<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
------- Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____ to ____
COMMISSION FILE NUMBER: 0-11085
CONAM REALTY INVESTORS 2 L.P.
-----------------------------
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
California 13-3100545
---------- ----------
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION NO.
INCORPORATION OR ORGANIZATION
1764 San Diego Avenue
San Diego, CA 92110 92110-1906
- -------------------- -----------
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES ZIP CODE
(619) 297-6771
--------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, AT DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in real estate:
Land $ 5,744,972 $ 5,744,972
Buildings and improvements 23,681,664 23,681,664
-------------------------------------------
29,426,636 29,426,636
Less accumulated depreciation (13,402,882) (12,689,727)
-------------------------------------------
16,023,754 16,736,909
Cash and cash equivalents 1,298,970 1,109,506
Restricted cash 521,854 342,282
Other assets, net of accumulated amortization
of $307,385 in 1998 and $260,496 in 1997 247,615 181,421
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 18,092,193 $ 18,370,118
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable 11,382,614 11,554,935
Distribution payable 200,000 -
Accounts payable and accrued expenses 386,699 197,443
Due to general partner and affiliates 18,766 18,504
Security deposits 92,286 103,908
-------------------------------------------
Total Liabilities 12,080,365 11,874,790
-------------------------------------------
Partners' Capital (Deficit):
General Partner (615,506) (567,156)
Limited Partners (80,000 Units outstanding) 6,627,334 7,062,484
-------------------------------------------
Total Partners' Capital 6,011,828 6,495,328
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 18,092,193 $ 18,370,118
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME
Rental $ 1,092,226 $ 1,071,005 $ 3,333,733 $ 3,208,782
Interest and other 12,070 18,623 32,241 40,760
----------------------------------------------------------------------------------
Total Income 1,104,296 1,089,628 3,365,974 3,249,542
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 595,287 661,158 1,682,747 1,729,543
Depreciation and amortization 253,369 255,279 760,045 762,085
Interest 221,296 225,649 667,227 680,038
General and administrative 50,882 46,470 139,455 149,793
----------------------------------------------------------------------------------
Total Expenses 1,120,834 1,188,556 3,249,474 3,321,459
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (16,538) $ (98,928) $ 116,500 $ (71,917)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ALLOCATED:
To the General Partner $ (1,654) $ (9,893) $ 11,650 $ (7,192)
To the Limited Partners (14,884) (89,035) 104,850 (64,725)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (16,538) $ (98,928) $ 116,500 $ (71,917)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
PER LIMITED PARTNERSHIP UNIT
(80,000 UNITS OUTSTANDING)
NET INCOME (LOSS) $ (0.19) $ (1.11) $ 1.31 $ (0.81)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
GENERAL LIMITED
PARTNER PARTNERS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE (DEFICIT) AT DECEMBER 31, 1997 $ (567,156) $ 7,062,484 $ 6,495,328
Net income 11,650 104,850 116,500
Distributions ($6.75 per Unit) (60,000) (540,000) (600,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE (DEFICIT) AT SEPTEMBER 30, 1998 $ (615,506) $ 6,627,334 $ 6,011,828
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 116,500 $ (71,917)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 760,044 762,085
Increase (decrease) in cash arising from changes in
operating assets and liabilities:
Fundings to restricted cash (232,496) (245,218)
Release of restricted cash 52,924 53,150
Other assets (113,083) -
Accounts payable and accrued expenses 189,256 232,165
Due to general partner and affiliates 262 357
Security deposits (11,622) (2,055)
-------------------------------------------
Net cash provided by operating activities 761,785 728,567
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES-
Additions to real estate - (388,231)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (400,000) (200,000)
Mortgage principal payments (172,321) (159,511)
-------------------------------------------
Net cash used for financing activities (572,321) (359,511)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 189,464 (19,175)
Cash and cash equivalents, beginning of period 1,109,506 962,290
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,298,970 $ 943,115
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
Cash paid during the period for interest $ 667,227 $ 680,038
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
- -------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements should be read in
conjunction with the Partnership's annual 1997 audited consolidated financial
statements within Form 10-K.
