<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, 1998 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 MARCH 31, 1998
PART I
FINANCIAL INFORMATION
<PAGE>
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Assets
Real estate investments:
Property, net $ 6,392,011 $ 6,522,742
Cash and cash equivalents 1,537,825 1,083,887
Short-term investments - 596,268
------------ ------------
$ 7,929,836 $ 8,202,897
============ ============
Liabilities and Partners' Capital
Accounts payable $ 32,105 $ 53,995
Accrued management fee 12,799 28,809
Deferred disposition fees 225,840 225,840
------------ ------------
Total liabilities 270,744 308,644
------------ ------------
Partners' capital (deficit):
Limited partners ($781 per unit;
100,000 units authorized, 32,767
units issued and outstanding) 7,800,707 8,033,516
General partners (141,615) (139,263)
------------ ------------
Total partners' capital 7,659,092 7,894,253
------------ ------------
$ 7,929,836 $ 8,202,897
============ ============
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Investment Activity
Property rentals $ 202,600 $ 365,278
Depreciation and amortization (98,999) (109,304)
Property operating expenses (28,978) (57,277)
--------- ---------
74,623 198,697
Joint venture earnings - 40,854
--------- ---------
Total real estate operations 74,623 239,551
Interest on cash equivalents
and short-term investments 20,313 72,122
--------- ---------
Total investment activity 94,936 311,673
--------- ---------
Portfolio Expenses
General and administrative 26,009 29,742
Management fee 12,799 153,468
--------- ---------
38,808 183,210
--------- ---------
Net Income $ 56,128 $ 128,463
========= =========
Net income per limited partnership
unit $ 1.70 $ 3.88
========= =========
Cash distributions per
limited partnership unit $ 8.80 $ 12.50
========= =========
Number of limited partnership
units outstanding during
the period 32,767 32,818
========= =========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31,
1998 1997
----------------------- ------------------------
General Limited General Limited
Partners Partners Partners Partners
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at beginning
of period $(139,263) $8,033,516 $ (97,317) $19,392,367
Cash distributions (2,913) (288,376) (4,147) (410,600)
Net income 561 55,567 1,285 127,178
--------- ---------- --------- -----------
Balance at end of
period $(141,615) 7,800,707 $(100,179) $19,108,945
========= ========== ========= ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended March 31,
----------------------
1998 1997
----------------------
<S> <C> <C>
Net cash provided by operating activities $ 158,405 $ 354,735
Cash flows from investing activities:
Decrease in short-term
investments, net 586,822 400,993
Cash flows from financing activities:
Distributions to partners (291,289) (414,747)
---------- ----------
Net increase in cash and cash
equivalents 453,938 340,981
Cash and cash equivalents:
Beginning of period 1,083,887 3,560,038
---------- ----------
End of period $1,537,825 $3,901,019
========== ==========
</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, 1998 and December 31, 1997 and the results of its
operations, its cash flows and partners' capital (deficit) for the interim
periods ended March 31, 1998 and 1997. These adjustments are of a normal
recurring nature.
See notes to financial statements included in the Partnership's 1997 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 its remaining
real estate investment 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. ("AEW") to provide
asset management advisory services.
NOTE 2 - PROPERTY
- -----------------
The Partnership's investment in property consists of 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, 1998 December 31, 1997
--------------- ------------------
<S> <C> <C>
Land $ 4,711,859 $ 4,711,859
Buildings and improvements 7,855,152 7,855,152
Accumulated depreciation (2,519,595) (2,440,345)
Investment valuation allowance (4,200,000) (4,200,000)
----------- -----------
5,847,416 5,926,666
Other net assets 544,595 596,076
----------- -----------
$ 6,392,011 $ 6,522,742
=========== ===========
</TABLE>
<PAGE>
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 AEW. 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 Results of Operations relate to the Medlock Oaks joint
venture:
Results of Operations
---------------------
<TABLE>
<CAPTION>
Quarter Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenue
Rental income $ - $ $287,448
Other - 495
---------- ----------
- 287,943
---------- ----------
Expenses
Depreciation and amortization - 111,867
Operating expenses - 77,873
---------- ----------
- 189,740
---------- ----------
Net income $ - $ 98,203
========== ==========
</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, 1998 were made on April 29, 1998 in the aggregate amount of $129,413 ($3.91
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.
