<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1997
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12945
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First Capital Institutional Real Estate, Ltd. - 2
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(Exact name of registrant as specified in its charter)
Florida 59-2313852
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two North Riverside Plaza, Suite 1100, Chicago, Illinois 60606-2607
- -------------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(312) 207-0020
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(Registrant's telephone number, including area code)
Not applicable
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(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 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
--- ----
Documents incorporated by reference:
The First Amended and Restated Certificate and Agreement of Limited Partnership
filed as Exhibit A to the Partnership's Prospectus dated October 19, 1983,
included in the Partnership's Registration Statement on Form S-11, is
incorporated herein by reference in Part I of this report.
<PAGE>
BALANCE SHEETS
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
June 30,
1997 December 31,
(Unaudited) 1996
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<S> <C> <C>
ASSETS
Investment in commercial rental properties:
Land $ 7,086,800 $10,237,400
Buildings and improvements 25,113,100 36,061,200
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32,199,900 46,298,600
Accumulated depreciation and amortization (10,038,500) (13,818,600)
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Total investment properties, net of accumulated
depreciation and amortization 22,161,400 32,480,000
Cash and cash equivalents 12,391,200 4,573,400
Investments in debt securities 3,900,500 1,051,100
Restricted cash 50,000 50,000
Rents receivable 60,700 99,800
Investment in and loans to joint venture 5,485,300 5,852,800
Other assets 17,500 59,100
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$ 44,066,600 $44,166,200
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 492,300 $ 322,900
Due to Affiliates 66,600 76,200
Distributions payable 10,767,100 848,900
Security deposits 119,000 137,600
Other liabilities 8,300 114,400
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11,453,300 1,500,000
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Partners' capital:
General Partners (deficit) (500) (131,300)
Limited Partners (84,886 Units issued and
outstanding) 32,613,800 42,797,500
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32,613,300 42,666,200
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$ 44,066,600 $44,166,200
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</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the six months ended June 30, 1997 (Unaudited)
and the year ended December 31, 1996
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' (deficit) capital, January 1,
1996 $(131,300) $48,846,800 $48,715,500
Net income for the year ended December
31, 1996 424,400 2,778,800 3,203,200
Distributions for the year ended December
31, 1996 (424,400) (8,828,100) (9,252,500)
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Partners' (deficit) capital, December 31,
1996 (131,300) 42,797,500 42,666,200
Net income for the six months ended June
30, 1997 277,000 1,286,100 1,563,100
Distributions for the six months ended
June 30, 1997 (146,200) (11,469,800) (11,616,000)
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Partners' (deficit) capital, June 30,
1997 $ (500) $32,613,800 $32,613,300
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</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended June 30, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Income:
Rental $1,389,800 $1,561,400
Interest 166,600 182,300
Gain on sale of Property 126,800
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1,683,200 1,743,700
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Expenses:
Depreciation and amortization 279,800 311,600
Property operating:
Affiliates 60,200 82,000
Nonaffiliates 228,700 236,300
Real estate taxes 127,900 140,400
Insurance--Affiliate 11,500 19,300
Repairs and maintenance 131,900 160,300
General and administrative:
Affiliates 6,900 12,900
Nonaffiliates 64,200 86,200
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911,100 1,049,000
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Net income before income from participation in joint
venture 772,100 694,700
Income from participation in joint venture 89,200 151,100
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Net income $ 861,300 $ 845,800
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Net income allocated to General Partner $ 192,100 $ 127,500
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Net income allocated to Limited Partners $ 669,200 $ 718,300
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Net income allocated to Limited Partners per Unit
(84,886 Units outstanding) $ 7.88 $ 8.46
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</TABLE>
STATEMENTS OF INCOME AND EXPENSES
For the six months ended June 30, 1997 and 1996
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Income:
Rental $2,959,300 $3,190,200
