Item 1. Business.
Copley Realty Income Partners 4; A Limited Partnership (the "Partnership") was organized under the Uniform Limited Partnership Act of the Commonwealth of Massachusetts on March 16, 1989, 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 Fourth Income Corp. (the "Managing General Partner") and ICOP 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 5-11 (the "Registration Statement") with the Securities and Exchange Commission on March 23, 1989, with respect to a public offering of 40,000 units of limited partnership interest at a 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 June 30, 1989.
The first sale of Units occurred on November 9, 1989, 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 December 31, 1990. As of December 31, 1990, a total of 11,931 Units had been sold, a total of 966 investors had been admitted as limited partners (the "Limited Partners") and a total of $11,899,370 had been contributed to the capital of the Partnership.
As of December 31, 1999, the Partnership had disposed of all of its real estate investments. The principal terms of the sales of the Partnership's investments are set forth in the following table:
The Partnership has no employees. Services are performed for the Partnership by the Managing General Partner and affiliates of the Managing General Partner.
Industrial Building in Simi Valley, California ("Shasta Way").
On September 29, 1989, the Partnership acquired a 25.2% interest in a joint venture formed with Copley Realty Income Partners 3; A Limited Partnership, an affiliate of the Partnership (the "Affiliate") with a 34.8% interest, and an affiliate of The Hewson Company (the "Developer"). As of December 31, 1998, the Partnership had contributed $5,149,893 to the capital of the joint venture out of a maximum commitment of $5,512,500. Effective January 1, 1996, the joint venture was restructured whereby the Developer withdrew, and the ownership interests of the Partnership and its Affiliate increased to 42% and 58%, respectively. The joint venture agreement entitled the Partnership and the Affiliate to receive a preferred return on their respective invested capital at the rate of 10% per annum. The joint venture agreement also entitled the Partnership to receive 42% of remaining cash flow and 42% of sale and refinancing proceeds following the return of the Partnership's and the Affiliate's equity.
The joint venture owned approximately 12.13 acres of land in Simi Valley, California and in June 1991 completed construction thereon of a 235,080 square foot industrial building. On August 27, 1999, the joint venture sold its property to an unaffiliated third party for gross proceeds of $13,057,000, of which the Partnership's share was $5,483,940. The Partnership received its 42% share of the net proceeds, after closing costs, in the amount of $5,404,521 and recognized a gain of $1,974,170 ($163.81 per Limited Partnership Unit) on the sale. On September
22, 1999 the Partnership made a capital distribution of $5,297,364 ($444.00 per Limited Partnership Unit) from the proceeds of the sale.
Item 2.
Item 2. Properties.
The Partnership has disposed of all its real property investments.
Item 3.
Item 3. Legal Proceedings.
The Partnership is not a party to, nor are any of its properties subject to, any material pending legal proceedings.
Item 4.
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.
PART II
Item 5.
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, 1999, there were 911 holders of Units.
The Partnership's Amended and Restated Agreement of Limited Partnership dated November 9, 1989, 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. For the year ended December 31, 1999, cash distributions paid in 1999, or distributed after year end with respect to 1999, to the Limited Partners as a group totaled $5,689,656, including $5,297,364 ($444 per Limited Partnership Unit) representing proceeds from the sale of the remaining property. For the year ended December 31, 1998, cash distributions paid in 1998, or distributed after year end with respect to 1998, to the Limited Partners as a group totaled $468,650.
Total cash distributions exceeded net income in 1999 and, therefore, resulted in a reduction of partners' capital. Regular cash distributions from operations also exceeded cash provided by operating activities in 1999. Reference is made to the Partnership's Statement of Partners' Capital (Deficit) and Statement of Cash Flows in Item 7 hereof.
Item 6.
Item 6. Selected Financial Data.
(1) Net Income in 1999 includes a gain from the sale of the remaining property of $1,968,155. Cash Distributions include returns of capital totaling $444.00 per Limited Partnership Unit.
(2) Net Income in 1997 includes gains from the sales of two properties totaling $1,931,975. Cash Distributions include returns of capital totaling $402.00 per Limited Partnership Unit.
(3) Cash distributions in 1995 include a discretionary reduction of cash reserves of $37.00 per Limited Partnership Unit, which was classified as a return of capital.
Item 7.
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 December 1990 and a total of 11,931 units were sold. The Partnership received proceeds of $10,097,962, net of selling commissions and other offering costs, which have been used for investment in real estate and to pay related acquisition costs, or retained as working capital reserves.
In July 1995, the Partnership reduced its working capital reserves by making a capital distribution of $441,447 ($37 per Limited Partnership Unit). After the distribution, the Partnership's adjusted capital contribution was $963 per Unit.
On May 1, 1997, the Hohokam property within the Newhew joint venture was sold for $2,990,000. The Partnership received net proceeds of $2,826,133, after closing costs. On May 29, 1997, the Partnership made a capital distribution of $2,791,854 ($234 per Limited Partnership Unit) from the proceeds of the sale. The distribution reduced the adjusted capital contribution to $729 per Unit.
On October 24, 1997, the Partnership sold the Fairmont property for $3,600,000, of which $1,139,082 was used to discharge the related note payable. The Partnership received net proceeds of $2,017,775, after closing costs. On November 24, 1997, the Partnership made a capital distribution of $2,004,408 ($168 per Limited Partnership Unit) from the proceeds of the sale. The distribution reduced the adjusted capital contribution to $561 per Unit.
On August 27, 1999, the Shasta Way joint venture, in which the Partnership and an affiliate own a 42% and 58% interest, respectively, sold its property to an unaffiliated third party for gross proceeds of $13,057,000, of which the Partnership's share was $5,483,940. The Partnership received its 42% share of the net proceeds, after closing costs, in the amount of $5,390,812. On September 22, 1999 the Partnership made a capital distribution of $5,297,364 ($444.00 per Limited Partnership Unit) from the proceeds of the sale. The distribution reduced the adjusted capital contribution to $117 per Unit.
