FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period.........to.........
Commission file number 0-11723
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
(Exact name of registrant as specified in its charter)
California 94-2883067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number) (864) 239-1000
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 past 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 .
PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
a) CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
BALANCE SHEET
(in thousands, except unit data)
September 30, December 31,
1997 1996
(Unaudited) (Note)
Assets
Cash and cash equivalents $ 8,938 $ 18,478
Securities available for sale 11 11
Other assets 169 23
Investment in Master Loan to affiliate 83,908 84,167
Less: Allowance for impairment loss (47,454) (48,043)
36,454 36,124
$ 45,572 $ 54,636
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued liabilities $ 31 $ 29
Distributions payable 141 141
172 170
Partners' Capital (Deficit)
General partner's (561) (560)
Limited partners'(909,138 units
outstanding at September 30, 1997 and
December 31, 1996, respectively) 45,961 55,026
45,400 54,466
$ 45,572 $ 54,636
Note:The balance sheet at December 31, 1996, has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See Accompanying Notes to Financial Statements
b) CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues:
Rental income $ -- $ 345 $ -- $ 1,206
Interest income on investment
in Master Loan to affiliate 147 -- 236 --
Reduction of allowance for impairment
loss in Master Loan to affiliate 78 16 588 216
Other income 142 110 463 328
Total revenues 367 471 1,287 1,750
Expenses:
Operating -- 540 -- 1,446
Depreciation and amortization -- 144 -- 485
General and administrative 95 124 361 468
Total expenses 95 808 361 2,399
Loss on sale of investment property -- (90) -- (90)
Net income (loss) $ 272 $ (427) $ 926 $ (739)
Net income (loss) allocated
to general partner (1%) $ 2 $ (4) $ 9 $ (7)
Net income (loss) allocated
to limited partners (99%) 270 (423) 917 (732)
$ 272 $ (427) $ 926 $ (739)
Net income (loss) per
limited partnership unit $ .30 $ (.46) $ 1.01 $ (.80)
See Accompanying Notes to Financial Statements
c) CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner's Partners' Total
Original capital contributions 912,182 $ 1 $228,046 $228,047
Partners' capital (deficit) at
December 31, 1995 909,138 $ (554) $ 55,599 $ 55,045
Net loss for the nine months
ended September 30, 1996 -- (7) (732) (739)
Partners' capital (deficit) at
September 30, 1996 909,138 $ (561) $ 54,867 $ 54,306
Partners' capital (deficit) at
December 31, 1996 909,138 $ (560) $ 55,026 $ 54,466
Net income for the nine months
ended September 30, 1997 -- 9 917 926
Distributions to partners -- (10) (9,982) (9,992)
Partners' capital (deficit) at
September 30, 1997 909,138 $ (561) $ 45,961 $ 45,400
See Accompanying Notes to Financial Statements
d) CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net income (loss) $ 926 $ (739)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization -- 485
Reduction of allowance for impairment loss
in Master Loan to affiliate (588) (216)
Loss on sale of investment property -- 90
Change in accounts:
Other assets (147) 232
Accounts payable and accrued liabilities 2 (49)
Tenant security deposit liabilities -- (112)
Accrued property taxes -- (44)
Net cash provided by (used in) operating activities 193 (353)
Cash flows from investing activities:
Property improvements and replacements -- (132)
Principal receipts on Master Loan 409 625
Advances on Master Loan (150) (1,000)
Proceeds from sale of investment property -- 2,119
Net cash provided by investing activities 259 1,612
Cash flows used in financing activities:
Distributions to partners (9,992) --
Net cash used in financing activities (9,992) --
Net (decrease) increase in cash and cash equivalents (9,540) 1,259
Cash and cash equivalents at beginning of period 18,478 9,276
Cash and cash equivalents at end of period $ 8,938 $ 10,535
See Accompanying Notes to Financial Statements
e) CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Consolidated Capital
Institutional Properties/2 (the "Partnership") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of ConCap Equities, Inc., (the "General Partner"), all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended September 30, 1997, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the Partnership's annual report on Form 10-K for the year ended
December 31, 1996.
NOTE B - SALE OF NORTH PARK PLAZA
On September 12, 1996, the Partnership sold North Park Plaza to an unaffiliated
party. The property was sold in an effort to maximize the Partnership's return
on its investment. The Partnership received net proceeds of approximately
$2,119,000 after payment of closing costs. This disposition resulted in a loss
of approximately $90,000.
