Item 3. Legal Proceedings . . . . . . . . . . . . . . . 6
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 6
PART II
Item 5.

Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters . . . . . . . . 6
Item 6.

Item 6. Selected Financial Data . . . . . . . . . . . . 8
Item 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As a result of the public offering as described in Item 1, the Partnership had approximately $55,000,000( after deducting selling expenses and other offering costs) with which to make investments in income-producing commercial and residential real property, to pay legal fees and other costs (including acquisition fees) related to such investments and to satisfy working capital requirements. A portion of the proceeds was utilized to acquire the properties described in Item 1 above.
During 1996 some of the Holders of Interests in the Partnership received from unaffiliated third parties unsolicited tender offers to purchase up to 4.9% of the Interests in the Partnership at amounts between $350 and $400 per Interest. The Partnership recommended against acceptance of these offers on the basis that, among other things, the offer prices were inadequate. Such offers have expired. As of the date of this report, the Partnership is aware that 850 Interests have been purchased by such unaffiliated third parties either pursuant to such tender offers or through negotiated purchases. The Partnership has recently received a request from another unaffiliated third party for the list of Holders of Interests. It is possible that other offers for Interests may be made by unaffiliated third parties in the future although there is no assurance that any other third party will commence an offer for Interests, the terms of any such offer or whether any such offer, if made, will be consummated, amended or withdrawn. The board of directors of JMB Realty Corporation ("JMB"), the corporate general partner of the Partnership, has established a special committee (the "Special Committee") consisting of certain directors of JMB to deal with all matters relating to tender offers for Interests in the Partnership, including any and all responses to such tender offers. The Special Committee has retained independent counsel to advise it in connection with any potential tender offers for Interests and has retained Lehman Brothers Inc. as financial advisor to assist the Special Committee in evaluating and responding to any additional potential tender offers for Interests.
The Partnership has been made aware that in mid-March another unaffiliated third party made an unsolicited tender offer to some of the Holders of Interests. This offer sought to purchase up to 4.9% of the Interests in the Partnership for $310 per Interest. This offer is currently scheduled to expire in late April 1997. The Special Committee is in the process of formulating their response regarding this latest offer.
During the fourth quarter of 1996, the Partnership distributed approximately $16,003,000 to the Holders of Interests ($249 per Interest) which included substantially all of the net proceeds from the August 1996 sale of the Ashby Apartments, as described below. The General Partners have deferred their share of the distributions of proceeds from this sale. In addition, the Partnership distributed $81,183 to the
General Partners which represented their share of operational cash flow of the Partnership. At December 31, 1996, the Partnership and its consolidated venture had cash and cash equivalents of approximately $3,934,000. Such funds are available for contributions to its joint ventures, distributions to partners and for other working capital requirements. The Partnership's share of currently budgeted tenant and improvements and other capital expenditures for its unconsolidated venture and corporation in 1997 is currently budgeted to be approximately $175,000. Actual amounts expended in 1997 may vary depending on a number of factors including actual leasing activity, results of property operations, liquidity considerations and other market conditions over the course of the year. The source of capital (in addition to the cash and cash equivalents noted above) for such items and for both future short-term and long-term liquidity and distributions to the Limited and General Partners is expected to be from net cash generated by the Partnership's investment properties and from the sale of such investments. In such regard, reference is made to the Partnership's property specific discussions below. The General Partners do not intend to incur any additional indebtedness secured by a mortgage or otherwise, unless it is determined by the Corporate General Partner that it is in the best interests of the Holders of Interests.
ASHBY APARTMENTS
On August 26, 1996 the CIP/Ashby joint venture sold the land and related improvements of The Ashby at McLean Apartments. The sale price was $21,400,000 (before selling costs). Reference is made to the Notes for a further description of the sale.
1225 CONNECTICUT AVENUE
1225 Investment Corporation incurred approximately $5,300,000 of anticipated tenant improvement costs, lobby renovation and sprinkler system costs related to the lease extension for Ernst & Young, as well as tenant improvement costs for other tenants in 1994 and 1995. Such costs were paid during 1994 and 1995 from the net proceeds of approximately $5,300,000 from the January 1994 refinancing of the existing mortgage loan secured by the property. The property remains 100% occupied at December 31, 1996.
LANDINGS SHOPPING CENTER
Occupancy at the property decreased to 60% at December 31, 1996, from 95% at December 31, 1995 primarily as a result of the vacating of six tenants which occupied approximately 37,000 square feet. The JMB/Landings joint venture (the "venture") is pursuing its legal remedies concerning the approximately $90,000 in aggregate arrearages due from various tenants, including approximately $52,000 in delinquent rents due from a tenant which had occupied 11,200 square feet whose parent company filed for bankruptcy protection earlier in 1996. In addition, tenant leases representing approximately 22%, 15% and 8% of the leasable space at the property are scheduled to expire in 1997, 1998 and 1999, respectively, not all of which are expected to be renewed. The venture is conserving its working capital in order to fund budgeted 1997 capital and tenant costs of approximately $290,000 (most of which has not been expended at March 21, 1997) and for potential future costs in connection with the lease-up of the vacant space, for which the venture is actively pursuing replacement tenants.
There are certain risks associated with the Partnership's investments made through joint ventures, including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership.
As the Partnership continues to conserve its working capital, all expenditures are carefully analyzed and certain capital projects are deferred when appropriate. By conserving working capital, the Partnership will be in a better position to meet the future needs of its properties since the availability of satisfactory outside sources of capital may be limited. In an effort to reduce Partnership operating expenses, the Partnership elected to make semiannual rather than quarterly distributions of available operating cash flow beginning in November 1995. After reviewing the Partnership's properties and marketplaces in which they operate, the General Partners of the Partnership expect to be able to conduct an orderly liquidation of its investment portfolio as quickly as practicable. In such regard, the unconsolidated ventures which own the Partnership's remaining investment properties (1225 Connecticut and JMB/Landings) have classified such properties as held for sale at December 31, 1996 and therefore such properties will no longer be subject to continuing depreciation. Therefore, the affairs of the Partnership are expected to be wound up no later than December 31, 1999 (sooner if the properties are sold in the nearer term), barring any unforeseen economic developments.
Although the Partnership expects to distribute sale proceeds from the disposition of the Partnership's remaining investment properties, without a dramatic improvement in market conditions, aggregate distributions from sale proceeds received by the Limited Partners over the entire term of the Partnership are expected to approximate slightly more than half of their original investment. These aggregate sale proceeds when combined with aggregate distributions of net cash flow over the entire term of the Partnership are expected to approximate slightly less then the Limited Partners' original investment.
RESULTS OF OPERATIONS
At December 31, 1996 the Partnership owned an interest in two operating investment properties.
The increase in cash and cash equivalents at December 31, 1996 as compared to December 31, 1995 is attributable primarily to operating cash flow generated in 1996 in excess of operating cash flow distributed in 1996.
The decreases in interest, rents and other receivables, prepaid expenses, investment property, tenant security deposits and venture partner's subordinated equity in venture at December 31, 1996 as compared to December 31, 1995 are attributable to CIP/Ashby's August 1996 sale of the Ashby at McLean Apartments.
The decrease in investment in unconsolidated corporation, at equity at December 31, 1996 as compared to December 31, 1995 and the decrease in Partnership's share of operations of unconsolidated corporation in 1996 as compared to 1995 and 1994 is attributable primarily to the Partnership's share ($2,851,415) of the provision for value impairment recorded by 1225 Investment Corporation at December 31, 1996.
The decreases in rental income and property operating expenses in 1996 as compared to 1995 are primarily due to the August, 1996 sale of the Ashby at McLean Apartments. The increase in rental income in 1995 as compared to 1994 is attributable primarily to higher effective rents at The Ashby due to rental increases implemented during 1995. The decrease in depreciation expense in 1996 as compared to 1995 is primarily due to the suspension of depreciation as of April 1, 1996 on the Ashby at McLean Apartments as such property was classified as held for sale as of such date. The decrease in depreciation expense in 1995 as compared to 1994 is due primarily to the provision for value impairment of $7,572,479 which was recorded at September 30, 1994 by CIP/Ashby on The Ashby at McLean Apartments.
The increase in interest income in 1996 as compared to 1995 is due primarily to higher average investment balances in 1996 in the Partnership's and its consolidated venture's short-term investments (primarily as a result of CIP/Ashby's temporary investment of the Ashby at McLean Apartments sale proceeds in interest-bearing cash equivalents). The increase in interest income in 1995 as compared to 1994 is attributable primarily to higher yields in 1995 on the Partnership's and its consolidated venture's short-term investments.
Fees for professional services increased in 1996 as compared to 1995 and 1994 primarily as a result of expenses incurred in connection with tender offer matters, as discussed above.
The increases in general and administrative expenses in 1996 and 1995 as compared to 1994 are attributable primarily to an increase in reimbursable costs to affiliates of the General Partners and the recognition of certain additional prior year reimbursable costs to such affiliates in 1995 and to the timing of the recognition of costs for certain outsourcing services and certain printing costs in 1996.
The provision for value impairment in the amount of $7,572,459 recorded in 1994 was due to the uncertainty of CIP/Ashby's ability to recover the net carrying value of the Ashby at McLean Apartments.
The increase in Partnership's share of operations of unconsolidated corporation in 1995 as compared to 1994 is due primarily to an increase in average occupancy in 1995 due to Ernst & Young's lease renewals and the corresponding increase in rental income at 1225 Connecticut Avenue, N.W.
The Partnership's share of operations of unconsolidated venture in 1995 contains the Partnership's share ($1,750,000) of the provision for value impairment record by JMB/Landings. Operations of JMB/Landings decreased in 1996 primarily as a result of a decrease in occupancy and a corresponding decrease in rental income at The Landings Shopping Center in 1996.
The changes in venture partner's share of venture's operations in 1996 as compared to 1995 and in 1995 as compared to 1994 are due primarily to the suspension of depreciation and eventual sale of the Ashby at McLean Apartments in 1996 and the venture partner's share of the provision for value impairment recorded by CIP/Ashby at September 30, 1995 and the related decrease in depreciation expense recorded at the Ashby at McLean Apartments as a result of the above-mentioned value impairment.
The gain on sale of investment property is attributable to the August 1996 sale of the Ashby at McLean Apartments.
INFLATION
Due to the decrease in the level of inflation in recent years, inflation generally has not had a material effect on rental income or property operating expenses.
