<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, 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 SEPTEMBER 30, 1998
PART I
FINANCIAL INFORMATION
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Assets
Real estate investments:
Property, net $6,232,187 $6,522,742
Cash and cash equivalents 1,554,854 1,083,887
Short-term investments - 596,268
---------- ----------
$7,787,041 $8,202,897
========== ==========
Liabilities and Partners' Capital
Accounts payable $ 37,056 $ 53,995
Accrued management fee 104,062 28,809
Deferred disposition fees 225,840 225,840
---------- ----------
Total liabilities 366,958 308,644
---------- ----------
Partners' capital (deficit):
Limited partners ($781 per unit;
100,000 units authorized, 32,767
units issued and outstanding) 7,564,088 8,033,516
General partners (144,005) (139,263)
---------- ----------
Total partners' capital 7,420,083 7,894,253
---------- ----------
$7,787,041 $8,202,897
========== ==========
</TABLE>
(See accompanying notes to unaudited financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998 September 30, 1997 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Investment Activity
Property rentals $202,712 $ 608,300 $373,125 $1,107,258
Depreciation and amortization (98,998) (296,992) (98,996) (316,748)
Property operating expenses (38,261) (95,211) (47,621) (150,673)
-------- --------- -------- ----------
65,453 216,097 226,508 639,837
Joint venture earnings - - - 57,570
-------- --------- -------- ----------
Total real estate operations 65,453 216,097 226,508 697,407
Gain on sale of property - - - 387,990
-------- --------- -------- ----------
Total real estate activity 65,453 216,097 226,508 1,085,397
Interest on cash equivalents
and short-term investments 20,033 59,675 57,007 204,056
-------- --------- -------- ----------
Total investment activity 85,486 275,772 283,515 1,289,453
-------- --------- -------- ----------
Portfolio Expenses
General and administrative 20,445 70,167 20,557 84,796
Management fee 104,062 129,660 28,851 221,563
-------- --------- -------- ----------
124,507 199,827 49,408 306,359
-------- --------- -------- ----------
Net Income (Loss) $(39,021) $ 75,945 $234,107 $ 983,094
======== ========= ======== ==========
Net income (loss) per
limited partnership unit $ (1.18) $ 2.29 $ 7.06 $ $ 29.66
======== ========= ======== ==========
Cash distributions per
limited partnership unit $ 3.91 $ 16.62 $ 11.97 $ $191.28
======== ========= ======== ==========
Number of limited partnership
units outstanding during
the period 32,767 32,767 32,818 32,818
======== ========= ======== ==========
</TABLE>
(See accompanying notes to unaudited financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998 September 30, 1997 September 30, 1997
---------------------- ---------------------- ----------------------- -----------------------
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 $(142,320) $7,730,837 $(139,263) $8,033,516 $(109,492) $14,248,893 $ (97,317) $19,392,367
Cash distributions (1,294) (128,119) (5,501) (544,614) (3,968) (392,831) (23,633) (6,277,802)
Repurchase of limited
partnership units - - - - - (22,752) - (22,752)
Net income (loss) (391) (38,630) 759 75,186 2,341 231,766 9,831 973,263
--------- ---------- --------- ---------- --------- ----------- --------- -----------
Balance at end of
period $(144,005) $7,564,088 $(144,005) $7,564,088 $(111,119) $14,065,076 $(111,119) $14,065,076
========= ========== ========= ========== ========= =========== ========= ===========
</TABLE>
(See accompanying notes to unaudited financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
SUMMARIZED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 434,260 $ 911,029
---------- -----------
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 586,822 826,682
---------- -----------
Net cash provided by investing activities 586,822 4,784,930
---------- -----------
Cash flows from financing activities:
Distributions to partners (550,115) (6,301,435)
Repurchase of limited partnership units - (22,752)
---------- -----------
Net cash used in financing activities (550,115) (6,324,187)
---------- -----------
Net increase (decrease) in cash and cash
equivalents 470,967 (628,228)
Cash and cash equivalents:
Beginning of period 1,083,887 3,560,038
---------- -----------
End of period $1,554,854 $ 2,931,810
========== ===========
</TABLE>
(See accompanying notes to unaudited financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
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, 1998 and December 31, 1997 and the
results of its operations, its cash flows and partners' capital (deficit) for
the three and nine months ended September 30, 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. (the "Advisor ") 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>
September 30, 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 (2,678,095) (2,440,345)
Investment valuation allowance (4,200,000) (4,200,000)
Other net assets 543,271 596,076
----------- -----------
$ 6,232,187 $ 6,522,742
=========== ===========
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
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 Results of Operations relate to the Medlock Oaks joint
venture:
Results of Operations
---------------------
<TABLE>
<CAPTION>
Period from
Nine Months Ended January 1, 1997
September 30, 1998 through May 2, 1997
------------------ --------------------
<S> <C> <C>
Revenue
Rental income $ - $400,861
Other - 735
-------- --------
- 401,596
-------- --------
Expenses
Depreciation and amortization - 156,940
Operating expenses - 112,258
-------- --------
- 269,198
-------- --------
Net income $ - $132,398
======== ========
</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, 1998 were made on October 29, 1998 in the aggregate amount of
$129,413 ($3.91 per limited partnership unit).
On that date, the Partnership also made an additional distribution of
operating cash reserves in the aggregate amount of $922,772 ($27.88 per limited
partnership unit).
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
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 the two sales during May and December of 1997, capital
of $7,182,093 ($219 per limited partnership unit) has been returned to the
limited partners, reducing the adjusted capital contribution to $781 per unit.
