<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, 1999
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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
- --------------------------------------------------------------------------------
(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 700, 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
- --------------------------------------------------------------------------------
(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
BALANCE SHEETS
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
- ---------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $4,783,900 $19,078,600
Investments in debt
securities 951,100
Rents receivable 27,800 27,800
Other assets 16,200 10,200
- ---------------------------------------------------
$5,779,000 $19,116,600
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and
accrued expenses $ 41,700 $ 115,500
State income taxes
payable 75,300
Due to Affiliates 3,700 2,000
Distributions payable 13,361,200
Other liabilities 3,100
- ---------------------------------------------------
45,400 13,557,100
- ---------------------------------------------------
Partners' capital:
General Partner 75,000 73,300
Limited Partners (84,886
Units issued and
outstanding) 5,658,600 5,486,200
- ---------------------------------------------------
5,733,600 5,559,500
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$5,779,000 $19,116,600
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</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the six months ended June 30, 1999 (Unaudited)
and the year ended December 31, 1998
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Partners' capital, January 1, 1998 $ -- $ 20,873,100 $ 20,873,100
Net income for the year ended December
31, 1998 214,800 6,883,800 7,098,600
Distributions for the year ended
December 31, 1998 (141,500) (22,270,700) (22,412,200)
- ------------------------------------------------------------------------------
Partners' capital, December 31, 1998 73,300 5,486,200 5,559,500
Net income for the six months ended
June 30, 1999 1,700 172,400 174,100
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Partners' capital, June 30, 1999 $ 75,000 $ 5,658,600 $ 5,733,600
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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, 1999 and 1998
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Income:
Rental $ $341,100
Interest 67,400 191,000
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67,400 532,100
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Expenses:
Depreciation and amortization 59,800
Property operating:
Affiliates 15,800
Nonaffiliates 6,000 39,900
Real estate taxes 23,600
Insurance--Affiliate 1,400
Repairs and maintenance 39,400
General and administrative:
Affiliates 7,000 7,500
Nonaffiliates 44,800 45,400
Additional expenses of sale 5,600
- ------------------------------------------------------------------------------
57,800 238,400
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Income before income from participation in joint venture and
state income tax expense 9,600 293,700
Income from participation in joint venture 60,900
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Income before state income tax expense 9,600 354,600
State income tax expense 600 171,200
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Net income $ 9,000 $183,400
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Net income allocated to General Partner $ 0 $ 51,900
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Net income allocated to Limited Partners $ 9,000 $131,500
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Net income allocated to Limited Partners per Unit (84,886
Units outstanding) $ 0.11 $ 1.55
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</TABLE>
STATEMENTS OF INCOME AND EXPENSES
For the six months ended June 30, 1999 and 1998
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Income:
Rental $ $ 859,200
Interest 232,700 408,300
Gain on sale of Property 1,639,300
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232,700 2,906,800
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Expenses:
Depreciation and amortization 160,000
Property operating:
Affiliates 200 46,500
Nonaffiliates 11,800 138,000
Real estate taxes (1,300) 47,200
Insurance--Affiliate 6,000
Repairs and maintenance (300) 81,900
General and administrative:
Affiliates 15,800 17,700
Nonaffiliates 31,800 98,800
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58,000 596,100
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Income before income from participation in joint venture
and state income tax expense 174,700 2,310,700
Income from participation in joint venture 170,900
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Income before state income tax expense 174,700 2,481,600
State income tax expense 600 171,200
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Net income $174,100 $2,310,400
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Net income allocated to General Partner $ 1,700 $ 132,800
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Net income allocated to Limited Partners $172,400 $2,177,600
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Net income allocated to Limited Partners per Unit
(84,886 Units outstanding) $ 2.03 $ 25.65
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</TABLE>
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 1998
(Unaudited)
(All dollars rounded to nearest 00s)
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 174,100 $ 2,310,400
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 160,000
(Income) from participation in joint venture (170,900)
(Gain) on sale of Property (1,639,300)
Changes in assets and liabilities:
(Increase) in rents receivable (38,300)
(Increase) decrease in other assets (6,000) 6,100
(Decrease) increase in accounts payable and accrued
expenses (73,800) 5,600
Increase (decrease) in due to Affiliates 1,700 (12,000)
(Decrease) in state income taxes payable (75,300)
(Decrease) in other liabilities (3,100) (54,300)
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Net cash provided by operating activities 17,600 567,300
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Cash flows from investing activities:
Payments for capital and tenant improvements (3,000)
(Increase) in investments in debt securities (951,100) (1,504,300)
Proceeds from sale of Property 7,823,200
Distributions received from joint venture 464,500
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Net cash (used for) provided by investing
activities (951,100) 6,780,400
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Cash flows from financing activities:
Distributions paid to Partners (13,361,200) (9,286,800)
(Decrease) in security deposits (29,100)
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Net cash (used for) financing activities (13,361,200) (9,315,900)
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Net (decrease) in cash and cash equivalents (14,294,700) (1,968,200)
Cash and cash equivalents at the beginning of the
period 19,078,600 14,444,600
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Cash and cash equivalents at the end of the period $ 4,783,900 $12,476,400
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</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
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 Partnership has disposed of its real estate properties. Upon resolution of
the environmental matter disclosed in Note 3 and other post-closing matters
related to the sales of the Partnership's properties, the Partnership will make
a liquidating distribution and dissolve.
