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 June 30, 1997 Commission File Number 0-17810
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2961376
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 Franklin Street, 25th Fl.
Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 261-9000
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 JUNE 30, 1997
PART I
FINANCIAL INFORMATION
BALANCE SHEETS
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
Assets
Real estate investments:
Property, net $10,064,628 $10,221,007
Joint ventures - 3,543,935
----------- -----------
10,064,628 13,764,942
Cash and cash equivalents 3,591,554 3,560,038
Short-term investments 690,246 2,062,313
----------- -----------
$14,346,428 $19,387,293
=========== ===========
Liabilities and Partners'
Capital
Accounts payable $ 46,523 $ 51,224
Accrued management fee 39,244 41,019
Deferred disposition fee 121,260 -
----------- -----------
Total liabilities 207,027 92,243
----------- -----------
Partners' capital (deficit):
Limited partners ($880 and
$1,000 per unit, respectively;
100,000 units authorized,
32,818 units issued and
outstanding) 14,248,893 19,392,367
General partners (109,492) (97,317)
----------- -----------
Total partners' capital 14,139,401 19,295,050
----------- -----------
$14,346,428 $19,387,293
=========== ===========
(See accompanying notes to financial statements)
STATEMENTS OF OPERATIONS (Unaudited)
Quarter Ended Six Months Ended Quarter Ended Six Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
-------------- ---------------- -------------- ----------------
Investment Activity
Property rentals $ 368,855 $ 734,133 $ 380,031 $ 781,502
Depreciation and amortization (108,448) (217,752) (201,374) (402,744)
Property operating expenses (45,775) (103,052) (41,096) (96,657)
-------------- ---------------- -------------- ----------------
214,632 413,329 137,561 282,101
Joint venture earnings 16,716 57,570 63,451 117,542
Lease termination fee - - 1,600,000 1,600,000
Gain on sale of property 387,990 387,990 - -
Investment valuation allowance - - (3,000,000) (3,350,000)
-------------- ---------------- --------------- ---------------
Total real estate operations 619,338 858,889 (1,198,988) (1,350,357)
Interest on cash equivalents
and short-term investments 74,927 147,049 53,674 101,310
-------------- ---------------- --------------- ---------------
Total investment activity 694,265 1,005,938 (1,145,314) (1,249,047)
-------------- ---------------- --------------- ---------------
Portfolio Expenses
General and administrative 34,497 64,239 32,786 59,662
Management fee 39,244 192,712 41,019 41,019
-------------- ---------------- --------------- ---------------
73,741 256,951 73,805 100,681
-------------- ---------------- --------------- ---------------
Net Income (Loss) $ 620,524 $ 748,987 $ (1,219,119) $ (1,349,728)
============== ================ =============== ===============
Net income (loss) per
limited partnership unit $ 18.72 $ 22.59 $ (36.74) $ (40.68)
============== ================ =============== ===============
Cash distributions per
limited partnership unit $ 166.81 $ 179.31 $ -- $ --
============== ================ =============== ===============
Number of limited partnership
units outstanding during
the period 32,818 32,818 32,848 32,848
============== ================ =============== ===============
(See accompanying notes to financial statements)
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Quarter Ended Six Months Ended Quarter Ended Six Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
----------------------- ----------------------- ----------------------- -----------------------
General Limited General Limited General Limited General Limited
Partners Partners Partners Partners Partners Partners Partners Partners
--------- ----------- --------- ----------- -------- ----------- -------- -----------
Balance at beginning
of period $(100,179) $19,108,945 $ (97,317) $19,392,367 $(81,216) $21,004,332 $(79,910) $21,133,635
Cash distributions (15,518) (5,474,371) (19,665) (5,884,971) - - - -
Net income (loss) 6,205 614,319 7,490 741,497 (12,191) (1,206,928) (13,497) (1,336,231)
--------- ----------- --------- ----------- -------- ----------- -------- -----------
Balance at end of
period $(109,492) $14,248,893 $(109,492) $14,248,893 $(93,407) $19,797,404 $(93,407) $19,797,404
========= =========== ========= =========== ======== =========== ======== ===========
(See accompanying notes to financial statements)
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
----------- ----------
Net cash provided by operating activities $ 615,730 $ 894,841
----------- ----------
Cash flows from investing activities:
Net proceeds from sale of property 3,836,988 -
Increase in deferred disposition fees 121,260 -
Decrease in short-term
investments, net 1,362,174 677,844
----------- ----------
Net cash provided by investing activities 5,320,422 677,844
----------- ----------
Cash flows from financing activities:
Distributions to partners (5,904,636) -
----------- ----------
Net increase in cash and cash
equivalents 31,516 1,572,685
Cash and cash equivalents:
Beginning of period 3,560,038 1,934,364
----------- ----------
End of period $ 3,591,554 $3,507,049
=========== ==========
(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 June 30, 1997 and December 31, 1996 and the results of
its operations, its cash flows and partners' capital (deficit) for the interim
periods ended June 30, 1997 and 1996. These adjustments are of a normal
recurring nature.
