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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period ended September 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to                        

 

Commission File Number 0-12945

 

First Capital Institutional Real Estate, Ltd.—2

(Exact name of registrant as specified in its charter)

 

Florida   59-2313852

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Two North Riverside Plaza,

Suite 700,

Chicago, Illinois

  60606-2607
(Address of principal executive offices)   (Zip Code)

 

(312) 207-0020

(Registrant’s telephone number, including area code)

 

Not applicable

(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 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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

 

Documents incorporated by reference:

 

The First Amended and Restated Certificate and Agreement of Limited Partnership filed as Exhibit A to the definitive Prospectus dated October 25, 1982, included in the Registrant’s Registration Statement on Form S-11 (Registration No. 2-86361), is incorporated herein by reference in Part I of this report.

 



PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

BALANCE SHEETS

(All dollars rounded to nearest 00s)

 

     September 30,
2004
(Unaudited)
   December 31,
2003

ASSETS

             

Cash and cash equivalents

   $ 6,118,300    $ 6,168,100

Other assets

     7,300      5,000

     $ 6,125,600    $ 6,173,100

LIABILITIES AND PARTNERS’ CAPITAL

      

Liabilities:

             

Accounts payable and accrued expenses

   $ 125,700    $ 106,500

Other liabilities

     2,800      2,800

Total Liabilities

     128,500      109,300

Commitments and contingencies for environmental remediation

     —        —  

Partners’ capital:

             

General Partner

     77,600      78,300

Limited Partners (84,886 Units issued and outstanding)

     5,919,500      5,985,500

       5,997,100      6,063,800

     $ 6,125,600    $ 6,173,100

STATEMENT OF PARTNERS’ CAPITAL

For the nine months ended September 30, 2004

(Unaudited)

(All dollars rounded to nearest 00s)

 

    General
Partner
    Limited
Partners
    Total  


Partners’ capital, January 1, 2004

  $ 78,300     $ 5,985,500     $ 6,063,800  

Net (loss) for the nine months ended September 30, 2004

    (700 )     (66,000 )     (66,700 )


Partners’ capital, September 30, 2004

  $ 77,600     $ 5,919,500     $ 5,997,100  


 

2

The accompanying notes are an integral part of the financial statements.


STATEMENTS OF INCOME AND EXPENSES

For the quarters ended September 30, 2004 and 2003

(Unaudited)

(All dollars rounded to nearest 00s

except per Unit amounts)

 

     2004     2003  


Income:

                

Interest

   $ 20,200     $ 14,400  


       20,200       14,400  


Expenses:

                

General and administrative:

                

Affiliates

     2,500       2,500  

Nonaffiliates

     41,500       26,200  


       44,000       28,700  


Net (loss)

   $ (23,800 )   $ (14,300 )


Net (loss) allocated to General Partner

   $ (200 )   $ (100 )


Net (loss) allocated to Limited Partners

   $ (23,600 )   $ (14,200 )


Net (loss) allocated to Limited Partners per unit (84,886 Units outstanding)

   $ (0.28 )   $ (0.17 )


 

STATEMENTS OF INCOME AND EXPENSES

For the nine months ended September 30, 2004 and 2003

(Unaudited)

(All dollars rounded to nearest 00s

except per Unit amounts)

 

     2004     2003  


Income:

                

Interest

   $ 49,100     $ 51,100  

Other

     1,000        


       50,100       51,100  


Expenses:

                

General and administrative:

                

Affiliates

     7,300       7,300  

Nonaffiliates

     109,500       93,600  


       116,800       100,900  


Net (loss)

   $ (66,700 )   $ (49,800 )


Net (loss) allocated to General Partner

   $ (700 )   $ (500 )


Net (loss) allocated to Limited Partners

   $ (66,000 )   $ (49,300 )


Net (loss) allocated to Limited Partners per unit (84,886 Units outstanding)

   $ (0.78 )   $ (0.58 )


STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2004 and 2003

(Unaudited)

(All dollars rounded to nearest 00s)

 

     2004     2003  


Cash flows from operating activities:

 

       

Net (loss)

   $ (66,700 )   $ (49,800 )

Adjustments to reconcile net (loss) to net cash (used in) operating activities:

                

Changes in assets and liabilities:

                

(Increase) decrease in other assets

     (2,300 )     4,100  

Increase in accounts payable and accrued expenses

     19,200       7,000  


Cash (used in) operating activities

     (49,800 )     (38,700 )

Cash and cash equivalents at the beginning of the period

     6,168,100       6,230,600  


Cash and cash equivalents at the end of the period

   $ 6,118,300     $ 6,191,900  


 

3

The accompanying notes are an integral part of the financial statements.


NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

1. Summary of significant accounting policies:

 

Definition of special terms:

Capitalized terms used in this report have the same meaning as those terms in the Partnership’s Registration Statement filed with the Securities and Exchange Commission on Form S-11. Definitions of these terms are contained in Article III of the First Amended and Restated Certificate and Agreement of Limited Partnership, which is included in the Registration Statement and incorporated herein by reference.

 

Accounting policies:

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Reference is made to the Partnership’s Annual Report for the year ended December 31, 2003, for a description of other accounting policies and additional details of the Partnership’s financial condition, results of operations, changes in Partners’ capital and changes in cash balances for the year then ended. The details provided in the notes thereto have not changed except as a result of normal transactions in the interim or as otherwise disclosed herein.

 

The Partnership has disposed of its real estate properties and upon resolution of the environmental matter disclosed in Note 3, the Partnership will make a liquidating distribution and dissolve.

 

The Partnership utilizes the accrual method of accounting. Under this method, revenues are recorded when earned and expenses are recorded when incurred.

 

Preparation of the Partnership’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash equivalents are considered all highly liquid investments with a maturity of three months or less when purchased.

 

The Partnership has one reportable segment as the Partnership is in the disposition phase of its life cycle, wherein it is seeking to resolve post-closing matters related to the properties sold by the Partnership.

2. Related party transactions:

 

In accordance with the Partnership Agreement, subsequent to October 19, 1984, the Termination of the Offering, the General Partner is entitled to 10% of Cash Flow (as defined in the Partnership Agreement) as a Partnership Management Fee. Net Profits (exclusive of Net Profits from the sale or disposition of Partnership properties) are allocated: first, to the General Partner, in an amount equal to the greater of the General Partner’s Partnership Management Fee or 1% of such Net Profits; second, the balance, if any, to the Limited Partners. Net Profits from the sale or disposition of a Partnership property are allocated: first, prior to giving effect to any distributions of Sale Proceeds from the transaction, to the General Partner and the Limited Partners with negative balances in their capital accounts pro rata in proportion to such respective negative balances, to the extent of the total of such negative balances; second, to the General Partner, in an amount necessary to make the balance in its capital account equal to the amount of Sale Proceeds to be distributed to the General Partner with respect to the sale or disposition of such property and third, the balance, if any, to the Limited Partners. Net Losses (exclusive of Net Losses from the sale, disposition or provision for value impairment of Partnership properties) are allocated 1% to the General Partner and 99% to the Limited Partners. Net Losses from the sale, disposition or provision for value impairment of Partnership properties are allocated: first, prior to giving effect to any distributions of Sale Proceeds from the transaction, to the extent that the balance in the General Partner’s capital account exceeds its Capital Investment or the balance in the capital accounts of the Limited Partners exceeds the amount of their Capital Investment (the “Excess Balances”), to the General Partner and the Limited Partners pro rata in proportion to such Excess Balances until such Excess Balances are reduced to zero; second, to the General Partner and the Limited Partners and among them (in the ratio which balances) until the balance in their capital accounts shall be reduced to zero; third, the balance, if any, 99% to the Limited Partners and 1% to the General Partner. Notwithstanding the foregoing, in all events there shall be allocated to the General Partner not less than 1% of Net Profits and Net Losses from the sale or disposition of a Partnership property. For the quarters and nine months ended September 30, 2004 and 2003, the General Partner was not paid a Partnership Management Fee. For the quarter and nine months ended September 30, 2004, the General Partner was allocated Net (Losses) of $(200) and $(700), respectively. For the quarter and nine months ended September 30, 2003, the General Partner was allocated Net (Losses) of $(100) and $(500), respectively.

 

Fees and reimbursements paid and payable by the Partnership to Affiliates during the quarter and nine months ended September 30, 2004 were as follows:

 

     Paid

    
     Quarter    Nine
Months
   Payable

Reimbursement of expenses,

at cost:

                    

—Accounting

   $ 2,500    $ 7,300    $ None

 

4


 

3. Environmental matter:

 

In 1996, the General Partner became aware of the existence of hazardous substances in the soil and groundwater under Lakewood Square Shopping Center (“Lakewood”). In connection with the 1997 sale of Lakewood, the purchaser assumed the obligation to remedy the hazardous substances in the manner required by law, which includes, but is not limited to, payment of all costs in connection with the remediation work. In addition, the purchaser provided the Partnership with certain indemnification protection in relation to clean-up costs and related expenses arising from the presence of these hazardous substances. At the present time, the General Partner is unaware of any claims or other matters referred to above against the Partnership. The purchaser completed the initial stage of the Remediation Action Plan which was approved by the Los Angeles Regional Water Quality Control Board. A successor owner continues to monitor the groundwater but is not at this time pursuing an active remediation program. There can be no assurance as to the timing of the completion of the remediation process. The General Partner continues to monitor the documentation delivered regarding activities to remedy the hazardous substances at Lakewood.