Operating Revenues and expenses from North Park Plaza were approximately
$1,208,000 and $1,931,000, respectively, for the nine months ended September 30,
1996.
NOTE C - RELATED PARTY TRANSACTIONS
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
The Partnership paid property management fees based upon collected gross rental
revenues for property management services as noted below for the nine month
periods ended September 30, 1997 and 1996. Fees paid to affiliates of the
General Partner during the nine month periods ended September 30, 1997 and 1996,
are included in operating expenses on the statement of operations and are
reflected in the following table. The Partnership Agreement ("Agreement") also
provides for reimbursement to the General Partner and its affiliates for costs
incurred in connection with the administration of Partnership activities. The
General Partner, and its current affiliates, received reimbursements as
reflected in the following table:
September 30,
1997 1996
(in thousands)
Property management fees $ -- $ 61
Lease commissions -- 23
Reimbursement for services of affiliates 187 225
For the period of January 1, 1996 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency and insurer unaffiliated
with the General Partner. An affiliate of the General Partner acquired, in the
acquisition of a business, certain financial obligations from an insurance
agency which was later acquired by the agent who placed the master policy. The
agent assumed the financial obligations to the affiliate of the General Partner
who received payments on these obligations from the agent. The amount of the
Partnership's insurance premiums accruing to the benefit of the affiliate of the
General Partner by virtue of the agent's obligations is not significant.
On October 30, 1997, an Insignia affiliate commenced tender offers for limited
partnership interests in two real estate limited partnerships (including the
Partnership) in which Insignia affiliates act as general partner. The Purchaser
offered to purchase up to 300,000 of the outstanding units of limited
partnership interest in the Partnership, at $40.00 per Unit, net to the seller
in cash, upon the terms and subject to the conditions set forth in the Offer to
Purchase dated October 30, 1997 (the "Offer to Purchase") and the related
Assignment of Partnership Interest attached as Exhibits (a)(1) and (a)(2),
respectively, to the Tender Offer Statement on Schedule 14D-1 originally filed
with the Securities and Exchange Commission on October 30, 1997. Because of the
existing and potential future conflicts of interest (described in the
Partnership's Statements on Schedule 14D-9 filed with the Securities and
Exchange Commission), neither the Partnership nor the General Partner expressed
any opinion as to the Offer to Purchase and made no recommendation as to whether
unit holders should tender their units in response to the Offer to Purchase.
NOTE D NET INVESTMENT IN MASTER LOAN
At September 30, 1997, the recorded investment in the Master Loan was considered
to be impaired under "FASB 114." The Partnership measured the impairment of the
loan based upon the fair value of the collateral due to the fact that repayment
of the loan is expected to be provided solely by the collateral. For the nine
months ended September 30, 1997, the Partnership recorded approximately $824,000
in income based upon an increase in the fair value of the collateral.
Approximately $236,000 was recorded as interest income on investment in Master
Loan to affiliate. A cash payment for $89,000 was received from Consolidated
Capital Equity Partners/2, L.P. ("CCEP/2") during the second quarter of 1997.
The payment for the interest income recorded in the third quarter will be
received subsequent to September 30, 1997. Approximately $588,000 was recorded
as a reduction of allowance for impairment loss in Master Loan to affiliate.
Interest due to the Partnership pursuant to the terms of the Master Loan
Agreement, but not recognized in the income statements, totaled approximately
$16,457,000 and $15,500,000 for the nine months ended September 30, 1997 and
1996, respectively. At September 30, 1997, and December 31, 1996, such
cumulative unrecognized interest totaling approximately $149,800,000 and
$133,300,000, respectively, was not included in the balance of the investment in
Master Loan.
During the nine month period ended September 30, 1997, a $150,000 advance was
made to CCEP/2 as an advance on the Master Loan. During the nine month period
ended September 30, 1997, the Partnership received approximately $409,000 as
principal payments on the Master Loan which represented cash received by CCEP/2
on certain investments held by CCEP/2, which are required to be transferred to
the Partnership per the Agreement.
