Management had completed the
inventory and assessment phases of this Plan and had commenced the
testing and remediation/repair of internal systems.
o AEW Capital Management expects to conclude the internal testing,
remediation/repair and certifications of its Plan no later than
June 30, 1999.
The Partnership also relies on joint venture partners and/or property
managers to supply financial and other data with respect to its real properties.
The Partnership is in the process of surveying these third party providers and
assessing their compliance with Year 2000 requirements. To date, the Partnership
is not aware of any problems that would materially impact its results of
operations, liquidity or capital resources. However, the Partnership has not yet
obtained written assurances that these providers would be Year 2000 compliant.
The Partnership currently does not have a contingency plan in the event
of a particular provider or system not being Year 2000 compliant. Such a plan
will be developed if it becomes clear that a provider (including AEW Capital
Management) is not going to achieve its scheduled compliance objectives by June
30, 1999. The inability of one of these providers to complete its Year 2000
resolution process could materially impact the Partnership. In addition, the
Partnership is also subject to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions. Given the nature of its
operations, the Partnership will not incur any costs associated with Year 2000
compliance. All such costs are borne by AEW Capital Management and the
property managers.
Results of Operations
Form of Real Estate Investments
The La Mirada investment is wholly-owned by the Partnership. The Rancho
Dominguez investment, which was sold on December 15, 1997, was also a
wholly-owned property. The Medlock Oaks investment, which was sold on May 2,
1997, was structured as a joint venture with an affiliate of the Partnership.
Operating Factors
At Medlock Oaks, occupancy was 100% and 97% at May 2, 1997 and December
31, 1996, respectively. In the first quarter of 1996, the Managing General
Partner determined that the Partnership would be unable to recover the carrying
<PAGE>
value of this investment and, accordingly, the carrying value was reduced by
$350,000 through a charge to operations. As mentioned above, the Partnership and
its affiliate sold the Medlock Oaks buildings on May 2, 1997; the Partnership's
share of the gain was $509,250 ($15.37 per limited partnership unit).
The Rancho Dominguez property was 100% leased to a single tenant
through December 15, 1997. 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, which was received in December 1997, at the termination of
the lease. The entire lease termination fee was recognized as revenue in 1996.
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. An environmental remediation project was undertaken 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.
On December 15, 1997, the Rancho Dominguez building was sold for
$3,486,000, at which time the remaining environmental accrual of $49,811 was
reversed based on the results of an independent environmental inspection
completed concurrent with the sale of the property. The Partnership has no
remaining contractual obligations with respect to the Rancho Dominguez building.
The Partnership received net proceeds of $3,260,761, after closing costs, and
recognized a gain of $129,703 ($3.96 per limited partnership unit) on the sale.
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 then 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.
The tenant in the La Mirada property contributed 100% of the rental
revenue from the Partnership's investments for 1998. The tenant at La Mirada was
current with regard to lease payments at December 31, 1998. Management is not
aware of any impairment in this tenant's ability to perform in accordance with
the terms of its lease.
Investment Results
Excluding the impact of the valuation allowances and the lease
termination fee, investment income was $630,229, $1,647,366, and $1,068,825 for
the years ended December 31, 1998, 1997 and 1996, respectively. The changes in
investment income are primarily due to an asset sale in 1997.
Real estate operations for La Mirada were $335,307 in 1998 compared to
$301,489 in 1997. Results of real estate activity in 1998 include the reversal
of $225,840 of previously accrued deferred disposition fees which the Managing
General Partner determined would not be paid. Real estate operations for the
wholly-owned properties in 1997 increased by $200,482 as compared to 1996. The
increase resulted from lower depreciation and amortization expenses of $273,000
at Rancho Dominguez caused by the write-off of tenant improvements and other net
assets in 1996. Operating expenses at Rancho Dominguez were also lower in 1997.
This increase in operations was partially offset by lower rental revenue as a
result of the related lease restructuring at Rancho Dominguez.
<PAGE>
Joint venture earnings were $54,694 and $210,976 for the years ended
December 31, 1997 and 1996, respectively, all related to the Medlock Oaks
investment. The decrease in earnings in 1997 stems from the sale of the
investment in May 1997.
