<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, 1998
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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 _____________________
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 1000, Chicago, Illinois 60606-2607
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(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>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
BALANCE SHEETS
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in commercial rental properties:
Land $ 860,000 $ 3,848,300
Buildings and improvements 5,467,700 11,067,100
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6,327,700 14,915,400
Accumulated depreciation and amortization (2,557,300) (4,804,100)
- --------------------------------------------------------------------------
Total investment properties, net of accumulated
depreciation and amortization 3,770,400 10,111,300
Cash and cash equivalents 12,476,400 14,444,600
Investments in debt securities 1,504,300
Restricted cash 50,000 50,000
Rents receivable 105,600 67,300
Investment in joint venture 5,017,800 5,311,400
Other assets 29,000 35,100
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$22,953,500 $30,019,700
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 225,700 $ 220,100
Due to Affiliates 40,100 52,100
Distributions payable 8,343,500 8,768,000
Security deposits 20,400 49,500
Other liabilities 2,600 56,900
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8,632,300 9,146,600
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Partners' capital:
General Partners 29,000 --
Limited Partners (84,886 Units issued and
outstanding) 14,292,200 20,873,100
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14,321,200 20,873,100
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$22,953,500 $30,019,700
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</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the six months ended June 30, 1998 (Unaudited)
and the year ended December 31, 1997
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' (deficit) capital,
January 1, 1997 $(131,300) $42,797,500 $42,666,200
Net income for the year ended December
31, 1997 381,300 3,663,600 4,044,900
Distributions for the year ended December
31, 1997 (250,000) (25,588,000) (25,838,000)
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Partners' capital, December 31, 1997 -- 20,873,100 20,873,100
Net income for the six months ended June
30, 1998 132,800 2,177,600 2,310,400
Distributions for the six months ended
June 30, 1998 (103,800) (8,758,500) (8,862,300)
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Partners' capital, June 30, 1998 $ 29,000 $14,292,200 $14,321,200
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</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended June 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Income:
Rental $ 341,100 $1,389,800
Interest 191,000 166,600
Gain on sale of Property 126,800
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532,100 1,683,200
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Expenses:
Depreciation and amortization 59,800 279,800
Property operating:
Affiliates 15,800 60,200
Nonaffiliates 39,900 228,700
Real estate taxes 23,600 127,900
Insurance--Affiliate 1,400 11,500
Repairs and maintenance 39,400 131,900
General and administrative:
Affiliates 7,500 6,900
Nonaffiliates 45,400 63,200
Additional expenses of sale 5,600
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238,400 910,100
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Income before income from participation in joint
venture and state income tax expense 293,700 773,100
Income from participation in joint venture 60,900 89,200
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Income before state income tax expense 354,600 862,300
State income tax expense 171,200 1,000
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Net income $ 183,400 $ 861,300
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Net income allocated to General Partner $ 51,900 $ 192,100
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Net income allocated to Limited Partners $ 131,500 $ 669,200
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Net income allocated to Limited Partners per Unit
(84,886 Units outstanding) $ 1.55 $ 7.88
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STATEMENTS OF INCOME AND EXPENSES
For the six months ended June 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Income:
Rental $ 859,200 $2,959,300
Interest 408,300 259,900
Gain on sale of Property 1,639,300 126,800
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2,906,800 3,346,000
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Expenses:
Depreciation and amortization 160,000 604,500
Property operating:
Affiliates 46,500 131,100
Nonaffiliates 138,000 479,600
Real estate taxes 47,200 276,900
Insurance--Affiliate 6,000 27,500
Repairs and maintenance 81,900 288,800
General and administrative:
Affiliates 17,700 15,900
Nonaffiliates 98,800 129,600
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596,100 1,953,900
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Income before income from participation in joint
venture and state income tax expense 2,310,700 1,392,100
Income from participation in joint venture 170,900 172,000
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Income before state income tax expense 2,481,600 1,564,100
State income tax expense 171,200 1,000
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Net income $2,310,400 $1,563,100
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Net income allocated to General Partner $ 132,800 $ 277,000
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Net income allocated to Limited Partners $2,177,600 $1,286,100
