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, 1997 Commission File No. 0-13323 _________________ NEW ENGLAND LIFE PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Massachusetts 04-2803902 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 225 Franklin Street, 25th Floor Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 261-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] No voting stock is held by nonaffiliates of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE None PART I ------ Item 1. Business -------- New England Life Pension Properties II; A Real Estate Limited Partnership (the "Partnership") was organized under the Uniform Limited Partnership Act of the Commonwealth of Massachusetts on September 15, 1983, to invest primarily in newly constructed and existing income-producing real properties. The Partnership was initially capitalized with contributions of $2,000 from Copley Properties Company II, Inc. (the "General Partner") and $10,000 from NELRECO Troy, 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 September 21, 1983, with respect to a public offering of 50,000 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 $110,000,000). The Registration Statement was declared effective on November 23, 1983. The first sale of Units occurred on June 15, 1984, 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 of Units terminated on November 23, 1984, and the last group of initial investors was admitted to the Partnership on November 30, 1984. As of November 30, 1984, a total of 39,917 Units had been sold, a total of 5,980 investors had been admitted as limited partners (the "Limited Partners") and a total of $39,654,700 had been contributed to the capital of the Partnership. The remaining 70,083 units were de-registered on November 30, 1984. The Partnership has no employees. Services are performed for the Partnership by the General Partner and affiliates of the General Partner. As of December 31, 1997, the Partnership owned the one real estate investment described in E. below. In December 1993, it sold its second investment, an apartment complex in Grand Rapids, Michigan, which resulted in a capital distribution of $50.11 per Unit. In 1996 the Partnership sold its third and fourth investments, two industrial buildings in Elkridge, Maryland and a research and development building in Los Angeles County, California. These sales resulted in a capital distribution of $123.85 per Unit on January 30, 1997. In 1997 the partnership sold it's fifth and sixth investments, Willows Shopping Center in Concord, California and Columbia Warehouse, a research and development building, in Columbia, Maryland. These sales resulted in capital distributions of $21,037,855 ($527.04 per Unit) and $1,672,123 ($41.89 per Unit) on October 30, 1997 and November 25, 1997 respectively. In the opinion of the General Partner of the Partnership, the property is adequately covered by insurance. A. Light Industrial Facilities in Elkridge, Maryland ("Elkridge") -------------------------------------------------------------- In 1984 the Partnership acquired two adjacent parcels of land containing an aggregate of approximately five acres located in Elkridge, Maryland, for $362,500 and leased them to Dorsey Associates. Situated on the land were two light industrial buildings. In 1984 the Partnership also made a $2,062,500 non- recourse mortgage loan to Dorsey Associates, which was secured by a first mortgage of the buildings and of the leasehold interest in the land. On May 14, 1996, one of the buildings was sold and on December 20, 1996 the second building was sold. The Partnership received proceeds of $2,234,022 in satisfaction of the mortgage loan and ground lease, of which $2,233,755 was distributed to the Limited Partners as a capital distribution in the amount of $55.96 per Unit on January 30, 1997. B. Industrial/Research and Development Building in Columbia, Maryland ------------------------------------------------------------------ ("Oakland") - ----------- The Partnership previously owned a ground leasehold interest in a 2.5 acre parcel of land located in Columbia, Maryland, which was subleased to Columbia Warehouse Limited Partnership ("CWLP"). Situated on the land was a one- story light industrial building. The Partnership purchased the ground leasehold interest in 1984 for $137,500. The ground lease, as amended on June 1, 1989, had an unexpired term of approximately 75 years. Annual rental under the ground lease was approximately $3,420 and was adjusted at five-year intervals. The Partnership received an annual rent of $16,500 from the sublessee, plus an annual percentage rent equal to 75% of gross revenues from the rental of the building in excess of a base amount. The Partnership was entitled to 2 receive 75% of the net proceeds from the sale of the entire property after it recovered its investment in the land and the mortgage loan described below. In 1984 the Partnership also made a $1,062,500 non-recourse mortgage loan to CWLP that matured on June 29, 1994. The loan was secured by a first mortgage of the building and of the leasehold interest in the land. Interest only was payable monthly at the rate of 12% per annum. In October 1996, the Partnership reached an agreement in principle with the borrower on the mortgage loan, whereby the maturity date would be extended to December 1997. In addition, the fixed interest and ground rental payments would be reduced, but the Partnership's rate of participation in revenue from the underlying property would be increased, effective January 1, 1997. Further, the Partnership would be able to cause a sale of the property. On October 27, 1997, the Partnership sold its collective interest in Columbia Warehouse. The Partnership received proceeds of $1,671,200, of which $1,672,123 was distributed to the Limited Partners, as a capital distribution from sale proceeds and reserves, in the amount of $41.89 per Unit on November 25, 1997. C. Shopping Center in Concord, California ("Willows Shopping Center") ------------------------------------------------------------------ On July 30, 1984, the Partnership and an affiliate of the Partnership (the "Affiliate") jointly made land purchase-leaseback and leasehold mortgage loan investments aggregating $15,719,317 in a 24.8 acre shopping center known as The Willows Shopping Center in Concord, California. The Partnership's share of these investments aggregated $11,789,488, giving the Partnership a 75% interest in each component of the investment held in common with the Affiliate. The investments entitled the Partnership and the Affiliate jointly to receive an annual interest return of 13% on the $10,719,317 ten-year mortgage, together with an annual fixed rent under the ground lease equal to a 12.2% return on the $5,000,000 land purchase price plus an annual percentage rent equal to 50% of the ground tenant's annual gross revenues in excess of specified base amounts. On August 15, 1985, the Partnership and the Affiliate consented to a sale by the ground tenant, Willows Concord Venture ("Willows Concord"), of the ground tenant's ownership interest in the buildings and leasehold interest in the land to an affiliate of VMS Realty, Inc. In conjunction with the sale, the ground lease was amended to provide that the Partnership and the Affiliate would no longer participate in excess rental revenues from the Shopping Center or in net appreciation from the sale of the property. The mortgage loan was also amended to increase the principal amount by $3,880,683 to $14,600,000, to extend the maturity date one year to August, 1995, and to lower the interest rate from 13% per annum to a stepped rate beginning at 9% per annum and increasing to 12% over six years. Under the terms of the original ground lease, the joint ground lessors were entitled to 50% of the net proceeds from a sale. The Partnership received cash of $3,215,625 and an interest in the incremental mortgage loan amount equal to $2,910,512, 50% of which was payable to the former ground lessee upon full payment of the loan principal by the new mortgagor. The joint mortgagees also entered into a Collection and Disbursement Agreement pursuant to which Willows Concord was entitled to share in 50% of interest paid under the new mortgage note in excess of the interest that would have been payable under the original note. The Partnership and the Affiliate had not received interest payments currently on the mortgage loan since the payment due for March, 1990, and as a result, the Partnership and the Affiliate began foreclosure proceedings to take possession of the property. On October 4, 1990, Pacific First Bank, the second leasehold mortgagee, filed an involuntary bankruptcy petition in the United States Bankruptcy Court for the Northern District of California against the ground lessee/debtor, to which filing the ground lessee/debtor subsequently consented. The ground lessee/debtor later consented to relief from stay of foreclosure proceedings. The Partnership and the Affiliate sold their interest in the leasehold mortgage loan to Willows Concord on June 14, 1991. In return, the Partnership and the Affiliate took back a note in the amount of $14,863,206. Willows Concord foreclosed on the leasehold mortgage on June 18, 1991. The Partnership, the Affiliate and Willows Concord entered into a replacement promissory note in the same principal amount of $14,863,206, effective June 18, 1991. The new loan was secured by the leasehold interest, bore interest at the rate of 9.323% per annum and provided for a reduction in principal if the note was paid prior to maturity. The Partnership, the Affiliate and Willows Concord also entered into a new ground lease which provided for annual rent in the amount of $550,000 plus an annual percentage rent equal to 70% of the ground lessee's annual gross revenues in excess of a specified amount. The Partnership had a 75% share of such rent. To the extent that operating cash flow from the shopping center was not sufficient to pay the ground rent, such rent was accruable until June 1996 at which time Willows Concord was obligated to pay all unpaid accrued rent and to pay all future ground rent on 3 a current basis. The Partnership and the Affiliate had permitted the accrual of additional ground rent after June 1996, and evaluated various alternatives. On January 1, 1995 the Partnership and the Affiliate committed to make a $2.5 million construction loan to the ground lessee to fund the renovation of the Center. The Partnership committed to fund $1,875,000 of this amount. The loan bore interest at 11% per annum, provided for payments of principal and interest based on a 15-year amortization schedule, and matured on December 31, 1997. In addition, the ground lease was amended to provide the Partnership with the sole right to cause a sale of the Center on or after January 1, 1996. On September 18, 1997, Willows Shopping Center was sold. The Partnership received proceeds of $21,027,944 which, along with $9,912 form reserves, $21,037,856 was distributed to the Limited Partners as a capital distribution in the amount of $527.04 per Unit on October 30, 1997. D. Research and Development Building in Los Angeles County, California ------------------------------------------------------------------- ("Susana Corporate Center") - --------------------------- In 1985 the Partnership acquired a 4.02 acre parcel of land in Los Angeles County, California, for $1,750,000 and leased it back to the seller. Situated on the land was a one-story, 63,164 square foot research and development facility leased to a single tenant. In 1985 the Partnership also made a $3,250,000 non-recourse mortgage loan to the ground lessee. The loan was secured by a first mortgage on the building and the leasehold interest in the land. During 1993, the Partnership agreed to a restructuring of the ground lease and the mortgage loan. The mortgage loan was modified to increase the