Inflation is not expected to significantly impact future operations due to the expected liquidation of the Partnership by 1999. However, to the extent that inflation in future periods would have an adverse impact on property operating expenses, the effect would generally be offset by amounts recovered from tenants as many of the long-term leases at the Partnership's commercial properties have escalation clauses covering increases in the cost of operating and maintaining the properties as well as real estate taxes. Therefore, there should be little effect on operating earnings if the properties remain substantially occupied. In addition, substantially all of the leases at the Partnership's shopping center investment contain provisions which entitle the Partnership to participate in gross receipts of tenants above fixed minimum amounts.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
INDEX
Independent Auditors' Report Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Operations, years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Partners' Capital Accounts, years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows, years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
SCHEDULES NOT FILED:
All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
1225 INVESTMENT CORPORATION (A CORPORATION)
INDEX
Independent Auditors' Report Balance Sheets, December 31, 1996 and 1995 Statements of Operations, years ended December 31, 1996, 1995 and 1994 Statements of Changes in Shareholders' Equity, years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows, years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements Schedule --------
Real Estate and Accumulated Depreciation III
SCHEDULES NOT FILED:
All schedules other than the one indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
INDEPENDENT AUDITORS' REPORT
The Partners CARLYLE INCOME PLUS, L.P. - II:
We have audited the consolidated financial statements of Carlyle Income Plus, L.P.-II (a limited partnership) and consolidated venture as listed in the accompanying index. These consolidated financial statements are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carlyle Income Plus, L.P.-II and consolidated venture as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in the Notes to the consolidated financial statements, in 1996 the Partnership and its consolidated venture changed their method of accounting for long-lived assets and long-lived assets to be disposed of to conform with Statement of Financial Accounting Standards No. 121.
KPMG PEAT MARWICK LLP
Chicago, Illinois March 21, 1997
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS ------
1996 1995 ------------ -----------
Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .$ 3,933,927 3,606,715 Interest, rents and other receivables. . . . . . . . . . . . . . . . . 25,348 54,610 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 11,986 ------------ ----------- Total current assets . . . . . . . . . . . . . . . . . . . . . 3,959,275 3,673,311 ------------ ----------- Investment property, at cost - Land. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4,586,545 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . -- 16,793,928 ------------ ----------- -- 21,380,473 Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . -- 3,945,031 ------------ ----------- Total investment property, net of accumulated depreciation. . . . . . . . . . . . . . . -- 17,435,442 ------------ -----------
Investment in unconsolidated corporation, at equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,418,337 24,284,252 Investment in unconsolidated venture, at equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,133,922 3,980,419 ------------ -----------
$ 28,511,534 49,373,424 ============ ===========
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND PARTNERS' CAPITAL ACCOUNTS (DEFICITS) -----------------------------------------------------
1996 1995 ------------ ----------- Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 71,858 21,939 Amounts due to affiliates . . . . . . . . . . . . . . . . . . . . . . 5,388 26,687 ------------ ----------- Total current liabilities. . . . . . . . . . . . . . . . . . . 77,246 48,626 ------------ ----------- Tenant security deposits . . . . . . . . . . . . . . . . . . . . . . . . -- 107,369 ------------ ----------- Commitments and contingencies
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 77,246 155,995 ------------ ----------- Venture partner's subordinated equity in venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,910 5,523,770 Partners' capital accounts (deficits):
General partners: Capital contributions. . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000 Cumulative net earnings. . . . . . . . . . . . . . . . . . . . . . 443,106 450,800 Cumulative cash distributions. . . . . . . . . . . . . . . . . . . (906,336) (771,032) ------------ ----------- (438,230) (295,232) ------------ ----------- Limited partners (64,269.53 interests): Capital contributions, net of offering costs and purchase discounts . . . . . . . . . . . . . . . . . . 55,256,131 55,256,131 Cumulative net earnings. . . . . . . . . . . . . . . . . . . . . . 8,935,045 7,061,904 Cumulative cash distributions. . . . . . . . . . . . . . . . . . . (35,360,568) (18,329,144) ------------ ----------- 28,830,608 43,988,891 ------------ ----------- Total partners' capital accounts (deficits) . . . . . . . . . . . . . . . . . . . . . . . . . 28,392,378 43,693,659 ------------ ----------- $ 28,511,534 49,373,424 ============ ===========
See accompanying notes to consolidated financial statements. /TABLE
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------
Income: Rental income. . . . . . . . . . . . . . . . . . . $ 2,377,068 3,276,045 3,212,142 Interest income. . . . . . . . . . . . . . . . . . . 508,795 222,411 154,786 ------------ ----------- ----------- 2,885,863 3,498,456 3,366,928 ------------ ----------- ----------- Expenses: Depreciation . . . . . . . . . . . . . . . . . . . . 145,870 580,373 665,737 Property operating expenses. . . . . . . . . . . . . 1,188,800 1,576,669 1,600,383 Professional services. . . . . . . . . . . . . . . . 115,616 76,500 89,825 General and administrative . . . . . . . . . . . . . 205,938 203,507 117,422 Provision for value impairment . . . . . . . . . . . -- -- 7,572,479 ------------ ----------- ----------- 1,656,224 2,437,049 10,045,846 ------------ ----------- ----------- Operating earnings (loss). . . . . . . . . . 1,229,639 1,061,407 (6,678,918)
Partnership's share of operations of uncon- solidated corporation . . . . . . . . . . . . . . . (1,623,860) 1,443,793 1,115,481 Partnership's share of operations of unconsolidated venture . . . . . . . . . . . . . . . 153,503 (1,517,118) 245,774 Venture partner's share of venture's operations . . . . . . . . . . . . . . . . . . . . . (417,997) (351,434) 2,041,247 ------------ ----------- -----------
Net operating earnings (loss) . . . . . . . . . . . $ (658,715) 636,648 (3,276,416) Gain on sale of investment property, net of venture partner's share. . . . . . . . . . . 2,524,162 -- -- ------------ ----------- ----------- Net earnings (loss). . . . . . . . . . . . . . . . . 1,865,447 636,648 (3,276,416) ============ =========== ===========
Net earnings (loss) per limited partnership interest: Net operating earnings (loss). . . . . . . . . . $ (9.74) 9.41 (48.43) Net gain on sale of investment property. . . . . . . . . . . . . . . . . . . . . 38.88 -- -- ----------- ----------- ----------- $ 29.14 9.41 (48.43) =========== ========== ============
See accompanying notes to consolidated financial statements. /TABLE
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL ACCOUNTS (DEFICITS)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GENERAL PARTNERS LIMITED PARTNERS (64,269.53 INTERESTS) --------------------------------------------- -------------------------------------- CONTRI- BUTIONS, NET NET OF NET CONTRI- EARNINGS CASH OFFERING EARNINGS CASH BUTIONS (LOSS) DISTRIBUTIONS TOTAL COSTS (LOSS) DISTRIBUTIONS TOTAL ------- ---------- ------------- ----------- ----------- ---------- ------------- -----------
Balance at December 31, 1993. . . .$25,000 582,789 (473,363) 134,426 55,256,131 9,569,683 (12,673,426) 52,152,388
Net earnings (loss) . . . . -- (163,821) -- (163,821) -- (3,112,595) -- (3,112,595) Cash distri- butions ($32.00 per limited partnership interest) . . . -- -- (108,243) (108,243) -- -- (2,056,625) (2,056,625) ------- -------- --------- ---------- --------- ---------- ---------- ----------
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL ACCOUNTS (DEFICITS) - CONTINUED
GENERAL PARTNERS LIMITED PARTNERS (64,269.53 INTERESTS) --------------------------------------------- -------------------------------------- CONTRI- BUTIONS, NET OF CONTRI- NET CASH OFFERING NET CASH BUTIONS EARNINGS DISTRIBU- TOTAL COSTS EARNINGS DISTRIBUTIONS TOTAL (LOSS) TIONS (LOSS) ------- --------- --------- ------ ------- --------- ------------ ------ Balance (deficit) at December 31, 1994. . . . . .25,000 418,968 (581,606) (137,638) 55,256,131 6,457,088 (14,730,051) 46,983,168
Net earnings (loss). . . . . -- 31,832 -- 31,832 -- 604,816 -- 604,816
Cash distri- butions ($56.00 per limited partnership interest) . . . -- -- (189,426) (189,426) -- -- (3,599,093) (3,599,093) ------- -------- --------- --------- ---------- --------- ----------- ----------- Balance (deficit) at December 31, 1995. . . . . .25,000 450,800 (771,032) (295,232) 55,256,131 7,061,904 (18,329,144) 43,988,891
Net earnings (loss). . . . . -- (7,694) -- (7,694) -- 1,873,141 -- 1,873,141 Cash distri- butions ($265.00 per limited partnership interest). . . -- -- (135,304) (135,304) -- -- (17,031,424) (17,031,424) ------ ------- --------- --------- -------- -------- ------------ ------------
Balance (deficit) at December 31, 1996 . . . . .$25,000 443,106 (906,336) (438,230) 55,256,131 8,935,045 (35,360,568) 28,830,608 ======= ========= ======== ========= =========== ========== ============ ============
See accompanying notes to consolidated financial statements. /TABLE
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- -----------
Cash flows from operating activities: Net earnings (loss). . . . . . . . . . . . . . . . . $ 1,865,447 636,648 (3,276,416) Items not requiring (providing) cash or cash equivalents: Depreciation . . . . . . . . . . . . . . . . . . . 145,870 580,373 665,737 Total gain on sale of investment property . . . . . . . . . . . . . . . . . . . . (3,658,205) -- -- Partnership's share of operations of unconsolidated corporation, net of dividends . . . . . . . . . . . . . . . . 1,623,860 370,372 596,519 Partnership's share of operations of unconsolidated venture, net of distributions. . . . . . . . . . . . . . . . . . (153,503) 1,517,118 -- Venture partner's share of venture's operations and gain on sale. . . . . . . . . . . 1,552,040 351,434 (2,041,247) Provision for value impairment . . . . . . . . . . -- -- 7,572,479 Changes in: Interest, rents and other receivables. . . . . . . 41,248 (11,056) (15,864) Accounts payable . . . . . . . . . . . . . . . . . 49,919 (75,689) 10,318 Amounts due to affiliates. . . . . . . . . . . . . (21,299) 11,734 (18,675) Tenant security deposits . . . . . . . . . . . . . (107,369) (4,531) (5,621) ----------- ----------- ----------- Net cash provided by (used in) operating activities . . . . . . . . . . . 1,338,008 3,376,403 3,487,230 ----------- ----------- ----------- Cash flows from investing activities: Net sales and maturities of short-term investments. . . . . . . . . . . . . -- 2,109,006 1,727,751
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
1996 1995 1994 ----------- ----------- ----------- Additions to investment property . . . . . . . . . . (48,234) (121,684) (348,151) Partnership's distributions from unconsolidated corporation . . . . . . . . . . . . 2,242,055 144,912 -- Partnership's distributions from unconsolidated venture . . . . . . . . . . . . . . -- 250,000 279,226 Cash proceeds from sale of investment property, net of selling expenses . . . . . . . . . 20,996,011 -- -- ----------- ----------- ----------- Net cash provided by (used in) investing activities . . . . . . . . . . . 23,189,832 2,382,234 1,658,826 ----------- ----------- ----------- Cash flows from financing activities: Distributions to venture partner . . . . . . . . . . (7,033,900) (387,500) (1,224,500) Distributions to limited partners. . . . . . . . . . (17,031,424) (3,599,093) (2,056,625) Distributions to general partners. . . . . . . . . . (135,304) (189,426) (108,243) ----------- ----------- ----------- Net cash provided by (used in) financing activities . . . . . . . . . . . (24,200,628) (4,176,019) (3,389,368) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . 327,212 1,582,618 1,756,688 Cash and cash equivalents, beginning of year. . . . . . . . . . . . . 3,606,715 2,024,097 267,409 ----------- ----------- ----------- Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . $ 3,933,927 3,606,715 2,024,097 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for mortgage and other interest. . . . . . $ -- -- -- =========== =========== =========== Non-cash investing and financing activities $ -- -- -- =========== =========== ===========
See accompanying notes to consolidated financial statements. /TABLE
CARLYLE INCOME PLUS, L.P. - II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
OPERATIONS AND BASIS OF ACCOUNTING
General
The Partnership holds, through a joint venture and a corporation, an equity investment in an office building and a shopping center. Business activities consist of rentals to a variety of commercial and retail companies, and the ultimate sale or disposition of such real estate. The Partnership currently expects to conduct an orderly liquidation of its remaining investment portfolio and wind up its affairs not later than December 31, 1999.