In connection with two sales during 1997, capital of $7,182,093 has been
returned to the limited partners. On May 29, 1997, the Partnership made a
capital distribution of $120 per limited partnership unit, which reduced the
adjusted capital contribution to $880 per unit. On December 21, 1997, the
Partnership made a capital distribution of $99 per limited partnership unit,
which reduced the adjusted capital contribution to $781 per unit.
At March 31, 1998, the Partnership had $1,537,825 in cash and cash
equivalents, of which $129,413 was used for cash distributions to partners on
April 29, 1998; the remainder is being retained for working capital reserves.
Distributions of cash from operations for the first and second quarters of 1997
were made 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 and fourth quarter 1997 distributions were made at an annualized rate
of 4.0% on the adjusted capital contribution of $880. The distribution rate was
decreased during the third quarter of 1997 due to the sale of Medlock Oaks in
May 1997. The fourth quarter 1997 distribution included a special operating
distribution of $2,581,879 representing the final portion of the lease
termination fee from the tenant at Rancho Dominguez, and a reduction of
Partnership reserves. The first quarter 1998 distribution was made at an
annualized rate of 2.0% on the adjusted capital contribution of $781 per unit.
The rate was decreased this quarter as a result of decreased cash flow due to
the sale of Rancho Dominguez in December 1997. The source of future liquidity
and cash distributions to partners will primarily be cash generated by the
Partnership's real estate and invested cash and cash equivalents.
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 $44,395 and $41,551 at March 31, 1998 and December
31, 1997, respectively. Through March 31, 1998, the Partnership had repurchased
and retired 230 limited partnership units for an aggregate cost of $177,945.
<PAGE>
The carrying value of the Partnership's remaining real estate investment
in the financial statements at March 31, 1998 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. At March 31, 1998, the appraised
value of the La Mirada investment exceeded its carrying value by approximately
$1,100,000. 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 AEW 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
- ---------------------
Investment Results
As discussed above, the Rancho Dominguez and Medlock Oaks investments
were sold during 1997. Therefore, comparative real estate operating results are
presented for the La Mirada investment only.
The La Mirada investment had been vacant from August 1990 through January
1994. As of January 1, 1995, the property has been 100% occupied under a long-
term lease. Operating results at La Mirada were $62,545 and $77,540 for the
three months ended March 31, 1997 and 1998, respectively. The improvement is
the result of a decrease in legal and accounting fees between the two periods.
Cash flow to the Partnership increased by $15,000 in 1998 as compared to the
respective prior-year period consistent with the above increase in operating
results.
Interest on cash equivalents and short-term investments decreased by
approximately $52,000, or 72%, between the first three months of 1997 and 1998,
as a result of a decrease in average investment balances stemming from the
aforementioned special operating distribution in December 1997.
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 13%, between the first three months of
1997 and 1998, primarily due to decreases in legal and appraisal fees, partially
offset by an increase in investor servicing expenses.
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 operating distribution for the
first quarter of 1997 also includes an amount related to the lease termination
fee discussed above, which contributed to the decrease in management fees in
1998.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1998
PART II
OTHER INFORMATION
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 March 31, 1998.
<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)
May 8, 1998
/s/ Wesley M. Gardiner, Jr.
-------------------------------
Wesley M. Gardiner, Jr.
President, Chief Executive Officer and Director
of Managing General Partner,
Second Income Corp.
May 8, 1998
/s/ Karin J. Lagerlund
--------------------------------
Karin J. Lagerlund
Treasurer and 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,537,825
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,537,825
<PP&E> 6,392,011
<DEPRECIATION> 2,519,595
<TOTAL-ASSETS> 7,929,836
<CURRENT-LIABILITIES> 270,744
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,659,092
<TOTAL-LIABILITY-AND-EQUITY> 7,929,836
<SALES> 202,600
<TOTAL-REVENUES> 222,913
<CGS> 28,978
<TOTAL-COSTS> 28,978
<OTHER-EXPENSES> 137,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 56,128
<INCOME-TAX> 0
<INCOME-CONTINUING> 56,128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,128
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.70
</TABLE>