loan amount by $192,000 to a total of $3,442,000. The increase was made to fund tenant improvements. On October 20, 1996, the Susana Corporate Center was sold. The Partnership received proceeds of $2,710,014 in satisfaction of its mortgage loan and ground lease, of which $2,709,965 was distributed to the Limited Partners as a capital distribution in the amount of $67.89 per Unit on January 30, 1997. E. Research and Development Facility in Columbia, Maryland ("Case -------------------------------------------------------------- Communications Building") - ------------------------- The Partnership continues to own a 19.2 acre parcel of land in Columbia, Maryland, which it acquired for $2,570,379 and leased back to the seller. A 160,000 square foot research and development building has been constructed on the land. The ground lease has a term of 60 years and provides for a fixed annual rent of $262,392 plus additional rent equal to 65.864% of gross revenues from the rental of the building in excess of a base amount. The Partnership is entitled to receive 60% of the net proceeds from the sale of the entire property after it has recovered its investment in the land and the mortgage loan described below: The Partnership has also fully funded a $8,814,621 non-recourse mortgage loan to the ground lessee. Interest only is payable monthly at the rate of 11% per annum. The loan matured on May 1, 1995 and is secured by a first mortgage of the building and the leasehold interest in the land. The Partnership has also fully funded an additional $1,000,000 loan. This loan bears interest at the rate of 14% per annum, is secured by a second mortgage on the building and leasehold interest in the land and matured simultaneously with the first mortgage loan described above. In October 1996, the Partnership reached an agreement in principle with the borrower on the mortgage loan, whereby the maturity date was extended to December 1997. In addition, the fixed interest and ground rental payments were reduced, but the Partnership's rate of participation in revenue and sales proceeds from the underlying property was increased, effective January 1, 1997. The agreement was further amended whereby the Partnership was able to cause a sale of the property without cause. In October 1997, the Partnership formally executed the agreement to renew the mortgage loans at the previously agreed upon terms. 4 Item 2. Properties ---------- The following table sets forth the annual realty taxes for the Partnership's properties and information regarding tenants who occupy 10% or more of gross leasable area (GLA) in the Partnership's properties: - --------------------------------------------------------------------------------------------------------------------- ESTIMATED ANNUAL 1998 CONTRACT ANNUAL NUMBER OF RENT REALTY TENANTS WITH 10% NAME(S) OF SQUARE FEET OF PER Property TAXES OR MORE OF GLA TENANT(S) EACH TENANT SQ. FT. - --------------------------------------------------------------------------------------------------------------------- R&D Building in Columbia, MD $200,000 1 US Government 160,000 $12.95 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------- LEASE RENEWAL LINE OF BUSINESS EXPIRATION OPTIONS OF PRINCIPAL TENANTS - ---------------------------------------------- M-T-M (1) None Defense Research - ---------------------------------------------- (1) A long-term lease is being negotiated. 5 The following table sets forth for each of the last five years the gross leasable area, occupancy rates, rental revenues and net effective rent for the Partnership's properties: - -------------------------------------------------------------------------------------------------------------- RENTAL NET EFFECTIVE GROSS LEASABLE YEAR-END REVENUE RENT Property AREA OCCUPANCY RECOGNIZED ($/SF/YR)* - -------------------------------------------------------------------------------------------------------------- R&D Building in Columbia, MD - ----------------------------------------- 1993 160,000 100% $2,300,000 $14.38 1994 160,000 100% $2,636,836 $16.48 1995 160,000 100% $2,283,934 $14.27 1996 160,000 100% $2,272,575 $14.20 1997 160,000 100% $2,251,895 $14.07 - -------------------------------------------------------------------------------------------------------------- * Net effective rent calculation is based on average occupancy during the respective year. 6 Following is a schedule of lease expirations for each of the next ten years for the Partnership's properties based on the annual contract rent in effect at December 31, 1997: - ----------------------------------------------------------------------------------------------------- TENANT AGING REPORT PROPERTY # OF LEASE TOTAL TOTAL PERCENTAGE OF EXPIRATIONS SQUARE FEET ANNUAL RENTAL GROSS ANNUAL RENTAL* - ----------------------------------------------------------------------------------------------------- R&D Building in Columbia, MD (1) - ---------------------------- 1998 1 160,000 $2,072,000 100% 1999 0 0 $ 0 0% 2000 0 0 $ 0 0% 2001 0 0 $ 0 0% 2002 0 0 $ 0 0% 2003 0 0 $ 0 0% 2004 0 0 $ 0 0% 2005 0 0 $ 0 0% 2006 0 0 $ 0 0% - ----------------------------------------------------------------------------------------------------- (1) A long-term lease is being negotiated. * Does not include expenses paid by tenants. 7 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 & Development/Industrial Facilities in Columbia, MD - ------------------------------------------------------------ The property is located within the Howard County R&D submarket, which has a base of 8.9 million square feet and a 6.3% vacancy rate as of year-end 1997. Due to limited space in the marketplace, tenants continue to seek space that will accommodate their growth needs and are moving from Washington, D.C. to the Baltimore suburbs. The Columbia flex submarket contains 6.8 million square feet of space and a 6.5% vacancy rate. Planned construction of 300,000 square feet of speculative office space in this market is showing offering rates on new product that are setting new highs. As a result, 1997 rents for Howard County averaged in the $10.00 - $10.50 range. 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. 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. 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, 1997, there were 6,030 holders of Units. The Partnership's Amended and Restated Agreement of Limited Partnership dated June 15, 1984, 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, 1997, cash distributions paid for 1997 or distributed after year end with respect to 1997 to the Limited Partners as a group totaled $25,875,397 including $22,709,978 ($568.93 per limited partnership unit) representing a return of capital from the proceeds of property sales and from reserves established with the proceeds of prior sales. For the year ended December 31, 1996, cash distributions paid in 1996 or distributed after year end with respect to 1996 to the Limited Partners as a group totaled $7,429,752 including $4,943,720 ($123.85 per limited partnership unit) representing a return of capital from the proceeds of property sales. Distributions of operating cash flow were less than net income in 1997 and 1996. Distributions of operating cash flow were less than cash provided by operating activities in both years. Reference is made to the Partnership's Statement of Partners' Capital and Statement of Cash Flows in Item 8 herein. 8 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 12/31/97(5) 12/31/96(4) 12/31/95(3) 12/31/94(2) 12/31/93(1) ----------- ----------- ----------- ----------- ----------- Revenues $ 8,635,870 $ 5,238,031 $ 5,313,944 $ 5,061,123 $ 4,902,277 Net Income $ 6,687,557 $ 3,108,675 $ 1,710,797 $ 2,340,707 $ 1,376,686 Net Income per Unit of Limited Partnership Interest $ 165.86 $ 77.10 $ 42.43 $ 58.05 $ 34.14 Total Assets $15,648,034 $40,338,664 $39,074,700 $39,868,957 $41,816,002 Total Cash Distributions per Limited Partnership Unit, including amounts distributed after year end with respect to such year $648.23 $186.13 $62.28 $109.84 $61.12 (1) The Partnership recorded a provision of $1,670,000 ($41.42 per Unit) for impaired mortgage loans during 1993. (2) The Partnership recorded a provision of $800,000 ($19.84 per Unit) for impaired mortgage loans during 1994. (3) The Partnership recorded a provision of $1,428,000 ($35.42 per Unit) for impaired mortgage loans during 1995. (4) The Partnership sold two investments in 1996 which resulted in capital distributions of $4,943,720 ($123.85 per Unit). The Partnership also recorded a credit of $17,291 ($0.43 per Unit) for impaired mortgage loans during 1996. (5) The Partnership sold two investments in 1997 which resulted in capital distributions of $22,709,978 ($568.93 per Unit). 9 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 November, 1984. A total of 39,917 units were sold. The Partnership received proceeds of $36,296,995, net of selling commissions and other offering costs, which have been used for investment in real estate and the payment of related acquisition costs, or retained as working capital reserves. The Partnership made six real estate investments; five investments have been sold, one in 1993, two in 1996 and two in 1997. Capital of $33,028,124 ($827.42 per limited partnership unit) has been returned to the limited partners through December 31, 1997 as a result of sales and similar transactions. On September 18, 1997, the Willows Shopping Center, in Concord, California, which was owned by the Partnership (75%) and its Affiliate (25%), was sold to an institutional buyer (the "Buyer") unaffiliated with the Partnership. The selling price was determined by arm's length negotiations between the Partnership and its Affiliate and the Buyer. The total sales price was $28,575,000. The Partnership received its share of the net proceeds totaling $21,027,944, after closing costs, and recognized a gain of $3,322,455 ($82.40 per limited partnership unit). A disposition fee of $642,937 was accrued but not paid to AEW. On October 30, 1997, the Partnership made a capital distribution of $21,037,856 ($527.04 per limited partnership unit) from the proceeds of the sale and prior sales proceeds held in reserves. On October 27, 1997, the Oakland property located in Columbia, Maryland, was sold to an institutional buyer (the "Oakland Buyer") which is unaffiliated with the Partnership. The selling price was determined by arm's length negotiations between the Partnership and the Oakland Buyer. The property was sold for $1,900,000. The Partnership received net proceeds of $1,207,283 in full satisfaction of its ground lease and mortgage loan investments and related accrued interest. The Partnership received additional proceeds of $465,756 after closing costs as its participation share of the remaining proceeds after it recovered its investment in the land and mortgage loan. The transaction resulted in a gain of $400,826 ($10.04 per limited partnership unit). At December 31, 1997, the Partnership had $3,956,207 in cash, cash equivalents and short-term investments, of which $365,704 was used for operating cash distributions on January 29, 1998. The remainder of the cash and short-term investment balances, after these distributions, is being retained as working capital reserves. The source of future liquidity and cash distributions to partners is expected to be cash generated by the Partnership's real estate investments and proceeds from the sale of such investments. The adjusted capital contribution was reduced from $889.89 to $172.58 per limited partnership unit during 1997, with distributions of reserves and sales proceeds. Based on the weighted average adjusted capital contribution, distributions from operations were made at the annualized rate of 7% for the first and second quarters of 1997, and 9.5% for the third and fourth quarters of 1997. Distributions of cash from operations for 1996 were made at the annualized rate of 7% for the first, second