Interest on cash equivalents and short-term investments decreased
approximately $198,000 in 1998 as compared to 1997 as a result of a substantial
decrease in the average investment balance due to the temporary investment of
sale proceeds, in 1997, prior to distribution. Interest income increased
approximately $17,000 in 1997 compared to 1996 as a result of the investment of
the aforementioned sale proceeds.
Exclusive of the lease termination payments of $1,250,000 and $350,000
from Rancho Dominguez in 1996 and 1997, respectively, cash provided by operating
activities decreased by $660,000 between the two years. The decline is
attributable to decreased distributions from Medlock Oaks, declines in operating
activity at Rancho Dominguez, and an increase in Partnership management fees as
a result of increased cash distributions to Partners, as discussed above.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and investor servicing agent fees. These
expenses decreased approximately $8,000, or 8% between 1997 and 1998, primarily
due to decreases in appraisal and accounting fees and partially offset by an
increase to out-of-pocket expenses. General and administrative expenses
decreased approximately $8,000, or 7% in 1997 compared to 1996 primarily due to
lower appraisal and accounting 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.
Management fees increased in 1997 as compared to 1996 due to the increase in
distributable cash flow, and a corresponding increase in distributions to
Partners. The management fee in 1996 resulted from the resumption of operating
cash distributions as of the second quarter.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk:
The Partnership was not party to derivative financial instruments or
derivative commodity instruments at or during the year ended December 31, 1998.
The Partnership's only other financial instruments (as defined by Financial
Accounting Standards Board Statement No. 107) are its cash and cash equivalents
for which cost approximates market value.
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.
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Position(s) with the Managing General Partner Age
J. Christopher Meyer, III President, Chief Executive Officer and Director 51
Pamela J. Herbst Vice President and Director 43
J. Grant Monahon Vice President and Director 53
James J. Finnegan Vice President 38
Karin J. Lagerlund Treasurer and Principal Financial and Accounting Officer 34
</TABLE>
(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:
J. Christopher Meyer, III. joined AEW Real Estate Advisors, Inc.
("AEW") , formerly known as Copley Real Estate Advisors, Inc., in 1987 and has
been an officer at AEW since then. AEW is a subsidiary of AEW Capital
Management, L.P. ("AEW Capital Management"), of which he is also a Director.
Prior to joining AEW, he had senior positions with several regional real estate
development concerns, including Chief Financial Officer of Ford Motor Land
Development Corporation. His career at AEW has included asset management
responsibility for the company's Eastern Region, and portfolio manager for
several commingled real estate funds. Presently, Mr. Meyer has overall
responsibility for all the partnerships advised by AEW whose securities are
registered under the Securities and Exchange Act of 1934, and for several
commingled funds. He received a B.A. in Statistics from the Princeton University
and an MBA from the Wharton School of the University of Pennsylvania.
Pamela J. Herbst directs AEW Capital Management's Institutional Real
Estate Services, with oversight responsibility for the asset and portfolio
management areas. Ms. Herbst is a member of AEW Capital Management's Investment
Policy Group and Management Committee. She came to AEW Capital Management in
December 1996 as a result of the firm's merger with Copley Real Estate Advisors,
Inc., where she held various senior level positions in asset and portfolio
management, acquisitions, and corporate operations since 1982. Ms. Herbst is a
graduate of the University of Massachusetts (B.A.) and Boston University
(M.B.A.).
J. Grant Monahon is AEW Capital Management's General Counsel and a
member of the firm's Management Committee and Investment Policy Group. He has
over 25 years of experience in real estate law and investments. Prior to joining
the predecessor of AEW Capital Management in 1987, Mr. Monahon was a partner
with a major Boston law firm. As the head of that firm's real estate finance
department, he represented a wide variety of institutional clients, both
domestic and international, in complex equity and debt transactions. He is the
former Chairman of the General Counsel section of the National Association of
Real Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College
(B.A.) and Georgetown University Law Center (J.D.).
<PAGE>
James J. Finnegan is the Assistant General Counsel 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 AEW'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.).
Karin J. Lagerlund directs the Institutional Real Estate Services
Portfolio Accounting Group at AEW Capital Management, overseeing portfolio
accounting, performance measurement and client financial reporting for AEW's
private equity investment portfolios. Ms. Lagerlund is a Certified Public
Accountant and has over ten years experience in real estate consulting and
accounting. Prior to joining AEW Capital Management in 1994, she was an Audit
Manager at EY/Kenneth Leventhal LLP. Ms. Lagerlund is a graduate of Washington
State University (B.A.).
