U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-15705
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Virginia 04-2918819
(State of organization) (I.R.S.Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
July 21, 1986, as supplemented
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership commenced an offering to the public on July 21, 1986 for up
to 150,000,000 units (the "Units") of limited partnership interest (at $1 per
Unit) pursuant to a Registration Statement filed under the Securities Act of
1933. The Partnership raised gross proceeds of $134,425,741 between July 21,
1986 and June 2, 1988. As discussed further below, the Partnership also
received proceeds of $23 million from the issuance of zero coupon loans. The
loan proceeds, net of financing expenses of approximately $908,000, were used to
pay the offering and organization costs, acquisition fees and acquisition-
related expenses of the Partnership and to fund the Partnership's cash reserves.
The Partnership originally invested approximately $132,200,000 (net of
acquisition fees) in ten operating properties through joint venture investments.
Through March 31, 1995, two of these investments had been sold. The Partnership
retains an interest in eight operating properties, which are comprised of four
multi-family apartment complexes, two office/R&D complexes and two retail
shopping centers. The Partnership does not have any commitments for additional
investments but may be called upon to fund its portion of operating deficits or
capital improvement costs of its joint venture investments in accordance with
the respective joint venture agreements.
During the current fiscal year the Partnership successfully refinanced the
zero coupon loans secured by the Partnership's operating investment properties
which had been scheduled to mature in May and June of 1995. The Partnership
originally borrowed $23,000,000 to finance its offering costs and related
acquisition expenses in order to invest a greater portion of the initial
offering proceeds in real estate assets. The zero coupon loans were with two
different financial institutions, the first of which issued a loan in the
initial principal amount of $6,000,000 which was secured by the 625 North
Michigan Office Building, and the other of which issued loans which were secured
by the seven remaining investment properties. Due to declines in the market
value of the 625 North Michigan property over the past several years,
management's efforts were directed toward negotiating a modification and
extension agreement with the existing lender on this loan. Such declines in
value mirrored the state of commercial office buildings nationwide over this
period, and particularly in major metropolitan areas such as Chicago. As
previously reported, the Partnership executed an extension and modification
agreement with the 625 North Michigan lender in May 1994. The modification
agreement changed the nature of the existing debt obligation from a zero coupon
to a current paying, principal amortizing loan. Limited sources for the
financing of commercial office buildings in general and the stringent loan-to-
value ratio requirements for such loans would have made refinancing the 625
North Michigan property by conventional means very difficult. The final terms
of the 625 North Michigan agreement required the Partnership to make a principal
paydown on the loan of approximately $801,000. The new loan, in the initial
principal amount of approximately $9.7 million, has a scheduled maturity date of
May 1999. The loan bears interest at a rate of 9.125% per annum and requires
monthly payments of principal and interest of approximately $83,000. The terms
of the loan agreement also required the establishment of an escrow account for
real estate taxes, as well as a capital improvement escrow which is to be funded
with monthly deposits from the Partnership aggregating approximately $1 million
through the scheduled maturity date.
The zero coupon loans secured by the other seven investment properties had
scheduled maturity dates in June 1995 and became prepayable without penalty
beginning in September 1994. On September 27, 1994, the Partnership refinanced
the portion of the zero coupon loan secured by the Treat Commons Phase II
apartment complex, of approximately $3,353,000, with the proceeds of a new $7.4
million loan obtained by the TCR Walnut Creek Limited Partnership joint venture.
The $7.4 million loan is secured by the Treat Commons apartment complex, carries
an annual interest rate of 8.54% and matures in 7 years. The loan requires
monthly principal and interest payments of $59,786. On September 28, 1994, the
Partnership repaid the portion of the zero coupon loan secured by the Asbury
Commons apartment complex, of approximately $3,836,000, with the proceeds of a
new $7 million loan obtained by the consolidated Asbury Commons joint venture.
The $7 million loan is secured by the Asbury Commons apartment complex, carries
an annual interest rate of 8.75% and matures in 7 years. The loan requires
monthly principal and interest payments of $87,575. On October 22, 1994, the
Partnership applied a portion of the excess proceeds from the refinancings of
the Treat Commons and Asbury Commons properties described above and repaid the
portion of the zero coupon loan which had been secured by the West Ashley
Shoppes of approximately $2,703,000 and made a partial prepayment toward the
portion of the zero coupon loan secured by Hacienda Business Park of $3,000,000.
On November 7, 1994, the Partnership repaid the portion of the zero coupon loans
secured by The Gables Apartments and the Richmond Park and Richland Terrace
apartment complexes of approximately $2,353,000 and $2,106,000, respectively,
with the proceeds of a new $5.2 million loan secured by The Gables Apartments.
