<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996 Commission File Number 0-17810
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2742008
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
399 Boylston Street, 13th Fl.
Boston, Massachusetts 02116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 578-1200
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 twelve (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>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1996
PART I
FINANCIAL INFORMATION
<PAGE>
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
-------------- -----------------
Assets
<S> <C> <C>
Real estate investments:
Property, net $ 11,673,154 $ 13,422,112
Joint ventures 3,619,074 4,085,073
----------- ------------
15,292,228 17,507,185
Cash and cash equivalents 3,507,049 1,934,364
Short-term investments 982,611 1,682,508
----------- ------------
$ 19,781,888 $ 21,124,057
=========== ============
Liabilities and Partners' Capital
Accounts payable $ 36,872 $ 70,332
Accrued management fee 41,019 -
----------- ------------
Total liabilities 77,891 70,332
----------- ------------
Partners' capital (deficit):
Limited partners ($1,000 per unit;
100,000 units authorized, 32,848
units issued and outstanding) 19,797,404 21,133,635
General partners (93,407) (79,910)
------------ ------------
Total partners' capital 19,703,997 21,053,725
------------ ------------
$ 19,781,888 $ 21,124,057
============ ============
<FN>
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Quarter Ended Six Months Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
------------- ---------------- ------------- ---------------
Investment Activity
<S> <C> <C> <C> <C>
Property rentals $ 380,031 $ 781,502 $ 450,112 $ 826,145
Depreciation and amortization (201,374) (402,744) (198,495) (396,084)
Property operating expenses (41,096) (96,657) (44,993) (131,437)
------------- ------------- -------------- --------------
137,561 282,101 206,624 298,624
Joint venture earnings 63,451 117,542 52,933 104,034
Lease termination fee 1,600,000 1,600,000 - -
Investment valuation allowance (3,000,000) (3,350,000) - -
------------- ------------- -------------- --------------
Total real estate operations (1,198,988) (1,350,357) 259,557 402,658
Interest on cash equivalents
and short-term investments 53,674 101,310 34,198 62,422
------------- ------------- -------------- -------------
Total investment activity (1,145,314) (1,249,047) 293,755 465,080
------------- ------------- -------------- -------------
Portfolio Expenses
Management fee 41,019 41,019 - -
General and administrative 32,786 59,662 31,183 63,760
------------- ------------- ------------- -------------
73,805 100,681 31,183 63,760
------------- ------------- ------------- -------------
Net income (loss) $(1,219,119) $ (1,349,728) $ 262,572 $ 401,320
============= ============= ============== ==============
Net income (loss) per
limited partnership unit $ (36.74) $ (40.68) $ 7.91 $ 12.10
============= ============= ============== ==============
Number of limited partnership
units outstanding during
the period 32,848 32,848 32,848 32,848
============= ============= ============== ==============
<FN>
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Quarter Ended Six Months Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
---------------------- --------------------- --------------------- -----------------------
General Limited General Limited General Limited General Limited
Partners Partners Partners Partners Partners Partners Partners Partners
--------- -------- -------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period $(81,216) $21,004,332 $(79,910) $21,133,635 $ (91,623) $19,974,107 $ (93,010) $19,836,746
Net income (loss) (12,191) (1,206,928) (13,497) (1,336,231) 2,626 259,946 4,013 397,307
--------- ---------- ---------- ----------- ----------- ------------ ------------- -----------
Balance at end of
period $(93,407) $19,797,404 $(93,407) $19,797,404 $ (88,997) $20,234,053 $ (88,997) $20,234,053
========= ========== ========== =========== =========== ============ ============= ===========
<FN>
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
SUMMARIZED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
-------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 894,841 $ 704,103
---------- ----------
Cash flows from investing activities:
Decrease (increase) in short-term
investments, net 677,844 (512,929)
Investment in property - (115,194)
---------- ---------
Net cash provided by (used in)
investing activities 677,844 (628,123)
---------- ----------
Net increase in cash and cash
equivalents 1,572,685 75,980
Cash and cash equivalents:
Beginning of period 1,934,364 1,560,873
---------- ----------
End of period $3,507,049 $ 1,636,853
========== ==========
<FN>
(See accompanying notes to financial statements)
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Partnership's financial position as of June 30, 1996 and December 31, 1995
and the results of its operations, its cash flows and changes in partners'
capital (deficit) for the interim periods ended June 30, 1996 and 1995.