The unaudited interim consolidated financial statements include all normal and
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of financial position as of September 30, 1998 and the
results of operations for the three and nine months ended September 30, 1998 and
1997, cash flows for the nine months ended September 30, 1998 and 1997, and the
consolidated statement of partners' capital for the nine months ended September
30, 1998. Results of operations are not necessarily indicative of the results to
be expected for the full year.
No significant events have occurred subsequent to the year ended December 31,
1997, and no material contingencies exist, which would require disclosure in
this interim report per Regulation S-X, Rule 10-01, Paragraph (a) (5).
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Partnership had cash and cash equivalents of
$1,298,970 which were invested in money market funds, compared with $1,109,506
at December 31, 1997. The increase is attributable to net cash provided by
operating activities exceeding cash used for mortgage principal payments and
distributions. The Partnership also maintains a restricted cash balance which
totaled $521,854 at September 30, 1998 compared to $342,282 at December 31,
1997. The restricted cash funds represent escrows for insurance and real estate
taxes required under the terms of the current mortgage loans. The Partnership
expects sufficient cash to be generated from operations to meet its current
operating expenses.
The General Partner declared a regular cash distribution of $2.25 per Unit for
the quarter ended September 30, 1998 which will be paid in November, 1998. The
General Partner will determine the amount of future quarterly distributions
based on the Partnership's available cash flow and future cash needs.
The General Partner, on behalf of the Partnership, is negotiating and expects to
enter into an agreement for the sale of the Partnership's remaining properties
and properties owned by various other limited partnerships affiliated with the
General Partner (the "Affiliated Partnerships") to DOC Investors LLC, a Delaware
limited liability company to be formed to acquire real property ( the
"Purchaser"). An Affiliate of the General Partner will hold a 9% interest in the
Purchaser. Consummation of the sale is subject to various conditions, including
the execution of definitive documents, the approval of a majority in interest of
the Limited Partners, and approval by the limited partners of the Affiliated
Partnerships. Accordingly, there can be no assurance that the sale will be
consummated.
Following satisfaction of applicable securities regulatory requirements, the
General Partner will solicit the approval of the Limited Partners to the sale
and to a related amendment to the Partnership's agreement of limited partnership
by means of a Consent Solicitation Statement. Such Consent Solicitation
Statement will set forth the terms and conditions of the proposed sale, the text
of the proposed amendment to the Partnership's agreement of limited partnership,
and other matters with respect to the sale. If the sale and related amendment
are approved, and the other conditions to the sale satisfied, the sale, which is
expected to occur before December 31, 1998, would result in distributions
approximating the net asset value of the Units and the final liquidation of the
Partnership. The terms of the proposed sale are contained in the Preliminary
Consent Solicitation Statement filed by the Partnership with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of
1934 on October 30, 1998.
RESULTS OF OPERATIONS
Partnership operations for the three and nine months ended September 30, 1998
generated a net loss of ($16,538) and net income of $116,500, for the three and
six months ended September 30, 1998. This compares with a net loss of ($98,928)
and ($71,917) for the corresponding periods in 1997. The decrease in net loss
for the three month period ended September 30, 1998 is primarily attributable to
an increase in rental revenues and a decrease in property operating expenses.
The increase in net income for the nine month period ended September 30, 1998 is
primarily attributable to an increase in rental revenues and a decrease in
property operating expenses.
Property operating expenses for the three and nine months ended September 30,
1998 totaled $595,287 and $1,682,747 compared with $661,158 and $1,729,543 for
the corresponding periods in 1997. The decrease for the three month period is
primarily attributable to reduced repair and maintenance expenses at Ponte Vedra
Beach Village I. The decrease for the nine month period is due to a decrease in
repair and maintenance expenses at Ponte Vedra Beach Village I and Rancho
Antigua.
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
RESULTS OF OPERATIONS - CONTINUED
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the first nine months of 1998 and 1997, average occupancy levels at the
Partnership's properties were as follows:
<TABLE>
<CAPTION>
PROPERTY 1998 1997
---------------------------------------------------------------
<S> <C> <C>
Creekside Oaks 95% 94%
Ponte Vedra Beach Village I 92% 93%
Rancho Antigua 95% 91%
Village at the Foothills I 96% 89%
---------------------------------------------------------------
</TABLE>
YEAR 2000
The Partnership has assessed the potential impact of the Year 2000 issue on its
computer systems, operating equipment with imbedded microchips and major third
party vendors. If the proposed sale of its remaining properties is consummated,
the Partnership will liquidate prior to January 1, 2000, and no Year 2000 issues
will be presented.