At December 31, 1999, the Partnership had $1,291,411 in cash and cash equivalents. The balance is being retained primarily as a reserve in the event of any claims for breach of representations or warranties in connection with the sale of Shasta Way; pending dissolution and liquidation of the Partnership later in 2000, and for working capital. The annualized distribution rate relating to all four quarters of 1998 was 7.0% on the adjusted capital contribution of $561. Cash distributions from operations related to the first two quarters of 1999 were made at the annualized rate of 5.5% on the adjusted capital contribution of $561 per unit. Cash distributions related to the third quarter of 1999 were made at the annualized rate of 7% on the weighted average capital contribution of $517.57 per unit. The increase in the distribution rate was due to higher than expected cash receipts from the Shasta Way joint venture due to a later than anticipated sale date.
Results of Operations
Form of Real Estate Investments
The Newhew investment was structured as a joint venture with a real estate management/development firm. The Shasta Way investment had been structured as a joint venture with a real estate management/development firm and an affiliate of the Partnership. As of January 1, 1996, the Shasta Way joint venture was restructured, and the management/development firm's interest was assigned to the Partnership and its affiliate in proportion to their respective ownership interests. The Partnership's ownership percentage increased to 42%.
Operating Factors
As discussed above, the Partnership sold the two Newhew Phase I buildings (Hohokam Corporate Center) on May 1, 1997 for gross proceeds of $2,990,000. The Partnership received net proceeds of $2,826,133, after closing costs, and recognized a gain of $973,919 ($80.81 per Limited Partnership Unit) on the sale. Occupancy at Hohokam was 100% as of the sale date.
As discussed above, the Partnership sold Fairmont Commerce Center (Newhew's Phase II investment) on October 24, 1997 for gross proceeds of $3,600,000, of which $1,139,082 was used to discharge the related note payable. The Partnership received net proceeds of $2,017,775, after closing costs, and recognized a gain of $958,056 ($80.30 per Limited Partnership Unit) on the sale. Occupancy at Fairmont was 100% as of the sale date.
As discussed the Shasta Way joint venture, in which the Partnership and an affiliate owned a 42% and 58% interest, respectively, on August 27, 1999 for gross proceeds of $13,057,000, of which the Partnership's share was $5,483,940. The Partnership received its 42% share of the net proceeds, after closing costs, in the amount of $5,390,812, and recognized a gain of $1,968,155 ($163.31 per Limited Partnership Unit) on the sale. Shasta Way had been 100% leased to one tenant through the date of sale.
Investment Results
Interest income on cash equivalents and short-term investments for 1999 increased approximately $4,500, or 5% as compared to 1998, due to higher invested balances, as well as higher short-term yields. Interest income on cash equivalents and short-term investments for 1998 decreased approximately $28,000, or 26% as compared to 1997, due to lower invested balances, as well as lower short-term yields.
Joint venture earnings were $198,117, $257,979 and $382,320 for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease of $124,341 between 1998 and 1997 is due to the sale of the two Newhew investments in 1997, as discussed above. The decrease between 1999 and 1998 is due to the sale of the Shasta Way investment in 1999, as discussed above.
Operating cash flow remained relatively stable between 1999 and 1998. The decrease in 1997 is due to the sale of the Newhew investments.
Portfolio Expenses
General and administrative expenses primarily consist of real estate appraisal, legal, accounting, printing and servicing agent fees. General and administrative expenses remained relatively stable between the periods ended December 31, 1998 and 1999. General and administrative expenses decreased by $10,000, or 13%, in 1998 as compared to 1997 primarily due to decreases in consulting, bank service fees and appraisal fees, partially offset by an increase in legal costs.
The Partnership management fee is 9% of distributable cash flow from operations after any increase or decrease in working capital reserves as determined by the Managing General Partner. The management fee decreased in 1999 compared to 1998 and also between 1998 compared to 1997, which was consistent with the corresponding changes in distributable cash flow.
Inflation
By their nature, real estate investments tend to not be adversely affected by inflation. Inflation may result in appreciation in the value of real estate investments over time, if rental rates and replacement costs increase. Declines in real property values during the period of the Partnership operations, due to market and economic conditions, have overshadowed the positive effect inflation may have on the value of the Partnership's investments.
Item 7A.
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, 1999. 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.
Item 8. Financial Statements and Supplementary Data.
The independent auditor's reports and financial statements listed in the accompanying index are filed as part of this report. See Index to the Financial Statements on page 13.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
The Partnership has had no disagreements with its accountants on any matters of accounting principles or practices or financial statement disclosure.
PART III
Item 10.
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, 1999.
Name Position(s) with the Managing General Partner Age - ---- --------------------------------------------- ---
Alison Husid Cutler President, Chief Executive Officer and Director 37 Pamela J. Herbst Vice President and Director 44 J. Grant Monahon Vice President and Director 54 James J. Finnegan Vice President 39 Karin J. Lagerlund Treasurer and Principal Financial and Accounting Officer 35
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationships.
None.
(e) Business Experience.
The Managing General Partner was incorporated in Massachusetts on March 14, 1989. The background and experience of the executive officers and directors of the Managing General Partner are as follows:
Alison Husid Cutler is a Portfolio Manager in AEW Institutional Real Estate Services, with responsibility for several real estate equity portfolios representing approximately $800 million in client capital. She has over 12 years of experience in real estate finance and investment management. Ms. Cutler joined the predecessor of AEW Capital Management, L.P. ("AEW Capital Management") in 1987 as Controller for a portfolio management team responsible for the acquisition, management, restructuring and disposition of client assets in New England and the western U.S. She later served as Asset Manager for a portfolio of assets in Arizona and the West Coast. Prior to joining AEW, Ms. Cutler worked for several years as a Senior Auditor with Peat Marwick, Main & Co. She is a Certified Public Accountant and a graduate of the University of Massachusetts (B.A.).