These adjustments are of a normal recurring nature.
See notes to financial statements included in the Partnership's 1995
Annual Report on Form 10-K for additional information relating to the
Partnership's financial statements.
NOTE 1 - ORGANIZATION AND BUSINESS
- ----------------------------------
Copley Realty Income Partners 2; A Limited Partnership (the
"Partnership") is a Massachusetts limited partnership organized for the
purpose of investing primarily in newly-constructed and existing income-
producing real properties. The Partnership commenced operations in October
1987, and acquired the three real estate investments it currently owns
prior to the end of 1988. The Partnership intended to dispose of its
investments within nine years of their acquisition, and then liquidate;
however, the managing general partner expects to extend the investment
period at least into 1998, having determined it to be in the best interest
of the limited partners.
<PAGE>
NOTE 2 - PROPERTY
- -----------------
The partnership's investment in property consists of an industrial
building in Rancho Dominguez, California, and a research and development
building in La Mirada, California. The following is a summary of the
Partnership's investment in property:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Land $ 7,339,344 $ 7,339,344
Buildings and improvements 12,235,440 12,235,440
Accrued lease termination fee 1,600,000 -
Accumulated depreciation (3,318,878) (2,971,596)
Investment valuation allowance (7,200,000) (4,200,000)
----------- -----------
10,655,906 12,403,188
Other net assets 1,126,831 1,181,139
Accrued environmental clean-up costs (109,583) (162,215)
----------- -----------
$11,673,154 $13,422,112
=========== ===========
</TABLE>
As a result of a protracted vacancy period and reduced expectations
for rental rates over the Partnership's investment horizon, the managing
general partner determined during 1993 that the carrying value of the La
Mirada investment exceeded its estimated net realizable value.
Consequently, the carrying value has been reduced by a total of $4,200,000.
<PAGE>
In the second quarter of 1996, the Partnership restructured the lease
with the sole tenant at the Rancho Dominguez property. The remaining lease
term was shortened to eighteen months and the rental rate was reduced, in
consideration for which the tenant agreed to pay two lump sum amounts: one
for $1,250,000 in July 1996, and another for $350,000 at the termination of
the lease. The final payment is secured by a letter of credit issued by a
California bank. As a result of new lease terms and current market
conditions, the managing general partner determined that the carrying value
of the Rancho Dominguez property exceeded its estimated fair market value.
Accordingly, the carrying value has been reduced. The net result of the
lease modification and attendant adjustment to investment carrying value is
a charge of $1,400,000 in the second quarter of 1996. The decrease in
estimated fair market value is $3,000,000 which is presented as an
investment valuation allowance, while the lease termination fee of
$1,600,000 is recognized as revenue.
NOTE 3 - REAL ESTATE JOINT VENTURES
- -----------------------------------
The following summaries of assets and liabilities and of results of
operations relate to the Medlock Oaks joint venture.
<TABLE>
<CAPTION>
Assets and Liabilities
------------------------
June 30, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Assets
Real property, at cost less
accumulated depreciation of
$2,627,390 and $2,425,096 $ 7,904,142 $ 8,103,524
Other 260,752 270,575
----------- -----------
8,164,894 8,374,099
Liabilities 97,904 49,817
----------- -----------
Net assets $ 8,066,990 $ 8,324,282
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Results of Operations
---------------------
Six Months Ended June 30,
--------------------------
1996 1995
------ ------
<S> <C> <C>
Revenue
Rental income $ 647,972 $ 611,358
Other 1,116 2,135
------------- ------------
649,088 613,493
------------- ------------
Expenses
Depreciation and amortization 222,809 215,084
Operating expenses 146,537 150,082
------------- -------------
369,346 365,166
------------- -------------
Net income $ 279,742 $ 248,327
============= =============
</TABLE>
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and its affiliate on behalf of their various financing
arrangements with the joint venture.