and third quarters. The carrying value of real estate investments in the financial statements 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, 1997, the appraised value of the Partnership's investment was approximately $1.5 10 million greater than its carrying value. The current appraised value of real estate investments has been estimated by the General Partner and is generally based on a correlation of traditional appraisal approaches performed by AEW Capital Management, L.P. ("AEW") and independent appraisers. Because of the subjectivity inherent in the valuation process, the estimated current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Partnership's 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 General Partner and its affiliates are assessing the modifications or replacements of its software that may be necessary. The General Partner and its affiliates do 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 problems. Results of Operations Operating Factors The two Elkridge buildings and the Susana Corporate Center were sold in 1996. As previously discussed, the Willows Shopping Center was sold in September 1997, and the Partnership recognized a gain of $3,322,455. At the time of sale, the Willows Shopping Center was 94% leased; at December 31, 1996 and December 31, 1995 it was 94% and 91% leased, respectively. Occupancy at the Oakland property was 88% at October 27, 1997, down from 91% at December 31, 1996 and December 31, 1995, due to a month-to-month tenant's vacating during the quarter. The property was sold in October 1997, and the Partnership recognized a gain of $400,826. The Case Communications property continues to be fully occupied by a government agency, whose lease expired in November 1996. The tenant has indicated its intention to renew, although a new lease agreement has not yet been executed. In the meantime, the tenant has been renting the space on a month-to-month basis under the same terms of the pre-existing lease. The Partnership's mortgage loans on Oakland and Case Communications matured in 1994 and 1995, respectively. In October 1996, the Partnership reached an agreement in principle (the "Agreement") with the borrowers, whereby the maturity dates were to be extended to December 1997. In addition, the fixed interest and ground rental payments were reduced, but the Partnership's rate of participation in revenue and sales proceeds from the underlying properties was increased to 80%. In addition, the Agreement was further amended whereby the Partnership will be able to cause a sale of the properties without cause. In October 1997, the Partnership formally executed the Agreement to renew the mortgage loans at the previously agreed upon terms. As a result of this restructuring, the Partnership obtained virtually the same risks and potential rewards as ownership of the asset would entail. Accordingly, the Partnership reported this investment as an owned property beginning in October 1997. 11 Investment Results During the fourth quarter of 1995, the Partnership determined that the mortgage loans secured by the Case Communications Building were impaired, primarily due to the change in the expected holding period for the property and a decrease in market rental rates. This impairment resulted in an increase to the valuation allowance of $1,100,000, which was charged to operations in 1995. During 1996, the estimated fair market value of the loan's collateral increased, resulting in a recovery to the valuation allowance of $300,000. Ground rent and interest payments from Case Communications continue to be made in accordance with contractual terms. 1997 Compared to 1996 Interest on cash equivalents and short-term investments in 1997 increased by approximately $84,000 compared to 1996, primarily due to higher average investment balances as a result of the receipt of the Willows Shopping Center sales proceeds. Total real estate activity was $6,656,336 and $2,559,474 (net of exclusions below) for the twelve months ended December 31, 1997 and 1996, respectively. This increase of $4,096,862, is partially due to gain on sale of properties in 1997 in the amount of $3,723,281,as well as an increase in percentage rent for 1997 and an increase in income from Willows Shopping Center prior to the sale. Additionally, the Partnership recorded net real estate operations totaling approximately $457,000 during the fourth quarter of 1997 due to the restructuring of the Case Communications investment. The increase in operating cash flow of approximately $52,000 or 2%, between 1996 and 1997 is due to a decrease in operating liabilities. 1996 Compared to 1995 Interest on cash equivalents and short-term investments in 1996 increased by $9,825 compared to 1995, primarily due to higher average investment balances during the last eight months of 1996 as a result of the receipt of the Elkridge and Susana sale proceeds, offset by lower average yields and lower average balances during the first four months of the year. Exclusive of the credit from (provision for) impaired mortgage loans and the operating results from Susana Corporate Center ($384,239 in 1996 and $480,793 in 1995) and Elkridge ($238,235 in 1996 and $123,000 in 1995), real estate results were $2,559,474 in 1996 compared to $2,655,357 in 1995. Operating income from the Case Communications and the Oakland investments both declined as a result of lower percentage rent payments. These decreases were partially offset by an increase in net operating income from the Willows Shopping Center of approximately $43,000 as a result of increased occupancy. Operating cash flow decreased $166,000, or 5%, between 1996 and 1995. This decrease is primarily due to the above mentioned changes in operating results and increased leasing costs at the Willows, partially offset by changes in net working capital. Portfolio Expenses 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 General Partner. 12 General and administrative expenses primarily consist of real estate appraisal, printing, legal, accounting and investor servicing fees. 1997 Compared to 1996 General and administrative expenses decreased approximately $7,500 or 5%, primarily due to a decrease in professional fees for 1997 as a result of fewer investments. Management fee expense decreased by approximately 12% in 1997 compared to 1996 due to a decrease in distributable cash flow. 1996 Compared to 1995 General and administrative expenses decreased approximately $20,000 or 12%, primarily due to a decrease in professional fees for 1996 as a result of fewer investments. Management fee expense was unchanged between 1996 and 1995, consistent with the level of distributable cash flow for each period. 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 positive effect inflation may have on the value of the Partnership's investments. 13 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. 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. 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 General Partner and the age and position held by each of them as of December 31, 1997. Name Position(s) with the General Partner Age - --------------------------- ---------------------------------------------------------- --------- Wesley M. Gardiner, Jr. President, Chief Executive Officer and Director 39 Pamela J. Herbst Vice President and Director 42 J. Grant Monahon Vice President and Director 52 James J. Finnegan Vice President 37 Karin J. Lagerlund Treasurer and Principal Financial and Accounting Officer 33 (c) Identification of Certain Significant Employees. ----------------------------------------------- None. (d) Family Relationships. -------------------- None. (e) Business Experience. -------------------- The General Partner was incorporated in Massachusetts on August 25, 1983. The background and experience of the executive officers and directors of the General Partner are as follows: Wesley M. Gardiner, Jr. joined AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley Real Estate Advisors, Inc., in 1990 and has been a Vice President at AEW since January, 1994. AEW is a subsidiary of AEW Capital Management, L.P. ("AEW Capital Management"). From 1982 to 1990, he was employed by Metric Realty, a nationally-known real estate investment advisor and syndication firm, as a portfolio manager responsible for several public and private limited partnerships. His career at AEW has included asset management responsibility for the company's Georgia and Texas holdings. Presently, Mr. Gardiner has overall responsibility for all the partnerships advised by AEW whose securities are registered under the Securities and Exchange Act of 1934. He received a B.A. in Economics from the University of California at San Diego. Pamela J. Herbst directs AEW Capital Management's Portfolio Advisory 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 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.). 14 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 the 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 Advisory 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 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 Partner and its 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, 2 and 6 of Notes to Financial Statements. The following table sets forth the amounts of the fees and cash distributions and reimbursements for out-of-pocket expenses which the Partnership paid to or accrued for the account of the General Partner and its affiliates for the year ended December 31, 1997: Amount of Compensation and Receiving Entity Type of Compensation Reimbursement - ------------------------------------ --------------------------- ------------- General Partner Share of Distributable Cash $ 22,083 AEW Real Estate Advisors, Inc. Management Fees and 218,407 (formerly known as Copley Real. Reimbursement of Expenses Estate Advisors, Inc.) New England Securities Corporation Servicing Fees and Reimbursement of Expenses 9,265 ------------- TOTAL $249,755 ============= For the year ended December 31, 1997, the Partnership allocated $38,394 of taxable loss to the General Partner. 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, 1997. Under the Partnership Agreement, the voting rights of the 15 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 General Partner. (b) Security Ownership of Management. An affiliate of the General Partner of the Partnership owned 831 Units at December 31, 1997. (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 Statement Schedules, 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 Schedules and Financial Statements Index No. 2 are filed as part of this Annual Report. (2) Financial Statement Schedules--The Financial Statement Schedules listed on the accompanying Index to Financial Statements and Schedules are 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, 1997, the Partnership filed no Current Reports on Form 8-K. 16 New England Life Pension Properties II; A Real Estate Limited Partnership Financial Statements * * * * * * * December 31, 1997 NEW ENGLAND LIFE PENSION PROPERTIES II; -------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP --------------------------------- INDEX TO FINANCIAL STATEMENTS AND SCHEDULES ------------------------------------------- Report of Independent Accountants Financial Statements: Balance Sheets - December 31, 1997 and 1996 Statements of Operations - Years ended December 31, 1997, 1996 and 1995 Statements of Partners' Capital - Years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements Financial Statement Schedules: Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1997, 1996 and 1995 Schedule IV - Mortgage Loans on Real Estate as of December 31, 1997 2 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Partners NEW ENGLAND LIFE PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of New England Life Pension Properties II; A Real Estate Limited Partnership (the "Partnership") 