<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 September 30, 1997 Commission File Number 0-17810
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2961376
(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 SEPTEMBER 30, 1997
PART I
FINANCIAL INFORMATION
<PAGE>
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets
Real estate investments:
Property, net $ 6,580,827 $10,221,007
Joint venture - 3,543,935
----------- -----------
6,580,827 13,764,942
Property held for disposition 3,403,308 -
Cash and cash equivalents 2,931,810 3,560,038
Short-term investments 1,233,426 2,062,313
----------- -----------
$14,149,371 $19,387,293
=========== ===========
Liabilities and Partners' Capital
Accounts payable $ 45,303 $ 51,224
Accrued management fee 28,851 41,019
Deferred disposition fee 121,260 -
----------- -----------
Total liabilities 195,414 92,243
----------- -----------
Partners' capital (deficit):
Limited partners ($880 and
$1,000 per unit, respectively;
100,000 units authorized, 32,770
and 32,818 units, respectively
issued and outstanding) 14,065,076 19,392,367
General partners (111,119) (97,317)
----------- -----------
Total partners' capital 13,953,957 19,295,050
----------- -----------
$14,149,371 $19,387,293
=========== ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended Quarter Ended Nine Months Ended
September 30, 1997 September 30, 1997 September 30, 1996 September 30, 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Investment Activity
Property rentals $373,125 $1,107,258 $ 353,676 $ 1,135,178
Depreciation and amortization (98,996) (316,748) (201,369) (604,113)
Property operating expenses (47,621) (150,673) (39,627) (136,284)
-------- ---------- --------- -----------
226,508 639,837 112,680 394,781
Joint venture earnings - 57,570 60,105 177,647
Lease termination fee - - - 1,600,000
Investment valuation allowance - - - (3,350,000)
-------- ---------- --------- -----------
Total real estate operations 226,508 697,407 172,785 (1,177,572)
Gain on sale of property - 387,990 - -
-------- ---------- --------- -----------
Total real estate activity 226,508 1,085,397 172,785 (1,177,572)
Interest on cash equivalents
and short-term investments 57,007 204,056 74,888 176,198
-------- ---------- --------- -----------
Total investment activity 283,515 1,289,453 247,673 (1,001,374)
-------- ---------- --------- -----------
Portfolio Expenses
General and administrative 20,557 84,796 29,987 89,649
Management fee 28,851 221,563 41,019 82,038
-------- ---------- --------- -----------
49,408 306,359 71,006 171,687
-------- ---------- --------- -----------
Net Income (Loss) $234,107 $ 983,094 $ 176,667 $(1,173,061)
======== ========== ========= ===========
Net income (loss) per
limited partnership unit $ 7.06 $ 29.66 $ 5.32 $ (35.35)
======== ========== ========= ===========
Cash distributions per
limited partnership unit $ 11.97 $ 191.28 $ 12.50 $ 12.50
======== ========== ========= ===========
Number of limited partnership
units outstanding during
the period 32,818 32,818 32,848 32,848
======== ========== ========= ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended Quarter Ended Nine Months Ended
September 30, 1997 September 30, 1997 September 30, 1996 September 30, 1996
------------------------ ------------------------ ----------------------- -----------------------
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 $(109,492) $14,248,893 $ (97,317) $19,392,367 $(93,407) $19,797,404 $(79,910) $21,133,635
Cash distributions (3,968) (392,831) (23,633) (6,277,802) (4,147) (410,600) (4,147) (410,600)
Repurchase of limited
partnership units - (22,752) - (22,752) - - - -
Net income (loss) 2,341 231,766 9,831 973,263 1,766 174,901 (11,731) (1,161,330)
--------- ----------- --------- ----------- -------- ----------- -------- -----------
Balance at end of
period $(111,119) $14,065,076 $(111,119) $14,065,076 $(95,788) $19,561,705 $(95,788) $19,561,705
========= =========== ========= =========== ======== =========== ======== ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
----------------------------
<S> <C> <C>
Net cash provided by operating activities $ 911,029 $2,532,944
----------- ----------
Cash flows from investing activities:
Net proceeds from sale of property 3,836,988 -
Increase in deferred disposition fees 121,260 -
Decrease in short-term
investments, net 826,682 677,844
----------- ----------
Net cash provided by investing activities 4,784,930 677,844
----------- ----------
Cash flows from financing activities:
Distributions to partners (6,301,435) (414,747)
Repurchase of limited partnership units (22,752) -
----------- ----------
Net cash used in financing activities (6,324,187) (414,747)
----------- ----------
Net increase (decrease)in cash and cash
equivalents (628,228) 2,796,041
Cash and cash equivalents:
Beginning of period 3,560,038 1,934,364
----------- ----------
End of period $ 2,931,810 $4,730,405
=========== ==========
</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 September 30, 1997 and December 31, 1996 and the results of its
operations, its cash flows and partners' capital (deficit) for the interim
periods ended September 30, 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 two real
estate investments it currently owns prior to the end of 1987. The Partnership
intended to dispose of its investments within six to nine years of their
acquisition, and then liquidate; however, the managing general partner has
extended the holding period, having determined it to be in the best interest of
the limited partners. The Partnership has engaged AEW Real Estate Advisors,
Inc. (the "Advisor") to provide asset management advisory services.
