<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 March 31, 1997 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)
225 Franklin Street, 25th Fl.
Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 261-9000
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 MARCH 31, 1997
PART I
FINANCIAL INFORMATION
<PAGE>
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Assets
Real estate investments:
Property, net $10,161,244 $10,221,007
Joint ventures 3,487,408 3,543,935
----------- -----------
13,648,652 13,764,942
Cash and cash equivalents 3,901,019 3,560,038
Short-term investments 1,650,428 2,062,313
----------- -----------
$19,200,099 $19,387,293
=========== ===========
Liabilities and Partners' Capital
Accounts payable $ 37,865 $ 51,224
Accrued management fee 153,468 41,019
----------- -----------
Total liabilities 191,333 92,243
----------- -----------
Partners' capital (deficit):
Limited partners ($1,000 per unit;
100,000 units authorized, 32,818
units issued and outstanding) 19,108,945 19,392,367
General partners (100,179) (97,317)
----------- -----------
Total partners' capital 19,008,766 19,295,050
----------- -----------
$19,200,099 $19,387,293
=========== ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
----------- ------------
<S> <C> <C>
Investment Activity
Property rentals $ 365,278 $ 401,471
Depreciation and amortization (109,304) (201,370)
Property operating expenses (57,277) (55,561)
--------- ---------
198,697 144,540
--------- ---------
Joint venture earnings 40,854 54,091
Investment valuation allowance - (350,000)
--------- ---------
Total real estate operations 239,551 (151,369)
Interest on cash equivalents
and short-term investments 72,122 47,636
--------- ---------
Total investment activity 311,673 (103,733)
--------- ---------
Portfolio Expenses
General and administrative 29,742 26,876
Management fee 153,468 -
--------- ---------
183,210 26,876
--------- ---------
Net income (loss) $ 128,463 $(130,609)
========= =========
Net income (loss) per weighted
average limited partnership unit $3.88 $(3.94)
========= =========
Weighted average number of limited
partnership units outstanding
during the period 32,818 32,848
========= =========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31,
1997 1996
------ ------
General Limited General Limited
Partners Partners Partners Partners
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning
of period $ (97,317) $19,392,367 $(79,910) $21,133,635
Cash distributions (4,147) (410,600) - -
Net income (loss) 1,285 127,178 (1,306) (129,303)
--------- ----------- --------- -----------
Balance at end of
period $(100,179) $19,108,945 $(81,216) $21,004,332
========= =========== ========= ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
SUMMARIZED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 354,735 $ 346,275
---------- ----------
Cash flows from investing activities:
Increase (decrease) in short-term
investments, net 400,993 (431,256)
---------- ----------
Cash flows from financing activities:
Distributions to partners (414,747) -
---------- ----------
Net increase (decrease) in cash and cash
equivalents 340,981 (84,981)
Cash and cash equivalents:
Beginning of period 3,560,038 1,934,364
---------- ----------
End of period $3,901,019 $1,849,383
========== ==========
</TABLE>
(See accompanying notes to financial statements)
<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 March 31, 1997 and December 31, 1996 and the results of its
operations, its cash flows and changes in partners' capital (deficit) for the
interim periods ended March 31, 1997 and 1996. These adjustments are of a
normal recurring nature.
See notes to financial statements included in the Partnership's 1996 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.
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>
March 31, 1997 December 31, 1996
--------------- ------------------
<S> <C> <C>
Land $ 7,339,344 $ 7,339,344
Buildings and improvements 12,235,440 12,235,440
Accrued lease termination fee 350,000 350,000
Accumulated depreciation (3,554,410) (3,466,160)
Investment valuation allowance (7,200,000) (7,200,000)
----------- -----------
9,170,374 9,258,624
Other net assets 1,064,455 1,040,472
Accrued environmental clean-up costs (73,585) (78,089)
----------- -----------
$10,161,244 $10,221,007
=========== ===========
</TABLE>
<PAGE>
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 $4,200,000.
In the second quarter of 1996, the Partnership amended the lease with
the sole tenant at the Rancho Dominguez property. The remaining lease term was
shortened to eighteen months (along with an option for the Partnership to
terminate the lease with a ninety day notice) and the rental rate was reduced,
in consideration for which the tenant agreed to pay two lump sum amounts: one
for $1,250,000, which was received 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. This lease termination fee was recognized as
revenue in 1996. As a result of the new lease terms and current market
conditions, the managing general partner determined that the carrying value of
the Rancho Dominguez property was impaired. Accordingly, the carrying value was
reduced to estimated fair market value with an investment valuation allowance of
$3,000,000 which was also recognized in 1996.
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.
Assets and Liabilities
-----------------------
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Assets
Real property, at cost less
accumulated depreciation of
$2,922,139 and $2,821,679 $7,604,544 $7,702,658
Other 244,922 288,149
---------- ----------
7,849,466 7,990,807
---------- ----------
Liabilities 69,964 86,084
---------- ----------
Net assets $7,779,502 $7,904,723
========== ==========
</TABLE>
<PAGE>
Results of Operations
---------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1997 1996
------ ------
<S> <C> <C>
Revenue
Rental income $287,448 $320,174
Other 495 588
-------- --------
287,943 320,762
-------- --------
Expenses
Depreciation and amortization 111,867 111,867
Operating expenses 77,873 79,907
-------- --------
189,740 191,774
-------- --------
Net income $ 98,203 $128,988
======== ========
</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.
