<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number 0-15575
Exact Name of Registrant as Specified in Its Charter: T. ROWE
PRICE REALTY INCOME FUND II, AMERICA'S SALES-COMMISSION-FREE REAL
ESTATE LIMITED PARTNERSHIP
State or Other Jurisdiction of Incorporation or Organization:
Delaware
I.R.S. Employer Identification No.: 52-1470895
Address and zip code of principal executive offices: 100 East
Pratt Street, Baltimore, Maryland 21202
Registrant's Telephone Number, including area code: 1-800-638-
5660
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1997 1996
____________ ____________
Assets
Real Estate Property Investments
Land . . . . . . . . . . . $ 8,443
Buildings and Improvements 19,352
________
27,795
Less: Accumulated Depreciation
and Amortization . . . . (6,625)
________
21,170
Held for Sale . . . . . . . 14,860
________
36,030
Cash and Cash Equivalents . . . $ 15,333 3,667
Receivables (less allowance
of $22 in 1996) . . . . . . 34 162
Other Assets . . . . . . . . . - 333
________ ________
$ 15,367 $ 40,192
________ ________
________ ________
Liabilities and Partners' Capital
Security Deposits and
Prepaid Rents . . . . . . . $ 505
Accrued Real Estate Taxes . . . 394
Accounts Payable and Other
Accrued Expenses . . . . . $ 99 307
________ ________
Total Liabilities . . . . . . . 99 1,206
Partners' Capital . . . . . . . 15,268 38,986
________ ________
$ 15,367 $ 40,192
________ ________
________ ________
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>3
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-unit amounts)
January 1 Years Ended
through December 31,
September 30,
____________________
1997 1996 1995
__________ _________ ________
Revenues
Rental Income . . . . $ 3,376 $ 5,944 $ 6,717
Interest Income . . . 264 245 247
_______ _______ _______
3,640 6,189 6,964
_______ _______ _______
Expenses
Property Operating
Expenses . . . . 649 1,113 1,103
Real Estate Taxes . . 485 747 991
Depreciation and
Amortization . . 242 1,781 2,362
Decline (Recovery) of
Property Values . (30) 3,168 (682)
Management Fee to General
Partner . . . . . 220 298 346
Partnership Management
Expenses . . . . 675 501 452
_______ _______ _______
2,241 7,608 4,572
_______ _______ _______
Income (Loss) from
Operations before
Real Estate Sold 1,399 (1,419) 2,392
Gain on Real Estate
Sold . . . . . . 2,912 699 -
_______ _______ _______
Net Income (Loss) . . $ 4,311 $ (720) $ 2,392
_______ _______ _______
_______ _______ _______
<PAGE>4
January 1 Years Ended
through December 31,
September 30, ___________________
1997 1996 1995
Activity per Limited
Partnership Unit
Net Income (Loss) . . $ 51.09 $ (8.48) $ 28.16
_______ _______ _______
_______ _______ _______
Cash Distributions Declared
from Operations . $ 30.16 $ 35.50 $ 37.68
from Sale
Proceeds . . . 290.62 70.86 40.79
_______ _______ _______
Total Distributions . $ 320.78 $ 106.36 $ 78.47
Declared . . . . _______ _______ _______
_______ _______ _______
Units Outstanding . . 84,099 84,099 84,099
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>5
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
General Limited
Partner Partners Total
________ ________ ________
Balance, December 31,
1994 . . . . . . $ (267) $ 52,804 $ 52,537
Net Income . . . . . 24 2,368 2,392
Cash Distributions . (32) (5,796) (5,828)
_______ _______ _______
Balance, December 31,
1995 . . . . . . (275) 49,376 49,101
Net Loss . . . . . . (7) (713) (720)
Cash Distributions . (26) (9,369) (9,395)
_______ _______ _______
Balance, December 31,
1996 . . . . . . (308) 39,294 38,986
Net Income . . . . . 14 4,297 4,311
Cash Distributions . (36) (28,323) (28,359)
Capital Contribution 330 - 330
_______ _______ _______
Balance, September 30,
1997 . . . . . . $ 0 $ 15,268 $ 15,268
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
January 1 Years Ended
through December 31,
September 30,
__________________
1997 1996 1995
________ _________ __________
Cash Flows from
Operating Activities
Net Income . . . . . $ 4,311 $ (720) $ 2,392
Adjustments to Reconcile Net
Income (Loss) to Net Cash
Provided by Operating
Activities
Depreciation and
Amortization 242 1,781 2,362
Decline (Recovery)
of Property
Values . . . (30) 3,168 (682)
Gain on Real Estate
Sold . . . . 2,912) (699) -
Change in Receivables 128 6 (11)
Change in Other Assets 65 72 (125)
Change in Security
Deposits and Prepaid
Rents . . . . (505) 12 (29)
Change in Accrued Real
Estate Taxes (394) (108) 70
Change in Accounts
Payable and
Other Accrued
Expenses . . (208) (126) 154
_______ _______ _______
Net Cash Provided by
Operating Activities 697 3,386 4,131
_______ _______ _______
Cash Flows from Investing
Activities
Proceeds from Property
Dispositions . . . 39,709 5,959 2,622
Investments in Real
Estate . . . . . . (711) (1,065) (962)
_______ _______ _______
Net Cash Provided
by Investing
Activities . . . . 38,998 4,894 1,660
_______ _______ _______
<PAGE> 7