At September 30, 1998, the Partnership had $1,554,854 in cash and cash
equivalents, of which $1,052,185 was used for cash distributions to partners on
October 29, 1998; the remainder is being retained for working capital reserves.
The October distribution includes a special distribution of operating reserves
of $922,772. Distributions of cash from operations for the first two quarters of
1997 were made at an annualized rate of 5.0%; the rate was reduced to 4.0% for
the third quarter of 1997. The first quarter 1997 distribution was based on a
capital contribution of $1,000 per unit; the second quarter 1997 distribution
was based on the weighted average adjusted capital contribution of $957.33 per
unit; the third quarter 1997 distribution was based on the adjusted capital
contribution of $880. 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 previously retained in working capital reserves. Operating cash
distributions for the first three quarters of 1998 were made at an annualized
rate of 2.0% on the adjusted capital contribution of $781 per unit. The rate
was decreased as of the third quarter of 1997 and first quarter of 1998 as a
result of decreased cash flow due to the sales of Medlock Oaks and Rancho
Dominguez in May and December 1997, respectively. 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 $70,365 and $41,551 at September 30, 1998 and
December 31, 1997, respectively. Through September 30, 1998, the Partnership
had repurchased and retired 230 limited partnership units for an aggregate cost
of $177,945.
The carrying value of the Partnership's remaining real estate investment
in the financial statements at September 30, 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 investment 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
September 30, 1998, the appraised value of the La Mirada investment exceeded
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
its carrying value by approximately $1,000,000. The current appraised value of
this real estate investment 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.
The Year 2000 Issue is a result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business operations.
The Partnership relies on AEW Capital Management L.P. ("AEW Capital
Management"), the parent of AEW Real Estate Advisors, Inc., to generate
financial information and to provide other services which are dependent on the
use of computers. The Partnership has obtained assurances from AEW Capital
Management that:
. AEW Capital Management has developed a Year 2000 Plan (the "Plan")
consisting of five phases: inventory, assessment, testing,
remediation/repair and certification.
. As of September 30, 1998, AEW Capital Management had completed the
inventory and assessment phases of this Plan and had commenced the testing
and remediation/repair of internal systems.
. AEW Capital Management expects to conclude the internal testing,
remediation/repair and certifications of its Plan no later than
December 31, 1998.
The Partnership also relies on joint venture partners and/or property
managers to supply financial and other data with respect to its real properties.
The Partnership is in the process of surveying these third party providers and
assessing their compliance with Year 2000 requirements. To date, the
Partnership is not aware of any problems that would materially impact its
results of operations, liquidity or capital resources. However, the Partnership
has not yet obtained written assurances that these providers would be Year 2000
compliant.
The Partnership currently does not have a contingency plan in the event of
a particular provider or system not being Year 2000 compliant. Such a plan will
be developed if it becomes clear that a provider (including AEW Capital
Management) is not going to achieve its scheduled compliance objectives. The
inability of one of these providers to complete its Year 2000 resolution process
could materially impact the Partnership. In addition, the Partnership is also
subject to external forces that might generally affect industry and commerce,
such as utility or transportation company Year 2000 compliance failures and
related service interruptions.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
Results of Operations
- ---------------------
Investment Results
For the three and nine months ended September 30, 1998, real estate
operating results were $65,453 and $216,097, respectively, compared to $226,508
and $697,407 for the comparable periods in 1997. The decreases of $161,055 and
$481,310 for the three and nine-month periods, respectively, are primarily due
to a reduction in aggregate operating income of $146,401 and $476,554 over the
same periods as a result of the sales of the Medlock Oaks and Rancho Dominguez
investments in May 1997 and December 1997, respectively.
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 $220,853 and $216,097 for the
nine months ended September 30, 1997 and 1998, respectively. For the three
months ending September 30, 1997 and 1998, operating income was $80,107 and
$65,453 at La Mirada. The decline in 1998 over the respective prior year three
month period is due to consulting fees in addition to increased accounting fees
between the two periods.
For the three and nine months ended September 30, 1998, interest on cash
equivalents and short-term investments decreased by approximately $144,000 and
$37,000 between the respective periods as a result of a decrease in average
investment balances stemming from the special operating distribution in December
1997 described above.
The decrease in operating cash flow of approximately $477,000 between the
first nine months of 1997 and 1998 is primarily due to a decrease in real estate
activity as a result of the sales of Rancho Dominguez and Medlock Oaks in 1997,
as mentioned 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 $15,000 between the first nine months of 1997 and
1998, primarily due to decreases in accounting and appraisal fees. General and
administrative expenses were virtually unchanged between the two three month
periods.
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, in addition to the decrease in overall distributable cash flow. Partially
offsetting this decrease was the fee incurred as a result of the special
operating distribution in October of 1998 as discussed above, which also
accounts for the increase between the two three month periods.
<PAGE>
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 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 September 30, 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)
November 13, 1998
/s/ J. Christopher Meyer III
-------------------------------
J. Christopher Meyer III
President, Chief Executive Officer and Director
of Managing General Partner,
Second Income Corp.
November 13, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,554,854
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,554,854
<PP&E> 6,232,187
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,787,041
<CURRENT-LIABILITIES> 366,958
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,420,083
<TOTAL-LIABILITY-AND-EQUITY> 7,787,041
<SALES> 608,300
<TOTAL-REVENUES> 667,975
<CGS> 95,211
<TOTAL-COSTS> 95,211
<OTHER-EXPENSES> 496,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 75,945
<INCOME-TAX> 0
<INCOME-CONTINUING> 75,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,945
<EPS-PRIMARY> 2.29
<EPS-DILUTED> 2.29
</TABLE>