Pamela J. Herbst directs AEW Capital Management, L.P.'s ("AEW Capital Management") Institutional Real Estate Services, with oversight responsibility for the direct equity investing and asset and portfolio management of existing core and core-plus commingled funds and separate accounts. Ms. Herbst is a member of AEW Capital Management's Investment Policy Group and Operating 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 Chief Operating Officer 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.).
James J. Finnegan is the 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.
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 5 of Notes to the Financial Statements.
The following table sets forth the amounts of the fees and cash distributions 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, 1999. Cash Distributions to General Partners include amounts distributed after year-end with respect to 1999.
Amount of Compensation and Receiving Entity Type of Compensation Reimbursement - ---------------- -------------------- -------------
AEW Real Estate Advisors, Inc. Management Fees and Reimbursement of Expenses $ 50,190
General Partners Share of Distributable Cash 3,962
New England Securities Corporation Servicing Fees and Reimbursement of Expenses 1,828
TOTAL $ 55,980 ==========
For the year ended December 31, 1999, the Partnership allocated $4,848 of taxable income to the General Partners.
Item 12.
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, 1999. 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, 1999.
(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.
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.
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on the accompanying Index to Financial Statements and Schedule and Financial Statement Index No. 2 are filed as part of this Annual Report.
(2) Financial Statement Schedule--The Financial Statement Schedule listed on the accompanying Index to Financial Statements and Schedule is filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report and incorporated in this Annual Report as set forth in said Index.
(b) Reports on Form 8-K: During the last quarter of the year ended December 31, 1999, the Partnership filed no Current Report on Form 8-K.
Copley Realty Income Partners 4;
A Limited Partnership
Financial Statements
* * * * * * *
December 31, 1999
COPLEY REALTY INCOME PARTNERS 4; A LIMITED PARTNERSHIP
Report of Independent Accountants
Financial Statements (in liquidation as of December 31, 1999):
Balance Sheets - December 31, 1999 and 1998
Statements of Operations - For the Years Ended December 31, 1999, 1998 and 1997
Statements of Partners' Capital (Deficit) - For the Years Ended December 31, 1999, 1998 and 1997
Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
All schedules are omitted because they are not applicable
Report of Independent Accountants
To the Partners of Copley Realty Income Partners 4; A Limited Partnership:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Copley Realty Income Partners 4, A Limited Partnership (the "Partnership") at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of Fourth Income Corp., the Managing General Partner of the Partnership (the "Managing General Partner"); our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, 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 provide a reasonable basis for the opinion expressed above.
As described in Note 1 to the financial statements, the Partnership adopted a plan of liquidation on December 31, 1999 and as a result changed its basis of accounting for periods subsequent to December 31, 1999 from the going concern basis to the liquidation basis of accounting.
/s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 21, 2000
COPLEY REALTY INCOME PARTNERS 4; A LIMITED PARTNERSHIP
BALANCE SHEETS (in liquidation as of December 31, 1999)
December 31, ------------------------ 1999 1998 ---------- ----------
Assets
Real estate joint venture $3,478,418
Cash and cash equivalents $1,291,411 1,498,022 ---------- ----------
$1,291,411 $4,976,440 ========== ==========
Liabilities and Partners' Capital
Accounts payable $ 37,020 $ 40,674 Accrued management fee -- 11,705 Deferred disposition fees -- 197,700 Accrued expenses for liquidation 49,300 -- ---------- ---------- Total liabilities 86,320 250,079 ---------- ----------
Partners' capital:
Limited partners ($117 and $561 per unit; respectively, 100,000 units authorized; 11,931 units issued and outstanding) 1,184,568 4,723,600 General partners 20,523 2,761 ---------- ---------- Total partners' capital 1,205,091 4,726,361 ---------- ----------
$1,291,411 $4,976,440 ========== ==========
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 4; A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS (in liquidation as of December 31, 1999)
Year ended December 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ----------
Investment Activity
Joint venture earnings $ 198,117 $ 257,979 $ 382,320 Gain on sale of investment 1,968,155 -- 1,931,975 Reversal of deferred disposition fee 197,700 -- -- ---------- ---------- ----------
Total real estate activity 2,363,972 257,979 2,314,295
Interest on cash equivalents and short-term investments 83,035 78,537 106,219 ---------- ---------- ----------
Total investment activity 2,447,007 336,516 2,420,514 ---------- ---------- ----------
Portfolio Expenses General and administrative 65,457 64,589 74,137 Management fee 39,190 46,818 62,587 Amortization 2,366 4,732 6,472 Estimated liquidation period expenses 49,300 -- -- ---------- ---------- ----------
156,313 116,139 143,196 ---------- ---------- ----------
Net Income $2,290,694 $ 220,377 $2,277,318 ========== ========== ==========
Net income per limited partnership unit $ 190.08 $ 18.29 $ 188.97 ========== ========== ==========
Cash distributions per limited partnership unit $ 486.70 $ 40.21 $ 459.41 ========== ========== ==========
Number of limited partnership units outstanding during the year 11,931 11,931 11,931 ========== ========== ==========
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 4; A LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) (in liquidation as of December 31, 1999)
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 4; A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (in liquidation as of December 31, 1999)
(See accompanying notes to financial statements)
COPLEY REALTY INCOME PARTNERS 4; A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
General
Copley Realty Income Partners 4; 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 September 1989, and sold its last remaining investment in August 1999. On December 31, 1999, The Partnership adopted a plan of liquidation.
The Managing General Partner of the Partnership is Fourth 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 ICOP Associates Limited Partnership, a Massachusetts limited partnership. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by AEW pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment Companies, Limited Partnership ("NEIC"), a publicly traded master limited partnership, acquired certain assets subject to then existing liabilities from Aldrich, Eastman & Waltch, Inc. and its affiliates and principals (collectively "the AEW Operations"). Simultaneously, a new entity, AEW Capital Management, L.P. was formed, into which NEIC contributed its interests in Copley and its affiliates. As a result, the AEW Operations were combined with AEW 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. was wholly owned by NEIC Operating Partnership, L.P. AEW is a subsidiary of AEW Capital Management, L.P. Effective April 1, 1998, NEIC changed its name to Nvest, L.P. and NEIC Operating Partnership, L.P. changed its name to Nvest Companies, 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 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.