(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, 1998. Cash distributions to General Partners include
amounts distributed after year-end with respect to 1998.
<TABLE>
<CAPTION>
Amount of
Compensation and
Receiving Entity Type of Compensation Reimbursement
<S> <C> <C>
AEW Real Estate Advisors, Inc. Management Fees and
Reimbursement of Expenses $ 159,460
General Partners Share of Distributable Cash 16,023
New England Securities Corporation Servicing Fee and
Reimbursement of
Expenses 3,932
----------------
TOTAL $ 179,415
===============
</TABLE>
<PAGE>
For the year ended December 31, 1998, the Partnership allocated $2,388
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.
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, 1998. 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, 1998.
(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 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. The Partnership filed one Current Report
on Form 8-K dated March 9, 1999 reporting on Items No. 2
(Acquisition or Disposition of Assets) and No. 7 (Financial
Statements and Exhibits), relating in both cases to the
February 26, 1999 sale of La Mirada.
<PAGE>
Copley Realty Income Partners 2;
A Limited Partnership
Financial Statements
* * * * * * *
December 31, 1998
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets - December 31, 1998 and 1997
Statements of Operations - For the Years Ended December 31, 1998, 1997
and 1996
Statements of Partners' Capital (Deficit) - For the Years Ended December
31, 1998, 1997 and 1996
Statements of Cash Flows - For the Years Ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at December 31,
1998, 1997 and 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, 1998, 1997 and 1996, 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, 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 year ended December 31, 1996 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 for the year ended
December 31, 1996. We also did not audit the financial statements of MCV III, a
wholly-owned property, for the year ended December 31, 1996 which statements
reflect operating income of $1,295,352. Those statements were audited by other
auditors whose report thereon has 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 year ended December 31, 1996
and for the operating income for MCV III for the year ended December 31, 1996 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, 1998,
1997 and 1996 provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
Boston, Massachusetts
March 9, 1999
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------------ ---------
<S> <C> <C>
Assets
Property, net real estate investment: $ - $ -
Property held for disposition, net 6,225,018 6,522,742
Cash and cash equivalents 518,094 1,083,887
Short-term investments - 596,268
------------------ -----------------
$ 6,743,112 $ 8,202,897
================== =================
Liabilities and Partners' Capital
Accounts payable $ 41,594 $ 53,995
Accrued management fee 12,799 28,809
Deferred disposition fees - 225,840
------------------ -----------------
Total liabilities 54,393 308,644
------------------ -----------------
Partners' capital (deficit):
Limited partners ($781 per unit,
100,000 units authorized;
32,767 units,
issued and outstanding) $ 6,840,037 $ 8,033,516
General partners (151,318) (139,263)
------------------- -----------------
Total partners' capital 6,688,719 7,894,253
------------------ -----------------
$ 6,743,112 $ 8,202,897
================== =================
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1998 1997 1996
-------------------- --------------------- -----------------
<S> <C> <C> <C>
Investment Activity
Property rentals $ 847,616 $ 1,419,767 $ 1,509,871
Depreciation and amortization (392,579) (415,746) (688,380)
Property operating expenses (119,730) (196,567) (214,519)
--------------------- ------------------- -----------------
335,307 807,454 606,972
Joint venture earnings - 54,694 210,976
Lease termination fee - - 1,600,000
Investment valuation allowances - - (3,350,000)
-------------------- -------------------- ----------------
Total real estate operations 335,307 862,148 (932,052)
Gain on sales of property - 517,693 -
Reversal of deferred disposition fee 225,840 - -
-------------------- ------------------- -----------------
Total real estate activity 561,147 1,379,841 (932,052)
Interest on cash equivalents
and short-term investments 69,082 267,525 250,877
-------------------- ------------------- -----------------
Total investment activity 630,229 1,647,366 (681,175)
-------------------- ------------------- -----------------
Portfolio Expenses
General and administrative 91,003 99,305 107,099
Management fee 142,460 505,722 123,057
-------------------- ------------------- -----------------
233,463 605,027 230,156
-------------------- ------------------- -----------------
Net Income (Loss) $ 396,766 $ 1,042,339 $ (911,331)
==================== =================== =================
Net income (loss) per weighted
average limited partnership unit $ 11.99 $ 31.46 $ (27.47)
==================== =================== ================
Cash distributions per limited
partnership unit outstanding for the
entire year $ 48.41 $ 377.08 $ 25.00