January 1 Years Ended
through December 31,
September 30,
__________________
1997 1996 1995
Cash Flows from Financing
Activities
Capital Contribution 330 - -
Cash Distributions . (28,359) (9,395) (5,828)
_______ _______ _______
Net Cash Used in Financing
Activities . . . . (28,029) (9,395) (5,828)
_______ _______ _______
Cash and Cash Equivalents
Net Change during
Period . . . . . . 11,666 (1,115) (37)
At Beginning of Year 3,667 4,782 4,819
_______ _______ _______
At End of Period . . $ 15,333 $ 3,667 $ 4,782
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE PARTNERSHIP AND ITS LIQUIDATION
T. Rowe Price Realty Income Fund II, America's
Sales-Commission-Free Real Estate Limited Partnership (the
Partnership), was formed in 1986 under the Delaware Revised
Uniform Limited Partnership Act for the purpose of acquiring,
operating and disposing of existing income-producing commercial
and industrial real estate properties. T. Rowe Price Realty
Income Fund II Management, Inc. is the General Partner.
In accordance with the provisions of the partnership
agreement, income and cash distributions from operations have
been allocated and paid, and gains on the real estate sold before
September 12, 1997, allocated, to the General and Limited
Partners at rates of 1% and 99%, respectively. All sales proceeds
were paid, and the gain on the liquidating sale of the
Partnership's interests in its eight remaining properties on
September 12, 1997, were allocated, 100% to the Limited Partners.
After the sale of its remaining properties on September 12,
1997, the Partnership entered into its final liquidating phase.
Later in September, the Partnership made a partial liquidating
distribution of $17,661,000 to the Limited Partners and a final
distribution to the General Partner of $22,000.
The Partnership will declare and make a final liquidating
distribution of its remaining net assets based on final balances
in the partners' capital accounts. This final distribution will
be made by December 31, 1997, to Limited Partners only and,
thereafter, the Partnership will be dissolved.
The accompanying financial statements for 1997 include
estimates of the costs of liquidating the Partnership. Results of
operations from October 1, 1997, until the date of the final
liquidating distribution are not expected to be significant and
will consist primarily of interest income and the settlement of
receivables and payables.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Partnership's financial statements are prepared in accordance
with generally accepted accounting principles which requires the
use of estimates and assumptions by the General Partner.
The consolidated financial statements include the accounts of
the Partnership and its pro-rata share of the partnership
accounts of T. Rowe Price-Pacific (AMCC), South Point Partners,
and Tierrasanta 234 in which the Partnership had 90%, 50%, and
30% interests, respectively. They also include the Partnership's
24% pro-rata share of the partnership accounts of Fairchild 234
until the property's disposition in 1996. The other partners in
the latter three ventures are affiliates of the Partnership. All
intercompany accounts and transactions have been eliminated in
consolidation.
<PAGE> 9
The Partnership reviewed its real estate property investments
for impairment whenever events or changes in circumstances
indicated that the property carrying amounts may not have been
recoverable. Such a review resulted in the Partnership recording
a provision for impairment of the carrying value of its real
estate property investments whenever the estimated future cash
flows from a property's operations and projected sale were less
than the property's net carrying value.
Depreciation was calculated primarily on the straight-line
method over the estimated useful lives of buildings and
improvements, which range from 5 to 40 years. Lease commissions
and tenant improvements were capitalized and amortized over the
lives of the respective leases using the straight-line method.
Cash equivalents consist of money market mutual funds, the
cost of which is equivalent to fair value.
The Partnership used the allowance method of accounting for
doubtful accounts. Provisions for (recoveries of) uncollectible
tenant receivables in the amounts of $41,000, $29,000, and
($101,000) were recorded in 1997, 1996, and 1995, respectively.
Bad debt expense (recovery) is included in Property Operating
Expenses.
Rental income was recognized on a straight-line basis over the
term of each lease. Rental income accrued, but not yet billed,
was included in Other Assets and aggregated $280,000 at December
31, 1996.
Under provisions of the Internal Revenue Code and applicable
state taxation codes, partnerships are generally not subject to
income taxes; therefore, no provision has been made for any
income taxes in the accompanying consolidated financial
statements.