The accompanying consolidated financial statements include the accounts of the Partnership and its majority-owned venture, CIP/Ashby Partners (prior to its property sale in August 1996) ("CIP/Ashby"). The effect of all transactions between the Partnership and the consolidated venture has been eliminated. The equity method of accounting has been applied in the accompanying consolidated financial statements with respect to the Partnership's interests in JMB/Landings Associates ("JMB/Landings") , and 1225 Investment Corporation ("1225 Connecticut Avenue, N.W."). Accordingly, the accompanying consolidated financial statements do not include the accounts of JMB/Landings, or of 1225 Connecticut Avenue, N.W.
The Partnership's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying consolidated financial statements have been prepared from such records after making appropriate adjustments to present the Partnership's accounts in accordance with generally accepted accounting principles ("GAAP") and to consolidate the accounts of the venture as described above. Such GAAP and consolidation adjustments are not recorded on the records of the Partnership. The net effect of these items for the years ended December 31, 1996 and 1995 is summarized as follows:
1996 1995 ------------------------------- ------------------------------ TAX BASIS TAX BASIS GAAP BASIS (Unaudited) GAAP BASIS (Unaudited) ------------ ----------- ------------ -----------
Total assets . . . . . . . . . . . . $ 28,511,534 40,988,399 49,373,424 58,228,874 Partners' capital accounts (deficit):
General Partners . . . . . . . . . (438,230) (447,922) (295,232) (405,313) Limited Partners . . . . . . . . . 28,830,608 41,405,331 43,988,891 58,634,487 Net earnings (loss):
General Partners . . . . . . . . . (7,694) 92,695 31,832 116,005 Limited Partners . . . . . . . . . 1,873,141 (197,732) 604,816 2,204,102 Net earnings (loss) per limited partnership interest. . . . . . . . . . . . . . 29.14 (3.08) 9.41 34.29 =========== =========== =========== ===========
/TABLE
The net earnings (loss) per limited partnership interest is based upon the number of limited partnership interests outstanding at the end of each period (64,269.53). Deficit capital accounts will result, through the duration of the Partnership, in net gain for financial reporting and Federal income tax purposes.
The preparation of financial statements in accordance with GAAP requires the Partnership to make estimates and assumptions that affect the reported or disclosed amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards No. 95 requires the Partnership to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. Partnership distributions or dividends from unconsolidated investments are considered cash flow from operating activities only to the extent of the Partnership's cumulative share of net earnings. In addition, the Partnership records amounts held in U.S. Government obligations at cost, which approximates market. For the purposes of these statements, the Partnership's policy is to consider all such amounts held with original maturities of three months or less ($3,808,897 and $3,494,383 at December 31, 1996 and 1995, respectively) as cash equivalents, which includes investments in an institutional mutual fund which holds United States Government obligations, with any remaining amounts (generally with original maturities of one year or less) reflected as short-term investments being held to maturity.
Certain amounts in the 1994 and 1995 consolidated financial statements have been reclassified to conform with the 1996 presentation.
No provision for state or Federal income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership.
INVESTMENT PROPERTIES
The Partnership has acquired, either by purchase of stock or through joint ventures, interests in one apartment building, one shopping center and one office building. At December 31, 1996, the apartment building has been sold and the remaining two investment properties are in operation. Under certain circumstances, the Partnership may be required to make cash contributions to the ventures either pursuant to the venture agreements or due to the Partnership's obligations as a general partner. The cost of the investment property represents the total cost to the Partnership plus certain acquisition costs.
Depreciation on the properties has been provided over the estimated useful lives of the various components as follows: YEARS ----- Buildings and improvements -- straight-line. . . . . . . . . . . . 30 Personal property -- straight-line. . . . . . . . . . . . 5 == Maintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.
The Partnership adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") as required in the first quarter of 1996. SFAS 121 requires that the Partnership record an impairment loss on its properties to be held for investment whenever their carrying value cannot be fully recovered through estimated undiscounted future cash flows from their operations and sale. The amount of the impairment loss to be recognized would be the difference between the property's carrying value and the property's estimated fair value. The Partnership's policy is to consider a property to be held for sale when the Partnership has committed to a plan to sell such property and active marketing activity has commenced or is expected to commence in the near term. In accordance with SFAS 121, any properties identified as "held for sale or disposition" are no longer depreciated. Adjustments for impairment loss for such properties (subsequent to the date of adoption of SFAS 121) are made in each period as necessary to report these properties at the lower of carrying value or fair value less costs to sell. The adoption of SFAS 121 did not have any significant effect on the Partnership's financial position, results of operations or liquidity.
The accompanying consolidated financial statements include $(1,470,357), $(73,325) and $1,361,255, respectively, of the Partnership's share of total operations of $(3,422,578), $281,780 and $3,053,517 for the years ended December 31, 1996, 1995 and 1994 of unconsolidated properties held for sale as of December 31, 1996.
JMB/Landings
In August 1988, the Partnership, through JMB/Landings Associates, a joint venture partnership with Carlyle Income Plus, Ltd. ("CIP-I"), another partnership sponsored by the General Partners of the Partnership, acquired a 50% interest in a shopping center located in Sarasota, Florida and known as The Landings Shopping Center.
JMB/Landings purchased the shopping center for a purchase price of $13,100,000 which was paid in cash at closing. The Partnership contributed one-half of such amount ($6,550,000) to JMB/Landings for its 50% interest. As certain specified minimum occupancy and income levels were not achieved, the purchase price was reduced by approximately $532,000 in 1990.
The terms of the JMB/Landings partnership agreement provide generally that annual cash flow, sale proceeds and tax items will be distributed or allocated based on the capital contributions made by each partner. Distributions and allocations to date have been made (and any obligations to make additional capital contributions will be made) 50% to the Partnership.
Occupancy at the Landings Shopping Center decreased to 60% at December 31, 1996, from 95% at December 31, 1995 primarily as a result of the vacating of six tenants which occupied approximately 37,000 square feet. JMB/Landings is pursuing its legal remedies concerning the approximately $90,000 in aggregate arrearages due from various tenants, including approximately $52,000 in delinquent rents due from a tenant which had occupied 11,200 square feet whose parent company filed for bankruptcy protection earlier in 1996. In addition, tenant leases representing approximately 22%, 15% and 8% of the leasable space at the property are scheduled to expire in 1997, 1998 and 1999, respectively, not all of which are expected to be renewed. JMB/Landings is conserving its working capital in order to fund budgeted 1997 capital and tenant costs of approximately $290,000 and for potential future costs in connection with the lease-up of the vacant space, for which JMB/Landings is actively pursuing replacement tenants. Furthermore, as of December 31, 1996, JMB/Landings has committed to a plan to sell the property and therefore the property was classified by the JMB/Landings Venture as held for sale and will not be subject to continued depreciation.
In response to uncertainty relating to the ability to recover the net carrying value of the property through future operations and sale, JMB/Landings, for financial reporting purposes, recorded a provision for value impairment at September 30, 1995 in the amount of $3,500,000 (of which the Partnership's share was $1,750,000). Such provision was recorded to reduce the net basis of the investment property to its then estimated fair value. There can be no assurance that any estimated fair value of this investment property would ultimately be obtained by the Partnership in any future sale or disposition transaction. An affiliate of the General Partners of the Partnership manages the property for a fee equal to 4% of the property's gross receipts. Such property management fees for the years ended December 31, 1996, 1995 and 1994 aggregated $43,866, $45,840 and $46,008, respectively.
CIP/Ashby
In February 1990, the Partnership, through CIP/Ashby Partners ("CIP/Ashby"), a joint venture partnership with CIP-I, acquired a 69% interest in an apartment building located in McLean, Virginia and known as The Ashby at McLean Apartments ("The Ashby"). The Ashby has 250 units, commercial space and related parking facilities. CIP/Ashby's total cash investment in The Ashby was approximately $28,705,000, of which the Partnership's share was approximately $19,806,000.
In response to the uncertainty relating to CIP/Ashby's ability to recover the net carrying value of The Ashby through future operations or sale, CIP/Ashby, as a matter of prudent accounting practice and for financial reporting purposes, recorded a provision for value impairment at September 30, 1994 in the amount of $7,572,479 (of which the Partnership's share was $5,225,011). Such provision was recorded to reduce the net basis of the investment property to its then estimated fair value.