<PAGE>
NOTE 4 - SUBSEQUENT EVENT
- -------------------------
Distributions of cash from operations relating to the quarter ended
June 30, 1996 were made on July 25, 1996 in the aggregate amount of
$414,747 ($12.50 per limited partnership unit).
<PAGE>
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
Liquidity and Capital Resources
- -------------------------------
The Partnership completed its offering of units of limited partnership
interest in April 1988, and a total of 32,997 units were sold. The
Partnership received proceeds of $29,379,522, net of selling commissions
and other offering costs, which have been invested in real estate, used to
pay related acquisition costs or retained as working capital reserves.
At June 30, 1996, the Partnership had $4,489,660 in cash, cash
equivalents and short-term investments, of which $414,747 was used for cash
distributions to partners on July 25, 1996; the remainder is being retained
for working capital reserves. As a result of the poor performance of two
of the Partnership's investments over the past several years and the
uncertainty regarding future performance, the managing general partner
determined that it was prudent to augment working capital reserves. The
Partnership did not make any cash distributions to the partners during the
three-year period from the third quarter of 1990 through the second quarter
of 1993. Distributions of cash from operations to the partners were
resumed from the third quarter of 1993 through the first quarter of 1994,
when the managing general partner again suspended operating cash
distributions as a result of the additional uncertainty concerning the
Partnership's future cash flow from the Rancho Dominguez investment. As a
result of the attainment of an adequate level of cash reserves, and the
restructuring of the Rancho Dominguez lease during the second quarter of
1996, the managing general partner has resumed distributions of cash from
operations, effective this second quarter, at an annualized rate of 5.0% on
a capital contribution of $1,000 per unit. The source of future liquidity
and cash distributions to partners will be cash generated by the
Partnership's real estate and short-term investments.
The Partnership maintains a fund for the purpose of repurchasing
limited partnership units. Two percent of cash flow, as defined, is
designated for this fund which had a balance of approximately $600 at June
30, 1996 and December 31, 1995. Through June 30, 1996, the Partnership had
repurchased 149 limited partnership units for an aggregate cost of
$135,921.
<PAGE>
The carrying value of real estate investments in the financial
statements at June 30, 1996 is at depreciated cost, or if the investment's
carrying value is determined not to be recoverable through expected
undiscounted future cash flows, the carrying value is reduced to estimated
fair market value. The fair market value of such investments is further
reduced by the estimated cost of sale for properties held for sale.
Carrying value may be greater or less than current appraised value. The
appraised value of two of the Partnership's investments approximated their
carrying value at June 30, 1996. The appraised value of the Partnership's
remaining investment was $300,000 less than its carrying value. The
current appraised value of real estate investments has been estimated by
the managing general partner and is generally based on a combination of
traditional appraisal approaches performed by the Partnership's advisor,
Copley Real Estate Advisors, Inc., and independent appraisers. Because of
the subjectivity inherent in the valuation process, the current appraised
value may differ significantly from that which could be realized if the
real estate were actually offered for sale in the marketplace.
Results of Operations
- ---------------------
Form of Real Estate Investments
The Dominguez and La Mirada investments are wholly-owned by the
Partnership. The Medlock Oaks investment is structured as a joint venture
with an affiliate of the Partnership.
<PAGE>
Operating Factors
At Medlock Oaks, occupancy remained at 98% during the second quarter
of 1996. (Occupancy was 95% at December 31, 1995, and 97% at June 30,
1995.) Based on a then contemplated sales transaction, the managing
general partner revised its estimate of the fair market value of this
investment in the first quarter of 1996. Accordingly, the carrying value
was reduced by $350,000 through a charge to operations.
The Rancho Dominguez property is 100% leased to a single tenant.