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. These financial statements are the responsibility of Copley Properties Company II, Inc., the General Partner of the Partnership; 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 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 General Partner, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP - ------------------------ Boston, Massachusetts March 23, 1998 3 NEW ENGLAND LIFE PENSION PROPERTIES II; - --------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP - --------------------------------- BALANCE SHEETS December 31, ------------------------ 1997 1996 ----------- ----------- ASSETS Real estate investments: Ground leases and mortgage loans, net $ -- $12,896,144 Property, net 11,660,486 16,795,323 Deferred leasing costs and other assets, net -- 809,629 ----------- ----------- 11,660,486 30,501,096 Cash and cash equivalents 2,111,776 7,877,668 Short-term investments 1,844,431 1,912,918 Interest and rent receivable 31,341 46,982 ----------- ----------- $15,648,034 $40,338,664 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Accounts payable $ 65,476 $ 1,014,398 Accrued management fee 36,169 62,089 Deferred disposition fees 1,172,249 472,312 ----------- ----------- Total liabilities 1,273,894 1,548,799 ----------- ----------- Partners' capital: Limited partners ($172.58 per unit; 110,000 units authorized, 39,917 units issued and outstanding) 14,261,105 38,719,002 General partner 113,035 70,863 ----------- ----------- Total partners' capital 14,374,140 38,789,865 ----------- ----------- $15,648,034 $40,338,664 =========== =========== (See accompanying notes to financial statements) 4 NEW ENGLAND LIFE PENSION PROPERTIES II; - --------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP - --------------------------------- STATEMENTS OF OPERATIONS Year ended December 31, -------------------------------------- 1997 1996 1995 ---------- ----------- ----------- INVESTMENT ACTIVITY Property rentals $2,960,401 $ 2,364,793 $ 2,340,380 Property operating expenses (950,646) (1,029,200) (1,063,651) Depreciation and amortization (641,035) (706,119) (697,495) ---------- ----------- ----------- 1,368,720 629,474 579,234 Ground rentals and interest on mortgage loans 1,564,335 2,552,474 2,679,916 Credit from (provision for) impaired mortgage loans - 17,291 (1,428,000) ---------- ----------- ----------- Total real estate operations 2,933,055 3,199,239 1,831,150 Gain on disposition of investments 3,723,281 - - ---------- ----------- ----------- Total real estate activity 6,656,336 - - Interest on cash equivalents and short-term investments 387,853 303,473 293,648 ---------- ----------- ----------- Total investment activity 7,044,189 3,502,712 2,124,798 ---------- ----------- ----------- PORTFOLIO EXPENSES Management fee 218,407 248,355 248,355 General and administrative 138,225 145,682 165,646 ---------- ----------- ----------- 356,632 394,037 414,001 ---------- ----------- ----------- NET INCOME $6,687,557 $ 3,108,675 $ 1,710,797 ========== =========== =========== Net income per limited partnership unit $165.86 $77.10 $42.43 ========== =========== =========== Cash distributions per limited partnership unit $778.58 $62.28 $61.17 ========== =========== =========== Number of limited partnership units outstanding during the year 39,917 39,917 39,917 ========== =========== =========== (See accompanying notes to financial statements) 5 NEW ENGLAND LIFE PENSION PROPERTIES II; - --------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP - --------------------------------- STATEMENTS OF CASH FLOWS Year ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,687,557 $ 3,108,675 $ 1,710,797 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 641,035 706,119 697,495 (Credit from) provision for impaired mortgage loans - (17,291) 1,428,000 Gain on disposition of investment (3,723,281) - - Increase in deferred leasing costs and other assets (33,086) (348,491) (67,865) Decrease (increase) in operating receivables (27,623) 191,725 (178,617) Increase (decrease) in operating liabilities (211,008) (255,250) (38,668) ------------ ----------- ----------- Net cash provided by operating activities 3,333,594 3,385,487 3,551,142 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of investments 20,936,707 2,362,397 - Repayment of mortgage loan investments 1,062,500 2,423,791 - Capital expenditures on owned property (763,835) (1,285,649) (1,247,337) Decrease (increase) in short-term investments, net 68,487 613,008 (1,206,689) Increase in deferred disposition fees 699,937 157,848 - ------------ ----------- ----------- Net cash provided by (used in) investing activities 22,003,796 4,271,395 (2,454,026) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITY: Distributions to partners (31,103,282) (2,511,144) (2,466,387) ------------ ----------- ----------- Net cash used in financing activity (31,103,282) (2,511,144) (2,466,387) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents (5,765,892) 5,145,738 (1,369,271) Cash and cash equivalents: Beginning of year 7,877,668 2,731,930 4,101,201 ------------ ----------- ----------- End of year $ 2,111,776 $ 7,877,668 $ 2,731,930 ------------ =========== =========== NON-CASH TRANSACTIONS: Effective October 14, 1997, the Partnership`s ground lease/mortgage loan investment in the Case Communications Building was converted to a wholly-owned property. The carrying value of this investment at conversion was $11,676,847. (See accompanying notes to financial statements) 6 NEW ENGLAND LIFE PENSION PROPERTIES II; - --------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP - --------------------------------- STATEMENTS OF PARTNERS' CAPITAL Year ended December 31, ------------------------------------------------------------------------ 1997 1996 1995 ---------------------- ---------------------- ---------------------- General Limited General Limited General Limited Partner Partners Partner Partners Partner Partners -------- ------------ -------- ----------- -------- ----------- Balance at beginning of year $ 70,863 $ 38,719,002 $ 64,888 $38,127,446 $ 72,444 $38,875,480 Cash distributions (24,704) (31,078,578) (25,112) (2,486,032) (24,664) (2,441,723) Net income 66,876 6,620,681 31,087 3,077,588 17,108 1,693,689 -------- ------------ -------- ----------- -------- ----------- Balance at end of year $113,035 $ 14,261,105 $ 70,863 $38,719,002 $ 64,888 $38,127,446 -------- ============ ======== =========== ======== =========== (See accompanying notes to financial statements) 7 NEW ENGLAND LIFE PENSION PROPERTIES II; - --------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP - --------------------------------- NOTES TO FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BUSINESS - ---------------------------------- General ------- New England Life Pension Properties II; A Real Estate 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. It primarily serves as an investment for qualified pension and profit sharing plans and other entities intended to be exempt from federal income tax. The Partnership commenced operations in June, 1984 and acquired six real estate investments through 1986, five of which have been sold as of December 31, 1997. It intends to dispose of its investments within twelve years of their acquisition, and then liquidate; however, the General Partner could extend the investment period if it is in the best interest of the limited partners. The General Partner of the Partnership is Copley Properties Company II, Inc., a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley Real Estate Advisors, Inc. ("Copley"). Subject to the 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 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. As such, at December 31, 1997, AEW Capital Management, L.P. is wholly owned by NEIC Operating Partnership, L.P. AEW is a subsidiary of AEW Capital Management, 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. At December 31, 1997 and 1996, an affiliate of the general partner owned 831 units of limited partnership interest which were repurchased from certain qualified plans within specified annual limitations provided for in the Partnership Agreement. 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 from operations, as defined, before deducting such fees. Acquisition fees were paid in an amount equal to 2% of the gross proceeds from the offering. 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. Payment of disposition fees are subject to the prior receipt by the limited partners of their capital contributions plus a stipulated return thereon. 8 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 $9,265, $8,834 and $7,973 in 1997, 1996 and 1995, respectively. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Accounting Estimates -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires the 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. Ground Leases and Mortgage Loans -------------------------------- While the related land and loan investments are legally separable, the terms thereof have been negotiated jointly and the investment performance is evaluated on a combined basis. They are, therefore, presented together in the accompanying balance sheet and statement of operations. Investments in land subject to ground leases are stated at cost, plus accrued revenue. Investments in mortgage loans to the related ground lessees are originally stated at cost, plus accrued interest. If the mortgage loan is impaired (see "Impaired Mortgage Loans" below), the carrying amount is adjusted to the estimated market value of the underlying collateral less anticipated costs of sale. Impaired Mortgage Loans ----------------------- The Partnership considers a loan to be impaired when it is probable that it will be unable to collect all amounts due under the contractual terms of the loan agreement. Factors that the Partnership considers in determining whether a loan is impaired include its past due status, fair value of the underlying collateral and economic prospects of the borrower. When a loan is impaired, its carrying value is periodically adjusted, through a valuation allowance, to its estimated market value which is based on the appraised value of the underlying collateral less anticipated costs of sale. Changes in the valuation allowance are reported in the Statement of Operations. Property -------- Property, including ground lease mortgage loans which are in substance real estate investments, includes land, building, and improvements which are stated at cost less accumulated depreciation plus other operating assets and liabilities. The Partnership's initial carrying value of an investment previously reported as a ground lease/mortgage loan equals the carrying amount of the predessor investment at the conversion date. The Partnership and an affiliate share common ownership of the Willows Shopping Center investment. The form of the investment is a combination ground lease and mortgage loan, as described above; however, in this case (Willows Shopping Center), substantial economic risks of property ownership rest with the Partnership and its affiliate. Accordingly, the investment was accounted for as owned property, although the Partnership and its affiliate have a priority claim to all unrecognized contractual revenue. The Partnership's financial statements include its proportionate ownership share (75%) of the individual assets, liabilities, revenue and expenses related to the property. Land and buildings and improvements (net of accumulated depreciation) are classified as property in the balance sheet. 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 estimated useful lives of the buildings and improvements. Leasing costs are also capitalized and amortized over the related lease terms. 