See notes to financial statements included in the Partnership's 1996 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 two real
estate investments it currently owns prior to the end of 1987. The Partnership
intended to dispose of its investments within nine years of their acquisition,
and then liquidate; however, the managing general partner has extended the
holding period, 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:
June 30, 1997 December 31, 1996
-------------- ------------------
Land $ 7,339,344 $ 7,339,344
Buildings and improvements 12,235,440 12,235,440
Accrued lease termination fee 350,000 350,000
Accumulated depreciation (3,642,660) (3,466,160)
Investment valuation allowance (7,200,000) (7,200,000)
----------- -----------
9,082,124 9,258,624
Other net assets 1,041,057 1,040,472
Accrued environmental clean-up costs (58,553) (78,089)
----------- -----------
$10,064,628 $10,221,007
=========== ===========
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 was reduced by $4,200,000.
In the second quarter of 1996, the Partnership amended 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 the lease with a ninety day notice) and the rental rate was reduced,
in consideration for which the tenant agreed to pay two lump sum amounts: one
for $1,250,000, which was received in July 1996, and another for $350,000 at the
termination of the lease. The final payment is secured by a letter of credit
issued by a California bank. This lease termination fee was recognized as
revenue in 1996. As a result of the new lease terms and current market
conditions, the managing general partner determined that the carrying value of
the Rancho Dominguez property was impaired. Accordingly, the carrying value was
reduced to estimated fair market value with an investment valuation allowance of
$3,000,000 which was also recognized in 1996.
NOTE 3 - REAL ESTATE JOINT VENTURES
- -----------------------------------
On May 2, 1997, the Medlock Oaks buildings, which were owned by the
Partnership (43%) and an affiliate (57%), were sold for a total sales price of
$9,402,779. The Partnership received net proceeds of $3,958,248 after closing
costs, and recognized a gain of $387,990 ($11.70 per limited partnership unit)
on the sale. A disposition fee of $121,260 was accrued but not paid to the
advisor. On May 29, 1997, the Partnership made a capital distribution of
$3,938,160 ($120 per limited partnership unit) from the proceeds of the sale.
The following summarized financial information relates to the Medlock Oaks
joint venture:
Assets and Liabilities
----------------------
June 30, 1997 December 31, 1996
------------- -----------------
Assets
Real property, at cost less
accumulated depreciation of
$0 and $2,821,679 $ - $7,702,658
Other - 288,149
------------- ----------
- 7,990,807
Liabilities - 86,084
------------- ----------
Net assets $ - $7,904,723
============= ==========
Results of Operations
---------------------
Period from Six Months
January 1, 1997 Ended
through May 2,1997 June 30, 1996
------------------ -------------
Revenue
Rental income
Other $400,861 $647,972
735 1,116
-------- --------
401,596 649,088
-------- --------
Expenses
Depreciation and amortization
Operating expenses 156,940 222,809
112,258 146,537
-------- --------
269,198 369,346
-------- --------
Net income
$132,398 $279,742
======== ========
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 June
30, 1997 were made on July 24, 1997 in the aggregate amount of $396,799 ($11.97
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.
On May 2, 1997, the Medlock Oaks buildings, which were owned by the
Partnership (43%) and an affiliate (57%), were sold for a total sales price of
$9,402,779. The Partnership received net proceeds of $3,958,248, after closing
costs, and recognized a gain of $387,990 ($11.70 per limited partnership unit)
on the sale. A disposition fee of $121,260 was accrued but not paid to the
advisor. On May 29, 1997, the Partnership made a capital distribution of
$3,938,160 ($120 per limited partnership unit) from the proceeds of the sale.
The distribution reduced the adjusted capital contribution to $880 per unit.
At June 30, 1997, the Partnership had $4,281,800 in cash, cash equivalents
and short-term investments, of which $396,799 was used for cash distributions to
partners on July 24, 1997; the remainder is being retained for working capital
reserves. The managing general partner suspended operating cash distributions
as of the second quarter of 1994 as a result of the uncertainty concerning the
Partnership's future cash flow from the Rancho Dominguez investment. After the
attainment of an adequate level of cash reserves and the restructuring of the
Rancho Dominguez lease, the managing general partner resumed distributions of
cash from operations, as of the second quarter of 1996, at an annualized rate of
5.0% on a capital contribution of $1,000 per unit. The first quarter 1997
distribution includes $1,137,359 related to the first installment of a
lease-termination fee, which was received in 1996 and retained previously in
working capital reserves. The second quarter 1997 distribution was based on the
weighted average adjusted capital contribution. The 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 $52,912 and $10,087 at June 30, 1997 and December
31, 1996, respectively. Through June 30, 1997, the Partnership had repurchased
and retired 179 limited partnership units for an aggregate cost of $153,771.