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. Late in the third quarter of 1997, the Partnership executed
a purchase and sale agreement to sell the Rancho Dominguez property.
Accordingly, this property has been reclassified on the Balance Sheet as
"Property held for disposition". The following is a summary of the
Partnership's investment in property:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------- ------------------
<S> <C> <C>
Land $ 4,711,859 $ 7,339,344
Buildings and improvements 7,855,152 12,235,440
Accrued lease termination fee - 350,000
Accumulated depreciation (2,389,466) (3,466,160)
Investment valuation allowance (4,200,000) (7,200,000)
----------- -----------
5,977,545 9,258,624
Other net assets 603,282 1,040,472
Accrued environmental clean-up costs - (78,089)
Property held for disposition 3,403,308 -
----------- -----------
$ 9,984,135 $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 was 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 at that time, 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
- -----------------------------------
On May 2, 1997, the Medlock Oaks buildings, which were owned by the
Partnership (43%) and an affiliate (57%), were sold for a total sales price of
$9,402,779. The Partnership received net proceeds of $3,958,248 after closing
costs, and recognized a gain of $387,990 ($11.70 per limited partnership unit)
on the sale. A disposition fee of $121,260 was accrued but not paid to the
Advisor. On May 29, 1997, the Partnership made a capital distribution of
$3,938,160 ($120 per limited partnership unit) from the proceeds of the sale.
The following summarized financial information is presented in the
aggregate for the Medlock Oaks joint venture:
Assets and Liabilities
----------------------
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets
Real property, at cost less
accumulated depreciation of
$0 and $2,821,679 $ _ $7,702,658
Other - 288,149
----------- ----------
- 7,990,807
Liabilities - 86,084
----------- ----------
Net assets $ - $7,904,723
=========== ==========
</TABLE>
<PAGE>
Results of Operations
---------------------
<TABLE>
<CAPTION>
Period from Nine Months
January 1, 1997 Ended
through May 2,1997 September 30, 1996
------------------- ------------------
<S> <C> <C>
Revenue
Rental income $400,861 $965,082
Other 735 1,627
-------- --------
401,596 966,709
-------- --------
Expenses
Depreciation and amortization 156,940 334,676
Operating expenses 112,258 209,318
-------- --------
269,198 543,994
-------- --------
Net income $132,398 $422,715
======== ========
</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
September 30, 1997 were made on October 30, 1997 in the aggregate amount of
$291,716 ($8.80 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.
On May 2, 1997, the Medlock Oaks buildings, which were owned by the
Partnership (43%) and an affiliate (57%), were sold for a total sales price of
$9,402,779. The Partnership received net proceeds of $3,958,248, after closing
costs, and recognized a gain of $387,990 ($11.70 per limited partnership unit)
on the sale. A disposition fee of $121,260 was accrued but not paid to the
Advisor. On May 29, 1997, the Partnership made a capital distribution of
$3,938,160 ($120 per limited partnership unit) from the proceeds of the sale.
The distribution reduced the adjusted capital contribution to $880 per unit.