NOTE E - COMMITMENT
The Partnership is required by the Agreement to maintain working capital
reserves for contingencies of not less than 5% of Net Invested Capital, as
defined in the Agreement. In the event expenditures are made from this reserve,
operating revenue shall be allocated to such reserves to the extent necessary to
maintain the foregoing level. Reserves, including cash and cash equivalents
totaling approximately $8,938,000, were greater than the reserve requirement of
approximately $7,157,000 at September 30, 1997.
NOTE F - CONTINGENCIES
In May 1997, the Partnership was named as a defendant in a lawsuit brought by
PHC Construction Corporation in the Circuit Court for Oakland County, Michigan.
The complaint arises from construction services allegedly performed by the
plaintiff at the North Park Plaza Building in Southfield, Michigan prior to the
sale of that property in September 1996. The complaint asserts claims for
breach of contract, quantum meruit and promissory estoppel. The Partnership was
only recently served with the complaint and is evaluating its position.
NOTE G - DISTRIBUTION
In April 1997, the Partnership distributed approximately $9,992,000 to the
partners. The limited partners received approximately $9,982,000 ($10.98 per
limited partnership unit) and the general partners received approximately
$10,000. Of the total distribution approximately $9,000,000 was from surplus
funds as a result of the refinancing of the CCEP/2 properties, which was passed
up to the Partnership as a reduction in principle of the master loan. These
funds were distributed 100% to the limited partners. The remaining distribution
amount of approximately $992,000 was from operations which is allocated based on
the 1% to the general partner and 99% to the limited partners.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Partnership's sole investment property, North Park Plaza, was sold in
September 1996. As of September 30, 1997, the Partnership has no real estate
assets.
Results of Operations
The Partnership reported net income of approximately $272,000 and $926,000,
respectively for the three and nine months ended September 30, 1997, as compared
to net losses of approximately $427,000 and $739,000, respectively for the
corresponding period of 1996. The increase in net income is attributable to the
sale of the Partnership's investment property in September 1996, the increase in
income recognized on the master loan, an increase in other income and a decrease
in general and administrative expenses. The Partnership recognized a loss on
the operations of North Park Plaza during the nine month period ended September
30, 1996, of approximately $723,000. As discussed in "Item 1. Note D - Net
Investment in Master Loan", the Partnership recorded income on the master loan
of approximately $824,000 as compared to $216,000 for the nine month period
ended September 30, 1996. The increase in income recognized is due to the
increase in the fair value of the collateral during the nine months ended
September 30, 1997. Other income increased for the nine month period ended
September 30, 1997 due to an increase in interest income on investments. This
increase is due to an increase in cash balances and higher yields on these
investments. General and administrative expenses decreased due to a decrease in
reimbursements to affiliates and professional fees.
Liquidity and Capital Resources
At September 30, 1997 the Partnership had cash and cash equivalents of
approximately $8,938,000 versus approximately $10,535,000 at September 30, 1996.
Net cash provided by operating activities increased primarily due to the
increase in net income as previously explained. Net cash provided by investing
activities decreased due to a decrease in principal receipts on the Master Loan
for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996. Also, the Partnership received proceeds from the sale
of North Park Plaza during the nine months ended September 30, 1996, which were
only partially offset by the higher advances on the Master Loan during the nine
months ended September 30, 1996. Cash used in financing activities increased as
a result of the $9,992,000 distribution which took place during the second
quarter of 1997.
The sufficiency of existing liquid assets to meet future liquidity requirements
is directly related to the level of expenditures required to meet the ongoing
operating needs of the Partnership. Such assets are currently thought to be
sufficient for any near-term needs of the Partnership. See "CCEP/2 Property
Operations" for discussion on CCEP/2's ability to provide future cash flow as
Master Loan debt service. During the second quarter of 1997, the Partnership
made a distribution of approximately $9,992,000. No distributions were made
during the nine months ended September 30, 1996. Future cash distributions will
depend on the levels of net cash generated from operations, Master Loan
interest income, and the availability of cash reserves.
The Partnership is required by the Partnership Agreement to maintain working
capital reserves for contingencies of not less than 5% of Net Invested Capital,
as defined by the Partnership Agreement. Reserves, including cash and cash
equivalents, totaling approximately $8,938,000, were greater than the reserve
requirement of $7,157,000 as of September 30, 1997.
CCEP/2 Property Operations
For the nine months ended September 30, 1997, CCEP/2's net loss totaled
approximately $16,893,000 on total revenues of approximately $13,717,000.