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 the acquisition and disposition of Partnership investments in real property. Partnership management fees are 9% of distributable cash flow from operations, as defined, before deducting such fees. AEW is also reimbursed for expenses incurred in connection with administering the Partnership ($11,000 in 1999, $11,000 in 1998, and $11,000 in 1997). Acquisition fees were based on 3% of the gross proceeds of the offering and were paid at the time commitments were initially funded. Disposition fees are limited to the lesser 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 August, 1999 (as discussed in Note 3), the Managing General Partner determined that previously accrued deferred disposition fees of $197,700 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 $1,828, $1,681 and $1,580 in 1999, 1998 and 1997 respectively. Fees to Back Bay Advisors, L.P., a wholly-owned subsidiary of Nvest Companies, L.P., for short-term investment advisory services totaled $0, $1,712 and $1,565 in 1999, 1998 and 1997, respectively.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquidation Basis of Accounting
In connection with its adoption of a plan of liquidation on December 31, 1999, the Partnership also adopted the liquidation basis of accounting which, among other things, requires that net realizable value and that assets and liabilities be stated at their estimated costs of liquidating the Partnership be provided to the extent that they are reasonably determinable.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Managing General Partner to make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. In the Partnership's business, certain estimates require an assessment of factors not within management's control, such as the ability of tenants to perform under long-term leases and the ability of the properties to sustain their occupancies in changing markets. Actual results, therefore, could differ from those estimates.
Real Estate Joint Ventures
Investments in joint ventures, including loans made to joint ventures, which are in substance real estate investments, are stated at cost, plus (minus) equity in undistributed joint venture income (losses). Allocations of joint venture income (losses) were made to the Partnership's venture partners as long as they had substantial economic equity in the project. Economic equity is measured by the excess of the appraised value of the property over the Partnership's total cash investment plus accrued preferential returns and interest thereon.
Capitalized Costs, Depreciation and Amortization
Maintenance and repair costs were expensed as incurred; significant improvements and renewals were capitalized. Depreciation was 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 were being amortized using the straight-line method over the estimated useful lives of the underlying real property.
Leases
Leases were accounted for as operating leases. Leasing commissions were amortized over the terms of the respective leases. Certain tenant leases provide for rent concessions at the beginning of the lease terms and for rental increases over the lease terms. Rental income was recognized on a straight-line basis over the respective lease terms.
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 held for disposition, the impairment loss also includes estimated costs of sale. Investments held for disposition are not depreciated during the holding period. Investments are considered to be held for disposition at the time management commits the Partnership to a plan to dispose of the investment.
Cash Equivalents and Short-Term Investments
Cash equivalents are stated at cost plus accrued interest. The Partnership considers all highly liquid investments purchased with a maturity of ninety days or less to be cash equivalents; otherwise, they are classified as short-term investments.
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 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 the 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: investing in real estate properties which are domiciled in the United States of America.
NOTE 3 - REAL ESTATE JOINT VENTURES
The Partnership was 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. The Partnership 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 a loan to one of the ventures, which was accounted for as a real estate investment due to the attendant risks of ownership. The joint venture agreements provide for the funding of cash flow deficits by the venture partners in proportion to ownership interests, and for the dilution of ownership share in the event a venture partner does not contribute proportionately.
The respective real estate management/development firm was responsible for day-to-day development and operating activities, although overall authority and responsibility for the business is shared by the venturers. The real estate management/development firm, or its affiliates, also provided various services to the respective joint venture for a fee.
The following is a summary of cash invested in joint ventures, net of returns of capital and excluding investment acquisition fees:
(C) Capital contribution
Shasta Way
On September 29, 1989, the Partnership entered into a joint venture with an affiliate of the Partnership, and with an affiliate of The Hewson Company, to construct and operate an industrial facility in Simi Valley, California. The Partnership committed to make, and as of December 31, 1998 had completely funded, capital contributions of up to $5,512,500. It was entitled to a preferred return of 10% per annum on its invested capital. The venture owned land on which it completed construction of an industrial building in 1991. Effective January 1, 1996, the joint venture was restructured, and the Hewson interest was assigned to the Partnership and its affiliate in proportion to their respective ownership interests. The Partnership's ownership percentage increased from 25.2% to 42%; its affiliate's interest was increased to 58%.
On August 27, 1999, the joint venture, sold its property to an unaffiliated third party for gross proceeds of $13,057,000, of which the Partnership's share was $5,483,940. The Partnership received its 42% share of the net proceeds, after closing costs, in the amount of $5,390,812 and recognized a gain of $1,968,155 ($163.31 per Limited Partnership Unit) on the sale. On September 22, 1999 the Partnership made a capital distribution of $5,297,364 ($444.00 per Limited Partnership Unit) from the proceeds of the sale.
Newhew
On April 1, 1991, the Partnership entered into a joint venture with an affiliate of The Hewson Company. The Partnership had an 80% ownership interest. The venture owned land which is improved with three multi-tenant industrial buildings; two were acquired in 1991 and one in 1992. Effective May 8, 1992, the joint venture agreement was amended to provide that the Partnership fund $2,185,000 in the form of capital and $1,365,000 in the form of a loan to the venture. The Partnership was entitled to a preferential return on its capital at the rate of 10% per annum. The loan bore interest at 10% per annum, which was payable monthly, maturing on August 1, 1999 and was prepayable at any time, without penalty if within six months of maturity.
On May 1, 1997, the Hohokam property within the Newhew joint venture was sold to an institutional buyer which was unaffiliated with the Partnership for $2,990,000. The Partnership received net proceeds of $2,826,133, after closing costs, and recognized a gain of $973,919 ($80.81 per Limited Partnership Unit) on the sale. A disposition fee of $89,700 was accrued but not paid to AEW. On May 29, 1997, the Partnership made a capital distribution of $2,791,854 ($234 per Limited Partnership Unit) from the proceeds of the sale.