Interest 259,900 356,500
Gain on sale of Property 126,800
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3,346,000 3,546,700
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Expenses:
Depreciation and amortization 604,500 625,400
Property operating:
Affiliates 131,100 203,800
Nonaffiliates 479,600 465,600
Real estate taxes 276,900 276,800
Insurance--Affiliate 27,500 38,700
Repairs and maintenance 288,800 341,900
General and administrative:
Affiliates 15,900 31,500
Nonaffiliates 130,600 164,100
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1,954,900 2,147,800
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Net income before income from participation in joint
venture 1,391,100 1,398,900
Income from participation in joint venture 172,000 212,000
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Net income $1,563,100 $1,610,900
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Net income allocated to General Partner $ 277,000 $ 254,700
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Net income allocated to Limited Partners $1,286,100 $1,356,200
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Net income allocated to Limited Partners per Unit
(84,886 Units outstanding) $ 15.15 $ 15.98
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</TABLE>
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 and 1996
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,563,100 $1,610,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 604,500 625,400
(Income) from participation in joint venture (172,000) (212,000)
(Gain) on sale of Property (126,800)
Changes in assets and liabilities:
Decrease in rents receivable 39,100 110,400
Decrease (increase) in other assets 41,600 (47,600)
Increase (decrease) in accounts payable and accrued
expenses 169,400 (33,500)
(Decrease) increase in due to Affiliates (9,600) 4,500
(Decrease) in other liabilities (106,100) (44,500)
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Net cash provided by operating activities 2,003,200 2,013,600
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Cash flows from investing activities:
Payments for capital and tenant improvements (325,000) (516,000)
(Increase) in investments in debt securities (2,849,400) (7,311,800)
(Increase) in restricted cash (25,000)
Proceeds from sale of Property 10,165,900
Distributions received from (contributions to) joint
venture 539,500 (35,100)
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Net cash provided by (used for) investing activities 7,531,000 (7,887,900)
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Cash flows from financing activities:
Distributions paid to Partners (1,697,800) (2,546,500)
(Decrease) in security deposits (18,600) (4,200)
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Net cash (used for) financing activities (1,716,400) (2,550,700)
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Net increase (decrease) in cash and cash equivalents 7,817,800 (8,425,000)
Cash and cash equivalents at the beginning of the period 4,573,400 12,268,000
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Cash and cash equivalents at the end of the period $12,391,200 $3,843,000
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</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement filed with the Securities and
Exchange Commission on Form S-11. Definitions of these terms are contained in
Article III of the First Amended and Restated Certificate and Agreement of
Limited Partnership, which is included in the Registration Statement and
incorporated herein by reference.
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Under this method of accounting,
revenues are recorded when earned and expenses are recorded when incurred.
Preparation of the Partnership's financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The financial information included in these financial statements is unaudited;
however, in management's opinion, all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation of the results of
operations for the periods included have been made. Results of operations for
the quarter and six months ended June 30, 1997 are not necessarily indicative
of the operating results for the year ending December 31, 1997.
The financial statements include the Partnership's 50% interest in four joint
ventures with Affiliated partnerships. These joint ventures were formed for the
purpose of each acquiring a 100% interest in certain real property and are
operated under the common control of the General Partner. Accordingly, the
Partnership's pro rata share of the ventures' revenues, expenses, assets,
liabilities and Partners' capital is included in the financial statements.
Investment in and loans to joint venture represents the recording of the
Partnership's interest, under the equity method of accounting, in a joint
venture with an Affiliated partnership. The joint venture acquired a preferred
majority interest in a joint venture with the seller of the Lansing, Michigan
property. Under the equity method of accounting, the Partnership recorded its
initial interest at cost and adjusts its investment account for its share of
joint venture income or loss and its distributions of cash flow (as defined in
the joint venture agreement).