9 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 terms of the mortgage loans or the estimated useful lives of the property. Leases provide for rental increases over the respective lease terms. Rental revenue is being recognized on a straight-line basis over the 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 estimated undiscounted cash flows generated from the operations and disposal of the property. The impairment loss is based on the excess of the investment's carrying value over its fair market value. For investments being held for sale, the impairment loss also includes estimated costs of sale. Property held for disposition 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, 1997 the appraised value of the Partnership's remaining investment exceeded its carrying value by approximately $1,500,000. At December 31, 1996 the appraised values of all of the Partnership's investments exceed their respective carrying values by a total of approximately $980,000. The current appraised value of the real estate investment has been estimated by the General Partner and is generally based on a correlation of traditional appraisal approaches performed by the Partnership's advisor and independent appraisers. Because of the subjectivity inherent in the valuation process, the estimated current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace. Cash Equivalents and Short-Term Investments ------------------------------------------- Cash equivalents are stated at cost, plus accrued interest. The Partnership considers all highly liquid debt instruments purchased with a maturity of ninety days or less to be cash equivalents; otherwise, they are classified as short-term investments. The Partnership has the positive intent and ability to hold all short-term investments to maturity; therefore, short-term investments are carried at cost, plus accrued interest, which approximates market value. At December 31, 1997 and 1996, all investments were in commercial paper with less than three and five months, respectively, remaining to maturity. Deferred Disposition Fees ------------------------- Disposition fees due to AEW related to sales or restructuring of investments are included in the determination of gains or losses resulting from such transactions. According to the terms of the advisory contract, payment of such fees has been deferred until the limited partners first receive their capital contributions, plus stipulated returns thereon. 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 withdrawal from, the Partnership. Effective January 1, 1998, the Partnership adopted FAS 128 "Earnings per Share," which simplifies the standards of reporting earnings per share (EPS) previously found in APB Opinion No. 15. It provides guidance on the computation and disclosure of basic and diluted EPS and requires 10 restatement of prior periods for comparative purposes. The adoption of FAS 128 did not have a material impact on the Partnership's financial statements. NOTE 3 - INVESTMENTS IN GROUND LEASES AND MORTGAGE LOANS - -------------------------------------------------------- Industrial/Research and Development Building in Columbia, Maryland ("Columbia") - -------------------------------------------------------------------------------- In 1984, the Partnership purchased the ground leasehold interest in a 2.5 acre parcel of land located in Columbia, Maryland, which is subleased to Columbia Warehouse Limited Partnership ("CWLP") for $137,500. The ground lease, as amended on June 1, 1989, had an unexpired term of approximately 75 years. Annual rental revenue under the ground lease was approximately $3,420 and was adjusted at five-year intervals. The Partnership received an annual rent of $16,500 from the sublessee, plus an annual percentage rent equal to 75% of gross revenues from the rental of the building in excess of a base amount. The Partnership was entitled to receive 75% of the net proceeds from the sale of the entire property after it recovered its investment in the land and the mortgage loan described below. In 1984 the Partnership also made a $1,062,500 non-recourse mortgage loan to CWLP that matured on June 29, 1994. The loan was secured by a first mortgage of the building and of the leasehold interest in the land. Interest only was payable monthly at the rate of 12% per annum. In October 1996, the Partnership reached an agreement in principle with the borrower on the mortgage loan, whereby the maturity date would be extended to December 1997. In addition, the fixed interest and ground rental payments would be reduced, but the Partnership's rate of participation in revenue from the underlying property would be increased to 80%. The agreement was further amended whereby the Partnership would be able to cause a sale of the property. In October 1997, the Partnership formally executed the agreement to renew the mortgage loan at the previously agreed upon terms. On October 27, 1997, the Partnership sold the Columbia property for $1,900,000. The selling price was determined by arm's length negotiations between the Partnership and the buyer. The Partnership received its share of the net proceeds totaling $1,671,200, after closing costs and repayment of the ground lease investment and mortgage loan, and recognized a gain of $400,826 ($10.04 per limited partnership unit). A disposition fee of $57,000 was accrued but not paid to AEW. On November 25, 1997, the Partnership made a capital distribution of $1,672,123 ($41.89 per limited partnership unit) from the proceeds of the sale and reserves. Research and Development Facility in Columbia, Maryland ("Case Communications - ----------------------------------------------------------------------------- Building") - ---------- The Partnership continues to own a 19.2 acre parcel of land in Columbia, Maryland, which it acquired for $2,570,379 and leased back to the seller. A 160,000 square foot research and development building has been constructed on the land. The ground lease has a term of 60 years and provides for a fixed annual rent of $262,392 plus additional rent equal to 65.864% of gross revenues from the rental of the building in excess of a base amount. The Partnership is entitled to receive 60% of the net proceeds from the sale of the entire property after it has recovered its investment in the land and the mortgage loan. The Partnership has also fully funded an $8,814,621 non-recourse mortgage loan to the ground lessee. Interest only was payable monthly at the rate of 11% per annum. The loan matured on May 1, 1995 and is secured by a first mortgage of the building and the leasehold interest in the land. The Partnership has also fully funded an additional $1,000,000 loan. This loan bore interest at the rate of 14% per annum, is secured by a second mortgage on the building and leasehold interest in the land and matured simultaneously with the first mortgage loan described above. 11 In October 1996, the Partnership reached an agreement in principle ("Case Agreement") with the borrower on the mortgage loan, whereby the maturity date was extended to December 1997. In addition, the fixed interest and ground rental payments were reduced to 9.5%, but the Partnership's rate of participation in revenue from the underlying property was increased, effective January 1, 1997. Further, the Partnership will be able to cause a sale of the property. In October 1997, the Partnership formally executed the agreement to renew the mortgage loans at the previously agreed upon terms. As a result of the execution of the Case Agreement which, amongst other things, increased the Partnership's participation in revenues and residual proceeds from sale of the collateral to 80% and granted the Partnership the ability to force a sale, the Partnership converted this investment to an owned "Property" effective in the fourth quarter of 1997. Net real estate operations for the fourth quarter of 1997 amounted to approximately $455,000 for the Case Communications Building. The following is a summary of the Partnership's investments in the Case Communications and Columbia Warehouse ground leases and mortgage loans: December 31, 1997 1996 ------------- ------------ Cash invested $ 13,585,000 $13,585,000 Unamortized acquisition costs and fees, net 12,755 18,677 Accrued ground lease and mortgage loan receivables 92,467 92,467 Sale of Collateral (Columbia Warehouse) (1,213,375) - Valuation allowance for impaired mortgage loans (800,000) (800,000) Transfer to wholly-owned property (Case Communications Building) (11,676,847) - ------------ ----------- $ - $12,896,144 ============ =========== Sale of Elkridge Buildings -------------------------- One of the two Elkridge buildings was sold on May 14, 1996. The second building was sold on December 20, 1996. The net proceeds received by the Partnership were used to repay the ground lease investment and the carrying value of the mortgage loan. Since the mortgage loan was impaired, its carrying value had been previously reduced to estimated fair market value, less anticipated costs of sale and thus no gain or loss on the sale was recognized. The total valuation allowance was $476,377, including $91,377 provided in 1996, which included a disposition fee of $70,848 payable to the advisor. On January 30, 1997, the Partnership made a capital distribution to the limited partners in the aggregate amount of $2,233,755 ($55.96 per limited partnership unit). Sale of Susana Corporate Center ------------------------------- The Susana Corporate Center in Los Angeles, California was sold on October 23, 1996. The net proceeds received by the Partnership were used to repay the ground lease investment and the carrying value of the mortgage loan. Since the mortgage loan was impaired, its carrying value had been previously reduced to estimated fair market value, less anticipated costs of sale and thus no gain or loss on the sale was recognized. The total valuation allowance was $2,604,332, including $191,332 provided in 1996, which included a disposition fee of $87,000 payable to the advisor. On January 30, 1997, the 12 Partnership made a capital distribution to the limited partners in the aggregate amount of $2,709,965 ($67.89 per limited partnership unit). Sale of Oxford Place -------------------- The Oxford Place apartment complex in Grand Rapids, Michigan was sold on December 29, 1993 and the entire net proceeds were received by the Partnership in full satisfaction of its ground lease and mortgage loan investment and related accrued interest. The Partnership accrued a disposition fee payable to the advisor of $172,425 in connection with the sale and made a capital distribution of $2,000,241 ($50.11 per limited partnership unit) from sales proceeds on July 28, 1994. Valuation Allowance ------------------- The activity in the valuation allowance during 1996 and 1997, together with the related recorded and carrying values of the impaired mortgage loans at the beginning and end of each year, are summarized in the table below. Recorded Valuation Carrying Value Allowance Value ------------ ------------ ------------ Balance at January 1, 1996 15,619,235 (3,898,000) 11,721,235 =========== =========== =========== Increase in estimated fair market value of collateral, net 17,291 17,291 Sale of collateral (Columbia) (5,712,147) 3,080,709 (2,631,438) ----------- ----------- ----------- Balance at December 31, 1996 $ 9,907,088 $ (800,000) $ 9,107,088 =========== =========== =========== Transfer to wholly-owned property (Case Communications) (9,907,088) 800,000 (9,107,088) Balance at December 31, 1997 $ -- $ -- $ -- =========== =========== =========== Except for the effect of the mortgage loan restructuring, the average recorded value of the impaired mortgage loans did not differ materially from the balances at the end of each period. As a result of the restructuring, the valuation allowance of $800,000 was charged off against the basis of the property investment at the conversion date. NOTE 4 - INVESTMENTS IN PROPERTIES - ---------------------------------- Willows Shopping Center, Concord, California The Willows Shopping Center investment (the "Willows"), acquired