NOTE 4 - SUBSEQUENT EVENT
- -------------------------
Distributions of cash from operations relating to the quarter ended March
31, 1997 were made on April 24, 1997 in the aggregate amount of $414,369 ($12.50
per limited partnership unit).
On that date, the Partnership also made an additional distribution of cash
from operations in the aggregate amount of $1,137,359 ($34.31 per limited
partnership unit), which related to the first installment of the lease
termination fee (See Note 2.) received in 1996 and held in working capital
reserves.
<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 March 31, 1997, the Partnership had $5,551,447 in cash, cash
equivalents and short-term investments, of which $1,551,728 was used for cash
distributions to partners on April 24, 1997; the remainder is being retained for
working capital reserves. The April cash distribution includes $1,137,359
related to the first installment of a lease termination fee, which was received
in 1996 and retained in working capital reserves. The managing general partner
suspended operating cash distributions as of the second quarter of 1994 as a
result of the uncertainty concerning the Partnership's future cash flow from the
Rancho Dominguez investment. After 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 resumed distributions of cash from
operations, as of the 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 primarily 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 $19,194 and $10,087 at March 31, 1997 and December
31, 1996, respectively. Through March 31, 1997, the Partnership had repurchased
and retired 179 limited partnership units for an aggregate cost of $153,771.
The carrying value of real estate investments in the financial statements
at March 31, 1997 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. After giving effect to the investment valuation
allowances, the appraised value of two of the Partnership's investments exceeded
their respective carrying value at March 31, 1997 by an aggregate total of
approximately $800,000. The appraised value of the third 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 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.
<PAGE>
Results of Operations
- ---------------------
Form of Real Estate Investments
The Rancho 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.
Operating Factors
At Medlock Oaks, occupancy decreased slightly to 92% during the first
quarter of 1997. (Occupancy was 97% at December 31, 1996, and 98% at March 31,
1996.) In the first quarter of 1996 the managing general partner determined
that the Partnership would be unable to recover the carrying value of this
investment and, accordingly, the carrying value was reduced by $350,000 through
a charge to operations. The property is now under contract for sale, which is
expected to close in the second quarter of 1997 at an expected sales price, net
of sales costs, which will exceed the carrying value.
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 which provided for a two-year extension of
the lease and a reduction in the monthly rent through 1995. The tenant
continued to pay rent based on the reduced rate through June 30, 1996.
During the second quarter of 1996, the Partnership further amended the
lease. The remaining lease term was shortened to eighteen months (along with an
option for the Partnership to terminate the lease with a ninety day notice) and
the rental rate was reduced, in consideration for which the tenant agreed to pay
two lump sum amounts: one of $1,250,000 which was received July 1996, and
another of $350,000 at the termination of the lease. The final payment is
secured by a letter of credit issued by a California bank. The lease
termination fee was recognized as revenue in 1996. The Partnership is actively
marketing the building for re-lease. 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 was impaired. Accordingly, the carrying
value was reduced to estimated fair market value with an investment valuation
allowance of $3,000,000 which was also recognized in 1996. Environmental
remediation at this property, due to contamination by a former tenant, was
recently completed. The cost was 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 $24,000, or 51%, between the first three months of 1996 and 1997,
as a result of an increase in average investment balances stemming from the
receipt of the lease termination payment ($1,250,000) in the third quarter of
1996.
Exclusive of the valuation allowance on the Medlock Oaks investment in
1996, total real estate operations for the first three months of 1997 increased
by $41,000 compared to the corresponding prior year period. This increase
resulted from lower depreciation and amortization expenses of $92,000 at Rancho
Dominguez, caused by the write-off of tenant improvements and other net assets
in 1996. This effect was partially offset by lower rental revenue as a result
of the related lease restructuring, higher operating expenses at La Mirada, and
lower rentals at Medlock Oaks due to the occupancy decline.
Cash flow from operations increased by approximately $9,000 between the
first quarters of 1996 and 1997. Although net income increased by $259,000, the
change largely resulted from lower non-cash expenses in 1997, such as the
investment valuation allowance and depreciation and amortization. In addition,
Partnership working capital at March 31, 1997 was lower than at the comparable
prior year quarter end.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These expenses
increased by approximately $3,000, or 11%, between the first three months of
1996 and 1997, primarily due to an increase in 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. There was no distributable cash
flow in the first quarter of 1996. Regular operating cash distributions were
resumed as of the second quarter of 1996. The operating distribution for the
first quarter of 1997 also includes an amount related to the lease termination
fee discussed above.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1997
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 March 31, 1997.
<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)
April 30, 1997
/s/ James J. Finnegan
--------------------------------
James J. Finnegan
Managing Director and General Counsel
of Managing General Partner,
Second Income Corp.
April 30, 1997
/s/ Daniel C. Mackowiak
--------------------------------
Daniel C. Mackowiak
Principal Financial and Accounting
Officer of Managing General Partner,
Second Income Corp.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,901,019
<SECURITIES> 1,650,428
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,551,447
<PP&E> 13,648,652
<DEPRECIATION> 3,554,410
<TOTAL-ASSETS> 19,200,099
<CURRENT-LIABILITIES> 191,333
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,008,766
<TOTAL-LIABILITY-AND-EQUITY> 19,200,099
<SALES> 406,132
<TOTAL-REVENUES> 478,254
<CGS> 57,277
<TOTAL-COSTS> 57,277
<OTHER-EXPENSES> 292,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 128,463
<INCOME-TAX> 0
<INCOME-CONTINUING> 128,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,463
<EPS-PRIMARY> 3.88
<EPS-DILUTED> 3.88
</TABLE>