Commercial rental properties are recorded at cost, net of any provisions for
value impairment, and depreciated (exclusive of amounts allocated to land) on
the straight-line method over their estimated useful lives. Lease acquisition
fees are recorded at cost and amortized on the straight-line method over the
life of each respective lease. Repair and maintenance costs are expensed
against operations as incurred; expenditures for improvements are capitalized
to the appropriate property accounts and depreciated over the estimated life of
such improvements.
The Partnership evaluates its rental properties when conditions exist when
conditions exist which indicate that it is probable that the sum of expected
future cash flows (undiscounted) from a property is less than its carrying
basis. Upon determination that an impairment has occurred, the basis in the
rental property is reduced to estimated fair value. Management was not aware of
any indicator that would result in a significant impairment loss during the
periods reported.
Cash equivalents are considered all highly liquid investments with maturity of
three months or less when purchased.
Investments in debt securities are comprised of corporate debt securities and
obligations of the United States government and are classified as held-to-
maturity. These investments are carried at their amortized cost basis in the
financial statements, which approximated fair market value. All of these
securities had maturities of less than one year when purchased.
Certain reclassifications have been made to the previously reported 1996
statements in order to provide comparability with the 1997 statements. These
reclassifications have no effect on net income or Partners' (deficit) capital.
Reference is made to the Partnership's annual report for the year ended
December 31, 1996 for a description of other accounting policies and additional
details of the Partnership's financial condition, results of operations,
changes in Partners' capital and changes in cash balances for the year then
ended. The details provided in the notes thereto have not changed except as a
result of normal transactions in the interim or as otherwise disclosed herein.
2. RELATED PARTY TRANSACTIONS:
In accordance with the Partnership Agreement, subsequent to October 19, 1984,
the Termination of the Offering, the General Partner is entitled to 10% of
distributable Cash Flow (as defined in the Partnership Agreement) as a
Partnership Management Fee. Net Profits (exclusive of Net Profits from the sale
or disposition of Partnership properties) are allocated: first, to the General
Partner, in an amount equal to the greater of the General Partner's Partnership
Management Fee or 1% of such Net Profits; second, the balance, if any, to the
Limited Partners. Net Profits from the sale or disposition of a Partnership
property are allocated: first, prior to giving effect to any distributions of
Sale Proceeds from the transaction, to the General Partner and the Limited
Partners with negative balances in their capital accounts pro rata in
proportion to such respective negative balances, to the extent of the total of
such negative balances; second, to the General Partner, in an amount necessary
to make the balance in its capital account equal to the amount of Sale Proceeds
to be distributed to the General Partner with respect to the sale or
disposition of such property and third, the balance, if any, to the Limited
Partners. Net Losses (exclusive of Net Losses from the sale, disposition or
provision for value impairment of Partnership properties) are allocated 1% to
the General Partner and 99% to the Limited Partners. Net Losses from the sale,
disposition or provision for value impairment of Partnership properties are
allocated: first, prior to giving effect to any distributions of Sale Proceeds
from the transaction, to the extent that the balance in the General Partner's
capital account exceeds its Capital Investment or the balance in the capital
accounts of the Limited Partners exceeds the amount of their Capital Investment
(the "Excess Balances"), to the General Partner and the Limited Partners pro
rata in proportion to such Excess Balances until such
4
<PAGE>
Excess Balances are reduced to zero; second, to the General Partner and the
Limited Partners and among them (in the ratio which balances) until the balance
in their capital accounts shall be reduced to zero; third, the balance, if any,
99% to the Limited Partners and 1% to the General Partner. Notwithstanding the
foregoing, in all events there shall be allocated to the General Partner not
less than 1% of Net Profits and Net Losses from the sale, disposition or
provision for value impairment of a Partnership property. For the quarter and
six months ended June 30, 1997, the General Partner was entitled to a
Partnership Management Fee, and accordingly, allocated Net Profits, of $61,300
and $146,200, respectively. In addition, the General Partner was allocated Net
Profits of $131,300 from the sale of Lakewood and Net (Losses) of $(500) from
the sale of Featherwood.