On October 24, 1997, the Partnership sold the Fairmont property to an institutional buyer which was unaffiliated with the Partnership for $3,600,000, of which $1,139,082 was used to discharge the related note payable. The Partnership received net proceeds of $2,017,775, after closing costs, and recognized a gain of $958,056 ($80.30 per Limited Partnership Unit) on the sale. A disposition fee of $108,000 was accrued but not paid to AEW. On November 24, 1997, the Partnership made a capital distribution of $2,004,408 ($168 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 joint ventures:
Assets and Liabilities
December 31, ----------------------- 1999 1998 ---------- ---------- Assets
Real property, at cost less accumulated depreciation of $1,084,004 at December 31, 1998 $ -- $7,146,195 Other -- 153,318 ---------- ---------- 7,299,513
Liabilities
Other -- 70,400 ---------- ----------
Net assets -- $7,229,113 ========== ==========
Results of Operations
Year ended December 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Revenue Rental income $ 997,109 $1,258,609 $1,690,135 Other income 3,336 2,269 5,914 ---------- ---------- ---------- 1,000,445 1,260,878 1,696,049 ---------- ---------- ----------
Expenses Operating expenses 219,783 460,785 374,044 Depreciation and amortization 308,955 183,877 545,693 Interest expense -- -- 82,238 ---------- ---------- ---------- 528,738 644,662 1,001,975 ---------- ---------- ----------
Net income $ 471,707 $ 616,216 $ 694,074 ========== ========== ==========
Liabilities and expenses exclude amounts owed and attributable to the Partnership and its affiliate on behalf of their various financing arrangements with the joint ventures.
The above summarized financial information includes the results of operations of the Newhew investments through their respective dates of sale.
NOTE 4 - INCOME TAXES
The Partnership's income for federal income tax purposes differs from that reported in the accompanying statement of operations as follows:
Year ended December 31, ------------------------------------------ 1999 1998 1997 ----------- ----------- ----------- Net income per financial statements $ 2,290,694 $ 220,377 $ 2,277,318
Timing differences: Joint venture earnings (129,504) 136,525 100,022 Expenses 49,300 Gain on sale of investments 58,139 -- 172,723 ----------- ----------- -----------
Taxable income $ 2,268,629 $ 356,902 $ 2,550,063 =========== =========== ===========
NOTE 5 - PARTNERS' CAPITAL
Allocations of net income (loss) 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 are made quarterly.
Net sale proceeds and financing proceeds are allocated first to 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 is 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.
FINANCIAL STATEMENTS INDEX NO. 2
Auditor's Report and Financial Statements
of Shasta Way Associates
Report of Independent Auditors from PricewaterhouseCoopers LLP
Balance Sheets - December 31, 1998 and 1997
Statements of Operations - For the Years ended December 31, 1998, 1997 and 1996
Statements of Partners' Capital - 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
Shasta Way Associates (A California General Partnership) December 31, 1998
PRICEWATERHOUSECOOPERS [LOGO]
PricewaterhouseCoopers LLP 160 Federal Street Boston MA 02110 Telephone (617) 439 4390
Report of Independent Accountants
March 9, 1999
To the Partners Shasta Way Associates
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Shasta Way Associates (a California general partnership) (the "Partnership") at December 31, 1998, and the results of its operations and its cash flows for the year in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The Partnership's financial statements for the years ended December 31, 1997 and 1996 were audited by other independent accountants whose report dated January 20, 1998 expressed an unqualified opinion on those statements.
/s/ PricewaterhouseCoopers LLP
Shasta Way Associates (A California General Partnership) December 31, 1998 Balance Sheet - --------------------------------------------------------------------------------
December 31, 1998 1997 --------------------------- Assets Cash $ 150,180 $ 8,718 Tenant Receivables -- 116,212 Rental Property Land 2,977,867 2,977,867 Buildings 6,807,151 6,803,913 Accumulated depreciation (2,575,455) (2,146,952) ----------- ----------- 7,209,563 7,634,828
Other Assets - net of accumulated amortization of $216,646 and $181,717 at December 31, 1998 and 1997 5,953 40,883
$ 7,365,696 $ 7,800,641 =========== ===========
Liabilities and partners' capital Security deposits $ 62,400 $ 62,400 Accounts payable and accrued expenses 8,000 18,652 Due to partners CRIP 3 2,104,381 1,802,692 CRIP 4 1,523,709 1,305,250 Partners' capital 3,667,206 4,611,647 ----------- -----------
$ 7,365,696 $ 7,800,641 =========== ===========
Shasta Way Associates (A California General Partnership) For the period ended December 31, 1998 Statement of Operations - --------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996 ----------------------------------------- Revenue Rental income $ 1,092,432 $ 1,045,432 $ 1,045,432 Tenant reimbursements 166,176 159,720 162,773 Interest and other income 2,269 5,914 3,636 ----------- ----------- ----------- 1,260,877 1,211,066 1,211,841 ----------- ----------- -----------
Expenses Rental operating expenses 172,796 184,831 160,800 General and administrative 11,081 12,079 22,411 Depreciation and amortization 463,433 463,433 463,433 Guaranteed payments CRIP 3 903,648 881,430 868,326 CRIP 4 654,360 638,272 628,733 ----------- ----------- ----------- 2,205,318 2,180,045 2,143,703
Net loss $ (944,441) $ (968,979) $ (931,862) =========== =========== ===========
Shasta Way Associates (A California General Partnership) For the period ended December 31, 1998 Statement of Partners' Capital - --------------------------------------------------------------------------------
Shasta Way Associates (A California General Partnership) For the period ended December 31, 1998 Statement of Cash Flows - --------------------------------------------------------------------------------
Shasta Way Associates (A California General Partnership Notes to the Financial Statements - --------------------------------------------------------------------------------
1. Organization and Other Matters
Shasta Way Associates (a California general partnership), formerly Hewson Shasta Way Associates (the "Partnership"), was formed September 29, 1989 as a California general partnership for the purpose of developing and operating a commercial industrial property in Simi Valley, California. The percentage ownership interests through December 31, 1995 were as follows:
Hewson Shasta Way L.P., a California limited partnership (Hewson) 40.0% Copley Realty Income Partners 3 (CRIP 3) 34.8% Copley Realty Income Partners 4 (CRIP 4) 25.2%
CRIP 3 and CRIP 4 were committed to contribute an aggregate of approximately $13,125,000 to the Partnership; subsequently, the Partnership Agreement provides for pro rata contributions by all partners. CRIP 3 and CRIP 4 contributed $7,111,757 and $5,149,893, respectively, through December 31, 1998.