in 1984, was owned jointly with an affiliate of the Partnership (the "Affiliate"); the Partnership had a 75% ownership share. The ground lessee/mortgagor stopped paying interest on the mortgage loan as of March 1990. As a result, the Partnership and its Affiliate began foreclosure proceedings to take possession of the property. A protracted series of legal interactions ensued, including the filing of an involuntary bankruptcy petition by the second leasehold mortgagee. In June 1991, the Partnership and its Affiliate sold the mortgage note to the original owner of the Willows, which in turn undertook and completed the foreclosure action. The Partnership and its Affiliate received a new mortgage note; the principal related to the Partnership's share was $11,147,406. The note bore interest at 9.323% per annum payable monthly, however, it could accrue with interest compounded at 11%. The loan had a maturity date of June 18, 2001. The original owner also assumed the ground lease. The ground lease provided for annual rental payments to the Partnership of $412,500. Rental payments were accruable through June 1996, with interest compounding at 11%, however, the Partnership had permitted additional accrual beyond that date as it 13 evaluated various alternatives. The ground lease also provided for participation rentals at 70% of gross revenues in excess of a base amount to the Partnership and its Affiliate. In connection with a major renovation of the property, on January 1, 1995, the Partnership and its Affiliate committed to make a construction loan to the ground lessee in the amount of $2,500,000. This loan was also accounted for as an investment in property. The Partnership's share was $1,875,000, of which $927,540 had been funded as of December 31, 1996. Interest accrued at 11% compounded monthly. Debt service payments began on January 1, 1996, including principal payments based upon a 15-year amortization schedule. In addition, the ground lease was amended whereby after January 1, 1996, the Partnership and the Affiliate could, at their sole discretion, offer the entire property for sale. On September 18, 1997, the Willows Shopping Center was sold to an institutional buyer (the "Buyer") unaffiliated with the Partnership. The selling price was determined by arm's length negotiations between the Partnership and its Affiliate and the Buyer. The total sales price was $28,575,000. The Partnership received its share of the net proceeds totaling $21,027,944, after closing costs, and recognized a gain of $3,322,455 ($82.40 per limited partnership unit). A disposition fee of $642,937 was accrued but not paid to AEW. On October 30, 1997, the Partnership made a capital distribution of $21,037,856 ($527.04 per limited partnership unit) from the proceeds of the sale and reserves. Case Communications Building, Columbia Maryland - ----------------------------------------------- As described in Note 3, the Partnership previously held the Case Communications Building investment as a combination ground lease/mortgage loan. As a result of a restructuring of this investment in October 1997, the Partnership acquired virtually the same risks and potential rewards of ownership of the property would entail. Accordingly, in October 1997, the Partnership commenced accounting for this investment as an owned property. At December 31, 1997, the Case Communications Building Property investment is comprised of the following: Land $ 2,581,367 Building and Other Assets, net 9,079,119 ----------- Total Property $11,660,486 =========== The buildings and improvements are being depreciated over 30 years using the straight-line method. NOTE 5 - 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, --------------------------------------- 1997 1996 1995 ------------ ----------- ---------- Net income per financial statements $ 6,687,557 $ 3,108,675 $1,710,797 Timing differences: Ground rent and mortgage loan interest (1) 1,208,197 1,800,239 1,779,246 Valuation allowances -- 17,291 1,428,000 Loss on sale (11,764,860) (3,919,175) -- ------------ ----------- ---------- Taxable income (loss) $ (3,869,106) $ 1,007,030 $4,918,043 ============ =========== ========== (1) Represents additional contractual revenue recognized for tax purposes related to the Willows Shopping Center, Elkridge, and Susana Corporate Center. 14 NOTE 6 - PARTNERS' CAPITAL - -------------------------- Allocations 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 partner. Cash distributions are made quarterly. Net sales 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 partner. As a result of such transactions the adjusted capital contribution per limited partnership unit was reduced from $1,000 to $940 during 1985 and further reduced to $889.89 during 1994. Income from a sale is allocated in proportion to the distribution of related proceeds, provided that the general partner is allocated at least 1%. Income or losses from a sale, 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 partner. NOTE 7 - SUBSEQUENT EVENT - ------------------------- Distributions of cash from operations relating to the quarter ended December 31, 1997 were made on January 29, 1998 in the aggregate amount of $365,704 ($9.07 per limited partnership unit). 15 Schedule III 97 NEW ENGLAND LIFE PENSION PROPERTIES II A REAL ESTATE LIMITED PARTNERSHIP SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 Initial Cost to Partnership Costs Subsequent to Acquisitions -------------------------------- ----------------------------------------- Land Adjustment in Encum- Buildings & Building & Land Investment Description brances Land Improvements Improvements due to Restructuring - ------------------------- ---------- ----------- ------------------ ----------------- --------------------- Industrial Buildings Columbia, Maryland Note A 2,618,087 0 9,152,119 (36,720) ---------------------------------------------------------------------------------------- Total $2,618,087 $0 $9,512,119 ======================================================================================== Gross amount at which Carried at Close of Period ---------------------------- Accumulated Buildings & Depreciation Date Depreciable Description Land Improvements Total & Amortization Acquired Life - ------------------------- ----------- -------------- ----------- ----------------- ------------- -------------- Industrial Buildings Columbia, Maryland 2,581,367 9,152,119 11,733,486 (73,000) 05/02/85 -- ---------- -------------- ----------- ----------------- ------------- -------------- Total $2,581,367 $9,152,119 $11,733,486 $(73,000) ========== ============= =========== ================= ============= ============== Notes: (A) All senior mortgages on the properties are held by New England Life Pension Properties II (B) Additions in 1997 relate to Mortgage loan restructuring described in Footnote-3 in Notes to the Financial Statements Reconciliation of real estate owned: 1995 1996 1997 Balance at beginning of period $21,318,333 $22,565,670 $ 22,460,406 Acquisitions 1,247,337 2,049,486 9,115,399 Dispositions 0 (2,154,750) (19,854,319) ------------ ----------- ------------ Balance at end of period $22,565,670 $22,460,406 $ 11,733,486 ============ =========== ============ Accumulated depreciation at beginning of year $ 1,740,992 $ 2,299,292 2,938,527 Depreciation expense 555,128 636,063 553,523 Amortization expense 3,172 3,172 3,172 Dispositions (3,422,222) Accumulated depreciation at end of year: $2,299,292 $2,938,527 73,000 ------------ ----------- ------------ 16 Schedule IV 97 03/25/98 NEW ENGLAND LIFE PENSION PROPERTIES II A REAL ESTATE LIMITED PARTNERSHIP MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV AS OF DECEMBER 31, 1997 Final Periodic Interest Maturity Payment Prior Face Amount Description Rate Date Terms Liens of Mortgage - ------------------------- ------------- --------- ------------ ------- --------------- Research and Development Buildings 9.50% Interest -- 8,814,621 Columbia, Maryland (See Note 3) 05/01/95 Monthly Principal at Maturity 14.00% Interest -- 1,000,000 (See Note 3) 05/01/95 Monthly Principal at Maturity ------------- --------- ------------ ------- --------------- Total $9,814,621 ============= ========= ============ ======= =============== Valuation Allowance Accrued Carrying Disposition for Impaired Interest Reclass (1) Amount of Description Mortgage Loans Receivable Mortgage - ------------------------- ------------- -------------- ------------ -------------- --------- Research and Development Buildings Columbia, Maryland -- (800,000) 92,467 (8,107,088) $0 (1,000,000) -- -- $0 ------------- -------------- ------------ -------------- --------- $(1,000,000) $(800,000) $92,467 $(8,107,088) $0 ============= ============== ============ ============== ========= 1995 1996 1997 Balance at beginning of period $14,126,658 $12,691,267 $10,169,588 Reclass of accrued interest receivable -- 92,467 Valuation allowance for impaired mortgage loans (1,428,000) 17,291 Amortization (7,391) 0 Reclass to wholly-owned property -- -- (8,107,088) Dispositions (2,631,437) (2,062,500) ------------ ----------- ----------- Balance at end of period $12,691,267 $10,169,588 $0 ------------ ----------- ----------- Notes: /(1)/ Represents the reclass of the Partnership's mortgage loan investment to Property (see Footnote - 3 in Notes to Financial Statement) 17 FINANCIAL STATEMENTS INDEX NO. 2 AUDITOR'S REPORT AND FINANCIAL STATEMENTS OF M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP (REFERRED TO ELSEWHERE HEREIN AS CASE COMMUNICATIONS) Independent Auditor's Report of Wolpoff & Company, LLP Balance Sheets - December 31, 1997 and 1996 Statements of Income - For the Years Ended December 31, 1997, 1996 and 1995 Statements of 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 18 M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP FINANCIAL REPORT DECEMBER 31, 1997 M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ CONTENTS -------- DECEMBER 31, 1997 ----------------- ACCOUNTANT'S REVIEW REPORT 1 FINANCIAL STATEMENTS Statement of Assets, Liabilities, and Partners' Capital - Income Tax Basis 2 - 3 Statement of Revenue and Expenses - Income Tax Basis 4 Statement of Changes in Partners' Capital - Income Tax Basis 5 Statement of Cash Flows - Income Tax Basis 6 Notes to Financial Statements 7 - 9 ACCOUNTANTS REPORT ON SUPPLEMENTARY INFORMATION 10 SUPPLEMENTARY INFORMATION Schedule of Supplemental Ground Rent Calculation 11 Schedule of Changes in Partners' Capital - Income Tax Basis 12 WOLPOFF & COMPANY, LLP To the Partners M.O.R. XXIX Associates Limited Partnership Columbia, Maryland We have reviewed the accompanying statement of assets, liabilities, and partners' capital - income tax basis of M.O.R. XXIX Associates Limited Partnership as of December 31, 1997 and 1996, and the related statements of revenue and expenses - income tax basis, changes in partners' capital - income tax basis, and cash flows -income tax basis for the years ended December 31, 1997, 1996, and 1995, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of M.O.R. XXIX Associates Limited Partnership. A review consists principally of inquiries of Partnership personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As described in Note 1, these financial statements were prepared on the basis of accounting the Partnership uses for income tax purposes, which is a comprehensive basis of accounting other than generally accepted accounting principles. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with the basis of accounting described in Note 1. /s/ Wolpoff & Company, LLP WOLPOFF & COMPANY, LLP Baltimore, Maryland January 9, 1998 352480 CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS 200 SAINT PAUL PLACE . SUITE 2300 . BALTIMORE, MARYLAND 21202 (410) 837-3770 . FAX (410) 752-2369 P.O. BOX 470 . 