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and six months ended June 30, 1997 were as follows:
<TABLE>
<CAPTION>
Paid
-------------------
Quarter Six Months Payable
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Property management and leasing fees $ 54,500 $126,200 $21,800
Reimbursement of property insurance premiums, at
cost 24,100 24,100 3,400
Real estate
commissions (a) None None 40,300
Reimbursement of expenses, at cost:
--Accounting 7,100 11,000 600
--Investor communications 5,000 6,500 500
--Legal 21,800 32,500 None
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$103,500 $200,300 $66,600
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</TABLE>
(a) As of June 30, 1997, the Partnership owed $40,300 to the General Partner
for real estate commissions earned in connection with the sales of
Partnership properties. These commissions have been accrued but not paid.
In accordance with the Partnership Agreement, the Partnership will not pay
the General Partner or any Affiliate a real estate commission from the sale
of a Partnership property until Limited Partners have received cumulative
distributions of Sale or Financing Proceeds equal to 100% of their Original
Capital Contribution, plus a cumulative return (including all Cash Flow (as
defined in the Partnership Agreement) which has been distributed to the
Limited Partners from the initial investment date) of 6% simple interest
per annum on their Capital Investment from the initial investment date).
3. PROPERTY SALES:
On May 16, 1997, a joint venture in which the Partnership owns a 50% interest,
consummated the sale of Lakewood Square Shopping Center ("Lakewood"), located
in Lakewood, California, for a sale price of $17,750,000, of which the
Partnership's share was $8,875,000. The Partnership's share of net proceeds
from this transaction was $8,670,100, which was net of closing expenses. The
Partnership reported a net gain of $176,600 for the six months ended June 30,
1997 in connection with this sale and intends to distribute $8,658,400 or
$102.00 per Unit on August 31, 1997 to Limited Partners of record as of May 16,
1997.
On June 27, 1997, a joint venture in which the Partnership owns a 50% interest,
consummated the sale of 12621 Featherwood Office Building, located in Houston,
Texas, for a sale price of $3,146,700, of which the Partnership's share was
$1,573,300. The Partnership's share of net proceeds from this transaction was
$1,495,800, which is net of closing expenses. The Partnership reported a net
loss of $49,800 for the six months ended June 30, 1997 in connection with this
sale and intends to distribute $1,495,700 or $17.62 per Unit on November 30,
1997 to Limited Partners of record as of June 27, 1997. Additional expenses
will be incurred during the quarter ending September 30, 1997 which may be
greater or less than the estimated amounts.
4. ENVIRONMENTAL MATTER:
In December 1996, the General Partner became aware of the existence of
hazardous substances in the ground under Lakewood. The sources of the hazardous
substances is believed to emanate from one or more of the tenants operating a
dry cleaning business at Lakewood. In connection with the sale of Lakewood the
purchaser assumed the obligation to remedy the hazardous substances in the
manner required by law, which includes but is not limited to payment of all
costs in connection with the remediation work, including, without limitation,
the costs for all investigation, installation, operation, maintenance, testing
and monitoring costs, all power and utility costs and any and all pumping taxes
or fees that may be applicable. Also included in the agreement was a one-year
indemnification by purchaser against and from any and all claims, demands,
losses, liabilities, costs, damages, expenses, clean-up costs required by, and
fines and damages imposed by, governmental agencies with jurisdiction over the
Property, and all reasonable costs and expenses incurred by the purchaser
related to the hazardous substances.
5. SUBSEQUENT EVENT:
On July 24, 1997, the Partnership sold Banana River Square Shopping Center,
located in Cocoa Beach, Florida, for a sale price of $5,185,000. Net proceeds
from this transaction were approximately $4,935,000, which was net of actual
and estimated closing expenses. The Partnership will report a gain for
financial reporting purposes of approximately $260,000 during the quarter
ending September 30, 1997 from this sale and will distribute $4,935,300 or
$58.14 per Unit on November 30, 1997 to Limited Partners of record as July 24,
1997.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the Partnership's annual report for the year ended
December 31, 1996 for a discussion of the Partnership's business.