The new $5.2 million loan bears interest at 8.72% and matures in 7 years. The
loan requires monthly principal and interest payments of $42,646. On February
9, 1995, the Partnership repaid the portion of the zero coupon loan secured by
the Hacienda Business Park, of approximately $3,583,000, with the proceeds of a
new $3.5 million loan obtained by the consolidated Hacienda Park Associates
joint venture. The $3.5 million loan is secured by the Hacienda Business Park,
carries an annual interest rate of 9.04% and matures in 7 years. The loan
requires monthly principal and interest payments of $35,620. On February 10,
1995, the Partnership repaid the portion of the zero coupon loan secured by the
Loehmann's Plaza shopping center, of approximately $4,093,000, with the proceeds
of a new $4 million loan obtained by the Daniel/Metcalf Associates Partnership
joint venture. The $4 million loan is secured by the Loehmann's Plaza shopping
center, carries an annual interest rate of 9.04% and matures on February 15,
2003. The loan requires monthly principal and interest payments of $33,700.
Legal liability for the repayment of the new mortgage loans secured by the Treat
Commons, Gables and Loehmann's Plaza properties rests with the respective joint
ventures. Accordingly these mortgage loan liabilities are recorded on the books
of the unconsolidated joint ventures. The Partnership has indemnified TCR
Walnut Creek Limited Partnership, Richmond Gables Associates and Daniel/Metcalf
Associates Partnership, and the related co-venture partners, against all
liabilities, claims and expenses associated with these borrowings.
The refinancing of the zero coupon loans with conventional loans requiring
monthly principal and interest payments has significantly reduced the cash flows
from the properties to the Partnership. Of the $18.7 million of distributions
from unconsolidated joint ventures reflected on the Partnership's Statement of
Cash Flows for fiscal 1995, approximately $14.9 million represents net proceeds
from refinancing transactions recorded at the unconsolidated joint venture
level. The Partnership received total operating cash flow distributions of
approximately $5.2 million during fiscal 1995 (including $1.4 million from
consolidated ventures), as compared to total distributions from all properties
of approximately $7.2 million received during fiscal 1994. Distributions from
the properties are expected to decline further in fiscal 1996 due to the full
12-month effect of the current debt service requirements of the refinanced
mortgage loans. The reduction in cash flows from the properties, combined with
expected future capital needs, required management to reduce the quarterly
distribution rate from 5.25% per annum to 2% beginning with the payment made on
November 15, 1994 for the quarter ended September 30, 1994. The expected future
capital needs relate primarily to the ongoing capital requirements of the
Partnership's commercial properties, including planned capital alterations,
tenant improvements and leasing commissions. As discussed further below, there
remains a significant amount of vacant space at the 625 North Michigan, Hacienda
Park and West Ashley commercial properties as of March 31, 1995. In addition,
the trend toward corporate downsizing and restructurings that has followed in
the wake of the last national recession continue to impact the leasing of
office/R&D space in general, resulting in significant tenant turnover and lease
modification requests. The Partnership has also planned a major capital
improvement program for Loehmann's Plaza which is presently in process.
Significant capital will be required to fund these anticipated leasing and
capital improvement expenditures.
The Hacienda Park investment property consists of four separate office/R&D
buildings comprising approximately 185,000 square feet. As previously reported,
two of these buildings had been leased to a single tenant. Due to corporate
reorganization and downsizing measures, this tenant did not renew its lease on
one of the buildings, which expired in June 1993. Furthermore, while the
Partnership negotiated the renewal of this tenant's other lease for five years
commencing in June 1994, it was at market rents which are substantially lower
than the previous lease rental rate. During the current year, the Partnership
secured a new tenant, under a seven-year lease, for the vacant 31,000 square
foot building at Hacienda Park. The Partnership agreed to pay for the tenant
improvement costs to modify this space to the needs of the new tenant. Tenant
improvements and leasing commissions related to this lease totalled
approximately $630,000. As a result of these measures, the Hacienda Park
investment property, which was 72% leased as of March 31, 1994, had improved to
89% leased at March 31, 1995. At Loehmann's Plaza, management plans to invest
approximately $2 million over the next 24 months to complete a major capital
enhancement program which includes a general upgrade of the property's exterior.
The improvement program is necessary in order for the property to remain
competitive in its market. A portion of the funds required to pay for this
capital work are expected to come from a $550,000 Renovation and Occupancy
Escrow withheld by the lender from the proceeds of the $4 million loan
discussed further above which was obtained in February 1995. Funds may be
released from the Renovation and Occupancy Escrow to reimburse the venture
for the costs of the planned renovations in the event
that the venture satisfies certain requirements which include specified
occupancy and rental income thresholds. If such requirements have not been met
within 18 months from the date of the loan closing, the lender may apply the
balance of the escrow account to the payment of loan principal. In addition,
the lender required that the Partnership unconditionally guaranty up to
$1,400,000 of the loan obligation. This guaranty will be released in the event
that the venture satisfies the requirement for the release of the Renovation and
Occupancy Escrow funds or upon the repayment, in full, of the entire outstanding
mortgage loan liability. A significant amount of funds may also be needed to
pay for tenant improvement costs to re-lease the vacant anchor tenant space at
West Ashley Shoppes in the near term. As previously reported, Children's Palace
closed its retail store at the center in May 1991 and subsequently filed for
bankruptcy protection from creditors. In addition, Phar-Mor, West Ashley's
other major anchor tenant is currently operating under the protection of Chapter
11 of the U.S. Bankruptcy Code. While Phar-Mor has closed a number of its
locations nationwide as part of its bankruptcy reorganization, the Phar-Mor
drugstore at West Ashley Shoppes is reported to be one of their top performing
locations in the southeast. As a result, management is optimistic that its
continued operation is likely, assuming Phar-Mor successfully emerges from its
current Chapter 11 status. Capital improvement and leasing costs at 625 North
Michigan totalled $1.2 million in calendar 1994 and are expected to continue to
be significant for the foreseeable future due to the size and age of the
building, the large number of leases and the extremely competitive conditions
which exist in the market for downtown Chicago office space.