 

5


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Reference is made to the Partnership’s Annual Report for the year ended December 31, 2003 for a discussion of the Partnership’s business.

 

Certain statements in the Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the SEC, all as may be amended from time to time. Such forward looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Partnership, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Partnership cautions investors that any forward-looking statements made by the Partnership are not guarantees or indicative of future performance. Important assumptions and other important factors could cause actual results to differ materially from those forward-looking statements with respect to the Partnership. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

Although the Partnership believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of its forward-looking statements. The Partnership’s future financial condition and results of operations, as well as any forward-looking statements, are made only as of the date hereof and the partnership does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

 

The Partnership has substantially completed the disposition phase of its life cycle. The Partnership has sold its remaining property investments and is working towards resolution of post-closing property sale matters.

Operations

Net (loss) changed from $(14,300) and ($49,800) for the quarter and nine months ended September 30, 2003 to $(23,800) and ($66,700) for the quarter and nine months ended September 30, 2004. The change was primarily due to an increase in the costs related to investor services.

 

Liquidity and Capital Resources

The decrease in the Partnership’s cash position of $(49,800) for the nine months ended September 30, 2004 was the result of net cash used for operating activities. Liquid assets (including cash and cash equivalents) of the Partnership as of September 30, 2004 were comprised of amounts reserved for the Lakewood Square Shopping Center (“Lakewood”) (sold in 1997) environmental matter (as hereafter discussed) and Partnership liquidation expenses.

 

Net cash (used in) operating activities changed from $(38,700) for the nine months ended September 30, 2003 to $(49,800) for the nine months ended September 30, 2004. The decrease was primarily due to the increase in net (loss) as previously discussed, partially offset by an increase in outstanding obligations at September 30, 2004.

 

The Partnership has no financial instruments for which there are significant market risks.

 

As described in Note 3 of the Notes to Financial Statements, the Partnership is awaiting resolution of an environmental matter at Lakewood. The General Partner is continuing to monitor the documentation delivered regarding the activities to remedy the hazardous substances at Lakewood. There can be no assurance as to the actual timeframe for the remediation or that it will be completed without cost to the Partnership. As a result of this, it will be necessary for the Partnership to remain in existence and maintain a reserve for such costs. When the environmental matter at Lakewood is remediated to the satisfaction of the Partnership, Limited Partners will receive a final liquidating distribution of the remaining cash held by the Partnership, less amounts reserved for administrative expenses and any amounts deemed necessary to resolve, or provide for, any post-closing matters.

 

6


ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

The principal executive officer of the General Partner, Donald J. Liebentritt, and the principal financial officer of the General Partner, Philip Tinkler, have evaluated the effectiveness of the Partnership’s disclosure controls and procedures, as required by Rule 13a-15(e) and 15d – 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon the results of that evaluation, these executive officers have concluded that as of the end of the period covered by this quarterly report, the Partnership’s disclosure controls and procedures were effective in all material respects to ensure that the information required to be disclosed by the Partnership in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

 

The Partnership also maintains a system of internal control over financial reporting (as defined in Rules 13A-15(f) and 15d-15(f)) designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. During the most recent fiscal quarter, there have been no changes in internal control over financial reporting that occurred that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

The executive officers of the General Partner do not expect that the Partnership’s disclosure controls and procedures or internal controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Partnership have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

7


PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits:

 

31.1: Certification of Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

31.2: Certification of Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

32: Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

(b) Reports on Form 8-K:

 

There were no reports filed on Form 8-K for the quarter ended September 30, 2004.

 

8


 

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.

 

       

FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD.—2

 

        By:  

FIRST CAPITAL FINANCIAL, L.L.C.

GENERAL PARTNER

 

Date: November 12, 2004       By:  

/S/    DONALD J. LIEBENTRITT        


               

DONALD J. LIEBENTRITT

President and Chief Executive Officer

 

Date: November 12, 2004       By:  

/S/    PHILIP TINKLER        


               

PHILIP TINKLER

Vice President—Finance and Treasurer

 

9