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Net income allocated to Limited Partners per Unit
(84,886 Units outstanding) $ 25.65 $ 15.15
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</TABLE>
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,310,400 $ 1,563,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 160,000 604,500
(Income) from participation in joint venture (170,900) (172,000)
(Gain) on sale of Property (1,639,300) (126,800)
Changes in assets and liabilities:
(Increase) decrease in rents receivable (38,300) 39,100
Decrease in other assets 6,100 41,600
Increase in accounts payable and accrued expenses 5,600 169,400
(Decrease) in due to Affiliates (12,000) (9,600)
(Decrease) in other liabilities (54,300) (106,100)
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Net cash provided by operating activities 567,300 2,003,200
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Cash flows from investing activities:
Payments for capital and tenant improvements (3,000) (325,000)
(Increase) in investments in debt securities (1,504,300) (2,849,400)
Proceeds from sale of Property 7,823,200 10,165,900
Distributions received from joint venture 464,500 539,500
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Net cash provided by investing activities 6,780,400 7,531,000
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Cash flows from financing activities:
Distributions paid to Partners (9,286,800) (1,697,800)
(Decrease) in security deposits (29,100) (18,600)
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Net cash (used for) financing activities (9,315,900) (1,716,400)
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Net (decrease) increase in cash and cash
equivalents (1,968,200) 7,817,800
Cash and cash equivalents at the beginning of the
period 14,444,600 4,573,400
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Cash and cash equivalents at the end of the period $12,476,400 $12,391,200
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</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
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"). The Partnership utilizes the accrual
method of accounting. Under this method, 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, 1998 are not necessarily indicative
of the operating results for the year ending December 31, 1998.
The financial statements include the Partnership's 50% interest in a joint
venture with an Affiliated partnership. This joint venture was formed for the
purpose of acquiring a 100% interest in certain real property and is 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 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 limited partnership with the seller of the Lansing, Michigan
property ("Holiday"). Under the equity method of accounting, the Partnership
recorded its initial interest at cost and adjusts its investment account for
its share of Holiday's income or loss and its distributions of cash flow (as
defined in the limited partnership 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 for impairment 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 its estimated fair value. Management was not aware of any
indicator that would result in a significant impairment loss during the periods
reported.
Property sales are recorded when title transfers and sufficient consideration
has been received by the Partnership. Upon disposition, the related costs and
accumulated depreciation are removed from the respective accounts. Any gain or
loss is recognized in accordance with GAAP.
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
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 1997
statements in order to provide comparability with the 1998 statements. These
reclassifications have no effect on net income or Partners' capital.
Reference is made to the Partnership's annual report for the year ended
December 31, 1997 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 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
4
<PAGE>
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD. - 2
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 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, 1998, the
General Partner was paid a Partnership Management Fee and allocated Net
Profits, of $51,900 and $103,800, respectively. In addition, for the six months
ended June 30, 1998, the General Partner was allocated Net Profits of $29,000
from the sale of a Partnership property.
Fees and reimbursements paid and (receivable)/payable by the Partnership to
Affiliates during the quarter and six months ended June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Paid
Six (Receivable)
Quarter Months Payable
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Property management and leasing fees $ 27,800 $ 51,500 $(1,700)
Reimbursement of property insurance premiums,
at cost 2,800 4,600 None
Real estate commissions (a) None None 40,300
Legal 24,100 37,100 None
Reimbursement of expenses, at cost:
--Accounting 9,900 9,900 1,000
--Investor communications 4,200 4,200 500
- -----------------------------------------------------------------------------
$ 68,800 $107,300 $40,100
- -----------------------------------------------------------------------------
</TABLE>
(a) As of June 30, 1998, 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 SALE:
On March 4, 1998, the Partnership consummated the sale of Marketplace at
Rivergate Shopping Center, located in Nashville, Tennessee, for a sale price of
$8,128,000. Sale Proceeds from this transaction amounted to $7,823,200, which
was net of closing costs. The Partnership reported a gain of $1,639,300 for the
six months ended June 30, 1998 and will distribute $7,824,800 or $92.18 per
Unit on August 31, 1998 to Limited Partners of record as of March 4, 1998.