In July 1996, CIP/Ashby entered into a contract with a potential purchaser for the sale of this property for a sale price of $21,400,000 (before selling costs and prorations), payable in cash at closing. Pursuant to such contract, the property was sold August 26, 1996. CIP/Ashby recognized a gain on sale of $3,658,205 for financial reporting purposes (of which the Partnership's share is $2,524,162), primarily as a result of a value impairment recorded by CIP/Ashby in 1994 discussed above, and recognized a loss of approximately $3,549,000 for Federal income tax reporting purposes in 1996 (of which the Partnership's share was approximately $2,449,000).
As CIP/Ashby had committed to a plan to sell the property, the property was classified as held for sale as of April 1, 1996 and, therefore, was not been subject to continued depreciation as of that date. The results of operations of the property included in the accompanying consolidated financial statements were $930,380, $782,224 and a loss of $4,544,170 for the years ended December 31, 1996, 1995 and 1994, respectively.
The terms of the CIP/Ashby partnership agreement provided generally that annual cash flow, sale proceeds and tax items were distributed or allocated based on the capital contributions made by each partner. Distributions and allocations have been made 69% to the Partnership.
A former affiliate of the General Partners managed the property for a fee equal to 5% of the property's gross receipts. The former affiliate also operated the underground parking facilities which it leased from CIP/Ashby.
1225 Connecticut Avenue, N.W.
In May 1990, the Partnership acquired approximately 44% of the common stock of a newly formed Delaware corporation (1225 Investment Corporation) owned jointly with affiliates of the General Partners. The 1225 Investment Corporation had acquired an office building located in Washington, D.C. known as 1225 Connecticut Avenue, N.W. The eight-story office building has 202,915 rentable square feet and three levels of subsurface parking.
The 1225 Investment Corporation purchased 1225 Connecticut Avenue, N.W. office building for a purchase price of approximately $54,125,000, including the assumption of existing indebtedness of $2,700,000. The purchase price reflected a credit of $600,000, which was intended to allow the 1225 Investment Corporation to pay certain future expenses related to the removal of asbestos from the property. As of December 31, 1996, approximately $78,000 has been spent relating to the removal of asbestos. Furthermore, the 1225 Investment Corporation created reserves in the amount of approximately $532,000 and $1,000,000 for working capital and for certain possible capital improvements to the property, respectively. The Partnership contributed $24,000,000 for its approximate 44% interest in the stock of the 1225 Investment Corporation. the 1225 Investment Corporation has qualified as a real estate investment trust ("REIT") pursuant to sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Partnership is expected to be distributed approximately 44% of the 1225 Investment Corporation's dividends. Such dividends distributed from operations will constitute taxable income to the Partnership.
In January 1994, 1225 Investment Corporation refinanced the existing mortgage loan secured by the property. The existing loan had an outstanding balance of $1,667,247 at the time of refinancing and would have matured in March 1998. The refinanced mortgage loan is in the amount of $7,000,000 and requires payments of interest only, at an annual interest rate of 6.98%, for a period of 7 years. The loan matures February 1, 2001. 1225 Investment Corporation used the approximately $5,300,000 of loan proceeds to partially fund tenant improvement costs, as required by certain tenant leases, at the property.
As the 1225 Investment Corporation has committed to a plan to sell the property, the property was classified by the 1225 Investment Corporation as held for sale as of December 31, 1996 and therefore, will not be subject to continued depreciation.
In response to the uncertainty relating to 1225 Investment Corporation's ability to recover the net carrying value of The 1225 Connecticut Avenue, N.W. office building through future operations or sale, 1225 Investment Corporation, as a matter of prudent accounting practice and for financial reporting purposes, recorded a provision for value impairment in 1996 in the amount of $6,548,956 (of which the Partnership's share was $2,851,415). Such provision was applied $3,118,602 to buildings and improvements, $3,295,006 to accrued rents receivable and $135,348 to deferred expenses to reduce the net carrying value of the investment property to its then estimated fair value based upon an analysis of an independent appraisal received for the property as of December 31, 1996.
A former affiliate of the General Partners manages the property for a fee equal to 2.5% of the property's gross revenues, plus reimbursement for certain expenses of the manager.
PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership agreement, profits and losses of the Partnership from operations are generally allocated first to the General Partners in an amount equal to the greater of the General Partners' share of "Disbursable Cash" (as described below) or 1%. Profits from the sale or other disposition of investment properties are generally allocated first to the General Partners in an amount equal to the greater of the General Partners' share of cash distributions of the proceeds of any such sale or other disposition (as described below) or 1% of the total profits from any such sales or other dispositions, plus an amount which will reduce deficits (if any) in the General Partners' capital accounts to a level consistent with the gain anticipated to be realized from the sale of properties. Losses from the sale or other disposition of investment properties are to be allocated 1% to the General Partners.
The General Partners have made capital contributions of $25,000. Except under certain limited circumstances upon dissolution or liquidation of the Partnership or the General Partners' interests in the Partnership, the General Partners are not required to make any additional capital contributions. "Disbursable Cash" of the Partnership is to be distributed 93% to the Holders of Interests and 7% to the General Partners; provided, however, that receipt by the General Partners of two of such seven percentage points of disbursable cash otherwise distributable to them in any fiscal year will be subject to receipt by the Holders of Interests of a 6% return for such year on their "Average Adjusted Capital Contribution" on a noncumulative basis. Distributions of "Sale Proceeds" are to be initially allocated 99% to the Holders of Interests and 1% to the General Partners. However, upon the completion of the liquidation of the Partnership and final distribution of all Partnership funds, all previous distributions of sale proceeds to the General Partners are to be repaid to the Partnership to the extent that the Holders of Interests have not received sales proceeds equal to their initial capital investment plus a 6% return thereon (as defined). After receipt by the Holders of Interests of such preferred return, further distributions of sale proceeds are to be allocated to the General Partners until the General Partners have received distributions in an amount equal to 3% of the aggregate selling prices of all properties sold, with the remaining balance to be distributed 85% to the Holders of Interests and 15% to the General Partners; provided, however, that such 3% and 15% of sale proceeds distributable to the General Partners are subordinate to the Holders of Interests' receipt of a 9% return on their investment. Since the Holders of Interests are not expected to receive an amount equal to their initial contributed capital from the aggregate sale proceeds of all of the Partnership's investment properties, the General Partners are deferring their 1% share in the distributions of proceeds from sales at this time.
TRANSACTIONS WITH AFFILIATES
All of the Partnership's properties were managed by affiliates of the General Partners or their assignees for fees computed as a percentage of certain rents received by the properties. In December 1994, one of the affiliated property managers sold substantially all of its assets and assigned its interest in its management contracts to an unaffiliated third party. In addition, certain of the management personnel of the property manager became management personnel of the purchaser and its affiliates. The successor to the affiliated property manager's assets was the property manager of The Ashby at McLean Apartments prior to its sale in August 1996 and is acting as the property manager of 1225 Connecticut Ave. N.W. after the assignment of the management contract on the same terms that existed prior to the assignment of the management company contract.
The Partnership, pursuant to the Partnership Agreement, is permitted to engage in various transactions involving the Corporate General Partner and its affiliates including the reimbursement for salaries and salary-related expenses of its employees, certain of its officers, and other direct expenses relating to the administration of the Partnership and the operation of the Partnership's investments. Fees, commissions and other expenses required to be paid by the Partnership to the General Partners and their affiliates as of and for the year ended December 31, 1996, 1995 and 1994 are as follows:
UNPAID AT DECEMBER 31, 1996 1995 1994 1996 -------- -------- -------- --------------
Property management and leasing fees . . . . . . . . . . . . . $ -- -- 160,653 -- Insurance commissions. . . . . . . . . . 4,071 6,820 7,084 -- Reimbursement (at cost) for accounting services . . . . . . . . . . 5,139 45,518 49,928 414 Reimbursement (at cost) for portfolio management services . . . . . 13,311 13,530 11,850 4,011 Reimbursement (at cost) for legal services. . . . . . . . . . . . . 2,392 934 4,715 963 Reimbursement (at cost) for administrative charges and other out-of-pocket-expenses . . . . . 787 71,407 997 -- -------- -------- -------- ------
$ 25,700 138,209 235,227 5,388 ======== ======== ======== ======
________
/TABLE
All amounts payable to the General Partners and their affiliates do not bear interest and are expected to be paid in future periods.
INVESTMENT IN UNCONSOLIDATED VENTURE
Summary of financial information for JMB/Landings as of and for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ----------- -----------
Current assets . . . . . . . . . . . . . . $ 1,141,067 580,090 Current liabilities. . . . . . . . . . . . (27,202) (14,753) ----------- ----------- Working capital. . . . . . . . . 1,113,865 565,337
Investment property, net . . . . . . . . . 7,075,077 7,210,679 Other assets, net. . . . . . . . . . . . . 111,504 215,812 Other liabilities. . . . . . . . . . . . . (31,382) (29,768) Venture partner's equity . . . . . . . . . (4,135,142) (3,981,641) ----------- -----------
Partnership's capital. . . . . . $ 4,133,922 3,980,419 =========== ===========
Represented by: Invested capital . . . . . . . . . . . . $ 6,704,617 6,704,617 Cumulative distributions . . . . . . . . (2,729,801) (2,729,801) Cumulative earnings. . . . . . . . . . . 159,106 5,603 ----------- ----------- $ 4,133,922 3,980,419 =========== ===========
Total income . . . . . . . . . . . . . . . $ 1,038,681 1,272,150 =========== ===========
Expenses applicable to operating income. . . . . . . . . . . . . $ 731,676 4,306,385 =========== ===========
Net earnings (loss). . . . . . . . . . . . $ 307,005 (3,034,235) =========== =========== The total income, expenses applicable to operating earnings and net earnings for the above venture for the year ended December 31, 1994 were $1,224,744, $733,196 and $491,548, respectively.