==================== ==================== ================
Weighted average number of limited
partnership units outstanding during
the year 32,767 32,806 32,848
==================== =================== =================
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- -------------------------- ---------------
General Limited General Limited General
Partners Partners Partners Partners Partners
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ (139,263) $ 8,033,516 $ (97,317) $ 19,392,367 $ (79,910)
Cash distributions (16,023) (1,586,277) (52,369) (12,366,593) (8,294)
Repurchase of limited partnership units - - - (24,174) -
Net income (loss) 3,968 392,798 10,423 1,031,916 (9,113)
--------------- --------------- -------------- --------------- -------------
Balance at end of year $ (151,318) $ 6,840,037 $ (139,263) $ 8,033,516 $ (97,317)
================ =============== ============== =============== =============
Year ended December 31,
------------------------------------------------------------------------------------------
1996
-----------------------
Limited
Partners
Balance at beginning of year 21,133,635
Cash distributions (821,200)
Repurchase of limited partnership units (17,850)
Net income (loss) (902,218)
-------------
Balance at end of year $19,392,367
=============
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------------
1998 1997 1996
-------------- --------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 396,766 $ 1,042,339 $ (911,331)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization 392,579 415,746 688,380
Investment valuation allowances - - 3,350,000
Equity in joint venture net income - (54,694) (210,976)
Cash distributions from joint ventures - 152,012 396,881
Gain on sales of property - (517,693) -
Decrease in investment income
receivable 9,445 14,383 3,355
Decrease (increase) in accrued
lease termination fee - 350,000 (350,000)
Increase (decrease) in operating liabilities (28,411) (9,439) 21,912
Increase in property working capital (94,854) (96,341) (132,043)
---------------- ----------------- -------------
Net cash provided by operating activities 675,525 1,296,313 2,856,178
---------------- ----------------- -------------
Cash flows from investing activities:
Decrease (increase) in short-term investments,
net 586,822 1,451,663 (383,160)
Net proceeds from sales of property - 6,993,169 -
Provision for (reversal of)deferred
disposition fee (225,840) 225,840 -
---------------- ----------------- ---------------
Net cash provided by (used in)
investing activities 360,982 8,670,672 (383,160)
---------------- ----------------- ---------------
Cash flows from financing activities:
Distributions to partners (1,602,300) (12,418,962) (829,494)
Repurchase of limited partnership units - (24,174) (17,850)
--------------- ----------------- ------------
Net cash used in financing activities (1,602,300) (12,443,136) (847,344)
---------------- ----------------- ------------
Net increase (decrease) in cash and cash
equivalents (565,793) (2,476,151) 1,625,674
Cash and cash equivalents:
Beginning of year 1,083,887 3,560,038 1,934,364
--------------- ----------------- ------------
End of year $ 518,094 $ 1,083,887 $ 3,560,038
=============== ================= =============
(See accompanying notes to financial statements)
</TABLE>
<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 remaining real estate investment 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
extended the investment period at least into 1999, having determined it to be in
the best interest of the limited partners. As discussed below, the Partnership
sold its remaining real estate investment in February, 1999.
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, L. P. ("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 Capital 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. At year end 1997, NEIC completed a
restructuring plan under which it contributed all of its operations to a newly
formed private partnership, NEIC Operating Partnership, L.P., in exchange for a
general partnership interest in the newly formed entity. Accordingly, at
December 31, 1997, AEW Capital Management, L.P. is wholly owned by Nvest
Companies, L.P., the successor to NEIC Operating Partnership, L.P.
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. Effective April 1, 1998,
NEIC changed its name to Nvest, L.P. and NEIC Operating Partnership changed its
name to Nvest Companies, L.P.
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 1998, $19,638 in 1997, and $17,000 in 1996). 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 limited to the
lessor of 3% of the selling price of the property, or 50% of the standard real
estate commission customarily charged by an independent real estate broker.
Payments of disposition fees are subject to the prior receipt by the limited
partners of their capital contributions plus a stipulated return thereon. Based
on the Partnership's returns to date and the sale of the Partnership's sole
remaining real estate investment in February, 1999 (as discussed in Note 3), the
Managing General Partner determined that previously accrued deferred disposition
fees of $225,840 would not be paid and, accordingly, reversed such fees in 1999.
