SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 Commission File Number 0-17810
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2742008
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
399 Boylston Street, 13th Fl.
Boston, Massachusetts 02116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 578-1200
Former name, former address and former fiscal year if changed since last
report
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve (12) months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1996
PART I
FINANCIAL INFORMATION
BALANCE SHEET
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
Assets
Real estate investments:
Property, net $ 10,239,818 $ 13,422,112
Joint ventures 3,594,627 4,085,073
----------- ------------
13,834,445 17,507,185
Cash and cash equivalents 4,730,405 1,934,364
Short-term investments 996,192 1,682,508
----------- ------------
$ 19,561,042 $ 21,124,057
=========== ============
Liabilities and Partners' Capital
Accounts payable $ 54,106 $ 70,332
Accrued management fee 41,019 -
----------- ------------
Total liabilities 95,125 70,332
----------- ------------
Partners' capital (deficit):
Limited partners ($1,000 per unit;
100,000 units authorized, 32,848
units issued and outstanding) 19,561,705 21,133,635
General partners (95,788) (79,910)
------------ ------------
Total partners' capital 19,465,917 21,053,725
------------ ------------
$ 19,561,042 $ 21,124,057
============ ============
<FN>
(See accompanying notes to financial statements)
STATEMENT OF OPERATIONS (Unaudited)
Quarter Ended Nine Months Ended Quarter Ended Nine Months Ended
September 30, 1996 September 30, 1996 September 30, 1995 September 30, 1995
------------------ ------------------ ------------------ ------------------
Investment Activity
Property rentals $ 353,676 $ 1,135,178 $ 401,126 $ 1,227,271
Depreciation and amortization (201,369) (604,113) (199,628) (595,712)
Property operating expenses (39,627) (136,284) (54,506) (185,943)
------------- ------------- -------------- --------------
112,680 394,781 146,992 445,616
Joint venture earnings 60,105 177,647 52,060 156,094
Lease termination fee - 1,600,000 - -
Investment valuation allowance - (3,350,000) - -
------------- ------------- -------------- --------------
Total real estate operations 172,785 (1,177,572) 199,052 601,710
Interest on cash equivalents
and short-term investments 74,888 176,198 40,597 103,019
------------- ------------- -------------- -------------
Total investment activity 247,673 (1,001,374) 239,649 704,729
------------- ------------- -------------- -------------
Portfolio Expenses
Management fee 41,019 82,038 - -
General and administrative 29,987 89,649 28,980 92,740
------------- ------------- ------------- -------------
71,006 171,687 28,980 92,740
------------- ------------- ------------- -------------
Net income (loss) $ 176,667 $ (1,173,061) $ 210,669 $ 611,989
============= ============= ============== ==============
Net income (loss) per
limited partnership unit $ 5.32 $ (35.35) $ 6.35 $ 18.44
============= ============= ============== ==============
Cash distributions per limited
partnership unit $ 12.50 $ 12.50 $ - $ -
============= ============= ============== ==============
Number of limited partnership
units outstanding during
the period 32,848 32,848 32,848 32,848
============= ============= ============== ==============
<FN>
(See accompanying notes to financial statements)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Quarter Ended Nine Months Ended Quarter Ended Nine Months Ended
September 30, 1996 September 30, 1996 September 30, 1995 September 30, 1995
---------------------- --------------------- --------------------- -----------------------
General Limited General Limited General Limited General Limited
Partners Partners Partners Partners Partners Partners Partners Partners
--------- -------- -------- -------- --------- --------- ---------- ---------
Balance at
beginning
of period $(93,407) $19,797,404 $(79,910) $21,133,635 $ (88,997) $ 20,234,053 $(93,010) $ 19,836,746
Cash distributions (4,147) (410,600) (4,147) (410,600) - - - -
Net income (loss) 1,766 174,901 (11,731) (1,161,330) 2,107 208,562 6,120 605,869
--------- ---------- ---------- ----------- ----------- ----------- ---------- -----------
Balance at end of
period $(95,788) $19,561,705 $(95,788) $19,561,705 $ (86,890) $ 20,442,615 $(86,890) $ 20,442,615
========= ========== ========== =========== =========== =========== ========== ===========
<FN>
(See accompanying notes to financial statements)
SUMMARIZED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- ---------
Net cash provided by operating
activities $ 2,532,944 $ 1,126,801
---------- ----------
Cash flows from investing activities:
Decrease in short-term
investments, net 677,844 81,874
Investment in property - (156,772)
---------- ---------
Net cash provided by (used in)
investing activities 677,844 (74,898)
---------- ----------
Cash flows from financing activities:
Distributions to partners (414,747) -
---------- ----------
Net cash used in financing activity (414,747) -
--------- ----------
Net increase in cash and cash
equivalents 2,796,041 1,051,903
Cash and cash equivalents:
Beginning of period 1,934,364 1,560,873
---------- ----------
End of period $ 4,730,405 $ 2,612,776
========== ==========
<FN>
(See accompanying notes to financial statements)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Partnership's financial position as of September 30, 1996 and December 31,
1995 and the results of its operations, its cash flows and changes in
partners' capital (deficit) for the interim periods ended September 30,
1996 and 1995. These adjustments are of a normal recurring nature.