OPERATIONS
The table below is a recap of certain operating results of each of the
Partnership's properties for the quarters and six months ended June 30, 1997
and 1996. The discussion following the table should be read in conjunction with
the financial statements and notes thereto appearing in this report.
<TABLE>
<CAPTION>
Comparative Operating Results (a)
For the Quarters For the Six Months
Ended Ended
6/30/97 6/30/96 6/30/97 6/30/96
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOXHALL SQUARE BUILDING (50%)
Rental revenues $ 428,400 $ 371,600 $ 849,500 $785,600
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Property net income $ 144,400 $ 106,700 $ 268,900 $251,500
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Average occupancy 92% 83% 91% 83%
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ELLIS BUILDING (50%)
Rental revenues $ 323,600 $ 294,200 $ 639,300 $582,200
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Property net income $ 118,600 $ 106,500 $ 219,200 $196,200
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Average occupancy 97% 94% 97% 94%
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MARKETPLACE AT RIVERGATE SHOPPING CENTER
Rental revenues $ 268,500 $ 242,500 $ 543,100 $523,700
- -------------------------------------------------------------------------------------
Property net income $ 148,200 $ 114,900 $ 294,600 $237,900
- -------------------------------------------------------------------------------------
Average occupancy 95% 97% 95% 99%
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BANANA RIVER SQUARE SHOPPING CENTER
Rental revenues $ 181,800 $ 183,000 $ 373,300 $374,700
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Property net income $ 62,300 $ 63,000 $ 139,300 $129,200
- -------------------------------------------------------------------------------------
Average occupancy 90% 93% 90% 95%
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HOLIDAY OFFICE PARK NORTH AND SOUTH
(50%)
Rental revenues $ 399,200 $ 415,400 $ 783,600 $791,600
- -------------------------------------------------------------------------------------
Property net income $ 89,200 $ 151,100 $ 172,000 $212,000
- -------------------------------------------------------------------------------------
Average occupancy 86% 79% 85% 78%
- -------------------------------------------------------------------------------------
LAKEWOOD SQUARE SHOPPING CENTER (50%)
(B)
Rental revenues $ 147,000 $ 327,800 $ 513,600 $654,400
- -------------------------------------------------------------------------------------
Property net income $ 85,300 $ 155,400 $ 283,500 $309,400
- -------------------------------------------------------------------------------------
Average occupancy 96% 96%
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12621 FEATHERWOOD BUILDING (50%) (C)
Rental revenues (c) $ 142,200 (c) $269,500
- -------------------------------------------------------------------------------------
Property net (loss)
income $ (2,100) $ 64,300 $ (47,100) $113,000
- -------------------------------------------------------------------------------------
Average occupancy 100% 100%
- -------------------------------------------------------------------------------------
</TABLE>
(a) The above table excludes certain income and expense items which are not
directly related to individual property operating results such as interest
income from short-term investments and general and administrative expenses.
The Partnership's share of results from its participation in a joint
venture, treated under the equity method, is included above.
(b) Property was sold on May 16, 1997. For further information regarding the
sale see Note 3 of Notes to Financial Statements.
(c) Property was vacant from December 14, 1996 through its sale on June 27,
1997. For further information regarding the sale see Note 3 of Notes to the
Financial Statements.
Unless otherwise disclosed, discussions of fluctuations between 1997 and 1996
refer to both the quarters and six months ended June 30, 1997 and 1996.
Net income decreased by $47,800 for the six months ended June 30, 1997 when
compared to the six months ended June 30, 1996. The decrease was primarily due
to the vacancy at 12621 Featherwood Building ("Featherwood"). Also contributing
to the decrease was the effects of the sale of Lakewood Square Shopping Center
("Lakewood") and a decrease in interest earned on the Partnership's short-term
investments due to a decrease in cash available for investment.