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 $3,932, $3,696 and $3,524
in 1998, 1997 and 1996, 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, were 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 former joint venture investment, the Partnership
recorded its ownership share of the operating results, after the elimination of
all inter-entity transactions, since its venture partner, an affiliate of the
Partnership, had 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.
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.
Leases
Leases are accounted for as operating leases. Leasing commissions are
amortized over the terms of the respective leases. Rental income is recognized
on a straight-line basis over the terms of the respective leases.
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.
The carrying value of an investment may be more or less than its
current appraised value. At December 31, 1998, the appraised value of the
Partnership's remaining investment exceeded its carrying value by $975,000. At
December 31, 1997, the appraised value of the Partnership's investment exceeded
its carrying value by $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 AEW 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.
<PAGE>
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, 1997, all short-term investments are in commercial paper with less
than two months remaining to maturity.
Deferred Disposition Fees
According to the terms of the advisory contract, AEW is entitled to disposition
fees related to sales of real estate investments. Payment of the fees, however,
is contingent upon the limited partners first receiving their capital, plus a
stipulated return thereon. After the execution of a Purchase and Sale Agreement
to dispose of the Partnership's sole remaining real property asset during the
first quarter of 1999, the Managing General Partner determined that the
stipulated return of the limited partners' original invested capital would not
occur. As a result, previously accrued disposition fees payable to AEW totaling
$225,840 ($6.89 per limited partnership unit) were recognized as other income in
1998.
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.
Segment Data
Effective January 1, 1998, the Partnership adopted Financial Accounting
Standards Board Statement No. 131. "Disclosures about Segments on an Enterprise
and Related Information" (FAS 131). Based on the criteria established in FAS
131, the Managing General Partner has determined that the Partnership operates
in one operating segment which is investing in real estate properties which are
domiciled in the United States of America.
NOTE 3 - INVESTMENT IN PROPERTY
The following is a summary of the Partnership's investment in property:
December 31,
-------------------------------
1998 1997
---------------- ---------------
Land $ 4,711,859 $ 4,711,859
Buildings and improvements 7,855,152 7,855,152
Accrued lease termination fee - -
Accumulated depreciation (2,757,345) (2,440,345)
Investment valuation allowance (4,200,000) (4,200,000)
----------------- ----------------
5,609,666 5,926,666
Other net assets 615,352 596,076
----------------- ----------------
$ 6,225,018 $ 6,522,742
================= ===============
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). As discussed below, the La Mirada
building was sold in February 1999 and the Rancho Dominguez building was sold in
1997. 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.
<PAGE>
The buildings were being depreciated over 30 years. Tenant improvements
were being depreciated over the life of the underlying leases. Aggregate minimum
future rental payments for the La Mirada property are as follows: 1999-
$694,042; 2000- $796,644; 2001- $801,879; 2002- $859,464; 2003 - $859,464;
thereafter - $358,110.
The tenant in the Rancho Dominguez building had 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, which was received in December 1997, at the termination of
the lease. This lease termination fee was 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 was undertaken 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. As discussed below, the
Rancho Dominguez property was sold in December 1997, at which time the remaining
accrual of $49,811 was reversed based on the contractual results of an
independent environmental inspection completed concurrent with the sale of the
property. The Partnership has no remaining remediation cost obligations with
respect to the Rancho Dominguez building.
On December 15, 1997, the Rancho Dominguez building was sold for
$3,486,000. The Partnership received net proceeds of $3,260,761, after closing
costs, and recognized a gain of $129,703 ($3.96 per limited partnership unit). A
disposition fee of $104,580 was accrued but not paid to AEW. On December 30,
1997, the Partnership made a capital distribution of $3,243,933 ($99 per limited
partnership unit) from the proceeds of the sale.
On February 26, 1999 the La Mirada property was sold for gross proceeds
of $7,150,000. The Partnership received net proceeds of $6,955,515, after
closing costs, and recognized a gain in 1999 of $723,328 ($22.07 per limited
partnership).
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 were 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 provided 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 did not
contribute proportionately.
The respective real estate management/development firms were
responsible for day-to-day development and operating activities, although
overall authority and responsibility for the business was shared by the
venturers. The real estate management/development firms, or their affiliates,
also provided 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 was 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 bore
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%.
<PAGE>
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.