CRIP 3 and CRIP 4 are entitled to preferential cash payments to the extent of a stipulated return on their invested capital (Note 4). Prior to 1992, for financial reporting purposes, income and losses were allocated to the partners in accordance with their respective ownership interests, based on the long-term substance of the business enterprise and the requirement for all partners to fund capital, as described above. For the years ended December 31, 1992 through December 31, 1995, net income (loss) was allocated entirely to CRIP 3 and CRIP 4.
On January 1, 1996, the partners executed an Amended and Restated Statement of Partnership Agreement whereby Hewson transferred all of its rights, title and interest in and to the Partnership to CRIP 3 and CRIP 4. The percentage ownership interests are as follows:
Copley Realty Income Partners 3 (CRIP 3) 58.0% Copley Realty Income Partners 4 (CRIP 4) 42.0%
Beginning January 1, 1996, income and losses are allocated to CRIP 3 and CRIP 4 in accordance with the ownership interests.
2. Significant Accounting Polices
Rental Property
Rental property includes land and buildings and improvements, which are stated at cost less accumulated depreciation. The Partnership considers the property to be impaired when it determines the carrying value of the investment is not recoverable through expected undiscounted cash flows from operations and disposition of the property. An impairment loss, if any, would be based on the excess of the investment's carrying value over its estimated fair market value. The Partnership does not consider the property impaired at December 31, 1998 or
Income Recognition
The Partnership's rental property is leased to a single tenant as an operating lease. The lease includes a provision whereby the tenant is not responsible for rental payments for specified occupancy periods. Rental income is recognized over the lease term on a straight-line basis. Included in tenant receivables are $0 and $98,760 of deferred rent receivable for December 31, 1998 and 1997, respectively.
Shasta Way Associates (A California General Partnership Notes to the Financial Statements - --------------------------------------------------------------------------------
Income Taxes
Federal and state income taxes are not payable by the Partnership, since the partners report their proportionate share of taxable income or loss on their separate tax returns.
Depreciation and Amortization
Depreciation is provided on the straight-line method over the estimated lives of the assets, which are 31.5 years for the building and the term of the tenant's lease for tenant improvements.
Included in other assets are leasing commissions, which are amortized over the related tenant's lease.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
2. Rental Property
At December 31, 1989 the rental property under development consisted of approximately 12 acres of land with two buildings. During 1990 the buildings were demolished and construction of a 235,080 square-foot industrial building commenced. Construction was completed in June 1991.
The Partnership's property is being leased to a single tenant under an operating lease which expired in December 1998. However, in February 1999, the tenant exercised an option to renew the lease until December, 2003. The lease provides for the tenant to reimburse the Partnership for operating expenses.
The aggregate minimum rents due to the ventures under a non-cancelable lease are: 1999 - $1,297,641; 2000 -$1,297,641; 2001 - $1,310,618; 2002 - $1,323,594; 2003 - $1,323,594.
3. Related Party Transactions
The Partnership agreement provides that CRIP 3 and CRIP 4 will be paid guaranteed payments of 10% per annum on invested capital (as defined). The cumulative unpaid guaranteed payments are included in due to partners in the accompanying balance sheets.
Included in rental operating expenses are $39,032, $40,339, and $40,783 of management fees paid to Hewson Properties, Inc. in 1998, 1997, and 1996, respectively. These fees are paid at a rate of 3% of gross rental income received.
FINANCIAL STATEMENTS INDEX NO. 3
Independent Auditor's Report and Financial Statements
of Newhew Associates
Report of Independent Auditors from Ernst & Young LLP
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - For the Years ended December 31, 1997, 1996 and 1995
Statements of Changes in Partners' Capital - For the Years ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - For the Years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statements
Newhew Associates (An Arizona General Partnership)
December 31, 1997 and 1996
Newhew Associates (An Arizona General Partnership)
Financial Statements
December 31, 1997 and 1996
Contents
Report of Independent Auditors ............................................. 1
Financial Statements
Balance Sheets ............................................................. 2 Statements of Income ....................................................... 3 Statements of Partners' Capital ............................................ 4 Statements of Cash Flows ................................................... 5
[LETTERHEAD OF ERNST AND YOUNG LLP]
Report of Independent Auditors
To the Partners Newhew Associates
We have audited the accompanying balance sheets of Newhew Associates (an Arizona general partnership) as of December 31, 1997 and 1996, and the related statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Newhew Associates at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Phoenix, Arizona January 20, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
Newhew Associates (An Arizona General Partnership)
Balance Sheets
December 31 1997 1996 ------------------------- Assets Cash $ 56,663 $ 39,050 Tenant receivables -- 45,682 Rental properties Land -- 785,000 Buildings -- 3,446,963 Accumulated depreciation -- (572,559) ------------------------- -- 3,659,404 ------------------------- Other assets - net of accumulated amortization of $129,239 in 1996 700 51,037 ------------------------- $ 57,363 $ 3,795,173 =========================
Liabilities and partners' capital Accounts payable and accrued expenses Capital distributions $ -- $ 4,800 Other 30,310 141,315 Loan payable to partner -- 1,365,000 Note payable secured by rental property -- 1,084,418 Other liabilities -- 51,285 Partners' capital 27,053 1,148,355 ------------------------- $ 57,363 $ 3,795,173 =========================
See accompanying notes.