See notes to financial statements included in the Partnership's 1995
Annual Report on Form 10-K for additional information relating to the
Partnership's financial statements.
NOTE 1 - ORGANIZATION AND BUSINESS
- ----------------------------------
Copley Realty Income Partners 2; A Limited Partnership (the
"Partnership") is a Massachusetts limited partnership organized for the
purpose of investing primarily in newly-constructed and existing income-
producing real properties. The Partnership commenced operations in October
1987, and acquired the three real estate investments it currently owns
prior to the end of 1988. The Partnership intended to dispose of its
investments within nine years of their acquisition, and then liquidate;
however, the managing general partner expects to extend the investment
period at least into 1998, having determined it to be in the best interest
of the limited partners.
NOTE 2 - PROPERTY
- -----------------
The Partnership's investment in property consists of an industrial
building in Rancho Dominguez, California, and a research and development
building in La Mirada, California. The following is a summary of the
Partnership's investment in property:
September 30, 1996 December 31, 1995
----------------- -----------------
Land $ 7,339,344 $ 7,339,344
Buildings and improvements 12,235,440 12,235,440
Accrued lease termination fee 350,000 -
Accumulated depreciation (3,492,519) (2,971,596)
Investment valuation allowance (7,200,000) (4,200,000)
----------- -----------
9,232,265 12,403,188
Other net assets 1,093,028 1,181,139
Accrued environmental clean-up costs (85,475) (162,215)
----------- -----------
$ 10,239,818 $ 13,422,112
=========== ===========
As a result of a protracted vacancy period and reduced expectations
for rental rates over the Partnership's investment horizon, the managing
general partner determined during 1993 that the carrying value of the La
Mirada investment exceeded its estimated net realizable value.
Consequently, the carrying value has been reduced by a total of $4,200,000.
In the second quarter of 1996, the Partnership restructured the lease
with the sole tenant at the Rancho Dominguez property. The remaining lease
term was shortened to eighteen months (along with an option for the
Partnership to terminate with a ninety day notice) and the rental rate was
reduced, in consideration for which the tenant agreed to pay two lump sum
amounts: one for $1,250,000, which was received in July 1996, and another
for $350,000 at the termination of the lease. The final payment is secured
by a letter of credit issued by a California bank. As a result of new
lease terms and current market conditions, the managing general partner
determined that the carrying value of the Rancho Dominguez property
exceeded its estimated fair market value. Accordingly, the carrying value
was reduced. The net result of the lease modification and attendant
adjustment to investment carrying value was a charge of $1,400,000 in the
second quarter of 1996. The decrease in estimated fair market value is
$3,000,000 which has been presented as an investment valuation allowance,
while the lease termination fee of $1,600,000 has been recognized as
revenue.
NOTE 3 - REAL ESTATE JOINT VENTURES
- -----------------------------------
The following summaries of assets and liabilities and of results of
operations relate to the Medlock Oaks joint venture.