Net income increased by $15,500 for the quarter ended June 30, 1997 when
compared to the quarter ended June 30, 1996. The increase was primarily the
result of the gain on the sale of Lakewood and the improved operating results
at several of the Partnership's properties offsetting the partial absence of
operating results of Lakewood and lack of revenues at Featherwood.
Net income exclusive of properties sold during the period increased by $25,200
and $11,400 for the quarter and six months ended June 30, 1997 when compared to
the quarter and six months ended June 30, 1996, respectively. The increases
were primarily due to improved operating results at Foxhall Square Office
Building ("Foxhall"), Ellis Building ("Ellis") and Marketplace at Rivergate
Shopping Center ("Rivergate") along with a decrease in general and
administrative expenses resulting from reduced personnel costs and accounting
fees. Partially offsetting the increases were decreases in the Partnership's
equity investment in Holiday Office Park North and South ("Holiday").
The following comparative discussion excludes the results of the Partnership's
properties that were sold prior to June 30, 1997.
Rental revenues increased by $111,000 or 10.2% and $139,000 or 6.1% for the
quarter and six months ended June 30, 1997 when compared to the quarter and six
months ended June 30, 1996, respectively. The increases were primarily due to
increases in base rental revenues at Foxhall and Ellis due to the increases in
their average occupancy rate and an increase in tenant expense reimbursements
at Rivergate, Ellis and Foxhall. Partially offsetting the increases were
decreases in the base rental revenues at Banana River Square Shopping Center
due to a reduction in the average occupancy rate.
Real estate tax expense increased by $3,600 and $13,500 for the quarter and six
months ended June 30, 1997 when compared to the quarter and six months ended
June 30, 1996, respectively. The increases were primarily due to budgeted
increases at Foxhall and Ellis.
Depreciation and amortization expense increased by $13,700 and $13,800 for the
periods under comparison, respectively. The increases were primarily due to
depreciable assets placed in service at Foxhall exceeding those assets whose
lives expired.
Property operating expenses increased by $18,000 and $9,000 for the quarter and
six months ended June 30, 1997 when compared to the quarter and six months
ended June 30, 1996, respectively. The increases were primarily due to an
increase in management fees due to a decrease in leasing commissions paid to
outside brokers in 1997 at Foxhall. Also contributing to the increases were
increased utility costs at Ellis.
The Partnership's share of net income from Holiday decreased by $62,100 and
$40,100 for the quarterly and six-month periods under comparison, respectively.
The decreases were primarily the result of an increase in depreciation and
amortization expense which was the result of an increase in improvements made
to the property. Also contributing to the decreases was an increase in
management fees which is the result of lease commissions paid to outside
brokers being less in 1997 than 1996. Partially offsetting the increases was a
decrease in the estimated Michigan single business tax.
To increase and/or maintain occupancy levels at the Partnership's properties,
the General Partner, through its Affiliated and nonaffiliated asset and
property management groups, continues to
take the following actions: 1) implementation of marketing programs, including
hiring of third-party leasing agents or providing on-site leasing personnel,
advertising, direct mail campaigns and development of building brochures; 2)
early renewal of existing
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
tenants and addressing any expansion needs these tenants may have; 3) promotion
of local broker events and networking with local brokers; 4) networking with
national level retailers; 5) cold-calling other businesses and tenants in the
market area; and 6) providing rental concessions or competitively pricing
rental rates depending on market conditions.