Newhew Associates (An Arizona General Partnership)
Statements of Income
Year ended December 31 1997 1996 1995 ------------------------------------ Revenues Rental income $ 345,949 $ 620,835 $ 564,013 Tenant reimbursements 139,034 203,478 124,899 Other income -- 11,806 25,155 ------------------------------------ 484,983 836,119 714,067 ------------------------------------ Expenses Rental operating expenses 136,167 260,303 225,218 General and administrative 40,967 48,978 42,626 Depreciation and amortization 84,908 166,239 146,077 Interest 127,738 237,673 239,170 ------------------------------------ 389,780 713,193 653,091 ------------------------------------ Income before gain on sale of rental properties 95,203 122,926 60,976 ------------------------------------ Gain on sale of rental properties 2,709,153 -- -- ------------------------------------ Net income $2,804,356 $ 122,926 $ 60,976 ====================================
See accompanying notes.
Newhew Associates (An Arizona General Partnership)
Statements of Partners' Capital
California Copley Property Realty Investment Income Company Partners 4 Total --------------------------------------- Partners' capital - December 31, 1994 $ -- $ 1,277,953 $ 1,277,953 Contributions - 1995 -- 28,678 28,678 Distributions - 1995 -- (157,910) (157,910) Net income - For the year ended December 31, 1995 -- 60,976 60,976 --------------------------------------- Partners' capital - December 31, 1995 -- 1,209,697 1,209,697 Distributions - 1996 (4,800) (179,468) (184,268) Net income - for the year ended December 31, 1996 -- 122,926 122,926 --------------------------------------- Partners' (deficit) capital - December 31, 1996 (4,800) 1,153,155 1,148,355 Distributions - 1997 (446,000) (3,479,658) (3,925,658) Net income - for the year ended December 31, 1997 456,211 2,348,145 2,804,356 --------------------------------------- Partners' capital - December 31, 1997 $ 5,411 $ 21,642 $ 27,053 =======================================
See accompanying notes.
Newhew Associates (An Arizona General Partnership)
Statements of Cash Flows
See accompanying notes.
Newhew Associates (An Arizona General Partnership)
Notes to Financial Statements
December 31, 1997 and 1996
1. Organization and Other Matters
Newhew Associates (the Partnership) was formed April 1, 1991 as an Arizona general partnership for the purpose of acquiring commercial industrial properties located in Tempe, Arizona. Percentage ownership interests of the partners are as follows:
California Property Investment Company (CPIC) 20% Copley Realty Income Partners 4 (CRIP 4) 80%
Income is allocated first to CRIP 4 to provide for a priority return of 10%, compounded monthly, on invested capital (as defined). Second, income is allocated to the partners in the amount of their respective default priority returns and deficit preferred returns (as defined). Thereafter, income is allocated to the Partners in accordance with their respective ownership interests. Losses are allocated to the Partners in accordance with their respective ownership interests.
2. Significant Accounting Policies
Rental Properties
Rental properties are stated at cost. In 1996, the Partnership adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that real estate assets be evaluated for impairment if impairment indicators are present. An impairment writedown to fair value would occur only if the estimated undiscounted cash flows from the Partnership's properties were less than the carrying amount of the Partnership's properties. At December 31, 1997, the Partnership does not hold any assets that meet the impairment criteria of SFAS No. 121.
Newhew Associates (An Arizona General Partnership)
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Income Recognition
The Partnership's properties are being leased to tenants under operating leases. Certain of the leases include provisions whereby the tenant is not responsible for rental payments for specified occupancy periods. Rental income is recognized over the lease term on a straight-line basis. Included in tenant receivables is $5,794 of deferred rent receivable at December 31, 1996.
Sales of Rental Property
Sales of rental property are recorded when the sale closes with the buyer.
Income Taxes
Federal and state income taxes are not payable by the Partnership, since the partners report their proportionate share of taxable income or loss on their separate tax returns.
Depreciation and Amortization
Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which are 31.5 years for the building and the related tenants' leases for tenant improvements.
Included in other assets are organization costs, which are amortized over five years using the straight-line method, and loan costs, which are amortized over the term of the respective loan.
Costs of obtaining leases are deferred and amortized on a straight-line basis over the respective lease periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Newhew Associates (An Arizona General Partnership)
Notes to Financial Statements (continued)
3. Rental Properties
The rental properties consist of three industrial buildings comprising approximately 135,500 square feet, located on approximately 6.9 acres of land. Two of the industrial buildings, totaling approximately 52,300 square feet, were acquired in 1991 (the Hohokam Property). On May 12, 1992, the Partnership acquired one additional building, totaling approximately 83,200 square feet (the Fairmont Property). The Hohokam and Fairmont Properties were sold on May 1, 1997 and October 24, 1997, respectively. The components of the gain on sale are as follows:
Sales price $ 6,590,000 Cost of sales (3,880,847) ----------- Gain on sale of rental properties $ 2,709,153 ===========
4. Related Party Transactions
Included in rental operating expenses are $18,292, $26,654 and $22,169 of management fees paid to Hewson Properties, Inc. (HPI), an affiliate of CPIC, during 1997, 1996 and 1995, respectively. These fees are paid at a rate of 3% of gross rental income received.
During 1997, 1996 and 1995, HPI was reimbursed $8,256, $16,349 and $20,722, respectively for an on-site manager's salary in accordance with terms of the management agreement. The amounts are included in general and administrative expenses in the accompanying statements of income.
Pursuant to the sale of the Hohokam Property (Note 3), HPI was paid a sales commission of $59,800. The amount is included in the calculation of gain on sale of rental properties in the accompanying statement of income.