The market for multi-family residential properties throughout the country
continued to show signs of improvement during fiscal 1995, as the lack of
significant new construction of multi-family housing over the past 2-to-3 years
has allowed the oversupply which existed in most markets to be absorbed. The
results of the improving market supply and demand characteristics have been a
gradual improvement in occupancy levels and effective rental rates and a
corresponding increase in property values. Management expects to continue to
see improvement in this market segment in the near term and has examined the
Partnership's four apartment properties to identify whether a current sale of
one or more of these properties may be in the Partnership's best interests.
Based on such analysis, the Richmond Park/Richland Terrace and Treat Commons
properties were determined to be the best candidates for a current sale. In the
case of Richmond Park and Richland Terrace, the economic growth in the Portland,
Oregon area has been among the best in the country for some time. Such results
may lead to increased levels of development activity which could limit the
current favorable trends in the market for existing apartment properties.
Accordingly, management believes that the market value of Richmond Park and
Richland Terrace may be near its peak for the current market cycle. Subsequent
to year-end, the Partnership had signed a letter of intent to sell the Portland
properties to a third-party. However, during the potential buyer's due
diligence period the offer to purchase the properties was withdrawn. The
Partnership is currently negotiating with one of the other prospective buyers
that made an offer to purchase the properties. If an agreement cannot be
reached with this party, management intends to solicit other offers through
further marketing efforts in fiscal 1996. In the case of Treat Commons, the
Partnership owns Phase II of a 2-phase development. During fiscal 1995,
management learned that the owner of Phase I had decided to market the property
for sale. Management believes there may be advantages to a joint marketing
effort of both phases which could maximize the potential proceeds to the
Partnership from a sale of Treat Commons. If Phase I were sold separately in
the near future to a buyer with a long-term planned holding period, the
Partnership may not have the opportunity to market its property jointly with
Phase I. Accordingly, management has been working with the Phase I owner and
expects to actively market the property for sale during fiscal 1996. There are
no assurances that the Partnership will complete a sale transaction with regard
to these investments during fiscal 1996.
In light of the expected future capital needs for the Partnership's
commercial properties, as discussed above, and given the use of cash reserves
required to complete the fiscal 1995 refinancing and leasing transactions,
management is presently examining alternative sources of additional liquidity
which might be required by the Partnership. The primary options for generating
liquidity would be to complete the sales of the Richmond Park/Richland Terrace
and/or Treat Commons investments, as discussed above, or to engage in additional
borrowing activities. As of March 31, 1995, the Partnership's Richmond
Park/Richland Terrace and West Ashley properties are unencumbered and represent
additional borrowing capacity. Alternatively, the Partnership could reduce or
suspend distribution payments to the partners. Such distributions, which are
presently being paid at a rate of 2% per annum on remaining invested capital of
$943 per original $1,000 investment, total approximately $2.6 million on an
annual basis. Management is presently in the process of reviewing the timing
and magnitude of the Partnership's capital requirements and evaluating the
available options for addressing such needs. Management expects to formalize
its strategy for dealing with the Partnership's liquidity needs after assessing
the progress of the marketing efforts for Richmond Park/Richland Terrace and
Treat Commons in early fiscal 1996.
As previously reported, in May 1994 the Partnership and the co-venturer of
the West Ashley Shoppes joint venture executed a settlement agreement to resolve
their outstanding disputes regarding the net cash flow shortfall contributions
owed by the co-venturer under the terms of the joint venture's guaranty
agreement. Under the terms of the settlement agreement, the co-venturer
assigned 96% of its interest in the joint venture to the Partnership and the
remaining 4% of its interest in the joint venture to Second Equity Partners,
Inc., the Managing General Partner of the Partnership. Prior to the assignment
of its interest, the co-venturer had agreed to retire certain debt in the amount
of approximately $400,000 which encumbered certain out-parcels of the West
Ashley property. Under the original terms of the venture agreement, the
potential future economic value to be realized from these out-parcels would have
accrued to the co-venturer's benefit. As a result of the assignment, the future
economic value to be realized from the unencumbered out-parcels will accrue
solely to the benefit of the Partnership. In return for such assignment, the
Partnership agreed to release the co-venturer from all claims regarding net cash
flow shortfall contributions owed to the joint venture. In conjunction with the
assignment of its interest and withdrawal from the joint venture, the co-
venturer agreed to release certain outstanding counter claims against the
Partnership. As a result of the settlement agreement, the Partnership has
effectively assumed control over the affairs of the joint venture. The Managing
General Partner has engaged a local property management company to oversee the
day-to-day operations of the retail center, which was 68% leased as of March 31,
1995.