NOTE 3 - PROPERTY VALUATIONS
On January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which changed the Partnership's method of
accounting for its real estate property investments when
circumstances indicated that the carrying amount of a property
might not have been recoverable. Measurement of an impairment
loss on an operating property subsequent to adoption was based on
the estimated fair value of the property, which became the
property's new cost basis, rather than the sum of expected future
cash flows. Properties held for sale subsequent to adoption were
no longer depreciated but continued to be reflected at the lower
of historical cost or estimated fair value less anticipated
selling costs.
Based upon a review of market conditions, estimated holding
period and future performance expectations of each property, the
<PAGE> 10
General Partner determined that the net carrying values of
certain properties held for operations were likely not fully
recoverable. Charges recognized for such impairments aggregated
$2,489,000 in 1996.
With respect to properties held for sale, the Partnership
assessed property carrying values and recognized net recoveries
of $30,000 in 1997 and $682,000 in 1995 and a net decline of
$679,000 in 1996.
NOTE 4 - PROPERTY DISPOSITIONS
On June 29, 1995, the Partnership sold Sullyfield Circle and
received net proceeds of $2,622,000. The net book value of this
property at the date of disposition was also $2,622,000 after
accumulated depreciation expense and previously recorded declines
in value. Therefore, no gain or loss was recognized on the
property sale.
On February 14, 1996, the Partnership sold Regal Row and
received net proceeds of $3,612,000. The net book value of this
property at the date of disposition was also $3,612,000, after
accumulated depreciation expense and previously recorded declines
in value. Therefore, no gain or loss was recognized on the
property sale.
On August 28, 1996, Fairchild Corporate Center was sold and
the Partnership received net proceeds of $2,347,000. The net book
value of the Partnership's 24% interest at the date of sale was
$1,648,000, after deduction of accumulated depreciation and
previously recorded declines in property value. Accordingly, the
Partnership recognized a $699,000 gain on the sale of this
property.
On January 23, 1997, the AMCC property was sold and the
Partnership received net proceeds of $7,863,000. The net book
value of the Partnership's interest in this property at the date
of disposition was also $7,863,000, after accumulated
depreciation expense and previously recorded declines in property
value. Therefore, no gain or loss was recognized on the property
sale.
On April 8, 1997, South Point Plaza was sold and the
Partnership received net proceeds of $1,453,000. The net book
value of the Partnership's 50% interest in this property at the
date of disposition was also $1,453,000 after accumulated
depreciation expense and previously recorded declines in property
values. Therefore, no gain or loss was recognized on the property
sale.
On September 12, 1997, the Partnership sold its interests in
its eight remaining properties-Atlantic, Coronado, Oakbrook
Corners, Baseline, Business Plaza, Bonnie Lane, Glenn Avenue, and
Tierasanta-to a single, third-party buyer for net proceeds of
$30,393,000. The sale was approved by a majority of the Limited
<PAGE> 11
Partners on September 11, 1997. The net book value of the
Partnership's interests in the eight properties was $27,481,000
after accumulated depreciation expense and previously recorded
declines in property values. Accordingly, the Partnership
recognized a $2,912,000 gain on the sale of its interests in
these properties.
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
As compensation for services rendered in managing the
Partnership, the General Partner earned a partnership management
fee equal to 9% of net operating proceeds. The General Partner
earned partnership management fees of $220,000, $298,000, and
$346,000 in 1997, 1996, and 1995, respectively. In addition, the
General Partner's share of cash available for distribution from
operations, as discussed in Note 1, totaled $22,000, $30,000, and
$31,000 in 1997, 1996, and 1995, respectively.
In accordance with the partnership agreement, certain
operating expenses are reimbursable to the General Partner. The
General Partner's reimbursement of such expenses totaled
$173,000, $117,000, and $107,000 for communications and
administrative services performed on behalf of the Partnership in
1997, 1996, and 1995, respectively.
An affiliate of the General Partner earned a normal and
customary fee of approximately $14,000, $10,000, and $20,000 from
the money market mutual funds in which the Partnership made its
cash investments during 1997, 1996, and 1995, respectively.
The Partnership agreement includes provisions requiring that
the General Partner make a capital contribution upon the
liquidation of the Partnership if, at the time, the General
Partner's capital account has a deficit balance. On September 24,
1997, the General Partner contributed $330,000 to the Partnership
thereby increasing its capital account from a deficit balance to
zero.
LaSalle Advisors Limited Partnership (LaSalle) was the
Partnership's advisor and was compensated for its advisory
services directly by the General Partner. LaSalle was reimbursed
by the Partnership for certain operating expenses pursuant to its
contract with the Partnership to provide real estate advisory,
accounting, and other related services to the Partnership.