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, 1999 are not necessarily indicative
of the operating results for the year ending December 31, 1999.
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 the Ellis Building and until its sale
in August 1998 was 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.
The Partnership has one reportable segment as the Partnership is in the
disposition phase of its life cycle, wherein it is seeking to resolve post-
closing matters related to the properties sold by the Partnership.
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 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.
Reference is made to the Partnership's Annual Report for the year ended
December 31, 1998 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.
For the quarter and six months ended June 30, 1999 the General Partner was not
paid a Partnership Management Fee. For the quarter and six months ended June
30, 1998, the General Partner was paid a Partnership Management Fee of $51,900
and $103,800, respectively.
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 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, 1999, the
General Partner was allocated Net Profits, of $0 and $1,700, respectively. For
the quarter and six months ended June 30, 1998, the General Partner was
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.
4
<PAGE>
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and six months ended June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Paid
---------------
Six
Quarter Months Payable
- ------------------------------------------------------------
<S> <C> <C> <C>
Professional services None $ 600 None
Legal $ 500 2,300 None
Reimbursement of expenses, at cost:
--Accounting 1,700 6,600 $1,900
--Investor communications 2,900 7,900 1,800
- ------------------------------------------------------------
$ 5,100 $17,400 $3,700
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</TABLE>
3. ENVIRONMENTAL MATTER:
In December 1996, the Managing General Partner became aware of the existence of
hazardous substances in the groundwater under 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 Managing General Partner is unaware of any
claims or other matters referred to above against the Partnership. In November
1998, the purchaser submitted its corrective action plan (the "Plan") for the
site to the California Regional Water Quality Control Board ("Water Board").
The Plan provides for the recommended method of clean up and the obtaining of
regulatory approval upon completion. In December 1998, the Water Board
authorized the purchaser to proceed with its Plan subject to the Water Board's
satisfactory review of purchaser's pilot study (which tested the effectiveness
of the Plan's proposed remedial method). Purchaser reported in May 1999 that it
had completed the study. Purchaser is awaiting final approval from the Water
Board to begin implementation of the Plan. The timing of the completion of the
remediation process is contingent upon, among other things, the Water Board's
issuance of this approval. Accordingly, there can be no assurance as to the
timing of the completion of the remediation process. The Managing General
Partner is continuing to monitor the documentation delivered by the purchaser
regarding the purchaser's activities to remedy the hazardous substances.
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, 1998 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.
The Partnership has substantially completed the disposition phase of its life
cycle. During 1998, the Partnership sold its remaining real property
investments. The Partnership is currently working toward resolution of post
closing property sale matters.
OPERATIONS
Net income decreased by $174,400 for the quarter ended June 30, 1999 when
compared to the quarter ended June 30, 1998. The decrease was primarily due to
the absence of results in 1999 from the three properties sold by the
Partnership during 1998. The decrease was also due to a decrease in interest
earned on the Partnership's short-term investments due to a decrease in the
average cash available for investment.
Net income decreased by $2,136,300 for the six months ended June 30, 1999 when
compared to the six months ended June 30, 1998. The decrease was primarily due
to the gain recorded in 1998 on the sale of Marketplace at Rivergate Shopping
Center ("Rivergate"). The decrease was also due to the absence in 1999 of
results from properties sold during 1998 together with a decrease in interest
earned on the Partnership's short-term investments, which was due to a decrease
in the average cash available for investment.
LIQUIDITY AND CAPITAL RESOURCES
The decrease in the Partnership's cash position of $14,294,700 for the six
months ended June 30, 1999 was primarily the result of the Partnership's
distributions of cash to Partners and investments in debt securities exceeding
cash provided by operating activities. Liquid assets (including cash, cash
equivalents and investments in debt securities) of the Partnership as of June
30, 1999 were comprised of amounts held for the Lakewood environmental matter
(as hereafter discussed) and Partnership liquidation expenses.
The decrease of $549,700 in net cash provided by operating activities for the
six months ended June 30, 1999 when compared to the six months ended June 30,
1998 was primarily the result of the absence of operating results from
properties sold during 1998, exclusive of depreciation and amortization, as
previously discussed.