At March 31, 1995, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $1,827,000. Such amounts
will be utilized for the working capital requirements of the Partnership, as
well as for reinvestment in certain of the Partnership's properties (as
required) and for distributions to the partners. The source of future liquidity
and distributions to the partners is expected to be through cash generated from
operations of the Partnership's income-producing investment properties, the
potential short-term borrowings discussed above and proceeds received from the
sale or refinancing of such properties. Such sources of liquidity are expected
to be sufficient to meet the Partnership's needs on both a short-term and long-
term basis.
RESULTS OF OPERATIONS
1995 Compared to 1994
The Partnership reported a net loss of $304,000 for the fiscal year ended
March 31, 1995, as compared to a net loss of $78,000 for the prior year. This
increase in the Partnership's net loss is attributable to a decrease in the
Partnership's share of unconsolidated ventures' income of $389,000, which was
partially offset by a decrease in the Partnership's operating loss of $162,000.
The Partnership's operating results in fiscal 1995 include the consolidated
results of the West Ashley Shoppes joint venture. As discussed further above,
the Partnership assumed complete control over the affairs of the joint venture
which owns the West Ashley Shoppes property during the first quarter of fiscal
1995 as a result of the withdrawal of the co-venture partner and the assignment
of its remaining interest to the Partnership and Second Equity Partners, Inc.,
the Managing General Partner of the Partnership.
The Partnership's share of unconsolidated ventures' income decreased mainly
due to this change in the basis of presentation of the operating results of the
West Ashley Shoppes joint venture in the current year. The Partnership's share
of unconsolidated ventures' income in the prior year includes $292,000
attributable to the West Ashley joint venture. The Partnership's share of
unconsolidated ventures' income excluding West Ashley decreased by $97,000 in
the current year mainly due to increases in interest expense from the Treat
Commons and Gables joint ventures which were partially offset by an increase in
rental revenues from the Richmond Park and Richland Terrace Apartments.
Interest expense at Treat Commons and Gables increased due to the new loans
obtained by these joint ventures in the current year as more fully discussed
above. Rental revenues at the Portland Pacific joint venture (Richmond Park and
Richland Terrace) increased in the current year due to a higher occupancy rate
and rising rental rates associated with a strong local market. Average
occupancy at the two Portland, Oregon apartment complexes averaged 97% for
calendar 1994, as compared to 95% for calendar 1993.
The Partnership's operating loss decreased mainly due to a combination of a
decrease in interest expense and the inclusion in the current year of the
operations of the West Ashley joint venture. These positive effects on
operating loss were partially offset by a decrease in the net income reported by
the consolidated Hacienda and Asbury Commons joint ventures for calendar 1994.
Interest expense decreased by $735,000 in the current year due to the
refinancing and payoff of the zero coupon loans between May 1994 and February of
1995, as more fully discussed above. The Partnership's operating loss includes
net income of $217,000 attributable the West Ashley joint venture in the current
year, which reflects a decline in the venture's net operating results of $75,000
from the prior year. The decline in net income at West Ashley results mainly
from a decrease in rental revenues due to a decline in average occupancy from
69% for calendar 1993 to 67% for calendar 1994. The net income of the Hacienda
Park joint venture declined by $560,000 in comparison with the prior year
primarily due to a decline in rental revenues. Rental revenues at Hacienda Park
decreased by $781,000 mainly due to the full 12-month effect of the renewal of a
major lease at lower current market rents in the prior year. This decrease in
rental revenues was partially offset by an increase in the venture's other
income for calendar 1994. The net income of the Asbury Commons joint venture
decreased by approximately $214,000, largely due to an increase in interest
expense resulting from the new loan obtained by the joint venture in the current
year.
1994 Compared to 1993
The Partnership reported a net loss of $78,000 for the fiscal year ended
March 31, 1994, as compared to net income of $1,150,000 for fiscal 1993. The
significant change in net operating results was attributable to an increase in
the Partnership's operating loss of $842,000 combined with a decrease in the
Partnership's share of unconsolidated ventures' income of $385,000.
The increase in the Partnership's operating loss resulted from a combination
of a decline in the net income of the consolidated Hacienda Park joint venture
and an increase in Partnership interest expense and general and administrative
expenses. The net income of the Hacienda Park joint venture declined by
$488,000 in comparison with fiscal 1993. The primary reason for this
unfavorable change in the venture's operating results was a decline in rental
revenues caused by a drop in occupancy. The decline in occupancy during fiscal
1994 was a result of the expiration of a major tenant's lease. In addition, the
decline in revenues was also partly attributable to the renewal of another major
lease at rental rates which were substantially below the rates paid under the
prior lease agreement. Partnership general and administrative expenses
increased by approximately $96,000 as a result of certain costs incurred in
connection with an independent valuation of the Partnership's operating
properties, which was commissioned in conjunction with management's ongoing
refinancing efforts. In addition, interest expense on the Partnership's zero
coupon loans increased by approximately $282,000. Interest on the zero coupon
loans continued to compound in fiscal 1994, prior to the fiscal 1995 refinancing
transactions discussed above.
The Partnership's share of unconsolidated ventures' income decreased by
$385,000 in fiscal 1994, primarily due to a significant decrease in net income
from the 625 North Michigan joint venture. The joint venture's net income
decreased due to the combined effects of a decrease in rental income and an
increase in property operating expenses. The decline in operating results at
625 North Michigan reflects the extremely competitive market conditions existing
in the market for downtown Chicago office space. Similarly, the increase in
property expenses was the result of an increase in repairs and maintenance
expenses due to the implementation of a general improvement program aimed at
improving the property's leasing status.