1301 WEST WASHINGTON STREET . HAGERSTOWN, MARYLAND 21741 (301) 733-7200 . FAX (301) 797-3153 - -------------------------------------------------------------------------------- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ STATEMENT OF ASSETS, LIABILITIES, AND PARTNERS' CAPITAL - INCOME TAX BASIS -------------------------------------------------------------------------- ASSETS ------ December 31, ----------------------- 1997 1996 ---------- ---------- PROPERTY, AT COST - Notes 1, 3 and 6 Building and Improvements $4,532,735 $4,532,735 Tenant Improvements 4,343,486 4,343,486 Deferred Costs 1,078,229 1,026,429 ---------- ---------- 9,954,450 9,902,650 Less Accumulated Depreciation and Amortization 6,616,056 6,051,751 ---------- ---------- PROPERTY, NET 3,338,394 3,850,899 ---------- ---------- OTHER ASSETS Cash and Cash Equivalents - Notes 1 and 7 6,162 2,612 Restricted Escrow Funds - Note 7 170,070 47,204 Receivable, Affiliates - Note 4 95,175 100,040 Tenant Receivables 27,262 48,207 ---------- ---------- TOTAL OTHER ASSETS 298,669 198,063 ---------- ---------- $3,637,063 $4,048,962 ========== ========== - ------------ See Accountant's Review Report. The notes to financial statements are an integral part of this statement. -2- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ STATEMENT OF ASSETS, LIABILITIES, AND PARTNERS' CAPITAL - INCOME TAX BASIS -------------------------------------------------------------------------- LIABILITIES AND PARTNERS' CAPITAL --------------------------------- December 31, ------------------------ 1997 1996 ----------- ---------- LIABILITIES Mortgages Payable - Note 2 $ 9,814,621 $9,814,621 Accrued Interest Payable 77,699 92,467 Accounts Payable and Accrued Expenses 17,196 37,067 Accrued Ground Rent 103,552 38,361 Payable to Tenant -0- 4,405 ----------- ----------- TOTAL LIABILITIES 10,013,068 9,986,921 COMMITMENTS AND CONTINGENCY - Note 3 PARTNERS' CAPITAL (DEFICIT) (6,376,005) (5,937,959) ----------- ----------- $ 3,637,063 $ 4,048,962 =========== =========== - -------------- See Accountant's Review Report. The notes to financial statements are an integral part of this statement. -3- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ STATEMENT OF REVENUE AND EXPENSES - INCOME TAX BASIS ---------------------------------------------------- Year Ended December 31, ------------------------------------ 1997 1996 1995 ---------- ---------- ---------- REVENUE - Note 5 Rental Income Base Rent $2,071,702 $1,931,810 $1,940,000 Special Rent -0- 160,000 160,000 Operating Expense Reimbursement (Net of Expenses) 180,193 180,765 183,934 ---------- ---------- ---------- 2,251,895 2,272,575 2,283,934 Interest and Other Income 8,002 7,910 28,533 ---------- ---------- ---------- TOTAL REVENUE 2,259,897 2,280,485 2,312,467 ---------- ---------- ---------- OPERATING EXPENSES Property Taxes 187,305 186,202 187,073 Management Fees - Note 4 84,606 80,963 83,164 Legal and Accounting 7,584 3,767 4,190 General and Administrative 6,052 708 4,038 Reimburse to Tenant -0- 100,037 -0- Bad Debts -0- 541 -0- ---------- ---------- ---------- TOTAL OPERATING EXPENSES 285,547 372,218 278,465 ---------- ---------- ---------- OPERATING INCOME 1,974,350 1,908,267 2,034,002 ---------- ---------- ---------- MORTGAGE INTEREST AND GROUND RENT - Notes 2 and 3 Mortgages 932,389 1,109,608 1,109,608 Ground Rent 894,163 713,435 718,830 ---------- ---------- ---------- 1,826,552 1,823,043 1,828,438 ---------- ---------- ---------- INCOME BEFORE DEPRECIATION AND AMORTIZATION 147,798 85,224 205,564 DEPRECIATION AND AMORTIZATION (564,305) (507,436) (525,263) ---------- ---------- ---------- NET LOSS $ (416,507) $ (422,212) $ (319,699) ---------- ---------- ---------- - ------------ See Accountant's Review Report. The notes to financial statements are an integral part of this statement. -4- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ STATEMENT OF CHANGES IN PARTNERS' CAPITAL - INCOME TAX BASIS ------------------------------------------------------------ Year Ended December 31, ------------------------------------------ 1997 1996 1995 ----------- ----------- ----------- CAPITAL CONTRIBUTIONS $ 1,000 $ 1,000 $ 1,000 ----------- ----------- ----------- REDEMPTION OF PARTNER'S INTEREST - Note 6 259,800 259,800 259,800 ----------- ----------- ----------- DISTRIBUTIONS Prior Years (1,126,670) (914,624) (744,927) Current Year (21,539) (212,046) (169,697) ----------- ----------- ----------- (1,148,209) (1,126,670) (914,624) ----------- ----------- ----------- ACCUMULATED LOSSES Prior Years (5,072,089) (4,649,877) (4,330,178) Current Year (416,507) (422,212) (319,699) ----------- ----------- ----------- (5,488,596) (5,072,089) (4,649,877) ----------- ----------- ----------- TOTAL PARTNERS' DEFICIT $ (6,376,005) $(5,937,959) $(5,303,701) ============ =========== =========== - ------------- See Accountant's Review Report. The notes to financial statements are an integral part of this statement. -5- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ STATEMENT OF CASH FLOWS - INCOME TAX BASIS ------------------------------------------ Year Ended December 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(416,507) $(422,212) $(319,699) --------- --------- --------- Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities Depreciation and Amortization 564,305 507,436 525,263 Change in Tenant Receivables 20,945 (41,101) 75,085 Change in Accounts Payable and Accrued Expenses (19,871) 4,777 (52,564) Change in Payable to Tenant (4,405) (45,659) 29,280 Decrease in Accrued Interest Payable (14,768) -0- -0- Change in Accrued Ground Rent 65,191 37,043 (41,506) --------- --------- --------- Total Adjustments 611,397 462,496 535,558 --------- --------- --------- Net Cash Provided by Operating Activities 194,890 40,284 215,859 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Deferred Costs (51,800) (10,360) (39,278) Change in Property Tax and Insurance Fund (122,866) (45,940) 39,086 Change in Receivable, Affiliates 4,865 397,122 (120,616) Decrease in Refundable Deposit -0- (299,963) -0- --------- --------- --------- Net Cash Provided (Used) by Investing Activities (169,801) 40,859 (120,808) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to Partners (21,539) (212,046) (169,697) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,550 (130,903) (74,646) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,612 133,515 208,161 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,162 $ 2,612 $ 133,515 --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During the Year for Interest $ 947,157 $1,109,608 $1,109,608 ========= ========== ========== - ----------- See Accountant's Review Report. The notes to financial statements are an integral part of this statement. -6- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- DECEMBER 31, 1997 ----------------- Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ M.O.R. XXIX Associates Limited Partnership (the Partnership) was formed in November 1984 pursuant to an agreement under the Maryland Uniform Limited Partnership Act. The Partnership owns and operates an office building in Howard County, Maryland, containing approximately 160,000 square feet of leasable area. The building was placed into service on March 1, 1986, and has been 100% occupied since that date (see Note 5). Income Tax Basis ---------------- The Partnership follows the policy of preparing its financial statements on the basis utilized for income tax reporting. Consequently, the financial statements are not prepared in accordance with generally accepted accounting principles. Cash and Cash Equivalents ------------------------- The Partnership considers all highly liquid debt instruments purchased with a maturity of 3 months or less to be cash equivalents. The majority of the partnership's cash is held in financial institutions with insurance provided by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Periodically during the year, an account balance exceeded the FDIC insurance limitation. Interest Expense ---------------- Interest expense and real property taxes incurred during the construction period were capitalized as a deferred cost and were amortized over a 10-year period. Depreciation ------------ All property is recorded at cost Building costs are being depreciated using the Accelerated Cost Recovery System (ACRS) (19 years, straight- line) for costs incurred prior to December 31, 1986, and the Modified Accelerated Cost Recovery System (MACRS) (31.5 and 39 years, straight- line) for costs incurred after 1986. Amortization ------------ Various deferred costs are being amortized as follows: Amortization Amount Period -------- --------------- Leasing Commissions 478,120 5-10 Years Permanent Mortgage Costs 114,980 Fully Amortized -------- $593,100 ======== -7- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- DECEMBER 31, 1997 ----------------- Note l - Income Taxes ------------ (Cont.) Partnerships are not subject to income taxes. The partners are required to report their respective shares of partnership income or loss and other tax items on their income tax returns. Use of Estimates ---------------- The preparation of financial statements requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Note 2 - FINANCING Mortgage Debt ------------- Mortgage financing was provided by New England Life Pension Properties II in the amount of $9,814,621, through two separate nonrecourse mortgages. The first mortgage originated May 1, 1985, in the amount of $8,814,621 and an interest rate of 11%. The second mortgage was fully funded during 1986 in the amount of $1,000,000; the interest rate was 14%. Effective January 1, 1997, the mortgages were amended to reduce the interest rate to 9.5% and extend the maturity dates to December 31, 1997. At December 31, 1997, the mortgage automatically extended to an additional year at the same terms. Pertinent information regarding these mortgages is as follows: First Mortgage Second Mortgage -------------- --------------- Outstanding Balance, December 31,1997 $8,814,621 $1,000,000 Interest Rate 9.5% 9.5% Payment Constant Interest Only Interest Only Original Term 10 Years 9 Years Maturity Date December 31,1997 December 31,1997 Amount Due at Maturity $8,814,621 $1,000,000 Note 3 - LAND SALE AND LEASEBACK In 1985 the Partnership sold its land to New England Life Pension Properties II for $2,385,379 and entered into a land lease with a term of 60 years. Effective January 1, 1997, the annual base is $226,611. The lease provides for supplemental rent equal to 80% of the gross receipts of the property, in excess of $1,237,500. Prior to January 1, 1997, the annual base was $262,392, and the supplemental rent was 65.864% of gross receipts in excess of $1,247,500. For this purpose, the special tenant rent amounting to $160,000 annually is not included in gross receipts for 1996 and 1995. The remaining minimum land lease payments total $11,103,939 for 1998 through 2045. The total ground rent for 1997, 1996, and 1995 is as follows: 1997 1996 1995 -------- -------- -------- Basic Annual Rent $226,611 $262,392 $262,392 Supplemental Rent* 667,552 451,043 456,438 -------- -------- -------- $894,163 $713,435 $718,830 -------- -------- -------- * See Schedule of Supplemental Ground Rent Calculation. -8- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- DECEMBER 31, 1997 ----------------- Note 4 - RELATED PARTY TRANSACTIONS The Partnership has various contractual arrangements with Manekin Corporation, an entity affiliated with certain partners. Management Fees --------------- The Partnership has entered into an agreement with Manekin Corporation to act as management agent for the property. The management agreement provided for management fees equal to 1% of rents and tenant expense billings. On January 1, 1996, the management fee was increased to 3%. For 1997, 1996, and 1995, management fees of $84,606, $80,963, and $83,164, respectively, were incurred. Receivable, Affiliates ---------------------- The Partnership participates in a central disbursing cash account with various entities affiliated with the Partnership. As