INVESTMENT IN UNCONSOLIDATED CORPORATION
Summary financial information for the 1225 Investment Corporation as of and for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ----------- -----------
Current assets . . . . . . . . . . . . . . 1,619,958 2,383,361 Current liabilities. . . . . . . . . . . . (330,655) (328,676) ----------- -----------
Working capital. . . . . . . . . 1,289,303 2,054,685 Investment property, net . . . . . . . . . 52,000,000 56,328,487 Other assets . . . . . . . . . . . . . . . 68,590 3,854,983 Long-term debt . . . . . . . . . . . . . . (7,000,000) (7,000,000) Other liabilities. . . . . . . . . . . . . (15,477) (16,164) Affiliated shareholders' equity . . . . . (25,924,079) (30,937,739) ----------- ----------- Partnership's equity in affiliated corporation . . . . $ 20,418,337 24,284,252 =========== =========== Represented by: Stock purchase and additional paid-in-capital. . . . . . . . . . . . $ 24,429,164 24,429,164 Cumulative dividends . . . . . . . . . . (10,326,950) (8,084,895) Cumulative earnings. . . . . . . . . . . 6,316,123 7,939,983 ----------- ----------- $ 20,418,337 24,284,252 =========== =========== Total income . . . . . . . . . . . . . . . $ 7,341,297 7,753,063 =========== =========== Expenses applicable to operating income . . . . . . . . . . . $ 11,070,880 4,437,048 =========== =========== Net earnings (loss). . . . . . . . . . . . $ (3,729,583) 3,316,015 =========== ===========
The total income, expenses applicable to operating earnings and net earnings for the above corporation for the year ended December 31, 1994 were $6,578,479, $4,016,510 and $2,561,969, respectively.
INDEPENDENT AUDITORS' REPORT
The Partners Carlyle Income Plus, L.P.-II:
We have audited the financial statements of 1225 Investment Corporation as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Management of the Corporation. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Management of the Corporation, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 1225 Investment Corporation as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in the Notes to the financial statements, in 1996 the Corporation changed its method of accounting for long- lived assets and long-lived assets to be disposed of to conform with Statement of Financial Accounting Standards NO. 121.
KPMG PEAT MARWICK LLP
Chicago, Illinois March 21, 1997
1225 INVESTMENT CORPORATION (A CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS ------
1996 1995 ------------ -----------
Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 1,511,116 2,317,327 Rents and other receivables. . . . . . . . . . . . . . . . . . . . . . 91,937 19,128 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,905 46,906 ------------ ----------- Total current assets . . . . . . . . . . . . . . . . . . . . . 1,619,958 2,383,361 ------------ ----------- Investment property - Schedule III: Land. . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 24,161,484 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . -- 38,400,096 ------------ ----------- -- 62,561,580 Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . -- 6,233,093 ------------ -----------
Total property held for investment, net of accumulated depreciation. . . . . . . . . . . . . . . -- 56,328,487
------------ ----------- Property held for sale or disposition . . . . . . . . . . . . . . . . . 52,000,000 -- ------------ ------------ Total investment property. . . . . . . . . . . . . . . . . . . 52,000,000 56,328,487
Deferred costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,590 247,472 Accrued rents receivable . . . . . . . . . . . . . . . . . . . . . . . -- 3,607,511 ------------ -----------
$ 53,688,548 62,566,831 ============ ===========
1225 INVESTMENT CORPORATION (A CORPORATION)
BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ 1996 1995 ------------ ----------- Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 83,435 39,655 Accrued real estate taxes. . . . . . . . . . . . . . . . . . . . . . . 206,503 248,304 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . 40,717 40,717 ------------ ----------- Total current liabilities. . . . . . . . . . . . . . . . . . . 330,655 328,676
Tenant security deposits . . . . . . . . . . . . . . . . . . . . . . . . 15,477 16,164 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000,000 7,000,000 ------------ -----------
Commitments and contingencies
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 7,346,132 7,344,840
Shareholders' equity: Common stock, $1 par value per share 100,000 shares authorized; 55,128 shares issued and outstanding at December 31, 1996 and December 31, 1995 . . . . . . . 55,128 55,128 Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . 55,503,444 55,503,444 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,717,668) (18,567,676) Accumulated earnings . . . . . . . . . . . . . . . . . . . . . . . . . 14,501,512 18,231,095 ------------ ----------- Total shareholders' equity . . . . . . . . . . . . . . . . . . 46,342,416 55,221,991 ------------ ----------- $ 53,688,548 62,566,831 ============ ===========
See accompanying notes to financial statements. /TABLE
1225 INVESTMENT CORPORATION (A CORPORATION)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ---------- ----------
Income: Rental income. . . . . . . . . . . . . . . . . . . . $ 7,260,819 7,584,997 6,391,556 Interest income. . . . . . . . . . . . . . . . . . . 80,478 168,066 186,923 ----------- ---------- ---------- 7,341,297 7,753,063 6,578,479 ----------- ---------- ---------- Expenses: Mortgage and other interest. . . . . . . . . . . . . 488,600 488,600 466,987 Depreciation . . . . . . . . . . . . . . . . . . . . 1,281,412 1,287,756 1,144,439 Property operating expenses. . . . . . . . . . . . . 2,471,625 2,428,540 2,259,776 Amortization of deferred costs . . . . . . . . . . . 43,534 78,662 -- General and administrative . . . . . . . . . . . . . 236,753 153,490 145,308 Provision for value impairment . . . . . . . . . . . 6,548,956 -- -- ----------- ---------- ---------- 11,070,880 4,437,048 4,016,510 ----------- ---------- ----------
Net earnings (loss). . . . . . . . . . . . . $ (3,729,583) 3,316,015 2,561,969 =========== ========== ==========
See accompanying notes to financial statements. /TABLE
1225 INVESTMENT CORPORATION (A CORPORATION)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AFFILIATED SHAREHOLDERS ----------------------------------------------------------------- NET NET CAPITAL EARNINGS DIVIDENDS INVESTED (LOSS) PAID TOTAL ------------- ---------- ----------- -----------
Balance at December 31, 1993 . . . . . . . $ 31,129,408 6,972,402 (5,721,399) 32,380,411
Net earnings . . . . . . . . . . . . . . . -- 1,446,488 1,446,488 Dividends paid . . . . . . . . . . . . . . -- -- (2,220,458) (2,220,458) ------------ ---------- ----------- ----------- Balance at December 31, 1994 . . . . . . . 31,129,408 8,418,890 (7,941,857) 31,606,441
Net earnings . . . . . . . . . . . . . . . -- 1,872,222 -- 1,872,222 Dividends paid . . . . . . . . . . . . . . -- -- (2,540,924) (2,540,924) ------------ ---------- ----------- ----------- Balance at December 31, 1995 . . . . . . . 31,129,408 10,291,112 (10,482,781) 30,937,739
Net earnings (loss). . . . . . . . . . . . -- (2,105,723) -- (2,105,723) Dividends paid . . . . . . . . . . . . . . -- -- (2,907,937) (2,907,937) ----------- ----------- ----------- ----------- Balance at December 31, 1996 . . . . . . . $ 31,129,408 8,185,389 (13,390,718) 25,924,079 =========== =========== ============ ===========
/TABLE
1225 INVESTMENT CORPORATION (A CORPORATION)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
CARLYLE INCOME PLUS, L.P. - II -------------------------------------------------------------- NET NET CAPITAL EARNINGS DIVIDENDS GRAND INVESTED (LOSS) PAID TOTAL TOTAL ------------- ---------- ---------- ----------- -----------
Balance at December 31, 1993 . . . . . . . . . . . $ 24,429,164 5,380,709 (4,413,818) 25,396,055 57,776,466
Net earnings . . . . . . . . -- 1,115,481 -- 1,115,481 2,561,969 Dividends paid . . . . . . . -- -- (1,712,000) (1,712,000) (3,932,458) ------------ ---------- ----------- ----------- ----------- Balance at December 31, 1994 . . . . . . . . . . . 24,429,164 6,496,190 (6,125,818) 24,799,536 56,405,977
Net earnings . . . . . . . . -- 1,443,793 -- 1,443,793 3,316,015 Dividends paid . . . . . . . -- -- (1,959,077) (1,959,077) (4,500,001) ------------ ---------- ----------- ----------- ----------- Balance at December 31, 1995 . . . . . . . . . . . 24,429,164 7,939,983 (8,084,895) 24,284,252 55,221,991
Net earnings (loss) . . . . -- (1,623,860) -- (1,623,860) (3,729,583) Dividends paid . . . . . . . -- -- (2,242,055) (2,242,055) (5,149,992) ------------- ----------- ----------- ----------- ------------ Balance at December 31, 1996 . . . . . . . . . . . . $ 24,429,164 6,316,123 (10,326,950) 20,418,337 46,342,416 ============ ========== =========== =========== ===========
See accompanying notes to financial statements. /TABLE
1225 INVESTMENT CORPORATION (A CORPORATION)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ----------- -----------
Cash flows from operating activities: Net earnings (loss). . . . . . . . . . . . . . . . . . $(3,729,583) 3,316,015 2,561,969 Items not requiring (providing) cash: Depreciation . . . . . . . . . . . . . . . . . . . . 1,281,412 1,287,756 1,144,439 Amortization of deferred costs . . . . . . . . . . . 43,534 78,662 -- Provision for value impairment . . . . . . . . . . . 6,548,956 -- -- Changes in: Rents and other receivables. . . . . . . . . . . . (72,809) 18,692 220,104 Prepaid expenses . . . . . . . . . . . . . . . . . 30,001 (6,768) (326) Escrow deposits. . . . . . . . . . . . . . . . . . -- -- 280,000 Deferred expenses. . . . . . . . . . . . . . . . . -- -- (251,052) Accrued rents receivable . . . . . . . . . . . . . 312,505 (544,645) 595,599 Accounts payable . . . . . . . . . . . . . . . . . 43,780 (106,420) (454,961) Accrued real estate taxes. . . . . . . . . . . . . (41,801) 19,929 22,840 Accrued interest payable . . . . . . . . . . . . . -- -- 31,543 Tenant security deposits . . . . . . . . . . . . . (687) 484 15,680 ----------- ----------- ----------- Net cash provided by (used in) 4,415,308 4,063,705 4,165,835 operating activities . . . . . . . . . . . . ----------- ----------- ----------- Cash flows from investing activities: Net sales and maturities (purchases) of short-term investments . . . . . . . . . . . . . . -- 2,948,422 (1,234,369) Additions to investment property . . . . . . . . . . (71,527) (1,480,977) (3,230,869) Payment of deferred costs. . . . . . . . . . . . . . -- (28,025) -- ----------- ----------- ----------- Net cash provided by (used in) investing activities . . . . . . . . . . . (71,527) 1,439,420 (4,465,238) ----------- ----------- -----------
1225 INVESTMENT CORPORATION (A CORPORATION)
STATEMENTS OF CASH FLOWS - CONTINUED
1996 1995 1994 ----------- ----------- -----------
Cash flows from financing activities: Proceeds from refinanced mortgage loan payable -- -- 7,000,000 Principal payments on long-term debt . . . . . . . . -- -- (1,694,722) Cash dividends paid to shareholders. . . . . . . . . (5,149,992) (4,500,001) (3,932,458) ----------- ----------- ----------- Net cash provided by (used in) financing activities . . . . . . . . . . . (5,149,992) (4,500,001) 1,372,820 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . (806,211) 1,003,124 1,073,417 Cash and cash equivalents, beginning of year. . . . . . . . . . . . . 2,317,327 1,314,203 240,786 ----------- ----------- ----------- Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . $ 1,511,116 2,317,327 1,314,203 =========== =========== ===========
Supplemental disclosure of cash flow information: Cash paid for mortgage and other interest. . . . . . $ 488,600 488,600 435,444 =========== =========== =========== Non-cash investing and financing activities $ -- -- -- =========== =========== ===========
See accompanying notes to financial statements. /TABLE
1225 INVESTMENT CORPORATION (A CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
OPERATIONS AND BASIS OF ACCOUNTING
The accompanying financial statements have been prepared for the purpose of complying with Rule 3.09 of Regulation S-X of the Securities and Exchange Commission. They include the accounts of the unconsolidated corporation, 1225 Investment Corporation, in which Carlyle Income Plus, L.P.-II and affiliates of the General Partners of Carlyle Income Plus, L.P.- II are shareholders.