1993 Compared to 1992
The Partnership reported net income of $1,150,000 for the fiscal year ended
March 31, 1993, as compared to a net loss of $49,000 for fiscal 1992. This
favorable change resulted from a decrease in the Partnership's operating loss
coupled with an increase in the Partnership's share of unconsolidated ventures'
income.
The decrease in the Partnership's operating loss resulted mainly from a
combination of improved operating results of the consolidated Hacienda Park
joint venture and a decrease in Partnership general and administrative expenses.
The net operating results of the Hacienda Park joint venture improved by
$1,002,000 when compared to fiscal 1991. The primary reasons for this favorable
change were an increase in rental income, a decline in real estate tax expense
and a substantial decrease in non-cash depreciation charges. Hacienda Business
Park's rental revenue increased by $225,000, or 10%, mainly due to an increase
in average occupancy. Real estate tax expense for the Hacienda Business Park
decreased by $138,000 in fiscal 1993, mainly as a result of the receipt of
refunds totalling $104,000 related to prior years. Finally, depreciation
charges for the Hacienda Park joint venture declined by $767,000 in fiscal 1993
as a result of tenant improvement costs totalling $3.7 million having become
fully depreciated in the prior year. General and administrative expenses
decreased by $148,000 as a result of decreased legal expenses and various other
administrative costs. These favorable changes were partially offset by an
increase in interest expense on the Partnership's zero coupon loans of $227,000.
The Partnership's share of unconsolidated ventures' income increased by
$99,000 in fiscal 1993 primarily due to increases in net income from the 625
North Michigan and Loehmann's Plaza joint ventures. The increased net income
from the 625 North Michigan joint venture was mainly due to increased rental
revenue, resulting from a slight increase in average occupancy, and a decrease
in repairs and maintenance expenses due to the completion of a general
improvement program implemented during the prior year. Net income from the
Loehmann's Plaza joint venture increased due to increased rental revenue which
was partially offset by an increase in real estate tax and insurance expense.
These favorable changes were partially offset by a decrease in net income from
West Ashley Shoppes resulting from decreased rental revenue due to the anchor
store closing of Children's Palace. Despite the fact that the tenant was still
liable under the lease agreement, rent was no longer being accrued on this lease
due to the uncertainty of its collectibility.Inflation
The Partnership completed its eighth full year of operations in fiscal 1995.
The effects of inflation and changes in prices on the Partnership's operating
results to date have not been significant.
Inflation in future periods may increase revenues as well as operating
expenses at the Partnership's operating investment properties. Most of the
existing leases with tenants at the Partnership's shopping centers and office
buildings contain rental escalation and/or expense reimbursement clauses based
on increases in tenant sales or property operating expenses. Tenants at the
Partnership's apartment properties have short-term leases, generally of one year
or less in duration. Rental rates at these properties can be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases are
renewed or turned over. Such increases in rental income would be expected to at
least partially offset the corresponding increases in Partnership and property
operating expenses.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
(3) Exhibits:
The exhibits on the accompanying index to exhibits at page IV-3 are
filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal 1995.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER EQUITY PARTNERS
TWO LIMITED PARTNERSHIP
By: Second Equity Partners, Inc.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: September 11, 1995
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(3)
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated July 21, 1986, as pursuant to Rule 424(c)
supplemented, with particular and incorporated herein
reference to the Restated by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with Act of 1934 and incorporated
all such contracts filed as herein by reference.
exhibits of previously filed
Forms 8-K and Forms
10-K are hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the fiscal
year 1995 has been sent to the
Limited Partners. An Annual
Report will be sent to the
Limited Partners subsequent to
this filing.
(22) List of subsidiaries Included in Item I of Part I
of this Report Page I-1, to
which reference is hereby made.