The carrying value of real estate investments in the financial statements
at June 30, 1997 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. After
giving effect to the investment valuation allowances, the appraised value of the
Rancho Dominguez investment exceeded its carrying value at June 30, 1997 by
approximately $400,000. The appraised value of the La Mirada investment was
$300,000 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 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 Rancho Dominguez and La Mirada investments are wholly-owned by the
Partnership. The Medlock Oaks investment was structured as a joint venture with
an affiliate of the Partnership.
Operating Factors
As discussed above, the Partnership and its affiliate sold the Medlock Oaks
buildings on May 2, 1997, and recognized a gain of $387,990. Occupancy at
Medlock Oaks increased from 92% at March 31, 1997 to 100% as of the sale date.
(Occupancy was 97% at December 31, 1996 and 98% at June 30, 1996.) In the first
quarter of 1996, the managing general partner determined that the Partnership
would be unable to recover the carrying value of this investment and,
accordingly, the carrying value was reduced by $350,000 through a charge to
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 which provided for a two-year extension of
the lease and a reduction in the monthly rent through 1995. The tenant
continued to pay rent based on the reduced rate through June 30, 1996.
During the second quarter of 1996, the Partnership further amended the
lease. The remaining lease term was shortened to eighteen months (along with an
option for the Partnership to terminate the lease with a ninety day notice) and
the rental rate was reduced, in consideration for which the tenant agreed to pay
two lump sum amounts: one of $1,250,000 which was received July 1996, and
another of $350,000 at the termination of the lease.
The final payment is secured by a letter of credit issued by a California bank.
The lease termination fee was recognized as revenue in 1996. The Partnership is
actively marketing the building for re-lease and/or sale. As a result of new
lease terms and current market conditions, the managing general partner
determined that the carrying value of the Rancho Dominguez property was
impaired. Accordingly, the carrying value was reduced to estimated fair market
value with an investment valuation allowance of $3,000,000 which was also
recognized in 1996. Environmental remediation at this property, due to
contamination by a former tenant, was recently completed. The cost was
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 $46,000, or 45%, between the first six months of 1996 and 1997, as
a result of an increase in average investment balances stemming from the receipt
of the lease termination payment ($1,250,000) in the third quarter of 1996, as
well as an increase in short-term yields.
Exclusive of the lease termination fee and valuation allowance at Rancho
Dominguez in 1996, joint venture earnings from Medlock Oaks of $57,570 in 1997
and $117,542 in 1996, and the gain on sale and valuation allowances in 1997 and
1996, respectively, also related to Medlock Oaks, total real estate operations
for the first six months of 1997 increased by $71,000 compared to the
corresponding prior year period. This increase resulted from lower depreciation
and amortization expenses of $185,000 at Rancho Dominguez caused by the write-
off of tenant improvements and other net assets in 1996. This effect was
partially offset by lower rental revenue as a result of the related lease
restructuring, and higher operating expenses at La Mirada.
Cash flow from operations decreased by approximately $279,000 between the
first six months of 1996 and 1997, while net income decreased by $2,100,000.
The difference largely resulted from lower non-cash expenses in 1997, such as
the investment valuation allowances, and depreciation and amortization, as well
as the lease termination fee accrual in 1996, and the gain on sale in 1997. In
addition, cash distributions from Medlock Oaks decreased between the two
periods.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These expenses
increased by approximately $5,000, or 8%, between the first six months of 1996
and 1997, primarily due to an increase in accounting fees.
The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. There was no distributable cash
flow in the first quarter of 1996. Regular operating cash distributions were
resumed as of the second quarter of 1996. The operating distribution for the
first quarter of 1997 also includes an amount related to the lease termination
fee discussed above.
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1997
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: None.
b. Reports on Form 8-K: The Partnership filed one current report on
Form 8-K dated May 2, 1997, reporting on Item No.2 (Acquisition
or Disposition of Assets).
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)
August 13, 1997
/s/ James J. Finnegan
-------------------------------
James J. Finnegan
Managing Director and General Counsel
of Managing General Partner,
Second Income Corp.
August 13, 1997
/s/ Karin J. Lagerlund
--------------------------------
Karin J. Lagerlund
Principal Financial and Accounting
Officer of Managing General Partner,
Second Income Corp.