1225 Investment Corporation (the "Corporation") has the exclusive purpose of owning a 100% interest in the 1225 Connecticut Avenue N.W. office building, a 202,915 square foot office building located in Washington, D.C. Endowment and Foundation Realty, Ltd. -- JMB-IV, IDS Life Account RE, JMB/Northern Real Estate Fund, Carlyle Income Plus, L.P.-II, and certain other institutional investors collectively hold all of the common stock of the Corporation and are being advised by Heitman/JMB Advisory Corporation.
The Corporation's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying financial statements have been prepared from such records after making appropriate adjustments to present the Corporation's accounts in accordance with generally accepted accounting principles ("GAAP"). Such adjustments are not recorded on the records of the Corporation. The effect of these items for the years ended December 31, 1996 and 1995 is summarized as follows:
1996 1995 ----------------------------- ------------------------------ TAX BASIS TAX BASIS GAAP BASIS (Unaudited) GAAP BASIS (Unaudited) ------------ ----------- ------------ -----------
Total assets . . . . . . . . . . . . $ 53,688,548 64,154,246 62,566,831 64,846,159 Shareholders' equity . . . . . . . . 46,342,416 56,808,115 55,221,991 57,499,881 Net earnings (loss). . . . . . . . . (3,729,583) 3,207,134 3,316,015 3,036,158 =========== =========== =========== ===========
/TABLE
The preparation of financial statements in accordance with GAAP requires the Corporation to make estimates and assumptions that affect the reported or disclosed amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards No. 95 requires the Corporation to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. Corporation distribution or dividends from unconsolidated investments are considered cash flow from operating activities only to the extent of the Corporation's cumulative share of net earnings. In addition, the Corporation records amounts held in U.S. Government obligations at cost which approximates market. For the purposes of these statements, the Corporation's policy is to consider all such amounts held with original maturities of three months or less ($79,660 and $2,200,000 at December 31, 1996 and 1995, respectively) as cash equivalents with any remaining amounts (generally with original maturities of one year or less) reflected as short-term investments being held to maturity.
Depreciation on buildings and improvements has been provided over the estimated useful lives of the assets (30 years) using the straight-line method.
Maintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.
Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" was issued in March 1995. The Corporation adopted SFAS 121 as required in the first quarter of 1996. SFAS 121 requires that the Corporation record an impairment loss on its property to be held for investment whenever its carrying value cannot be fully recovered through estimated undiscounted future cash flows from operations and sale. The amount of the impairment loss to be recognized would be the difference between the property's carrying value and the property's estimated fair value. The Corporation's policy is to consider the property to be held for sale or disposition when the Corporation has committed to a plan to sell or dispose of such property and active marketing activity has commenced or is expected to commence in the near term. In accordance with SFAS 121, any property identified as "held for sale or disposition" is no longer depreciated. Adjustments for impairment loss for such a property (subsequent to a date of adoption of SFAS 121) are made in each period as necessary to report the property at the lower of carrying value or fair value less costs to sell. There can be no assurance that any estimated fair value of the property would ultimately be realized by the Corporation in any future sale or disposition transaction.
Under the prior accounting policy, provisions for value impairment were recorded with respect to the investment property whenever the estimated future cash flows from the property's operations and projected sale were less than the property's carrying value. An impairment loss under SFAS 121 is determined without regard to the nature or the balance of any non-recourse indebtedness. Upon the disposition of a property with the related extinguishment of the long-term debt for which an impairment loss has been recognized under SFAS 121, the Corporation would recognize, at a minimum, a net gain for financial reporting purposes (comprised of gain on extinguishment of debt and gain or loss on the sale or disposition of property) to the extent of any excess of the then outstanding balance of the property's non-recourse indebtedness over the then carrying value of the property, including the effect of any reduction for impairment loss under SFAS 121.
In addition, upon the disposition of an impaired property, the Corporation will generally recognize more net gain for financial reporting purposes under SFAS 121 than it would have under the Corporation's prior impairment policy, without regard to the amount, if any, of cash proceeds received by the Corporation in connection with the disposition. Although implementation of this accounting statement could significantly impact the Corporation's reported earnings, there would be no impact on cash flows. Further, any such impairment loss is not recognized for Federal income tax purposes.
Deferred costs consist of commitment fees incurred in connection with the refinancing of the property and lease commissions incurred. Deferred loan fees and lease commissions are amortized over the terms of the related debt agreement and leases using the straight-line method.
Although certain leases of the Corporation's office building provide for increases in minimum lease payments over the term of the lease, the Corporation accrues rental income for the full period of occupancy on a straight-line basis.
The Corporation has qualified as a real estate investment trust ("REIT") pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986 as amended and intends to distribute at least 95% of its taxable income annually to its shareholders. Since the Corporation has qualified as a REIT, the Corporation in general will not be subject to Federal corporate income tax or the District of Columbia corporate franchise tax (except for the District of Columbia corporate franchise minimum tax of $100) on its regular taxable income and will not be taxed on long-term capital gain income to the extent its income is distributed as dividends. Accordingly, no provision for income taxes has been made in the accompanying financial statements. Tax-exempt shareholders generally will not be required to pay any Federal income tax on the dividends they receive from the Corporation, provided such shareholders
have not financed the acquisition of shares with "acquisition indebtedness" as defined under the Code.
INVESTMENT PROPERTY
A description of the acquisition and other events relating to the property, including the provision for value impairment and the determination to classify the property as held for sale or disposition at December 31, 1996, is contained in the Notes to Consolidated Financial Statements of Carlyle Income Plus, L.P.-II. Such note is incorporated herein by reference.
MANAGEMENT AGREEMENT
A description of the terms of the management agreement is contained in the Notes to Consolidated Financial Statements of Carlyle Income Plus, L.P.-II. Such note is incorporated herein by reference.
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995: 1996 1995 ------------ ------------ 6.98% mortgage note, due February 1, 2001; secured by 1225 Connecticut Avenue N.W.; payable in monthly installments of $40,717 (interest only) . . . . . . . . . . . . . . . . . . . . $ 7,000,000 7,000,000 ---------- ---------- Total debt . . . . . . . . . . . . . 7,000,000 7,000,000 Less current portion of long-term debt. . . . . . . . . $ -- -- ---------- ---------- Total long-term debt . . . . . . . . $ 7,000,000 7,000,000 ========== ==========
Five year maturities of long-term debt are summarized as follows:
1997. . . . . . . . . $ -- 1998. . . . . . . . . -- 1999. . . . . . . . . -- 2000. . . . . . . . . -- 2001. . . . . . . . . 7,000,000 ===========
CORPORATION BY-LAWS
The Corporation's by-laws provide for the shareholders to be allocated or distributed shares of profits and losses, cash flow from operations and sale or refinancing proceeds according to their respective ownership percentages.
LEASES - AS PROPERTY LESSOR
At December 31, 1996, the Corporation's principal asset is an office building. The Corporation has determined that all leases relating to this property are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over the estimated useful life. Leases with tenants range in term from four to eleven remaining years and provide for fixed minimum rent and partial reimbursement of operating costs.
Minimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:
1997. . . . . . . . . . . . . . . . . . $ 6,805,000 1998. . . . . . . . . . . . . . . . . . . 6,817,000 1999. . . . . . . . . . . . . . . . . . . 6,862,000 2000. . . . . . . . . . . . . . . . . . . 6,633,000 2001. . . . . . . . . . . . . . . . . . . 6,040,000 Thereafter. . . . . . . . . . . . . . . . 30,880,000 ----------- $ 64,037,000 ===========
The Corporation leases approximately 80% of the available space of the property to one tenant under leases with remaining terms of eleven years. For the year ended December 31, 1996, such tenant represented approximately 71% of total revenue. The tenant's principal business is accounting and financial services.
TRANSACTIONS WITH AFFILIATES
Fees, commissions and other expenses required to be paid by the Corporation to affiliates of JMB Realty Corporation as of December 31, 1996 and for the years ended December 31, 1996, 1995 and 1994 are as follows:
UNPAID AT DECEMBER 31, 1996 1995 1994 1996 -------- -------- -------- --------------
Property management and leasing fees . . . . . . . . . . . . . $ -- -- 181,452 -- Insurance commissions. . . . . . . . . . 4,101 6,083 6,687 -- Reimbursement (at cost) for salary and salary - related expenses related to the on-site and other costs for the Partnership and its investment property . . . . . . -- 278 4,083 -- ------- ------- ------- -------- $ 4,101 6,361 192,222 -- ======= ======= ======= ========
/TABLE
SCHEDULE III
1225 INVESTMENT CORPORATION (A CORPORATION)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
COST CAPITALIZED INITIAL COST TO SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED CORPORATION (A) TO ACQUISITION AT CLOSE OF PERIOD (B) --------------------------- ------------------------ --------------------------------------- BUILDINGS BUILDINGS PROVISION BUILDINGS AND AND FOR VALUE AND ENCUMBRANCE LAND IMPROVEMENTS IMPROVEMENTS IMPAIRMENT LAND IMPROVEMENTS TOTAL (D) --------- ------- ------------ ------------ ----------- -------- ---------------------
OFFICE BUILDING: Washington, D.C.. . . . .$7,000,000 24,161,484 32,522,877 5,948,746 (3,118,602) 22,958,445 36,556,060 59,514,505 ========== ========== ========== ========== ========== ========== ========== ==========
/TABLE
SCHEDULE III
1225 INVESTMENT CORPORATION (A CORPORATION)
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF 1996 ACCUMULATED DATE OF DATE OPERATION REAL ESTATE DEPRECIATION(E) CONSTRUCTION ACQUIRED IS COMPUTED TAXES ---------------- ------------ ---------- --------------- -----------
OFFICE BUILDING: Washington, D.C.. . . . . . . . . . . . $7,514,505 1968 2/28/90 30 years 990,448 ========== =======
- ------------------ Notes: (A) The initial cost to the Corporation represents the original purchase price of the property, including amounts incurred subsequent to acquisition which were contemplated at the time the property was acquired.