of December 31, 1997 and 1996, the Partnership's share of the cash account was $93,094 and $100,040, respectively, and is reflected as receivable, affiliates. The funds earn interest at the applicable federal rate. As of December 31, 1997, other receivables from affiliates amounted to $2,081. Note 5 - TENANT LEASE The building has been 100% leased to the U.S. Government since January 1, 1990. The tenant has been negotiating a new lease with the landlord since October 31, 1996. The tenant pays base rent plus operating expenses and real estate taxes. Note 6 - REDEMPTION OF PARTNER'S INTEREST On December 18, 1986, the Partnership redeemed a partner's interest in the partnership. Concurrently, the basis of the Partnership's real property was adjusted pursuant to (S)734 of the Internal Revenue Code (IRC). The increase in basis was $259,800. Note 7 - CASH RESTRICTIONS On December 30, 1991, the Manekin Organization and the partners of the Partnership entered into a restructure and loan agreement with Mercantile-Safe Deposit & Trust Company (Mercantile). As a result, the organization entered into a lockbox arrangement with Mercantile whereby all rent payments are received directly by the bank. These funds are held for payment of monthly expenses including escrow amounts. Additionally, at its discretion, Mercantile may apply the remaining available funds to reduce debt owed to Mercantile, which is guaranteed by the Partnership and the partners. -9- To the Partners M.O.R. XXIX Associates Limited Partnership Columbia, Maryland ACCOUNTANTS REPORT ON SUPPLEMENTARY INFORMATION ----------------------------------------------- The accompanying supplementary information contained on pages 11 and 12 is presented for purposes of additional analysis. Such information has not been subjected to the same inquiries and analytical procedures applied in the review of the basic financial statements, but has been compiled from information that is the representation of the management of M.O.R. XXIX Associates Limited Partnership, without audit or review. Accordingly, we do not express an opinion or any other form of assurance on such supplementary information. /s/ Wolpoff & Company, LLP WOLPOFF & COMPANY, LLP Baltimore, Maryland January 9, 1998 -10- M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHIP ------------------------------------------ SCHEDULE OF SUPPLEMENTAL GROUND RENT CALCULATION ------------------------------------------------ Year Ended December 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- GROSS RENT RECEIPTS $2,072,000 $1,931,810 $1,940,000 BASE 1,237,560 1,247,000 1,247,000 ---------- ---------- ---------- GROSS RENT RECEIPTS IN EXCESS OF BASE 834,440 684,810 693,000 APPLICABLE PERCENTAGE 80.000% 65.864% 65.864% ---------- ---------- ---------- SUPPLEMENTAL GROUND RENT $ 667,552 $ 451,043 $ 456,438 ---------- ---------- ---------- - ---------- See Accountant's Report on Supplementary Information. - 11 - M.O.R. XXIX ASSOCIATES LIMITED PARTNERSHlP ------------------------------------------ SCHEDULE OF CHANGES IN PARTNERS' CAPITAL - INCOME TAX BASIS ----------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 ---------------------------- Partners' Partners' Partners Capital Current Year Capital Ownership (Deficit) ------------------------ (Deficit) Percentage 12/31/96 Distributions Net Loss 12/31/97 ----------- ----------- ------------- --------- ------------ GENERAL PARTNER RA & DM, Inc. 1.00% $ (59,380) $ (215) $ (4,165) $ (63,760) LIMITED PARTNER MRU Limited Partnership 99.00% (5,878,579) (21,324) (412,342) (6,312,245) ----------- ----------- ------------- --------- ------------ 100.00% $(5,937,959) $ (21,539) $(416,507) $ (6,376,005) =========== =========== ============= ========= ============ - ----------------------- See Accountants Report on Supplementary Information. - 12 - EXHIBIT INDEX ------------- Exhibit Page Number Exhibit Number - --------- --------------------------------------------------------------------- ------ 4. Amended and Restated Agreement of Limited Partnership * of New England Life Pension Properties II; A Real Estate Limited Partnership (filed as Exhibit 28A to Form 8-K dated June 15, 1984, as filed with the Commission on June 25, 1984). 10A. Form of Escrow Deposit Agreement among the Registrant, * NEL Equity Services Corporation and The Bank of Boston (filed as Exhibit 10A to the Registrant's Registration Statement on Form S-11, file no. 2-86659 [the "Registration Statement"]). 10B. Form of Advisory Contract between the Registrant and * Copley Real Estate Advisors, Inc. (filed as Exhibit 10B to the Registration Statement). 10C. Confirmatory Ground Sublease, dated as of June 29, 1984, * between the Registrant, as Lessor, and Columbia Warehouse Limited Partnership ("Columbia"), as Lessee [filed as Exhibit 10D to Post-Effective Amendment No. 1 to the Registration Statement, dated August 23, 1984 ("Post-Effective Amendment No. 1")]. 10D. Promissory Note, dated June 29, 1984, in the principal amount * of $1,062,500 from Columbia to the Registrant (filed as Exhibit 10E to Post-Effective Amendment No. 1). 10E. Deed of Trust, dated June 29, 1984, by and between Columbia * and the Trustees named therein (filed as Exhibit 10F to Post- Effective Amendment No. 1.). 10F. Confirmatory Ground Lease, dated as of June 29, 1984 * between the Registrant, as Lessor, and Dorsey Associates ("Dorsey"), as Lessee (filed as Exhibit 10G to Post- Effective Amendment No. 1.). 10G. Promissory Note, dated June 29, 1984, in the principal amount of * $2,062,500 from Dorsey to the Registrant (filed as Exhibit 10H to Post Effective Amendment No. 1). 10H. Deed of Trust, dated June 29, 1984, by and between Dorsey and * the Trustees named therein (filed as Exhibit 10I to Post- Effective Amendment No. 1). 10I. Deed of Trust and Security Agreement, dated as of July 30, 1984, * among Willows Concord Venture, as Grantor, El Camino Title Company, as Trustee, and New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant, as Beneficiaries (filed as Exhibit 28.1 to Form 8-K dated July 29, 1984, as filed with the Commission on August 4, 1984). 10J. Ground Lease dated as of July 30, 1984, between Willows Concord * Venture, as Lessee, and New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant, as Lessors (filed as Exhibit 28.2 to Form 8-K dated July 29, 1984, as filed with the Commission on August 14, 1984). Exhibit Page Number Exhibit Number - --------- --------------------------------------------------------------------- ------ 10K. Ground Lease dated as of December 21, 1984, between the * Registrant, as Lessor, and Susana Partners '82 ("Susana") as Lessee (filed as Exhibit 10(i)a to Form 8-K dated February 4, 1985, as filed on or about February 15, 1985, as amended). 10L. Deed of Trust and Security Agreement dated as of December 21, * 1984, among the Registrant, as Grantee, Susana, as Grantor, and First American Title Insurance Company, as Trustee (filed as Exhibit 10(i)b to Form 8-K dated February 15, 1985, as amended). 10N. Mortgage and Security Agreement, dated as of September 26, 1985, * by and between Oxford Place Apartments Limited Partnership, Mortgagor, and the Registrant, Mortgagee, in the amount of $4,250,000. 10O. Promissory Note, dated as of September 26, 1985, in the principal * amount of $4,250,000 from the Registrant to Oxford Place Apartments Limited Partnership. 10P. Ground Lease dated as of September 26, 1985 between the Registrant, * as Landlord and Oxford Place Apartments Limited Partnership, as Tenant. 10Q. Contract of Sale dated as of September 26, 1985, by and between * Oxford Apartments Limited Partnership, Seller, and the Registrant, Purchaser. 10R. Letter Agreement between New England Life Pension Properties; * A Real Estate Limited Partnership, the Registrant and Willows Concord Venture dated June 14, 1991. 10S. Promissory Note dated July 14, 1991 in the principal amount of * $14,863,206.38 from Willows Concord Venture to New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant. 10T. Assignment of Note and Liens Including Deed of Trust dated as * of June 13, 1991 by New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant to Willows Concord Venture. 10U. Assignment of VMS Loan Documents dated June 14, 1991 by * Willows Concord Venture to New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant. 10V. Deed of Trust and Security Agreement dated June 13, 1991 between * Willows Concord Venture, as Trustor; Chicago Title Company, as Trustee; and New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant, as Beneficiary. 10W. Assignment of Leases and Rents dated June 13, 1991 by Willows * Concord Venture to New England Life Pension Properties; A Real Estate Limited Partnership and the Registrant. Exhibit Page Number Exhibit Number - --------- --------------------------------------------------------------------- ------ 10X. Amended and Completely Restated Ground Lease dated effective * as of June 18, 1991 between Registrant, New England Life Pension Properties II; A Real Estate Limited Partnership and Willows Concord Venture. 10Y. Amended and Restated Secured Promissory Note effective as of * June 14, 1991, in the principal amount of $14,863,206.38 from Willows Concord Venture to the Registrant and New England Life Pension Properties II; A Real Estate Limited Partnership. 10Z. Modification Agreement and First Amendment to Loan Documents dated * August 13, 1991, by and between Willows Concord Venture, the Registrant and New England Life Pension Properties II; A Real Estate Limited Partnership. 10AA. Modification Agreement and Second Amendment to Loan Documents * dated September 12, 1991, by and between Willows Concord Venture, the Registrant and New England Life Pension Properties II; A Real Estate Limited Partnership. 10BB. Modification Agreement and Third Amendment to Loan Documents * dated October 15, 1991, by and between Willows Concord Venture, the Registrant and New England Life Pension Properties II; A Real Estate Limited Partnership. 10CC. Fourth Amendment to Loan Documents dated December 17, 1992 * by and between Willows Concord Venture Registrant and New England Life Pension Properties II; A Real Estate Limited Partnership. 10DD. Special Warranty Deed by and between Registrant, Grantor, and Oxford * Place Apartments Limited Partnership, Grantee, dated December, 1993. 10EE. Agreement to Cause Early Expiration of Term of Ground Lease by and * between Oxford Place Apartments Limited Partnership and Registrant dated as of December 29, 1993. 10FF. Discharge of Mortgage and Security Agreement executed by Registrant, * dated December, 1993. 10GG. Termination of Collateral Assignment of Lease or Leases executed by * Registrant, dated December, 1993. 10HH. Consent letter given by Registrant regarding sale of property dated * December 29, 1993. 10II. Construction Loan Agreement dated January 1, 1996 by and between * Willows Concord Venture, A California Limited Partnership as Borrower, and New England Life Pension Properties II; A Real Estate Limited Partnership as Lender. 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. NEW ENGLAND LIFE PENSION PROPERTIES II; A REAL ESTATE LIMITED PARTNERSHIP Date: March 31, 1998 By: /s/ Wesley M. Gardiner, Jr. --------------------------- Wesley M. Gardiner, Jr. President of the 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 /s/ Wesley M. Gardiner, Jr. Chief Executive Officer March 31, 1998 - ---- ----------------------- Wesley M. Gardiner, Jr. and Director Vice President /s/ Pamela J. Herbst and Director March 31, 1998 - ---- ----------------------- Pamela J. Herbst Vice President /s/ J. Grant Monahon and Director March 31, 1998 - ---- ---------------------- J. Grant Monahon /s/ James J. Finnegan Vice President March 31, 1998 - --- ----------------------- James J. Finnegan Treasurer and Principal Financial and /s/ Karin J. Lagerlund Accounting Officer March 31, 1998 - ---- ---------------------- Karin J. Lagerlund