CCEP/2 recognizes interest expense on the New Master Loan Agreement obligation
according to the note terms, although payments to the Partnership are required
only to the extent of Excess Cash Flow, as defined therein. During the nine
months ended September 30, 1997, CCEP/2's statement of operations includes total
interest expense attributable to the Master Loan of approximately $16,457,000,
$89,000 of which represents interest paid, and the remaining of which represents
interest expense in excess of required payments. CCEP/2 is expected to continue
to generate operating losses as a result of such interest accruals and noncash
charges for depreciation.
During the nine months ended September 30, 1997, the Partnership received
approximately $409,000 as principal payments on the Master Loan. This cash was
received by CCEP/2 on certain investments which it holds. Such cash receipts
are required to be transferred to the Partnership per the Agreement.
On October 30, 1997, an Insignia affiliate commenced tender offers for limited
partnership interests in two real estate limited partnerships (including the
Partnership) in which Insignia affiliates act as general partner. The Purchaser
offered to purchase up to 300,000 of the outstanding units of limited
partnership interest in the Partnership, at $40.00 per Unit, net to the seller
in cash, upon the terms and subject to the conditions set forth in the Offer to
Purchase dated October 30, 1997 (the "Offer to Purchase") and the related
Assignment of Partnership Interest attached as Exhibits (a)(1) and (a)(2),
respectively, to the Tender Offer Statement on Schedule 14D-1 originally filed
with the Securities and Exchange Commission on October 30, 1997. Because of the
existing and potential future conflicts of interest (described in the
Partnership's Statements on Schedule 14D-9 filed with the Securities and
Exchange Commission), neither the Partnership nor the General Partner expressed
any opinion as to the Offer to Purchase and made no recommendation as to whether
unit holders should tender their units in response to the Offer to Purchase.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1997, the Partnership was named as a defendant in a lawsuit brought by
PHC Construction Corporation in the Circuit Court for Oakland County, Michigan.
The complaint arises from construction services allegedly performed by the
plaintiff at the North Park Plaza Building in Southfield, Michigan prior to the
sale of that property in September 1996. The complaint asserts claims for
breach of contract, quantum meruit and promissory estoppel. The Partnership was
only recently served with the complaint and is evaluating its position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
S-K Reference
Number Description
27 Financial Data Schedule is filed as an exhibit to
this report.
99.1 Consolidated Capital Equity Partners/Two, L.P.,
unaudited financial statements for the three and
nine months ended September 30, 1997 and 1996.
(b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1997.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONSOLIDATED CAPITAL INSTITUTIONAL
PROPERTIES/2
By: CONCAP EQUITIES, INC.
General Partner
By: /s/ William H. Jarrard, Jr.
William H. Jarrard, Jr.
President
By: /s/ Ronald Uretta
Ronald Uretta
Vice President/Treasurer
Date: November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Capital Institutional Properties/2 1997 Third Quarter 10-Q and is qualified in
its entirety by reference to such 10-Q filing.
</LEGEND>
<CIK> 0000719184
<NAME> CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,938
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,572
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45,400
<TOTAL-LIABILITY-AND-EQUITY> 45,572
<SALES> 0
<TOTAL-REVENUES> 1,287
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926
<EPS-PRIMARY> 1.01<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
EXHIBIT 99.1
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED BALANCE SHEET
(in thousands)
September 30, December 31,
1997 1996
(Unaudited) (Note)
Assets
Cash and cash equivalents $ 1,717 $ 1,478
Other assets 5,049 4,956
Investments in limited partnerships -- 336
Investment properties:
Land 10,841 10,841
Building and related personal equipment 91,680 89,443
102,521 100,284
Less accumulated depreciation (61,830) (58,187)
40,691 42,097
$ 47,457 $ 48,867
Liabilities and Partners' Deficit
Accounts payable and accrued expenses $ 1,489 $ 1,793
Mortgage notes and interest payable 33,073 33,395
Master loan and interest payable 232,884 216,775
267,446 251,963
Partners' Deficit
General partner (2,186) (2,017)
Limited partners (217,803) (201,079)
(219,989) (203,096)
$ 47,457 $ 48,867
Note: The balance sheet at December 31, 1996, has been derived from the audited
financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements
b) CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues:
Rental income $ 4,532 $ 4,267 $ 13,643 $ 13,105
Other income 30 16 74 61
Total revenues 4,562 4,283 13,717 13,166
Expenses:
Operating 2,673 2,658 7,668 7,836
General and administrative 119 163 440 447
Interest 6,155 5,729 18,459 17,186
Depreciation and amortization 1,373 1,283 4,043 3,841
Write down of investment
properties -- -- -- 800
Total expenses 10,320 9,833 30,610 30,110
Net loss $(5,758) $(5,550) $(16,893) $(16,944)
Net loss allocated
to general partner (1%) $ (58) $ (55) $ (169) $ (169)
Net loss allocated
to limited partners (99%) (5,700) (5,495) (16,724) (16,775)
$(5,758) $(5,550) $(16,893) $(16,944)
See Accompanying Notes to Consolidated Financial Statements
c) CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Partners' deficit at December 31, 1995 $(1,797) $(179,265) $(181,062)
Net loss for the nine months ended
September 30, 1996 (169) (16,775) (16,944)
Distributions to partners (1) (7) (8)
Partners' deficit at September 30, 1996 $(1,967) $(196,047) $(198,014)
Partners' deficit at December 31, 1996 $(2,017) $(201,079) $(203,096)
Net loss for the nine months ended
September 30, 1997 (169) (16,724) (16,893)
Partners' deficit at September 30, 1997 $(2,186) $(217,803) $(219,989)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
</TABLE>
d) CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1997 1996
Cash flows from operating activities:
Net loss $(16,893) $(16,944)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 4,123 3,852
Write-down of investment property -- 800
Bad debt 134 --
Change in accounts:
Other assets (678) 106
Accounts payable and accrued expenses (304) (259)
Interest on master loan 16,368 15,534
Interest payable (115) 67
Net cash provided by operating activities 2,635 3,156
Cash flows from investing activities:
Property improvements and replacements (2,237) (3,100)
Distributions from investment in limited partnerships 336 124
Net cash used in investing activities (1,901) (2,976)
Cash flows from financing activities:
Principal payments on notes payable (207) (323)
Principal payments on Master Loan (409) (625)
Loan costs paid (29) (68)
Advances received on Master Loan 150 1,000
Distributions paid to Partners -- (8)
Net cash used in financing activities (495) (24)
Net increase in cash and cash equivalents 239 156
Cash and cash equivalents at beginning of period 1,478 2,132
Cash and cash equivalents at end of period $ 1,717 $ 2,288
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,127 $ 1,574
See Accompanying Notes to Consolidated Financial Statements
e) CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Consolidated
Capital Equity Partners/Two, L.P. ("CCEP/2") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of ConCap Equities, Inc., (the "General Partner"), all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended September 30, 1997, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997.
Consolidation
In 1985, Equity Partners/Two ("EP/2"), a California general partnership,
together with Anderson CC 2, a Georgia limited partnership, entered into a
general partnership agreement ("CC Office Associates") to acquire Cosmopolitan
Center, an office building located in Atlanta, Georgia. Pursuant to such general
partnership agreement, the property ownership is split 90%/10% between CCEP/2,
as successor to EP/2, and Anderson CC 2, respectively. CCEP/2's investment in CC
Office Associates is consolidated in CCEP/2's financial statements. No minority
interest liability has been reflected for Anderson CC 2's minority 10% interest
because the Master Loan balance, which is secured by a deed of trust held by
Consolidated Capital Institutional Properties/2 ("CCIP/2") on Cosmopolitan
Center, exceeds the value of the property. As a result, CC Office Associates
has a net capital deficit and no minority liability exists with respect to
CCEP/2.
NOTE B - RELATED PARTY TRANSACTIONS
CCEP/2 has no employees and is dependent on the General Partner and its
affiliates for management and administration of all partnership activities.
CCEP/2 paid property management fees based upon collected gross rental revenues
for property management services in each of the nine month periods ended
September 30, 1997 and 1996. Fees paid to affiliates of the General Partner
during the nine month periods ended September 30, 1997 and 1996, are included in
operating expenses on the consolidated statement of operations and are reflected
in the following table. The Partnership Agreement (the "Agreement") also
provides for reimbursement to the General Partner and its affiliates for costs
incurred in connection with the administration of CCEP/2's activities. The
General Partner, and its current affiliates, received reimbursements for the
nine months ended September 30, 1997 and 1996, as reflected in the following
table.