Assets and Liabilities
------------------------
September 30, 1996 December 31, 1995
------------------ -----------------
Assets
Real property, at cost less
accumulated depreciation of
$2,727,848 and $2,425,096 $ 7,838,502 $ 8,103,524
Other 248,882 270,575
----------- -----------
8,087,384 8,374,099
Liabilities 71,012 49,817
----------- -----------
Net assets $ 8,016,372 $ 8,324,282
=========== ===========
Results of Operations
---------------------
Nine Months Ended September 30,
-------------------------------
1996 1995
------ ------
Revenue
Rental income $ 965,082 $ 909,340
Other 1,627 2,994
----------- ----------
966,709 912,334
----------- ----------
Expenses
Depreciation and
amortization 334,676 322,626
Operating expenses 209,318 217,119
----------- -----------
543,994 539,745
----------- -----------
Net income $ 422,715 $ 372,589
=========== ===========
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and its affiliate on behalf of their various financing
arrangements with the joint venture.
NOTE 4 - SUBSEQUENT EVENT
- -------------------------
Distributions of cash from operations relating to the quarter ended
September 30, 1996 were made on October 24, 1996 in the aggregate amount of
$414,747 ($12.50 per limited partnership unit).
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
Liquidity and Capital Resources
- -------------------------------
The Partnership completed its offering of units of limited partnership
interest in April 1988, and a total of 32,997 units were sold. The
Partnership received proceeds of $29,379,522, net of selling commissions
and other offering costs, which have been invested in real estate, used to
pay related acquisition costs or retained as working capital reserves.
At September 30, 1996, the Partnership had $5,726,597 in cash, cash
equivalents and short-term investments, of which $414,747 was used for cash
distributions to partners on October 24, 1996; the remainder is being
retained for working capital reserves. As a result of the poor performance
of two of the Partnership's investments and the uncertainty regarding
future performance, the managing general partner determined in 1990 that it
was prudent to augment working capital reserves. Accordingly, the
Partnership did not make any cash distributions to the partners during the
three-year period from the third quarter of 1990 through the second quarter
of 1993. Distributions were resumed from the third quarter of 1993 through
the first quarter of 1994, when the managing general partner again
suspended operating cash distributions as a result of the additional
uncertainty concerning the Partnership's future cash flow from the Rancho
Dominguez investment. As a result of the attainment of an adequate level
of cash reserves and the restructuring of the Rancho Dominguez lease during
the second quarter of 1996, the managing general partner has resumed
distributions of cash from operations, effective with the second quarter,
at an annualized rate of 5.0% on a capital contribution of $1,000 per unit.
The source of future liquidity and cash distributions to partners will
primarily be cash generated by the Partnership's real estate and short-term
investments.
The Partnership maintains a fund for the purpose of repurchasing
limited partnership units. Two percent of cash flow, as defined, is
designated for this fund which had a balance of approximately $18,800 and
$600 at September 30, 1996 and December 31, 1995, respectively. Through
September 30, 1996, the Partnership repurchased and retired 149 limited
partnership units for an aggregate cost of $135,921.
The carrying value of real estate investments in the financial
statements at September 30, 1996 is at depreciated cost, or if the
investment's carrying value is determined not to be recoverable through
expected undiscounted future cash flows, the carrying value is reduced to
estimated fair market value. The fair market value of such investments is
further reduced by the estimated cost of sale for properties held for sale.
Carrying value may be greater or less than current appraised value. The
appraised value of two of the Partnership's investments approximated their
carrying value at September 30, 1996. The appraised value of the third
investment was $400,000 less than its carrying value. The current
appraised value of real estate investments has been estimated by the
managing general partner and is generally based on a combination of
traditional appraisal approaches performed by the Partnership's advisor,
Copley Real Estate Advisors, Inc., and independent appraisers. Because of
the subjectivity inherent in the valuation process, the current appraised
value may differ significantly from that which could be realized if the
real estate were actually offered for sale in the marketplace.
Results of Operations
- ---------------------
Form of Real Estate Investments
The Dominguez and La Mirada investments are wholly-owned by the
Partnership. The Medlock Oaks investment is structured as a joint venture
with an affiliate of the Partnership.
Operating Factors
At Medlock Oaks, occupancy decreased slightly to 95% during the third
quarter of 1996. (Occupancy was 95% at December 31, 1995, and 97% at
September 30, 1995.) Based on a then contemplated sales transaction, the
managing general partner revised its estimate of the fair market value of
this investment in the first quarter of 1996. Accordingly, the carrying
value was reduced by $350,000 through a charge to operations.