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1) AND (2) AND ITEM 14(D)
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP:
Report of independent auditors F-3
Consolidated balance sheets as of March 31, 1995 and 1994 F-4
Consolidated statements of operations for the years ended
March 31, 1995, 1994 and 1993 F-5
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1995, 1994 and 1993 F-6
Consolidated statements of cash flows for the years
ended March 31, 1995, 1994 and 1993 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-27
1994 COMBINED JOINT VENTURES OF PAINEWEBBER EQUITY PARTNERS TWO LIMITED
PARTNERSHIP:
Report of independent auditors F-28
Combined balance sheet as of December 31, 1994 F-29
Combined statement of income and changes in ventures'
capital for the year ended December 31, 1994 F-30
Combined statement of cash flows for the year ended
December 31, 1994 F-31
Notes to combined financial statements F-32
Schedule III - Real Estate and Accumulated Depreciation F-39
1993 AND 1992 COMBINED JOINT VENTURES OF PAINEWEBBER EQUITY PARTNERS TWO LIMITED
PARTNERSHIP:
Report of independent auditors F-40
Combined balance sheets as of December 31, 1993 and 1992 F-41
Combined statements of income and changes in ventures' capital
for the years ended December 31, 1993, 1992 and 1991 F-42
Combined statements of cash flows for the years ended
December 31, 1993, 1992 and 1991 F-43
Notes to combined financial statements F-44
Schedule III - Real Estate and Accumulated Depreciation F-50
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying consolidated balance sheets of PaineWebber
Equity Partners Two Limited Partnership as of March 31, 1995 and 1994, and the
related consolidated statements of operations, changes in partners' capital
(deficit) and cash flows for each of the three years in the period ended March
31, 1995. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PaineWebber
Equity Partners Two Limited Partnership at March 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 28, 1995
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and 1994
(In Thousands, except for per Unit data)
ASSETS
1995 1994
Operating investment properties:
Land $ 8,808 $ 5,009
Building and improvements 40,975 36,515
49,783 41,524
Less accumulated depreciation (8,895) (8,947)
40,888 32,577
Investments in unconsolidated joint
ventures, at equity 39,887 65,519
Cash and cash equivalents 1,827 4,290
Escrowed cash 57 243
Accounts receivable 192 24
Accounts receivable - affiliates 15 68
Prepaid expenses 28 22
Deferred rent receivable 476 258
Deferred expenses, net of accumulated
amortization of $402 ($1,227 in 1994) 778 390
$ 84,148 $103,391
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 434 $ 211
Net advances from consolidated ventures 29 388
Tenant security deposits 103 86
Bonds payable 2,498 2,864
Notes payable and deferred interest 20,137 33,964
Other liabilities 348 331
Total liabilities 23,549 37,844
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 137 140
Cumulative cash distributions (666) (620)
Limited Partners ($1 per Unit;
134,425,741 Units issued):
Capital contributions, net of offering costs 119,747 119,747
Cumulative net income 13,336 13,637
Cumulative cash distributions (71,956) (67,358)
Total partners' capital 60,599 65,547
$ 84,148 $103,391
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1995, 1994 and 1993
(In Thousands, except for per Unit data)
1995 1994 1993
REVENUES:
Rental income and expense
reimbursements $ 4,211 $ 4,158 $ 4,555
Interest and other income 518 180 237
4,729 4,338 4,792
EXPENSES:
Interest expense 2,838 3,267 2,987
Depreciation and amortization 1,645 1,474 1,478
Property operating expenses 1,302 930 957
Real estate taxes 473 355 312
General and administrative 700 703 607
6,958 6,729 6,341
Operating loss (2,229) (2,391) (1,549)
Investment income:
Interest income on notes receivable 107 106 107
Partnership's share of unconsolidated
ventures' income 1,818 2,207 2,592
1,925 2,313 2,699
NET INCOME (LOSS) $ (304) $ (78) $ 1,150
Net income (loss) per 1,000
Limited Partnership Units $(2.24) $ (0.57) $ 8.47
Cash distributions per 1,000
Limited Partnership Units $34.20 $ 49.52 $ 49.52
The above per Limited Partnership Unit information is based upon the
134,425,741 Limited Partnership Units outstanding during each year.
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended March 31, 1995, 1994 and 1993
(In Thousands)
General Limited
Partners Partners Total
Balance at March 31, 1992 $ (354) $ 78,277 $ 77,923
Cash distributions (67) (6,657) (6,724)
Net income 11 1,139 1,150
BALANCE AT MARCH 31, 1993 (410) 72,759 72,349
Cash distributions (67) (6,657) (6,724)
Net loss (1) (77) (78)
BALANCE AT MARCH 31, 1994 (478) 66,025 65,547
Cash distributions (46) (4,598) (4,644)
Net loss (3) (301) (304)
BALANCE AT MARCH 31, 1995 $ (527) $ 61,126 $ 60,599
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1995 1994 1993
Cash flows from operating activities:
Net income (loss) $ (304) $ (78) $ 1,150
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Partnership's share of unconsolidated
ventures' income (1,818) (2,207) (2,592)
Interest expense 1,610 3,075 2,794
Depreciation and amortization 1,645 1,474 1,478
Amortization of deferred financing costs 164 - -
Changes in assets and liabilities:
Escrowed cash 205 (218) 15
Accrued interest receivable - - 13
Accounts receivable 55 103 37
Accounts receivable - affiliates 53 (10) (25)
Prepaid expenses (1) (9) (3)
Deferred rent receivable (119) 45 (71)
Tenant security deposits (3) 17 21
Accounts payable and accrued expenses 58 26 70
Advances from consolidated ventures (455) (170) (514)
Accounts payable - affiliates - (45) (80)
Other liabilities (4) - -
Total adjustments 1,390 2,081 1,143
Net cash provided by
operating activities 1,086 2,003 2,293
Cash flows from investing activities:
Distributions from unconsolidated
ventures 18,749 4,742 4,612
Additional investments in
unconsolidated ventures (383) - (169)
Additions to operating investment
properties (1,077) (91) (261)
Payment of leasing commissions (303) (43) (140)
Net cash provided by
investing activities 16,986 4,608 4,042
Cash flows from financing activities:
Distributions to partners (4,644) (6,724) (6,724)
Payment of principal and deferred
interest on notes payable (25,937) - -
Proceeds from issuance of notes payable 10,500 - -
Payment of deferred financing costs (328) - -
District bond assessments 85 - 45
Payments on district bond assessments (451) (92) (35)
Net cash used for
financing activities (20,775) (6,816) (6,714)
Net decrease in cash and cash equivalents (2,703) (205) (379)
Cash and cash equivalents,
beginning of year 4,290 4,495 4,874
Cash and cash equivalents,
West Ashley Shoppes,beginning of year 240 - -
Cash and cash equivalents, end of year $ 1,827 $ 4,290 $ 4,495
Cash paid during the year for interest $ 956 $ 192 $ 193
Write-off of fully depreciated
tenant improvements $ 3,026 $ - $ 832
See accompanying notes.