In the event that the sale is not consummated, the Partnership has relied on the
efforts of ConAm Management Corporation ("ConAm Management"), which has been
retained by the Partnership to manage the business and financial operation of
the Partnership's properties, to resolve any potential Year 2000 issues. In the
course of providing property management services for the Partnership, ConAm
Management retained a third party consultant to modify all applicable software
to provide for a 4-digit year field. The General Partner believes that the
modifications undertaken by ConAm Management related to computer systems are
sufficient to address any potential Year 2000 problems and that the impact of
the Year 2000 issue will not materially affect the Partnership's operating
results or financial condition if the Partnership is not liquidated prior to
January 1, 2000. Accordingly, neither ConAm Management nor the Partnership has
taken any further actions with respect to the Year 2000 issue related to the
computer systems.
The Partnership plans to initiate a program to evaluate the Year 2000 readiness
of each property's operating equipment with embedded microchips and replace as
considered necessary. In the event that the replacement project is not completed
by the Year 2000, failure of the property's operating equipment as a result of
the Year 2000 issue is not expected to have a significant impact on operations.
The Partnership plans to initiate discussion with significant suppliers and
other third parties to determine the extent to which the Partnership may be
vulnerable to the failure of these parties to address and correct their own Year
2000 issues. However, there can be no guarantee that the systems of other
companies that support the Partnership's operations will be timely converted or
that a failure by these companies to correct their Year 2000 problems would not
have a material adverse effect on the Partnership. At the present time the
Partnership does not have a contingency plan in place, in the event of Year 2000
failure related to significant suppliers and other third parties, but plans to
create one within the next year.
The Partnership currently has no indication that the costs associated with any
remedial actions in connection with the Year 2000 related to its operating
equipment with imbedded microchips and major third party vendors issue will be
material. All costs related to the remediation plan of the computer system were
incurred by ConAm Management in connection with their management services.
<PAGE>
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 hereunto duly authorized.
CONAM PROPERTY SERVICES II, LTD.
General Partner of ConAm Realty Investors 2 L.P.
BY: CONTINENTAL AMERICAN DEVELOPMENT, INC.
GENERAL PARTNER
Date: November 13, 1998 BY:/s/ DANIEL J. EPSTEIN
----------------------------------
Daniel J. Epstein
Director, President, and Principal Executive
Officer
Date: November 13, 1998 BY:/s/ ROBERT J. SVATOS
----------------------------------
Robert J. Svatos
Vice President and Director
<PAGE>
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 hereunto duly authorized.
CONAM PROPERTY SERVICES II, LTD.
General Partner of ConAm Realty Investors 2 L.P.
BY: CONTINENTAL AMERICAN DEVELOPMENT, INC.
GENERAL PARTNER
Date: November 13, 1998
-------------------------------------
Daniel J. Epstein
Director, President, and Principal Executive
Officer
Date: November 13, 1998
-------------------------------------
Robert J. Svatos
Vice President and Director
<PAGE>
CONAM REALTY INVESTORS 2 L.P.
AND CONSOLIDATED VENTURES
PART II OTHER INFORMATION
ITEMS 1-5 Not applicable
ITEMS 6 Exhibits
(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed
during the quarter ended September 30, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,820,824
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 29,426,636
<DEPRECIATION> 13,402,882
<TOTAL-ASSETS> 18,092,193
<CURRENT-LIABILITIES> 697,751
<BONDS> 11,382,614
0
0
<COMMON> 0
<OTHER-SE> 6,011,828
<TOTAL-LIABILITY-AND-EQUITY> 18,092,193
<SALES> 3,333,733
<TOTAL-REVENUES> 3,365,974
<CGS> 0
<TOTAL-COSTS> 1,682,747
<OTHER-EXPENSES> 899,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667,227
<INCOME-PRETAX> 116,500
<INCOME-TAX> 0
<INCOME-CONTINUING> 116,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,500
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