LaSalle's reimbursement for such expenses totaled $105,000,
$150,000, and $150,000 in 1997, 1996, and 1995, respectively.
An affiliate of LaSalle earned $101,000, $131,000, and
$129,000 in 1997, 1996, and 1995, respectively, for property
management fees and leasing commissions on tenant renewals and
extensions at several of the Partnership's properties.
<PAGE> 12
NOTE 6 - RECONCILIATION OF FINANCIAL STATEMENT TO TAXABLE INCOME
As described in Note 2, the Partnership has not incurred any
income tax liability; however, certain timing differences (in
thousands) exist between net income (loss) for financial
statement and federal income tax purposes. These differences are
summarized below:
1997 1996 1995
______ ______ _________
Net income (loss) reported
in financial
statements . . . $ 4,311 $ (720) $2,392
Declines of property
values . . . . . (8,516) (2,732) (2,793)
Interest income . . . - - 301
Depreciation . . . . (1,006) (214) 18
Other items . . . . . 81 (72) (303)
________ _________ ________
Taxable income (loss) $ (5,130) $ (3,738) $ (385)
________ _________ ________
________ _________ ________
<PAGE>13
INDEPENDENT AUDITORS' REPORT
To the Partners
T. Rowe Price Realty Income Fund II,
America's Sale-Commission-Free Real Estate Limited Partnership:
We have audited the consolidated balance sheets of T Rowe Price
Realty Income Fund II, America's Sales-Commission-Free Real
Estate Limited Partnership and its consolidated ventures as of
September 30, 1997 and December 31, 1996, and the related
consolidated statements of operations, partners' capital and cash
flows for the period January 1, 1997 through September 30, 1997
and for the years ended December 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of T. Rowe Price Realty Income Fund II,
America's Sales-Commission-Free Real Estate Limited Partnership
and its consolidated ventures as of September 30, 1997 and
December 31, 1996, and the results of their operations and their
cash flows for the period January 1, 1997 through September 30,
1997 and for the years ended December 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
October 17, 1997
<PAGE>14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources and Results of Operations
The Partnership s net income for its final nine months was
$4,311,000, which included a gain of $2,912,000 on the sale of
properties and income from operations of $1,399,000. Net income
amounted to $51.09 per unit. For the year ended December 31,
1996, the Partnership experienced a net loss of $720,000 or $8.48
per unit, which included a loss from operations of $1,419,000
offset in part by a gain of $699,000 from the sale of Fairchild.
The Partnership s real estate properties were sold on September
12, 1997, resulting in net proceeds of $30,393,000 and the gain
of $2,912,000.
The Partnership paid $210 per unit on September 19, 1997,
which was a substantial portion of the total liquidating
distributions. The Partnership anticipates making a final
liquidating distribution in early December of 1997.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 11, 1997, the limited partners of the
Partnership approved a proposal to sell all of the Partnership s
remaining real estate properties to Glenborough Realty Trust, and
thereafter dissolve and liquidate the Partnership. Under the
terms of the Partnership s Agreement of Limited Partnership, no
meeting was required in connection with the proposal, and the
vote was taken through a written consent solicitation.
Limited partners holding 80% (72,512) of the outstanding
units of limited partnership interest ("Units") cast votes on the
proposal. Of these, 70,875 Units were voted in favor of the
proposal, 1,078 against, and 559 abstained.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
27 - Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated September 12, 1997, reporting
the sale of the Partnership s real estate properties
and a distribution of a portion of the proceeds.
All other items are omitted because they are not applicable or
the answers are none.
<PAGE>15
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.
T. ROWE PRICE REALTY INCOME FUND II,
AMERICA'S SALES-COMMISSION-FREE
REAL ESTATE LIMITED PARTNERSHIP
By: T. Rowe Price Realty Income Fund II
Management, Inc., General Partner
Date: November 14, 1997 By: /s/ Lucy B. Robins
Lucy B. Robins
Vice President
Date: November 14, 1997 By: /s/ Mark S. Finn
Mark S. Finn
Chief Accounting Officer for
the Partnership
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated financial statements of T. Rowe Price
Realty Income Fund II, America's Sales-Commission-Free Real
Estate Limited Partnership included in the accompanying Form 10-Q
for the period ended September 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000787493
<NAME> T. ROWE PRICE REALTY INCOME FUND II, AMERICA'S
SALES-COMMISS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,333,000
<SECURITIES> 0
<RECEIVABLES> 34,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,367,000
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,268,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 15,367,000
<SALES> 0
<TOTAL-REVENUES> 3,640,000
<CGS> 0
<TOTAL-COSTS> 2,241,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,311,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,311,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,311,000
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0
<FN>
<F1>Not contained in registrant's unclassified balance sheet.
<F2>Partners' capital.
<F3>Not applicable. Net income per limited partnership unit is
$51.09.
</FN>