4. ENVIRONMENTAL MATTER:
In December 1996, the General Partner became aware of the existence of
hazardous substances in the soil and ground water of the Lakewood Square
Shopping Center ("Lakewood"). In connection with the 1997 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. In addition, the purchaser
provided the Partnership with certain indemnification protection in relation to
clean-up costs and related expenses arising from the presence of these
hazardous substances. At the present time, the General Partner is unaware of
any claims or other matters referred to above against the Partnership. In March
1998, the purchaser's plan to evaluate the site contamination was approved by
the Los Angeles Regional Water Quality Control Board ("Water Board"), subject
to certain monitoring and reporting activities recommended by the Water Board.
During the second half of 1998, the purchaser anticipates that it will complete
its site evaluation and will submit a corrective action plan for the site to
the Water Board. The General Partner is monitoring the documentation delivered
by purchaser regarding the purchaser's activities to remedy the hazardous
substances at Lakewood.
5. STATE INCOME TAX EXPENSE:
State income tax expense is comprised substantially of a tax imposed by the
District of Columbia based on taxable income.
6. SUBSEQUENT EVENT:
In July 1998, the joint venture in which Partnership owns a 50% interest
entered into a binding agreement to sell the Ellis Building for a sale price of
$13,875,000, which is prior to all transactional expenses. The transaction is
scheduled to consummate in August 1998. The consummation of the transaction
contemplated by this agreement is subject to customary conditions precedent.
There can be no assurance that this transaction will close.
5
<PAGE>
ITEM 2. 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, 1997 for a discussion of the Partnership's business.
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical facts, may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the maximum possible sales price. During the disposition
phase of the Partnership's life cycle, comparisons of operating results are
complicated due to the timing and effect of property sales. Components of the
Partnership's operating results are generally expected to decline as real
property interests are sold since the Partnership no longer realizes income or
incurs expenses from such real property interests. Through June 30, 1998, the
Partnership has sold all of its investments with the exception of its 50%
interest in the Ellis Building ("Ellis") and its 50% interest in a joint
venture's equity interest in Holiday Office Park North and South ("Holiday").
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, 1998
and 1997. 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
6/30/98 6/30/97 6/30/98 6/30/97
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
ELLIS BUILDING (50%)
Rental revenues $344,800 $ 323,600 $660,600 $ 639,300
- -------------------------------------------------------------
Property net income $137,000 $ 118,600 $246,400 $ 219,200
- -------------------------------------------------------------
Average occupancy 98% 97% 98% 97%
- -------------------------------------------------------------
HOLIDAY OFFICE PARK NORTH AND SOUTH
(50%)
Rental revenues $399,100 $ 399,200 $808,300 $ 783,600
- -------------------------------------------------------------
Property net income $ 60,900 $ 89,200 $170,900 $ 172,000
- -------------------------------------------------------------
Average occupancy 86% 86% 86% 85%
- -------------------------------------------------------------
SOLD PROPERTIES (B)
Rental revenues $ (3,600) $1,025,700 $198,600 $2,279,500
- -------------------------------------------------------------
Property net income $ 23,500 $ 438,100 $157,400 $ 939,200
- -------------------------------------------------------------
</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) Sold Properties includes the results of Marketplace at Rivergate Shopping
Center ("Rivergate") (sold March 4, 1998). In addition, Sold Properties
includes: Lakewood Square Shopping Center ("Lakewood"), 12621 Featherwood
Office Building, Banana River Square Shopping Center and Foxhall Square
Office Building ("Foxhall") (all of which were sold in 1997).
Unless otherwise disclosed, discussions of fluctuations between 1998 and 1997
refer to both the quarters and six months ended June 30, 1998 and 1997.
Net income increased by $747,300 for the six months ended June 30, 1998 when
compared to the six months ended June 30, 1997. The increase was primarily the
result of the 1998 gain recorded on the sale of Rivergate exceeding the 1997
gain recorded on the sale of Lakewood. The increase was also due to an increase
in interest income earned on the Partnership's short-term investments which was
the result of an increase in the amount of cash available for investment. The
increase was partially offset by the absence of results in 1998 from the Sold
Properties.