Also, CCEP/2 is subject to an Investment Advisory Agreement between CCEP/2 and
an affiliate of the General Partner. This agreement provides for an annual fee,
payable in monthly installments, to an affiliate of the General Partner for
advising and consulting services for CCEP/2's properties. Advisory fees paid
pursuant to this agreement are included in general and administrative expenses
on the consolidated statement of operations and are reflected in the following
table:
September 30,
1997 1996
(in thousands)
Property management fees $661 $626
Investment advisory fees 115 115
Lease commissions 265 233
Reimbursement for services of affiliates, including
approximately $15,000 and $39,000 of construction
oversight reimbursements in 1997 and 1996, respectively 211 257
In addition to the compensation and reimbursements described above, interest
payments are made to and loan advances are received from CCIP/2 pursuant to the
Master Loan Agreement, which is described more fully in the 1996 Annual Report.
No interest payments were made during the nine month period ended September 30,
1996. An interest payment of approximately $89,000 was made during the nine
month period ended September 30, 1997. (See further discussion in "Note C"). An
advance for $150,000 was received under the Master Loan Agreement during the
nine months ended September 30, 1997. Advances in the amount of $1,000,000 were
made under the Master Loan Agreement during the nine months ended September 30,
1996, to fund planned improvements at CCEP/2's investment properties. Principal
payments of approximately $409,000 and $625,000 were made on the Master Loan
during the nine months ended September 30, 1997 and 1996, respectively.
For the period of January 1, 1996 to August 31, 1997, the Partnership insured
its properties under a master policy through an agency and insurer unaffiliated
with the General Partner. An affiliate of the General Partner acquired, in the
acquisition of a business, certain financial obligations from an insurance
agency which was later acquired by the agent who placed the master policy. The
agent assumed the financial obligations to the affiliate of the General Partner
who received payments on these obligations from the agent. The amount of
CCEP/2's insurance premiums accruing to the benefit of the affiliate of the
General Partner by virtue of the agent's obligations is not significant.
NOTE C - MASTER LOAN AND ACCRUED INTEREST PAYABLE
The Master Loan principal and accrued interest payable balances at September 30,
1997, and December 31, 1996, are approximately $232,884,000 and approximately
$216,775,000, respectively.
Terms of Master Loan Agreement
Under the terms of the Master Loan Agreement, interest accrues at 10% per annum.
Payments are currently payable quarterly in an amount equal to "Excess Cash
Flow," generally defined in the Master Loan Agreement as net cash flow from
operations after third-party debt service and capital expenditures. Any unpaid
interest is added to principal, compounded annually, and is payable at the
loan's maturity. Any net proceeds from the sale or refinancing of any of
CCEP/2's properties are paid to CCIP/2 under the terms of the Master Loan
Agreement. The Master Loan Agreement matures in November 2000.
During the nine months ended September 30, 1997, CCEP/2 paid approximately
$409,000 to CCIP/2 as principal payments on the Master Loan. These payments
were comprised of cash received by CCEP/2 on certain investments which is
required to be transferred to CCIP/2 per the Master Loan Agreement. An interest
payment of approximately $89,000 was made during the nine months ended September
30, 1997.
NOTE D - ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Investment properties are accounted for under FASB Statement No 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," ("SFAS 121"). SFAS 121 requires that impairment losses be recorded on long-
lived assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount. The fair values of the
investment properties owned by the Partnership were determined using the net
operating income of the investment property capitalized at a rate deemed
reasonable for the type of property. Based on this valuation analysis it was
determined that there was an impairment loss at Town Center, and the Partnership
recorded a write down of $800,000 at the property. This write down was caused by
a decrease in occupancy and rental rates at the property. The General Partner
believes that it is unlikely that the property will be able to increase
occupancy or rental rates and that this write down is necessary due to the
location of the property and the weak economy in the Orange County, California
area.
NOTE E - CONTINGENCIES
In May 1997, the Partnership was named as a defendant in a lawsuit brought by
PHC Construction Corporation in the Circuit Court for Oakland County, Michigan.
The complaint arises from construction services allegedly performed by the
plaintiff at several property locations in Southfield, Michigan and asserts
claims for breach of contract, quantum meruit and promissory estoppel. The
Partnership was only recently served with the complaint and is evaluating its
position.