The Rancho Dominguez property is 100% leased to a single tenant.
During the second quarter of 1994, the tenant notified the Partnership that
it was experiencing financial difficulty and desired to restructure its
lease. A lease amendment was executed during 1995, retroactive to January
1, 1995, which provided for a two-year extension of the lease and the
deferral of 1995 rental payments totaling $400,000. The deferred amount
would be payable based upon the tenant's achieving a specified level of
operating revenues. Since this threshold was not achieved, the deferral
was permanently abated. In December 1995, the tenant's former parent
company, which had guaranteed the lease, paid the Partnership $275,000 in
full satisfaction of its obligations under the guarantee, which was
recorded as rental revenue in 1995. The tenant paid rent based on the
reduced rate through June 30, 1996.
During the second quarter of 1996, the Partnership further
restructured the lease. The remaining lease term was shortened to eighteen
months (along with an option for the Partnership to terminate with a ninety
day notice) and the rental rate was reduced, in consideration for which the
tenant agreed to pay two lump sum amounts: one for $1,250,000 which was
received July 1996, and another for $350,000 at the termination of the
lease. The final payment is secured by a letter of credit issued by a
California bank. As a result of new lease terms and current market
conditions, the managing general partner determined that the carrying value
of the Rancho Dominguez property exceeded its estimated fair market value.
Accordingly, the carrying value was reduced. The net result of the lease
modification and attendant adjustment to investment carrying value was a
charge of $1,400,000 in the second quarter of 1996. The decrease in
estimated fair market value is $3,000,000 which has been presented as an
investment valuation allowance, while the lease termination fee of
$1,600,000 has been recognized as revenue. Environmental remediation
continues at this property due to contamination by a former tenant. The
remediation is expected to be completed during 1996, the cost of which has
been previously accrued.
The La Mirada investment had been vacant from August 1990 through
January 1994, and has been fully occupied under a long term lease since
January 1, 1995. As a result of the protracted vacancy period and weakness
in the local market which had depressed rental rates, the managing general
partner determined in 1993 that the carrying value of the La Mirada
building exceeded its net realizable value. The carrying value was reduced
by $3,000,000 in 1993. Due to a further deterioration in market
conditions, the carrying value was further reduced by $1,200,000 in 1994.
Investment Results
Interest on cash equivalents and short-term investments increased by
approximately $73,000, or 71%, between the first nine months of 1995 and
1996, as a result of an increase in average investment balances, partially
offset by a decrease in interest rates. The growth in the investment
balances is consistent with the objective of increasing working capital
reserves, and the receipt of the lump sum termination payment from the
Rancho Dominguez tenant in the third quarter of 1996.
Exclusive of the valuation allowances on the Medlock Oaks and Rancho
Dominguez investments in 1996 and the lease termination fee from Rancho
Dominguez, total real estate operations for the first nine months of 1996
declined by $29,000, or 5% compared to the respective prior year period.
Operating results decreased at Rancho Dominguez and La Mirada by $28,000
and $23,000, respectively, partially offset by an increase of $22,000 at
Medlock Oaks.
Exclusive of the lease termination payment from Rancho Dominguez, cash
provided by operations increased by approximately $156,000 between the
first nine months of 1996 and 1995. Although investment results declined,
cash flow to the Partnership increased due primarily to the timing of cash
distributions from the Medlock Oaks joint venture, as well as decreases in
working capital items.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These
expenses decreased by approximately $3,000, or 3%, between the first nine
months of 1995 and 1996, primarily due to lower legal fees.
The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. The management fee in 1996
relates to the resumption of operating cash distributions commencing with
the second quarter, as discussed above.
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1996
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: None.
b. Reports on Form 8-K: No Current Reports on Form 8-K
were filed during the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COPLEY REALTY INCOME PARTNERS 2; A LIMITED
PARTNERSHIP
(Registrant)
November 12, 1996
/s/ Peter P. Twining
-------------------------------
Peter P. Twining
Managing Director and General Counsel
of Managing General Partner,
Second Income Corp.
November 12, 1996
/s/ Daniel C. Mackowiak
--------------------------------
Daniel C. Mackowiak
Principal Financial and Accounting
Officer of Managing General Partner,
Second Income Corp.