At September 30, 1997, the Partnership had $4,165,236 in cash, cash
equivalents and short-term investments, of which $291,716 was used for cash
distributions to partners on October 30, 1997; the remainder is being retained
for 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, the managing
general partner resumed distributions of cash from operations, as of the second
quarter of 1996, at an annualized rate of 5.0% on a capital contribution of
$1,000 per unit. The first quarter 1997 distribution includes $1,137,359
related to the first installment of a lease termination fee which was received
in 1996 and retained previously in working capital reserves. The second quarter
1997 distribution was based on the weighted average adjusted capital
contribution. The third quarter 1997 distribution was made at an annualized
rate of 4.0% on the adjusted capital contribution of $880. The distribution
rate was decreased during this quarter due to the sale of Medlock Oaks. 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 $36,571 and $10,087 at September 30, 1997 and
December 31, 1996, respectively. Through September 30, 1997, the Partnership
had repurchased and retired 227 limited partnership units for an aggregate cost
of $176,523.
The carrying value of real estate investments in the financial statements
at September 30, 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.
<PAGE>
Carrying value may be greater or less than current appraised value. After
giving effect to the investment valuation allowances, the appraised value of the
Rancho Dominguez investment exceeded its carrying value at September 30, 1997 by
approximately $200,000. The appraised value of the La Mirada investment
approximated 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
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.
Late in the third quarter of 1997, the Partnership executed a purchase
and sale agreement to sell the Rancho Dominguez property.
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, which was sold on May 2, 1997, was
structured as a joint venture with an affiliate of the Partnership.
Operating Factors
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. As a result of the new lease
terms and current market conditions at that time, 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 $28,000, or 16%, between the first nine months of 1996 and 1997,
as a result of an increase in average investment balances stemming from the
investment of both the receipt of the lease termination payment ($1,250,000) in
the third quarter of 1996, and proceeds from the Medlock Oaks sale in 1997, as
well as an increase in short-term yields.
Exclusive of the lease termination fee and valuation allowances at Rancho
Dominguez and Medlock Oaks in 1996, total real estate operations for the first
nine months of 1997 increased by $124,979 compared to the corresponding prior-
year period. The increase resulted from lower depreciation and amortization
expenses of $287,000 at Rancho Dominguez caused by the write-off of tenant
improvements and other net assets in 1996. This increase in operations was
partially offset by lower rental revenue as a result of the related lease
restructuring. The overall increase was also offset by higher operating
expenses at La Mirada, as well as a decrease in joint venture earnings due to
the sale of Medlock Oaks in May 1997.
Exclusive of the lease termination payment of $1,250,000 from Rancho
Dominguez, cash provided by operating activities decreased by $371,915 between
the two nine-month periods. The decline is attributable to decreased
distributions from Medlock Oaks, increases in working capital items, and
declines in operating activity at both Rancho Dominguez and La Mirada, as
discussed above.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These expenses
decreased by approximately $5,000, or 5%, between the first nine months of 1996
and 1997, primarily due to a decrease in appraisal fees, partially offset by an
increase in accounting 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, which contributed to the increase in management fees in
1997.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
PART II
OTHER INFORMATION
Items 1-5 Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: (27) Financial Data Schedule
b. Reports on Form 8-K: No current reports on Form 8-K were filed
during the quarter ended September 30, 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)
November 14, 1997
/s/ James J. Finnegan
-------------------------------
James J. Finnegan
Vice President
of Managing General Partner,
Second Income Corp.
November 14, 1997
/s/ Karin J. Lagerlund
--------------------------------
Karin J. Lagerlund
Principal Financial and Accounting
Officer of Managing General Partner,
Second Income Corp.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,931,810
<SECURITIES> 1,233,426
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,165,236
<PP&E> 9,984,135
<DEPRECIATION> 3,721,910
<TOTAL-ASSETS> 14,149,371
<CURRENT-LIABILITIES> 74,154
<BONDS> 121,260
0
0
<COMMON> 0
<OTHER-SE> 13,953,957
<TOTAL-LIABILITY-AND-EQUITY> 14,149,371
<SALES> 1,164,828
<TOTAL-REVENUES> 1,756,874
<CGS> 150,673
<TOTAL-COSTS> 150,673
<OTHER-EXPENSES> 623,107
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 983,094
<INCOME-TAX> 0
<INCOME-CONTINUING> 983,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 983,094
<EPS-PRIMARY> 29.66
<EPS-DILUTED> 29.66
</TABLE>