(B) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes was $62,206,360.
(C) Reference is made to Notes to Consolidated Financial Statements of Carlyle Income Plus, L.P. - II for a further description of the total provision for value impairment in the amount of $6,548,956 recorded as of December 31, 1996.
/TABLE
SCHEDULE III
1225 INVESTMENT CORPORATION (A CORPORATION)
REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
(D) Reconciliation of real estate owned:
1996 1995 1994 ------------ ------------ ------------
Balance at beginning of period . . . . . . . . . $ 62,561,580 61,080,603 57,849,734 Additions during period. . . . . . . . . . . . . . 71,527 1,480,977 3,230,869 Provision for value impairment allocable to property . . . . . . . . . . . . . . (3,118,602) -- -- ----------- ----------- ----------- Balance at end of period . . . . . . . . . . . . $ 59,514,505 62,561,580 61,080,603 =========== =========== =========== (E) Reconciliation of accumulated depreciation:
Balance at beginning of period . . . . . . . . . $ 6,233,093 4,945,337 3,800,898 Depreciation expense . . . . . . . . . . . . . . . 1,281,412 1,287,756 1,144,439 ----------- ----------- -----------
Balance at end of period . . . . . . . . . . . . $ 7,514,505 6,233,093 4,945,337 =========== =========== ===========
/TABLE
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes of or disagreements with accountants during fiscal years 1996 and 1995.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
The Corporate General Partner of the Partnership is JMB Realty Corporation ("JMB"), a Delaware corporation, substantially all of the outstanding stock of which is owned, directly or indirectly, by certain of its officers, directors, members of their families and their affiliates. JMB has responsibility for all aspects of the Partnership's operations. The Associate General Partner of the Partnership, AGPP Associates, L.P., is an Illinois limited partnership with JMB as the sole general partner which may, upon agreement with the Corporate General Partner, from time to time participate in managing Partnership properties, including approval of leasing parameters, property management budgets and changes in investment objectives based on changes in market conditions. The Associate General Partner shall be directed by a majority in interest of its limited partners (who are generally officers, directors and affiliates of JMB or its affiliates) as to whether to provide its approval (if applicable) with respect to the management of real property (or any interest therein) of the Partnership.
The Partnership is subject to certain conflicts of interest arising out of its relationships with the General Partners and their affiliates as well as the fact that the General Partners and their affiliates are engaged in a range of real estate activities. Certain services have been and may in the future be provided to the Partnership or its investment properties by affiliates of the General Partners, including property management services and insurance brokerage services. In general, such services are to be provided on terms no less favorable to the Partnership than could be obtained from independent third parties and are otherwise subject to conditions and restrictions contained in the Partnership Agreement. The Partnership Agreement permits the General Partners and their affiliates to provide services to, and otherwise deal and do business with, persons who may be engaged in transactions with the Partnership, and permits the Partnership to borrow from, purchase goods and services from, and otherwise to do business with, persons doing business with the General Partners or their affiliates. The General Partners and their affiliates may be in competition with the Partnership under certain circumstances, including, in certain geographical markets, for tenants for properties and/or for the sale of properties. Because the timing and amount of cash distributions and profits and losses of the Partnership may be affected by various determinations by the General Partners under the Partnership Agreement, including whether and when to sell or refinance a property, the establishment and maintenance of reasonable reserves, the timing of expenditures and the allocation of certain tax items under the Partnership Agreement, the General Partners may have a conflict of interest with respect to such determinations.
The names, positions held and length of service therein of each director and the executive and certain other officers of the Corporate General Partner are as follows: SERVED IN NAME OFFICE OFFICE SINCE ---- ------ ----------
Judd D. Malkin Chairman 5/03/71 Director 5/03/71 Chief Financial Officer 2/22/96 Neil G. Bluhm President 5/03/71 Director 5/03/71 Burton E. Glazov Director 7/01/71 Stuart C. Nathan Executive Vice President 5/08/79 Director 3/14/73 A. Lee Sacks Director 5/09/88 John G. Schreiber Director 3/14/73 H. Rigel Barber Executive Vice President 1/02/87 Chief Executive Officer 8/01/93 Glenn E. Emig Executive Vice President 1/01/93 Chief Operating Officer 1/01/95 Gary Nickele Executive Vice President and 1/01/92 General Counsel 2/27/84 Gailen J. Hull Senior Vice President 6/01/88 Howard Kogen Senior Vice President 1/02/86 Treasurer 1/01/91
There is no family relationship among any of the foregoing directors or officers. The foregoing directors have been elected to serve a one-year term until the annual meeting of the Corporate General Partner to be held on June 7, 1997. All of the foregoing officers have been elected to serve one-year terms until the first meeting of the Board of Directors held after the annual meeting of the Corporate General Partner to be held on June 7, 1997. There are no arrangements or understandings between or among any of said directors or officers and any other person pursuant to which any director or officer was elected as such.
JMB is the corporate general partner of Carlyle Real Estate Limited Partnership-VII ("Carlyle-VII"), Carlyle Real Estate Limited Partnership-IX ("Carlyle-IX"), Carlyle Real Estate Limited Partnership-XI ("Carlyle-XI"), Carlyle Real Estate Limited Partnership-XII ("Carlyle-XII"), Carlyle Real Estate Limited Partnership-XIII ("Carlyle-XIII"), Carlyle Real Estate Limited Partnership-XIV ("Carlyle-XIV"), Carlyle Real Estate Limited Partnership-XV ("Carlyle-XV"), Carlyle Real Estate Limited Partnership-XVI ("Carlyle-XVI"), Carlyle Real Estate Limited Partnership-XVII ("Carlyle-XVII"), JMB Mortgage Partners, Ltd.-III ("Mortgage Partners-III"), JMB Mortgage Partners, Ltd.-IV ("Mortgage Partners-IV"), Carlyle Income Plus, Ltd. ("Carlyle Income Plus") and the managing general partner of JMB Income Properties, Ltd.-IV ("JMB Income-IV"), JMB Income Properties, Ltd.-V ("JMB Income-V"), JMB Income Properties, Ltd.-VI ("JMB Income-VI"), JMB Income Properties, Ltd.-VII ("JMB Income-VII"), JMB Income Properties, Ltd.-X ("JMB Income-X"), JMB Income Properties, Ltd.-XI ("JMB Income-XI"), JMB Income Properties, Ltd.-XII ("JMB Income-XII"), and JMB Income Properties Ltd.-XIII ("JMB Income-XIII"). Most of the foregoing directors and officers are also officers and/or directors of various affiliated companies of JMB including Arvida/JMB Managers, Inc. (the general partner of Arvida/JMB Partners, L.P. ("Arvida")), Arvida/JMB Managers-II, Inc. (the general partner of Arvida/JMB Partners, L.P.-II ("Arvida-II") and Income Growth Managers, Inc. (the corporate general partner of IDS/JMB Balanced Income Growth, Ltd. ("IDS/BIG")). Most of such directors and officers are also partners of certain partnerships which are associate general partners in the following real estate limited partnerships: Carlyle-VII, Carlyle-IX, Carlyle-XI, Carlyle-XII, Carlyle-XIII, Carlyle-XIV, Carlyle-XV, Carlyle-XVI, Carlyle-XVII, JMB Income-VI, JMB Income-VII, JMB Income-X, JMB Income-XI, JMB Income-XII, JMB Income-XIII, Mortgage Partners-III, Mortgage Partners-IV, Carlyle Income Plus and IDS/BIG.
The business experience during the past five years of each such director and officer of the Corporate General Partner of the Partnership in addition to that described above is as follows:
Judd D. Malkin (age 59) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Malkin has been associated with JMB since October, 1969. Mr. Malkin is a director of Urban Shopping Centers, Inc. ("USC, Inc."), an affiliate of JMB that is a real estate investment trust in the business of owning, managing and developing shopping centers. He is a Certified Public Accountant.
Neil G. Bluhm (age 59) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Bluhm has been associated with JMB since August, 1970. Mr. Bluhm is a director of USC, Inc. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.
Burton E. Glazov (age 58) has been associated with JMB since June, 1971 and served as an Executive Vice President of JMB until December of 1990. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.
Stuart C. Nathan (age 55) has been associated with JMB since July, 1972. Mr. Nathan is also a director of Sportmart, Inc., a retailer of sporting goods. He is a member of the Bar of the State of Illinois.
A. Lee Sacks (age 63) (President and Director of JMB Insurance Agency, Inc.) has been associated with JMB since December, 1972.
John G. Schreiber (age 50) has been associated with JMB since December, 1970 and served as an Executive Vice President of JMB until December 1990. Mr. Schreiber is a director of Urban Shopping Centers, Inc., an affiliate of JMB that is real estate investment trust in the business of owning, managing and developing shopping centers. He is also a director of a number of investment companies advised or managed by T. Rowe Price Associates and its affiliates. Mr. Schreiber is President of Schreiber Investments, Inc., a company which is engaged in the real estate investing business. He is also a senior advisor and partner of Blackstone Real Estate Partners, an affiliate of the Blackstone Group, L.P. Since 1994, Mr. Schreiber has also served as a Trustee of Amli Residential Property Trust, a publicly-traded real estate investment trust that invests in multi-family properties. He holds a Masters degree in Business Administration from Harvard University Graduate School of Business.
H. Rigel Barber (age 47) has been associated with JMB since March, 1982. He holds a J.D. degree from the Northwestern Law School and is a member of the Bar of the State of Illinois.