On May 2, 1997, the Medlock Oaks buildings were sold to an
institutional buyer, which is unaffiliated with the Partnership, for a total
sales price of $9,402,779. The Partnership received its 43% share of the net
proceeds in the amount of $3,958,248, after closing costs, and recognized a gain
of $387,990 ($11.70 per limited partnership unit) on the sale. A disposition fee
of $121,260 was accrued but not paid to AEW. On May 29, 1997, the Partnership
made a capital distribution of $3,938,160 ($120 per limited partnership unit)
from the proceeds of the sale.
Summarized Financial Information
The following summarized financial information is presented in the
aggregate for the Medlock Oaks joint venture.
<TABLE>
<CAPTION>
Results of Operations
---------------------
Year ended December 31,
--------------------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenue
Rental income $ - $ 358,009 $ 1,165,073
Other - 36,653 114,609
---------------- ---------------- ----------------
- 394,662 1,279,682
---------------- ---------------- ----------------
Expenses
Depreciation and amortization - 156,941 454,305
Operating expenses - 129,254 321,958
---------------- ---------------- ----------------
- 286,195 776,263
---------------- ---------------- ----------------
Net income $ $ 108,467 $ 503,419
================ ================ ==================
</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.
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,
--------------------------------------
1998 1997 1996
--------------- ----------------- ---------------
<S> <C> <C> <C>
Net income (loss) per
financial statements $ 396,766 $ 1,042,339 $ (911,331)
Timing differences:
Joint venture earnings - (95,036) (106,138)
Rental revenue (261,165) 251,204 (394,752)
Expenses - 385 2,485
Depreciation and amortization 103,220 (137,824) 160,195
Valuation allowances - - 3,350,000
--------------- ---------------- ---------------
Taxable income $ 238,821 $ 1,061,068 $ 2,100,459
================ ================= ===============
</TABLE>
<PAGE>
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 $73,208
and $41,551 at December 31, 1998 and 1997, respectively. Through December 31,
1997, the Partnership repurchased and retired 230 limited partnership units for
an aggregate cost of $177,945.
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, 1998 were made on January 28, 1999 in the aggregate amount of
$129,413 ($3.91 per limited partnership unit). See Note 3 for discussion of
investment sale on February 26, 1999.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Initial Cost to
the Partnership
-----------------------------------------------------------------
Encum - Buildings & Other
Description brances Land Improvements (Net)
- ---------------- ------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
An industrial and an R & D
building (235,594 sq.ft) on
13.08 acres of land in Note A $ 7,339,344 $ 10,665,340 $ 144,934
Rancho Dominguez and
La Mirada, California ------------ ------------ ------------
Total Wholly-Owned .. $ 7,339,344 $ 10,665,340 $ 144,934
============ ============ ============
Costs Capitalized
Subsequent to Acquisition
---------------------------------------------------------------
Carrying Additions
Description Costs (Dispositions) Other
- ---------------- ----------- ------------ --------------
An industrial and an R & D
building (235,594 sq.ft) on
13.08 acres of land in Note A $ 0 ($ 1,294,871) $ 1,315,456
Rancho Dominguez and
La Mirada, California ------------ ------------ ------------
Total Wholly-Owned .. $ 0 ($ 1,294,871) $ 1,315,456
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which
Carried at Close of Period
-------------------------------------------------------------
Investment
Buildings & Valuation
Description Land Improvements Other Allowances Dispositions Total
- ---------------- ----------- ------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
An industrial and an R & D
building (235,594 sq.ft) on
13.08 acres of land in Note A $ 7,339,344 $ 9,370,469 $ 1,460,390 ($ 7,200,000) $0 $ 10,970,203
Rancho Dominguez and
La Mirada, California ----------- ------------- ------------- -------------- ------------ ------------
Total Wholly-Owned .. $ 7,339,344 $ 9,370,469 $ 1,460,390 ($ 7,200,000) $0 $ 10,970,203
============ ============ ============ ============= ============ =============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Depreciation Date of Date Depreciable
& Amortization Construction Acquired Life
--------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
An industrial and an R & D
building (235,594 sq.ft) on
13.08 acres of land in Note A $ 4,745,185 1962 & 11/12/87 30 years
Rancho Dominguez and 1987
La Mirada, California --------------
Total Wholly-Owned.. $ 4,745,185
</TABLE>
43% interest in Medlock Oaks
Associates. Owners of five
warehouse and service center
buildings (173,916 square feet) ---------- See Note B -----
situated on 14.9 acres of land
in Atlanta, Georgia.