LIQUIDITY AND CAPITAL RESOURCES
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price. In
the interim, the Partnership continues to manage and maintain its remaining
properties. Notwithstanding the Partnership's intention relative to property
sales, another primary objective of the Partnership is to provide cash
distributions to Partners from Partnership operations. To the extent cumulative
cash distributions exceed net income, such excess distributions are treated as
a return of capital. Cash Flow (as defined in the Partnership Agreement) is
generally not equal to net income or cash flows as determined by generally
accepted accounting principles ("GAAP"), since certain items are treated
differently under the Partnership Agreement than under GAAP. Management
believes that to facilitate a clear understanding of the Partnership's
operations, an analysis of Cash Flow (as defined in the Partnership Agreement)
should be examined in conjunction with an analysis of net income or cash flows,
as determined by GAAP. The following table includes a reconciliation of Cash
Flow (as defined in the Partnership Agreement) to cash flow provided by
operating activities as determined by GAAP. Such amounts are not indicative of
actual distributions to Partners and should not necessarily be considered as an
alternative to the results disclosed in the Statements of Income and Expenses
and Statements of Cash Flows.
<TABLE>
<CAPTION>
Comparative Cash Flow
Results For the Six
Months Ended
6/30/97 6/30/96
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flow (as defined in the Partnership Agreement) $ 2,176,200 $ 2,323,600
Less: Cash Flow from joint venture (307,400) (299,300)
Items of reconciliation:
Decrease in current assets 80,700 62,800
Increase (decrease) in current liabilities 53,700 (73,500)
- -------------------------------------------------------------------------------
Net cash provided by operating activities $ 2,003,200 $ 2,013,600
- -------------------------------------------------------------------------------
Net cash provided by (used for) investing activities $ 7,531,000 $(7,887,900)
- -------------------------------------------------------------------------------
Net cash (used for) financing activities $(1,716,400) $(2,550,700)
- -------------------------------------------------------------------------------
</TABLE>
The decrease in Cash Flow (as defined in the Partnership Agreement) of $147,400
for the six months ended June 30, 1997 when compared to the six months ended
June 30, 1996 was primarily due to the vacancy at Featherwood. Also
contributing to the decrease was the absence of results from Lakewood due to
its May 1997 sale and the decrease in interest earned on the Partnership's
short-term investments. Partially offsetting the decrease was the increase in
net income, exclusive of sold properties and depreciation and amortization, as
previously discussed.
The increase in the Partnership's cash position of $7,817,800 for the six
months ended June 30, 1997 was primarily the result of the receipt of Sales
Proceeds from the sale of Lakewood and Featherwood, net of the increase in
investments in debt securities. Liquid assets (including cash, cash equivalents
and investments in debt securities) as of June 30, 1997 were comprised of
amounts held for working capital purposes and undistributed Sales Proceeds.
The slight decrease of $10,400 in cash provided by operating activities for the
six months ended June 30, 1997 when compared
to the six months ended June 30, 1996 was primarily due to the
decrease in net income, as previously discussed, partially offset by the timing
of the payment of expenses at Banana River, Foxhall and Ellis.
Net cash (used for) provided by investing activities changed from
$(7,887,900) for the six months ended June 30, 1996 to $7,531,000 for the six
months ended June 30, 1997. The change was primarily due to the receipt of Sale
Proceeds from the sales of
Lakewood and Featherwood and the increase in distributions received from the
Partnership's equity investment in Holiday, partially offset by an increase in
investments in debt securities. The increase in investments in debt securities
is a result of the continued extension of the maturities of certain of the
Partnership's short-term investments in an effort to maximize the return on
these amounts as they are held for working capital purposes. These investments
are of investment-grade and generally mature less than one year from their date
of purchase.
The Partnership maintains working capital reserves to pay for capital
expenditures such as capital and tenant improvements and leasing costs. During
the six months ended June 30, 1997, the Partnership spent $325,000 for capital
and tenant improvements and leasing costs. The amount of capital expenditures
to be made during the remainder of 1997 and beyond is to a large extent
contingent on the progress made with respect to selling the remaining
Partnership properties. Actual amounts expended in 1997 are dependent on a
number of factors including leasing activity and other market conditions
throughout the year. The General Partner believes these expenditures are
necessary to increase and/or maintain occupancy levels in very competitive
markets, maximize rental rates charged to new and renewing tenants and prepare
the remaining properties for eventual disposition.