5. Loan Payable to Partner
Loan payable to partner consists of a loan payable to CRIP 4 under a $2,550,000 loan agreement dated August 1, 1991. On May 8, 1992, the loan agreement was amended and the maximum amount to be funded by CRIP 4 was limited to $1,365,000. Interest-only payments at 10% per annum are due monthly until August 1, 1999, at which time the principal balance and any unpaid interest will be due and payable. The loan is secured by the Hohokam Property. Included in interest expense in 1997, 1996 and 1995 is $45,500, $136,500 and $136,500, respectively, of interest paid to CRIP 4. The loan was repaid on May 1, 1997.
Newhew Associates (An Arizona General Partnership)
Notes to Financial Statements (continued)
6. Note Payable Secured by Rental Property
On July 6. 1992, the Partnership obtained a $1,150,000 loan from Principal Mutual Life Insurance Company. Interest accrues at 9.25% per annum. Principal and interest installments of $9,848 are due monthly until July 1, 1999, at which time the principal balance and any unpaid interest will be due and payable. The note is secured by the Fairmont Property. The note was repaid on October 24, 1997.
7. Impact of Year 2000 (unaudited)
Management of the Partnership is assessing the modifications or replacements of its software that may be necessary for its computer systems to function properly with respect to the dates in the year 2000 and thereafter. Management of the Partnership does not believe that the cost of either modifying existing software or converting to new software will be significant or that the year 2000 issue will pose significant operational problems for its computer systems.
EXHIBIT INDEX
Exhibit Page Number Number - ------ ------
10A. General Partnership Agreement of Hewson/Shasta Way * Associates dated as of September 29, 1989 between Hewson/Shasta Way, L.P., Copley Realty Income Partners 3; A Limited Partnership and Copley Realty Income Partners 4; A Limited Partnership.
10B. Joint Venture Agreement of Newhew Associates dated as of * April 1, 1991 between California Property Investment Company and the Registrant.
10C. Deed of Trust dated as of August 1, 1991 by and between * Hewson Properties, Inc. ("Trustor"), TransAmerica Title Insurance Company ("Trustee") and the Registrant ("Beneficiary").
10D. Loan Agreement entered into as of August 1, 1991, by and * between the Registrant and Newhew Associates.
10E. Promissory Note Secured by Deed of Trust in the principal * amount of $2,550,000 by Newhew Associates to the Registrant dated August 1, 1991.
10F. Parcel One Assignment of Rents and Leases dated August 1, * 1991, from Newhew Associates to the Registrant.
10G. Purchase and Sale Agreement dated March 23, 1992 by and * between Boston Safe Deposit and Trust Company, as Trustee for the Owens-Illinois Master Retirement Trust ("Seller") and Newhew Associates ("Purchaser").
10H. Indemnity Agreement and Assignment of Leases entered into * May 11, 1992 by and between Boston Safe Deposit and Trust Company, as Trustee for the Owens-Illinois Master Retirement Trust ("Seller") and Newhew Associates ("Purchaser").
10I. First Amendment to Newhew Associates Joint Venture * Agreement dated as of May 8, 1992 by and between California Property Investment Company and the Registrant.
10J. Assumption, Novation and Modification Agreement made as of * May 12, 1992 by and between New England Mutual Life Insurance Company, as Lender, Boston Safe Deposit and Trust Company, as Trustee for the Owens Illinois Master Retirement Trust and Newhew Associates, as Borrower.
10K. Secured Promissory Note in the principal amount of * $1,150,000 by Newhew Associates to Principal Mutual Life Insurance Company dated June 1992.
- -----------------------
10L. Deed of Trust, Security Agreement and Assignment of Rents * dated June 1, 1992 between Newhew Associates, as Trustor, Fidelity National Title Insurance Company, as Trustee, and Principal
Mutual Life Insurance Company, as Beneficiary.
EXHIBIT INDEX
Exhibit Page Number Number - ------ ------
10M. Assignment of Leases and Rents dated June 1992 by Newhew * Associates, as Assignor, to Principal Mutual Life Insurance Company, as Assignee.
10N. Assignment of Indemnification dated June 1992 by Newhew * Associates to Principal Mutual Life Insurance Company.
10O. Assignment and Assumption and Indemnity Agreement dated * January 1, 1996, by and between Hewson/Shasta Way L.P., a California limited partnership ("Assignor"), Copley Realty Income Partners 3; a Limited Partnership, a Massachusetts limited partnership ("CRIP 3"), and Copley Realty Income Partners 4; a Limited Partnership, a Massachusetts limited partnership ("CRIP 4").
10P. First Amendment to General Partnership Agreement dated * January 1, 1996, as amended to date (the "Partnership Agreement") of Hewson Shasta Way Associates, a California general partnership, by and among Hewson/Shasta Way L.P., a California limited partnership, Copley Realty Income Partners 3; a Limited Partnership, a Massachusetts limited partnership ("CRIP 3"), and Copley Realty Income Partners 4; a Limited Partnership, a Massachusetts limited partnership ("CRIP 4").
27. Financial Data Schedule
- -------- * Previously filed and incorporated herein by reference.
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 4; A LIMITED PARTNERSHIP
Date: March 28, 2000 By: /s/ Alison Husid Cutler ---------------------------------- Alison Husid Cutler President of the Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
President, Chief /s/ Alison Husid Cutler Executive Officer and - ------------------------------ Director of the Managing March 28, 2000 Alison Husid Cutler General Partner
/s/ Pamela J. Herbst Vice President and - ------------------------------ Director of the Managing March 28, 2000 Pamela J. Herbst General Partner
/s/ J. Grant Monahon Vice President and - ------------------------------ Director of the Managing March 28, 2000 J. Grant Monahon General Partner
/s/ James J. Finnegan - ------------------------------ Vice President of the March 28, 2000 James J. Finnegan Managing General Partner
/s/ Karin J. Lagerlund Treasurer and Principal - ------------------------------ Financial and Accounting Karin J. Lagerlund Officer of the Managing March 28, 2000 General Partner