<TABLE>
<CAPTION>
Accumulated
Depreciation Date of Date Depreciable
Dispositions Total & Amortization Construction Acquired Life
------------ ------ --------------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
43% interest in Medlock Oaks
Associates. Owners of five
warehouse and service center Phase I-1987
buildings (173,916 square feet) $0 $0 N/A Phase II-1990 12/4/87 30/15 Yrs
situated on 14.9 acres of land ============ ========
in Atlanta, Georgia.
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2
NOTE A TO SCHEDULE III
<TABLE>
<CAPTION>
Reconciliation of Real
Estate Owned
1996 1996 1996
COST INVESTMENT INCREASE IN 1996 INCREASE INVESTMENT
AS OF IN DEFERRED IN PROPERTY VALUATION
12/31/95 PROPERTY LEASING COSTS WORKING CAPITAL ALLOWANCE
-------- ---------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Rancho Dominguez, California
& La Mirada, California $16,677,583 $0 $0 $482,043 ($3,000,000)
========== ========= ============ =============== ============
1997 1997 1997
COST INVESTMENT INCREASE IN 1997 INCREASE INVESTMENT
AS OF IN DEFERRED IN PROPERTY VALUATION
12/31/96 PROPERTY LEASING COSTS WORKING CAPITAL ALLOWANCE
-------- ---------- ------------- ---------------- ------------
Rancho Dominguez, California
& La Mirada, California $14,159,626 $0 $0 $260,929 $0
=========== ========= ============ =============== ============
1998 1998 1998
COST INVESTMENT INCREASE IN 1998 INCREASE INVESTMENT
AS OF IN DEFERRED IN PROPERTY VALUATION
12/31/97 PROPERTY LEASING COSTS WORKING CAPITAL ALLOWANCE
-------- ----------- ------------- ---------------- ------------
Rancho Dominguez, California
& La Mirada, California $10,875,348 $0 $0 $94,855 $0
=========== ========= ============ ============== ============
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Real
Estate Owned
ACCUMULATED 1996 ACCUMULATED
COST AMORTIZATION & AMORTIZATION & AMORTIZATION & 12/31/96
BALANCE AT DEPRECIATION DEPRECIATION DEPRECIATION PROPERTY
12/31/96 AS OF 12/31/95 EXPENSE AS OF 12/31/96 NET
----------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rancho Dominguez, California
& La Mirada, California $14,159,626 $3,255,472 $683,147 $3,938,619 $10,221,007
=========== ============ ============= ============== =============
ACCUMULATED 1997 ACCUMULATED
COST AMORTIZATION & AMORTIZATION & AMORTIZATION & 1997 12/31/97
BALANCE AT DEPRECIATION DEPRECIATION DEPRECIATION SALES PROPERTY
12/31/97 AS OF 12/31/96 EXPENSE AS OF 12/31/97 (R.DOMINGUEZ) NET
----------- -------------- -------------- -------------- ------------- ------------
Rancho Dominguez, California
& La Mirada, California $14,420,555 $3,938,619 $413,987 $4,352,606 ($3,545,207) $6,522,742
=========== ============ =========== ============= ============ ==========
ACCUMULATED 1998 ACCUMULATED
COST AMORTIZATION & AMORTIZATION & AMORTIZATION & 1998 12/31/98
BALANCE AT DEPRECIATION DEPRECIATION DEPRECIATION SALES PROPERTY
12/31/98 AS OF 12/31/97 EXPENSE AS OF 12/31/98 (R.DOMINGUEZ) NET
----------- -------------- -------------- -------------- ------------- ------------
Rancho Dominguez, California
& La Mirada, California $10,970,203 $4,352,606 $392,579 $4,745,185 $0 $6,225,018
=========== ============ =========== ============= ============ ==========
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2
NOTE B TO SCHEDULE III
<TABLE>
<CAPTION>
1995 1995 CASH
BALANCE 1995 INVESTMENT RECEIVED
PERCENT OF AS OF INVESTMENT 1995 EQUITY IN VALUATION FROM
DESCRIPTION OWNERSHIP 12/31/94 IN PROPERTY INCOME (LOSS) ALLOWANCE JOINT VENTURES
----------- ---------- ---------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Medlock Oaks 43% $4,229,137 $0 $180,667 $0 ($319,499)
----------- --------- ------------ ---------- ----------------
$4,229,137 $0 $180,667 $0 ($319,499)
=========== ========= ============ ========= ================
</TABLE>
<TABLE>
<CAPTION>
1996 1996 CASH
BALANCE 1996 INVESTMENT RECEIVED
PERCENT OF AS OF INVESTMENT 1996 EQUITY IN VALUATION FROM