Net cash provided by (used for) investing activities changed from $6,780,400
for the six months ended June 30, 1998 to $(951,100) the six months ended June
30, 1999. The change was primarily due to the 1998 receipt of proceeds from the
sale of Marketplace at Rivergate. In addition, during the six months ended June
30, 1998, the Partnership received $464,500 of distributions from Holiday
Office Park North and South ("Holiday"). Partially offsetting this change was a
reduced amount of investments in debt securities. Investments in debt
securities are a result of the continued extension of the maturities of certain
of the Partnership's investments in an effort to maximize the return on these
assets as they are held for working capital purposes. These investments are of
investment-grade and mature less than one year from their date of purchase.
The Partnership has no financial instruments for which there are significant
market risks. Due to the timing of the maturities and liquid nature of the
Partnership's investments in debt securities, the Partnership does not believe
that it has material market risk.
The increase of $4,045,300 in net cash used for financing activities for the
six months ended June 30, 1999 when compared to the six months ended June 30,
1998 was due primarily to the cumulative amount of the February 28, 1999
special distributions of the Ellis Building and Holiday Sales Proceeds
exceeding the special distribution of Foxhall Sale Proceeds on February 28,
1998. The increase was partially offset by a decrease in the amount of
quarterly distributions of Cash Flow (as defined in the Partnership Agreement)
to Partners.
On February 28, 1999, in connection with the sale of Holiday, the Partnership
distributed $6,499,700 or $76.57 per Unit to Limited Partners of record as of
September 22, 1998.
On February 28, 1999, in connection with the sale of the Ellis Building, the
Partnership distributed $6,672,900 or $78.61 per Unit to Limited Partners of
record as of August 21, 1998.
The Year 2000 problem is the result of the inability of existing computer
programs to distinguish between a year beginning with "20" rather than "19".
This is the result of computer programs using two rather than four digits to
define an applicable year. If not corrected, any program having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a variety of problems including miscalculations,
loss of data and failure of entire systems. Critical areas that could be
effected are accounts receivable, accounts payable, general ledger, cash
management, investor services, computer hardware and telecommunications
systems.
The Partnership has engaged Affiliated and unaffiliated entities to perform all
of its critical functions that utilize software that may have time-sensitive
applications. All of these service providers are providing these services for
their own organizations as well as for their clients. The General Partner, on
behalf of the Partnership, has been in close communication with each of these
service providers regarding steps that they are taking to assure that there
will be no serious interruption of the operations of the Partnership resulting
from Year 2000 problems. Based on the results of these inquiries, as well as a
review of the disclosures by these service providers, the General Partner
believes that the Partnership will be able to continue normal business
operations and will incur no material costs related to Year 2000 issues.
The Partnership has not formulated a written contingency plan. However, the
General Partner believes that based on the status of the Partnership's real
estate portfolio and its limited number of transactions, aside from
catastrophic failure of banks, governmental agencies, etc., it could carry out
substantially all of its critical operations on a manual basis or easily
convert to systems that are Year 2000 compliant.
As described in Note 3 of Notes to Financial Statements, the Partnership is
awaiting resolution of an environmental matter at Lakewood. The General Partner
is continuing to monitor
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 cost to the Partnership.
The Partnership consummated the sale of its last remaining property in
September 1998. The General Partner has begun the process of winding up the
affairs of the Partnership. This process will include the resolution of all
post closing property sale matters. In addition, the environmental matter at
Lakewood will be closely monitored. While these matters are pending, the
Partnership will remain in existence. When the environmental matter is
satisfactorily remediated and the other post closing matters are resolved, the
Partnership will pay a liquidating distribution of the remaining assets held by
the Partnership, less amounts reserved for administrative expenses and any
amounts deemed necessary for contingencies and other post closing matters. In
line with reduced cash flow following the sale of its remaining properties,
distributions to Partners have been suspended until such time as a final
liquidating distribution may be made.
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 on Form 8-K filed during the three months ended
June 30, 1999.
<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 13, 1999 By: /s/ DOUGLAS CROCKER II
--------------- --------------------------------------
DOUGLAS CROCKER II
President and Chief Executive Officer
Date: August 13, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,783,900
<SECURITIES> 951,100
<RECEIVABLES> 27,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,762,800
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,779,000
<CURRENT-LIABILITIES> 45,400
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,733,600
<TOTAL-LIABILITY-AND-EQUITY> 5,779,000
<SALES> 0
<TOTAL-REVENUES> 232,700
<CGS> 0
<TOTAL-COSTS> 10,400
<OTHER-EXPENSES> 47,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 174,700
<INCOME-TAX> 600
<INCOME-CONTINUING> 174,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174,100
<EPS-BASIC> 2.03
<EPS-DILUTED> 2.03
</TABLE>