The decrease of $834,300 in net cash used for financing activities for the six
months ended June 30, 1997 when compared to the six months ended June 30, 1996
was due primarily to a decrease in distributions paid to Partners in 1997. The
General Partner adjusted the distributions to an amount consistent with the
Partnership's remaining assets and their related earnings following the special
distribution of Sales Proceeds in 1996 and the sale of several properties
during 1997.
On May 16, 1997, a joint venture in which the Partnership has a 50% interest,
completed the sale of Lakewood. The Partnership's share of net proceeds from
this sale amounted to $8,670,100. In connection with this sale, the Partnership
declared a special distribution in the amount of $8,658,400 or $102.00 per
Unit, which the Partnership will distribute on August 31, 1997 to Limited
Partners of record as of May 16, 1997.
On June 27, 1997, a joint venture in which the Partnership has a 50% interest,
completed the sale of Featherwood. The Partnership's share of net proceeds from
this sale amounted to $1,495,800. In connection with this sale, the Partnership
declared a special distribution in the amount of $1,495,700 or $17.62 per Unit,
which the Partnership will distribute on November 30, 1997 to Limited Partners
of record as of June 27, 1997.
On July 24, 1997, the Partnership completed the sale of Banana River. Net
proceeds from this sale were approximately $4,935,000. In connection with this
sale, the Partnership declared a special distribution in the amount of
$4,935,300 or $58.14 per Unit, which the Partnership will distribute on
November 30, 1997 to Limited Partners of record as of July 24, 1997.
The General Partner continues to take a conservative approach to projections of
future rental income in its determination of adequate levels of cash reserves
due to the capital and tenant improvements and leasing costs that may be
necessary at the Partnership's properties during the next several years. As a
result, cash continues to be retained to supplement working capital reserves.
For the six months ended June 30, 1997, Cash Flow (as defined in the
Partnership Agreement) retained to supplement working capital reserves amounted
to $714,300.
Distributions to Limited Partners for the six months ended June 30, 1997 were
declared in the amount of $551,700, or $6.50 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter. The amount of future
distributions to Partners will ultimately be dependent upon the performance of
the Partnership's investments as well as the General Partner's determination of
the amount of cash necessary to supplement working capital reserves to meet
future liquidity requirements of the Partnership. Accordingly, with the
exception of the distribution of Sales Proceeds, there can be no assurance as
to the amounts of cash for future distributions to Partners.
7
<PAGE>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: None
(b) Reports on Form 8-K
A report on Form 8-K was filed on June 2, 1997, reporting the
sale of Lakewood Square Shopping Center, located in Lakewood,
California.
<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 thereunto duly authorized.
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
By: FIRST CAPITAL FINANCIAL CORPORATION
GENERAL PARTNER
Date: August 14, 1997 By: /s/ DOUGLAS CROCKER II
--------------- ----------------------------------
DOUGLAS CROCKER II
President and Chief Executive Officer
Date: August 14, 1997 By: /s/ NORMAN M. FIELD
--------------- ----------------------------------
NORMAN M. FIELD
Vice President - Finance and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,441,200
<SECURITIES> 3,900,500
<RECEIVABLES> 60,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,402,400
<PP&E> 32,199,900
<DEPRECIATION> 10,038,500
<TOTAL-ASSETS> 44,066,600
<CURRENT-LIABILITIES> 11,404,700
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 32,613,300
<TOTAL-LIABILITY-AND-EQUITY> 44,066,600
<SALES> 0
<TOTAL-REVENUES> 3,346,000
<CGS> 0
<TOTAL-COSTS> 1,203,900
<OTHER-EXPENSES> 146,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,563,100
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,563,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,563,100
<EPS-PRIMARY> 15.15
<EPS-DILUTED> 15.15
</TABLE>