OWNERSHIP 12/31/95 IN PROPERTY INCOME (LOSS) ALLOWANCE JOINT VENTURES
---------- ---------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Medlock Oaks 43% $4,085,073 $0 $209,076 ($350,000) ($396,881)
------------ ------------ -------------- ------------ ---------------
$4,085,073 $0 $209,076 ($350,000) ($396,881)
=========== ============ ============== ============ ================
</TABLE>
<TABLE>
<CAPTION>
1997 1997 CASH
BALANCE 1997 INVESTMENT RECEIVED
PERCENT OF AS OF INVESTMENT 1997 EQUITY IN VALUATION FROM
OWNERSHIP 12/31/96 IN PROPERTY INCOME (LOSS) ALLOWANCE JOINT VENTURES
---------- ---------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Medlock Oaks 43% $3,543,935 $0 $54,055 $0 ($152,012)
------------ ------------ -------------- ------------ ---------------
$3,543,935 $0 $54,055 $0 ($152,012)
=========== ============ ============== ============ ================
</TABLE>
1995 1995
AMORTIZATION AMORTIZATION
OF OF BALANCE
ACQUISITION DEFERRED AS OF
DESCRIPTION FEES INTEREST 12/31/95
------------ ------------- ------------- ------------
Medlock Oaks ($5,232) $0 $4,085,073
-------- --------- ------------
($5,232) $0 $4,085,073
======== ========= ============
1996 1996
AMORTIZATION AMORTIZATION
OF OF BALANCE
ACQUISITION DEFERRED AS OF
FEES INTEREST 12/31/96
------------- ------------- ------------
Medlock Oaks ($5,233) $1,900 $3,543,935
-------- --------- ------------
($5,233) $1,900 $3,543,935
======== ========= ============
<TABLE>
<CAPTION>
1997 1997
AMORTIZATION AMORTIZATION
OF OF BALANCE
ACQUISITION DEFERRED 1997 AS OF
FEES INTEREST SALES 12/31/97
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Medlock Oaks ($1,759) $639 ($3,444,858) $0
-------- --------- ------------ -----------
($1,759) $639 ($3,444,858) $0
======== ========= ============ ===========
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
- -------- --------
<S> <C> <C>
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.
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).
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
- ------- -------
<S> <C> <C>
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.
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.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
- ------ -------
<S> <C> <C>
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".
27. Financial Data Schedule
- -----------------------------------------------
* Previously filed and incorporated herein by reference.
</TABLE>
<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 25, 1999 By: /s/ J. Christopher Meyer, III
------------------------------
J. Christopher Meyer, III
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
President, Chief
Executive Officer and
/s/ J. Christopher Meyer, III Director March 25, 1999
- ----------------------------------
J. Christopher Meyer, III
Vice President and
/s/ Pamela J. Herbst Director March 25, 1999
- ---------------------------
Pamela J. Herbst
Vice President and
/s/ J. Grant Monahon Director March 25, 1999
- ---------------------------
J. Grant Monahon
/s/ James J. Finnegan Vice President March 25, 1999
- ---------------------------
James J. Finnegan
Treasurer and Principal
/s/ Karin J. Lagerlund Financial and Accounting
- ----------------------------- Officer March 25, 1999
Karin J. Lagerlund
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 518,094
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 518,094
<PP&E> 6,225,018
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,743,112
<CURRENT-LIABILITIES> 54,393
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6,688,719
<TOTAL-LIABILITY-AND-EQUITY> 6,743,112
<SALES> 847,616
<TOTAL-REVENUES> 1,142,538
<CGS> 119,730
<TOTAL-COSTS> 119,730
<OTHER-EXPENSES> 626,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 396,766
<INCOME-TAX> 0
<INCOME-CONTINUING> 396,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 396,766
<EPS-PRIMARY> 11.99
<EPS-DILUTED> 11.99
</TABLE>