1. Organization
PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of
Virginia on May 16, 1986 for the purpose of investing in a diversified
portfolio of existing, newly-constructed or to-be-built income-producing
real properties. The Partnership authorized the issuance of a maximum of
150,000,000 Partnership Units (the "Units") of which 134,425,741 Units,
representing capital contributions of $134,425,741, were subscribed and
issued between June 1986 and June 1988.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the Partnership's investment
in five unconsolidated joint venture partnerships at March 31, 1995 (six at
March 31, 1994) which own operating properties. The Partnership accounts
for its investments in the unconsolidated joint ventures using the equity
method because the Partnership does not have majority voting control. Under
the equity method the ventures are carried at cost adjusted for the
Partnership's share of the ventures' earnings or losses and distributions.
All of the unconsolidated joint venture partnerships are required to
maintain their accounting records on a calendar year basis for income tax
reporting purposes. As a result, the Partnership recognizes its share of
the earnings or losses from the unconsolidated joint ventures based on
financial information which is three months in arrears to that of the
Partnership. See Note 5 for a description of the unconsolidated joint
venture partnerships.
As further discussed in Note 4, the Partnership acquired complete control
of Hacienda Park Associates on December 10, 1991 and the Atlanta Asbury
Partnership on February 14, 1992. Accordingly, these joint ventures have
been presented on a consolidated basis in the accompanying financial
statements. In addition, the Partnership acquired complete control of West
Ashley Shoppes Associates in May of 1994. Accordingly, this joint venture
has been presented on a consolidated basis beginning in fiscal 1995. As
discussed above, these joint ventures also have a December 31 year-end and
operations of the ventures continue to be reported on a three-month lag.
All material transactions between the Partnership and the joint ventures
have been eliminated upon consolidation, except for lag-period cash
transfers. Such lag-period cash transfers are accounted for as advances
from consolidated ventures on the accompanying balance sheet.
The consolidated operating investment properties (Saratoga Center and EG&G
Plaza, the Asbury Commons Apartments and the West Ashley Shoppes) are
carried at the lower of cost, adjusted for certain guaranteed payments from
partners and accumulated depreciation, or net realizable value. The net
realizable value of a property held for long-term investment purposes is
measured by the recoverability of the Partnership's investment from expected
future cash flows on an undiscounted basis, which may exceed the property's
current market value. The net realizable value of a property held for sale
approximates its market value. The Partnership's investments in Saratoga
Center and EG&G Plaza, the Asbury Commons Apartments and the West Ashley
Shoppes were considered to be held for long-term investment purposes as of
March 31, 1995 and 1994. Depreciation expense is computed using the
straight-line method over estimated useful lives of five to thirty-one and
one-half years. Acquisition fees paid to PaineWebber Properties
Incorporated and costs of identifiable improvements have been capitalized
and are included in the cost of the operating investment properties.
Capitalized construction period interest and taxes of West Ashley Shoppes,
in the aggregate amount of approximately $485,000, is included in the
balance of building and improvements on the accompanying balance sheet.
Maintenance and repairs are charged to expense when incurred.
The Partnership has reviewed FAS No. 121 ``Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of'' which is
effective for financial statements for years beginning after December 15,
1995, and believes this new pronouncement will not have a material effect on
the Partnership's financial statements.
For long-term commercial leases, rental income is recognized on the
straight-line basis over the term of the related lease agreement, taking
into consideration scheduled cost increases and free-rent periods offered as
inducements to lease the property. Deferred rent receivable represents
rental income earned by Hacienda Park Associates and West Ashley Shoppes
Associates which has been recognized on the straight-line basis over the
term of the related lease agreement.
Deferred expenses at March 31, 1995 include loan costs incurred in
connection with the Asbury Commons mortgage note payable described in Note
6, which are being amortized using the straight-line method over the term of
the loan. The amortization of such costs is included in interest expense on
the accompanying statements of operations. Deferred expenses also include
legal fees associated with the organization of the Hacienda Park joint
venture, which were amortized on the straight-line basis over a sixty-month
term, and deferred commissions and lease cancellation fees of Hacienda Park
Associates, which are being amortized on a straight-line basis over the term
of the respective lease.
Escrowed cash includes funds escrowed for the payment of property taxes
and tenant security deposits of the Asbury Commons and West Ashley
consolidated joint ventures. At March 31, 1994, escrowed cash also includes
funds escrowed as additional collateral under the terms of the loan
agreement secured by the 625 North Michigan operating property (see Note 6).