During the second quarter of 1994, the tenant notified the Partnership that
it was experiencing financial difficulty and desired to restructure its
lease. A lease amendment was executed during 1995, retroactive to January
1, 1995, which provided for a two-year extension of the lease and the
deferral of 1995 rental payments totaling $400,000. The deferred amount
would be payable based upon the tenant's achieving a specified level of
operating revenues. Since this threshold was not achieved, the deferral
was permanently abated. In December 1995, the tenant's former parent
company, which had guaranteed the lease, paid the Partnership $275,000 in
full satisfaction of its obligations under the guarantee, which was
recorded as rental revenue in 1995. The tenant paid rent based on the
reduced rate through June 30, 1996. During the second quarter of 1996, the
Partnership further restructured the lease. The remaining lease term was
shortened to eighteen months and the rental rate was reduced, in
consideration for which the tenant agreed to pay two lump sum amounts: one
for $1,250,000 in July 1996, and another for $350,000 at the termination of
the lease. The final payment is secured by a letter of credit issued by a
California bank. As a result of new lease terms and current market
conditions, the managing general partner determined that the carrying value
of the Rancho Dominguez property exceeded its estimated fair market value.
Accordingly, the carrying value has been reduced. The net result of the
lease modification and attendant adjustment to investment carrying value is
a charge of $1,400,000 in the second quarter of 1996. The decrease in
estimated fair market value is $3,000,000 which is presented as an
investment valuation allowance, while the lease termination fee of
$1,600,000 is recognized as revenue. Environmental remediation continues
at this property due to contamination by a former tenant. The remediation
is expected to be completed during 1996, the cost of which has been
previously accrued.
The La Mirada investment had been vacant from August 1990 through
January 1994, and has been fully occupied under a long term lease since
January 1, 1995. As a result of the protracted vacancy period and weakness
in the local market which had depressed rental rates, the managing general
partner determined in 1993 that the carrying value of the La Mirada
building exceeded its net realizable value. The carrying value was reduced
by $3,000,000 in 1993. Due to a further deterioration in market
conditions, the carrying value was further reduced by $1,200,000 in 1994.
<PAGE>
Investment Results
Interest on cash equivalents and short-term investments increased by
approximately $39,000, or 62%, between the first six months of 1995 and
1996, as a result of an increase in average investment balances, partially
offset by a decrease in interest rates. The growth in the investment
balance is consistent with the objective of increasing working capital
reserves.
Exclusive of the valuation allowances on the Medlock Oaks and Rancho
Dominguez investments in 1996 and the lease termination fee on Rancho
Dominguez, total real estate operations for the first six months of 1996
were virtually unchanged compared to the respective prior year period.
Operating results improved at Rancho Dominguez and Medlock Oaks by $6,000
and $14,000, respectively, offset by a decrease of $24,000 at La Mirada.
Cash provided by operations increased by approximately $191,000
between the first six months of 1996 and 1995. The difference is greater
than the changes in investment results due primarily to the timing of cash
distributions from the Medlock Oaks joint venture, as well as decreases in
working capital items.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These
expenses decreased by approximately $4,000, or 6%, between the first six
months of 1995 and 1996, primarily due to decreased legal fees.
The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. The management fee in 1996
relates to the resumption of operating cash distributions in the second
quarter as discussed above.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1996
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: None.
b. Reports on Form 8-K: No Current Reports on Form 8-K
were filed during the quarter ended June 30, 1996.
<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.
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Registrant)
August 14, 1996
/s/ Peter P. Twining
-------------------------------
Peter P. Twining
Managing Director and General Counsel
of Managing General Partner,
Second Income Corp.
August 14, 1996
/s/ Daniel C. Mackowiak
--------------------------------
Daniel C. Mackowiak
Principal Financial and Accounting
Officer of Managing General Partner,
Second Income Corp.
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3507049
<SECURITIES> 982611
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<CURRENT-ASSETS> 4489660
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0
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</TABLE>