Net income decreased by $677,900 for the quarter ended June 30, 1998 when
compared to the quarter ended June 30, 1997. The decrease was primarily the
result of the 1997 gain recorded on the sale of Lakewood and the absence of
1998 operating results from the Sold Properties. The decrease was also due to
the recording in 1998 of the Partnership's share of franchise taxes due to the
District of Columbia. Substantially all of this tax was incurred in connection
with the November 1997 sale of Foxhall.
Net income exclusive of Sold Properties increased by $10,200 for the six months
ended June 30, 1998 when compared to the six months ended June 30, 1997. The
increase was primarily the result of improved operating results at Ellis and
the increase in interest earned on the Partnership's short-term investments
exceeding the Partnership's share of franchise taxes due to the District of
Columbia, as previously discussed. Net income exclusive of the Sold Properties
decreased by $150,000 for the quarter ended June 30, 1998 when compared to the
quarter ended June 30, 1997. The decrease was primarily due to the
Partnership's share of franchise taxes due to the District of Columbia and
diminished operating results at the Partnership's equity investment in Holiday.
The following comparative discussion excludes the results of the Partnership's
properties that were sold prior to June 30, 1998.
Rental revenues increased by $21,100 or 6.5% and $21,300 or 3.3% for the
quarter and six months ended June 30, 1998 when compared to the quarter and six
months ended June 30, 1997, respectively. The increases were primarily the
result of an increase in tenant expense reimbursements at Ellis, which resulted
from increased billings to tenants.
Property operating expenses decreased by $5,200 for the six months ended June
30, 1998 when compared to the six months ended June 30, 1997. The decrease was
primarily the result of a decrease in personnel costs at Ellis. Property
operating expenses remained relatively unchanged for the quarterly periods
under comparison.
The Partnership's share of net income from Holiday decreased by $28,300 for the
quarterly periods under comparison. The decrease was primarily the result of an
increase in landscaping costs. The decrease was also due to an increase in
professional services which was related to costs incurred in the successful
appeal of real estate taxes. The decrease was partially offset by an increase
in base rental income, which was due to an increase in rates charged to new and
renewing tenants. The Partnership's share of net income from Holiday remained
relatively unchanged for the six months ended June 30, 1998 when compared to
the six months ended June 30, 1997.
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
tenants and addressing any expansion needs these tenants may have; 3) promotion
of local broker events and networking with local brokers; 4) cold-calling other
businesses and tenants in the market area; and 5) 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
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
6/30/98 6/30/97
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash Flow (as defined in the Partnership Agreement) $ 990,800 $ 2,176,200
Less: Cash Flow from joint venture (330,600) (307,400)
Items of reconciliation:
(Increase) decrease in current assets (32,200) 80,700
(Decrease) increase in current liabilities (60,700) 53,700
- ------------------------------------------------------------------------------
Net cash provided by operating activities $ 567,300 $ 2,003,200
- ------------------------------------------------------------------------------
Net cash provided by investing activities $ 6,780,400 $ 7,531,000
- ------------------------------------------------------------------------------
Net cash (used for) financing activities $(9,315,900) $(1,716,400)
- ------------------------------------------------------------------------------
</TABLE>
The decrease in Cash Flow (as defined in the Partnership Agreement) of
$1,185,400 for the six months ended June 30, 1998 when compared to six months
ended June 30, 1997 was primarily the result of the absence of 1998 results
from the Sold Properties, exclusive of depreciation and amortization, as
previously discussed.
The decrease in the Partnership's cash position of $1,968,200 for the six
months ended June 30, 1998 was primarily the result of distributions to
Partners and investments in debt securities exceeding net cash provided by
operating results and proceeds from the sale of Rivergate. Liquid assets
(including cash, cash equivalents and investments in debt securities) as of
June 30, 1998 were comprised of amounts held for working capital purposes and
undistributed Sales Proceeds.
The decrease of $1,435,900 in cash provided by operating activities for the six
months ended June 30, 1998 when compared to the six months ended June 30, 1997
was primarily the result of the absence of operating results from the Sold
Properties, exclusive of depreciation and amortization, as previously
discussed.