Glenn E. Emig (age 49) has been associated with JMB since December, 1979. Prior to becoming Executive Vice President of JMB in 1993, Mr. Emig was Executive Vice President and Treasurer of JMB Institutional Realty Corporation. He holds a Masters degree in Business Administration from the Harvard University Graduate School of Business and is a Certified Public Accountant.
Gary Nickele (age 44) has been associated with JMB since February, 1984. He holds a J.D. degree from the University of Michigan Law School and is a member of the Bar of the State of Illinois.
Gailen J. Hull (age 48) has been associated with JMB since March, 1982. He holds a Masters degree in Business Administration from Northern Illinois University and is a Certified Public Accountant.
Howard Kogen (age 61) has been associated with JMB since March, 1973. He is a Certified Public Accountant.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The General Partners are entitled to receive a share of cash distributions, when and as cash distributions are made to the Limited Partners, and a share of profits or losses. Reference is also made to the Notes for a description of such distributions and allocations. In 1996, 1995 and 1994, the General Partners received distributions of $135,304, $189,426, and $108,243 respectively. The General Partners received a share of Partnership earnings for tax purposes aggregating $92,695 in 1996.
The Partnership, pursuant to the Partnership Agreement is permitted to engage in various transactions involving the Corporate General Partner and its affiliates including the reimbursement for salaries and salary related expenses of its employees, certain of its officers, and other direct expenses relating to the administration of the Partnership and the operation of the Partnership's investments. The relationship of the Corporate General Partner (and its directors and officers) to its affiliates is set forth in Item 10 above.
JMB Insurance Agency, Inc., and affiliate of the Corporate General Partner, earned and received insurance brokerage commissions in 1996 aggregating $4,071 in connection with providing insurance coverage for certain of the real property investments of the Partnership. Such commissions are at rates set by insurance companies for the classes of coverage provided.
The Corporate General Partner and its affiliates were due reimbursement (at cost) in 1996 for accounting services, portfolio management services, legal services and for administrative charges and other out-of-pocket expenses of $5,139, $13,311, $2,392 and $787, respectively, of which $5,388 was unpaid at December 31, 1996.
All amounts payable to the General Partners and their affiliates do not bear interest and are expected to be paid in future periods.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person or group is known by the Partnership to own beneficially more than 5% of the outstanding Interests of the Partnership.
(b) The Corporate General Partner, its officers and directors and the Associate General Partner own the following Interests of the Partnership:
NAME OF AMOUNT AND NATURE BENEFICIAL OF BENEFICIAL PERCENT TITLE OF CLASS OWNER OWNERSHIP OF CLASS - -------------- ---------- ----------------- --------
Limited Partnership JMB Realty 5 Interests (1) Less than 1% Interests Corporation indirectly
Limited Partnership General Partners 5 Interests (1) Less than 1% Interests (and their officers, indirectly directors and partners)
(1) Includes 5 Interests owned by the Initial Limited Partner of the Partnership, for which JMB Realty Corporation as the indirect majority shareholder of the Initial Limited Partner is deemed to have the investment and voting power.
No officer or director of the Corporate General Partner of the Partnership possesses a right to acquire beneficial ownership of Interests of the Partnership.
All of the outstanding shares of the Corporate General Partner of the Partnership are owned by certain officers and directors (and members of their families) of JMB Realty Corporation, the Corporate General Partner, as set forth above in Item 10.
(c) 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.
/TABLE
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no significant transactions or business relationships with the General Partners, affiliates or their management other than those described in Items 10 and 11 above.
PART IV
ITEM 14.

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 (See Index to Financial Statements filed with this annual report).
(2) Exhibits.
3. The Prospectus of the Partnership dated May 24, 1988, as supplemented August 19, 1988, April 28, 1989, December 22, 1989, February 28, 1990, and June 5, 1990 as filed with the Commission pursuant to Rules 424(b) and 424(c), is hereby incorporated herein by reference to the Partnership's report for December 31, 1993 on Form 10-K (File No. 0- 17705) dated March 25, 1994.
3.1. Agreement of Limited Partnership is set forth as Exhibit A of the Partnership's Prospectus, which is incorporated herein by reference to the Partnership's Registration Statement on Form S-11 (File No. 33-19463) dated May 24, 1988.
4.1. Assignment Agreement is hereby incorporated by reference to Exhibit B of the Partnership's Prospectus, which is hereby incorporated herein by reference to Exhibit 4.1 of the Partnership's report for December 31, 1993 on Form 10-K (File No. 0-17705) dated March 25, 1994.
10.1. Escrow Deposit Agreement is hereby incorpor- ated by reference to the Partnership's Pre- Effective Amendment No. 2 to the Form S-11 (File No. 33-19463) Registration Statement of the Partnership dated May 16, 1988.
10.2. Purchase Agreement dated as of August 16, 1988, by and among Sembler Family Partnership #5, Ltd., University Retail Associates, Ltd. and JMB/Landings Associates and letter agreement with respect thereto, is hereby
incorporated herein by reference to Post- Effective Amendment No. 1 to the Form S-11 (File No. 33-19463) Registration Statement of the Partnership dated August 26, 1988.
10.3. Agreement for Operation and Management of Shopping Center dated as of August 16, 1988, by and between JMB/Landings Associates and The Sembler Company, is hereby incorporated herein by reference to Post-Effective Amendment No. 1 to the Form S-11 (File No. 33-19463) Registration Statement of the Partnership dated August 26, 1988.
10.4. Agreement Respecting Letters of Credit dated as of August 16, 1988, by and among Sembler Family Partnership #5, Ltd., University Retail Associates, Ltd. and JMB/Landings Associates, hereby incorporated herein by reference to Post-Effective Amendment No. 1 to the Form S- 11 (File No. 33-19463) Registration Statement of the Partnership dated August 26, 1988.
10.5. Guaranty dated as of August 16, 1988, by and among Melvin F. Sembler, Betty S. Sembler, M. Steven Sembler, Brent W. Sembler, Gregory S. Sembler, Craig H. Sher, Thomas G. Dabney, II and JMB/Landings Associates, hereby incorporated herein by reference to Post- Effective Amendment No. 1 to the Form S-11 (File No. 33-19463) Registration Statement of the Partnership dated August 26, 1988.
10.6. Agreement of Partnership of JMB/Landings Associates dated July 14, 1988, by and between Carlyle Income Plus, Ltd. and the Partnership, hereby incorporated herein by reference to Post-Effective Amendment No. 2 to the Form S- 11 (File No. 33-19463) Registration Statement of the Partnership dated September 28, 1988.
10.7. Acquisition documents relating to the purchase by the Partnership of a portion of the common stock in 1225 Investment Corporation which owns 1225 Connecticut Avenue in Washington, D.C. is hereby incorporated by reference to the Partnership's prospectus on Form S-11 (File No. (33-19463)) dated June 5, 1990 as amended.
10.8 Closing statement date January 28, 1994 relating to the refinancing by 1225 Investment Corporation which owns 1225 Connecticut Avenue in Washington, D.C., is hereby incorporated herein by reference to the Partnership's report for March 31, 1994 on Form 10-Q (File No. 0-17705) dated May 11, 1994.
10.9 Secured promissory note dated January 28, 1994 in the amount of $6,500,000 relating to the refinancing by 1225 Investment Corporation which owns 1225 Connecticut Avenue in Washington, D.C., is hereby incorporated herein by reference to the Partnership's report for March 31, 1994 on Form 10-Q (File No. 0-17705) dated May 11, 1994.
10.10. Secured promissory note dated January 28, 1994 in the amount of $500,000 relating to the refinancing by 1225 Investment Corporation which owns 1225 Connecticut Avenue in Washington, D.C., is hereby incorporated herein by reference to the Partnership's report for March 31, 1994 on Form 10-Q (File No. 0-17705) dated May 11, 1994.
10.11 Real Property Purchase Agreement between CIP/Ashby Partners and WRIT Limited Partnership dated July 19, 1996 relating to the sale by the Partnership (through the CIP/Ashby joint venture) of the Ashby at Mclean Apartments is hereby incorporated herein by reference to the Partnership's report for August 26, 1996 on Form 8-K (File No. 0-17705) dated September 6, 1996.
21. List of Subsidiaries.
24. Powers of Attorney.
27. Financial Data Schedule
(b) No Reports on Form 8-K were required or filed since the beginning of the last quarter of the period covered by this report.
No annual report or proxy material for the fiscal year 1996 has been sent to the Partners of the Partnership. An annual report will be sent to the Partners subsequent to this filing. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARLYLE INCOME PLUS, L.P. - II
By: JMB Realty Corporation Corporate General Partner
By: Gailen J. Hull Senior Vice President Date: March 21, 1997
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.
By: JMB Realty Corporation Corporate General Partner
JUDD D. MALKIN* By: Judd D. Malkin, Chairman and Chief Financial Officer Date: March 21, 1997
NEIL G. BLUHM* By: Neil G. Bluhm, President and Director Date: March 21, 1997
H. RIGEL BARBER* By: H. Rigel Barber, Chief Executive Officer Date: March 21, 1997
GLENN E. EMIG* By: Glenn E. Emig Chief Operating Officer Date: March 21, 1997
By: Gailen J. Hull, Senior Vice President Principal Accounting Officer Date: March 21, 1997
A. LEE SACKS* By: A. Lee Sacks, Director Date: March 21, 1997
STUART C. NATHAN* By: Stuart C. Nathan, Executive Vice President and Director Date: March 21, 1997
*By: GAILEN J. HULL, Pursuant to a Power of Attorney
By: Gailen J. Hull, Attorney-in-Fact Date: March 21, 1997
CARLYLE INCOME PLUS, L.P. - II
EXHIBIT INDEX
DOCUMENT INCORPORATED BY REFERENCE PAGE ------------ ----
3. Certain pages of the Prospectus Yes of the Partnership dated May 24, 1988, as supplemented August 19, 1988, April 28, 1989, December 22, 1989, February 28, 1990 and June 5, 1990.
3.1. Amended and Restated Agreement Yes of Limited Partnership, incorporated by reference to Exhibit A of the Partnership's Prospectus
4.1. Assignment Agreement, incorporated Yes by reference to Exhibit B to the Partnership's Prospectus
10.1.- Material Contracts Yes 10.11.
21. List of Subsidiaries No
24. Powers of Attorney No
27. Financial Data Schedule No