Net cash provided by investing activities decreased by $750,600 for the six
months ended June 30, 1998 when compared to the six months ended June 30, 1997.
The decrease was primarily due to Sales Proceeds received in 1997 exceeding
Sale Proceeds from the 1998 sale of Rivergate. The decrease was partially
offset by a decrease in the additional amount of cash invested in debt
securities during the comparable six months periods. During the six months
ended June 30, 1998, the Partnership received $464,500 in distributions from
Holiday.
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, 1998, the Partnership spent $3,000 for capital
and tenant improvements and leasing costs at Ellis and has projected to spend
approximately $45,000 during the remainder of 1998. In addition, the
Partnership spent $13,600 for capital and tenant improvements and leasing costs
at Holiday and is projecting to spend approximately $190,000 during the
remainder of 1998. Actual amounts expended in 1998 may vary depending on a
number of factors including leasing activity, other market conditions
throughout the year and the potential sale of one or both of the properties.
The General Partner believes these expenditures are necessary to maintain
occupancy levels in very competitive markets, maximize rental rates charged to
new and renewing tenants and prepare the remaining properties for eventual
disposition.
On March 4, 1998, the Partnership completed the sale of Rivergate. Sale
Proceeds from this transaction amounted to $7,823,200. In connection with this
sale, on August 31, 1998, the Partnership will distribute $7,824,800 or $92.18
per Unit to Limited Partners of record as of March 4, 1998.
The increase of $7,599,500 in net cash used for financing activities for the
six months ended June 30, 1998 when compared to the six months ended June 30,
1997 was due primarily to the special distribution of $8,249,200 of Foxhall
Sale Proceeds on February 29, 1998. The increase was partially offset by a
decrease in regular quarterly distributions of Cash Flow (as defined in the
Partnership Agreement) to Partners. The decrease in distributions is the result
of the General Partner's adjustment of the distributions to an amount
consistent with the Partnership's remaining assets and their related earnings
and cash flow following the special distributions of Sales Proceeds during 1998
and 1997.
As described in Note 4 of Notes to Financial Statements, there is uncertainty
surrounding an environmental matter at Lakewood. The General Partner is
continuing to monitor the documentation delivered by the purchaser of Lakewood
regarding the purchaser's activities to remedy the hazardous substances at
Lakewood. There can be no assurance as to the actual timeframe for the
remediation or that it will be completed without costs to the Partnership.
The General Partner, on behalf of the Partnership, has contracted for
substantially all of its business activities with certain principal entities
for which computer programs are utilized. Each of these companies is
financially responsible and have represented to management of the General
Partner that they are taking appropriate steps for modifications needed to
their respective systems to accommodate processing data by Year 2000.
Accordingly, the Partnership anticipates incurring no material Year 2000 costs
and is currently not aware of any material contingencies related to this
matter.
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. For
the six months ended June 30, 1998, Cash Flow (as defined in the Partnership
Agreement) of $46,800 was utilized from previously retained Cash Flow for
distributions to Partners.
Distributions to Limited Partners for the six months ended June 30, 1998 were
declared in the amount of $466,900, or $5.50 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 proceeds from the Rivergate sale, 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
There were no reports filed on Form 8-K during the quarter ended June
30, 1998.
<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, 1998 By: /s/ DOUGLAS CROCKER II
--------------- --------------------------------------
DOUGLAS CROCKER II
President and Chief Executive Officer
Date: August 14, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,526,400
<SECURITIES> 1,504,300
<RECEIVABLES> 105,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,136,300
<PP&E> 6,327,700
<DEPRECIATION> 2,557,300
<TOTAL-ASSETS> 22,953,500
<CURRENT-LIABILITIES> 8,589,400
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,321,200
<TOTAL-LIABILITY-AND-EQUITY> 22,953,500
<SALES> 0
<TOTAL-REVENUES> 2,906,800
<CGS> 0
<TOTAL-COSTS> 319,600
<OTHER-EXPENSES> 116,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,481,600
<INCOME-TAX> 171,200
<INCOME-CONTINUING> 2,310,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,310,400
<EPS-PRIMARY> 25.65
<EPS-DILUTED> 25.65
</TABLE>