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
Certain prior year amounts have been reclassified to conform to the fiscal
1995 presentation.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Second Equity Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber") and Properties Associates 1986, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General
Partner. Affiliates of the General Partners will receive fees and
compensation determined on an agreed-upon basis, in consideration of various
services performed in connection with the sale of the Units and the
acquisition, management, financing and disposition of Partnership
properties. The Managing General Partner and its affiliates are reimbursed
for their direct expenses relating to the offering of Units, the
administration of the Partnership and the acquisition and operations of the
Partnership's operating property investment.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to
the General Partners until the Limited Partners have received an amount
equal to a 7.5% noncumulative annual return on their adjusted capital
contributions. The General Partners will then receive distributions until
they have received an amount equal to 1.01% of total distributions of
distributable cash which has been made to all partners and PWPI has received
an amount equal to 3.99% of all distributions to all partners. The balance
will be distributed 95% to the Limited Partners, 1.01% to the General
Partners and 3.99% to PWPI. Payments to PWPI represent asset management fees
for PWPI's services in managing the business of the Partnership. Due to the
reduction in the Partnership's quarterly distribution rate to 2% during
fiscal 1992, no management fees were earned for the fiscal years ended March
31, 1995, 1994 and 1993, in accordance with the advisory agreement. All
sale or refinancing proceeds shall be distributed in varying proportions to
the Limited and General Partners, as specified in the amended Partnership
Agreement.
All taxable income (other than from a Capital Transaction) in each year
will be allocated to the Limited Partners and the General Partners in
proportion to the amounts of distributable cash distributed to them
(excluding the asset management fee) in that year or, if there are no
distributions of distributable cash, 98.95% to the Limited Partners and
1.05% to the General Partners. All tax losses (other than from a Capital
Transaction) will be allocated 98.95% to the Limited Partners and 1.05% to
the General Partners. Taxable income or tax loss arising from a sale or
refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of sale or
refinancing proceeds to which they are entitled; provided that the General
Partners shall be allocated at least 1% of taxable income arising from a
sale or refinancing. If there are no sale or refinancing proceeds, tax loss
or taxable income from a sale or refinancing will be allocated 98.95% to the
Limited Partners and 1.05% to the General Partner. Allocations of the
Partnership's operations between the General Partners and the Limited
Partners for financial accounting purposes have been made in conformity with
the allocations of taxable income or tax loss.
Included in general and administrative expenses for the years ended March
31, 1995, 1994 and 1993 is $268,000, $268,000 and $309,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell
Hutchins earned fees of $13,000, $8,000 and $8,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1995, 1994 and 1993, respectively.
Accounts receivable - affiliates at March 31, 1995 consists of investor
servicing fees of $63,000 due from the TCR Walnut Creek Limited Partnership
and $15,000 due from certain unconsolidated joint ventures for expenses paid
by the Partnership on behalf of the joint ventures. Accounts receivable -
affiliates at March 31, 1994 consists of investor services fees of $53,000
due from the TCR Walnut Creek Limited Partnership and $15,000 due from
certain unconsolidated joint ventures for expenses paid by the Partnership
on behalf of the joint ventures.
4. Operating Investment Properties
At March 31, 1995, the Partnership's balance sheet includes three
operating investment properties (two at March 31, 1994); Saratoga Center and
EG&G Plaza, owned by Hacienda Park Associates, the Asbury Commons
Apartments, owned by Atlanta Asbury Partnership, and the West Ashley Shoppes
Shopping Center, owned by West Ashley Shoppes Associates. In May 1994, the
Partnership and the co-venturer in the West Ashley joint venture executed a
settlement agreement whereby the Partnership assumed complete control over
the affairs of the venture. Accordingly, beginning in fiscal 1995, the
financial position and the results of operations of the West Ashley joint
venture are presented on a consolidated basis in the Partnership's financial
statements. The Partnership obtained controlling interests in the other two
joint ventures during fiscal 1992. The Partnership's policy is to report
the operations of these consolidated joint ventures on a three-month lag
Hacienda Park Associates
On December 24, 1987, the Partnership acquired an interest in Hacienda
Park Associates (the "joint venture"), a California general partnership
organized in accordance with a joint venture agreement between the
Partnership and Callahan Pentz Properties (the "co-venturer"). The joint
venture was organized to own and operate three buildings in the Hacienda
Business Park, which is located in Pleasanton, California, consisting of
Saratoga Center, a multi-tenant office building and EG&G Plaza, originally a
single tenant facility, now leased to two tenants. Saratoga Center,
completed in 1985, consists of approximately 83,000 net rentable square feet
located on approximately 5.6 acres of land. Phase I of EG&G Plaza was
completed in 1985 and Phase II was completed in 1987. Both phases together
consist of approximately 102,000 net rentable square feet located on
approximately 7 acres of land. The aggregate cash investment by the
Partnership for its interest was $24,930,043 (including an acquisition fee
of $890,000 paid to PWPI and certain closing costs of $40,043).
During the guaranty period, which was to have run from December 24, 1987
to December 24, 1991, the co-venturer had guaranteed to fund all operating
deficits, capital costs and the Partnership's preference return distribution
in the event that cash flow from property operations was insufficient. The
co-venturer defaulted on the guaranty obligations in fiscal 1990 and
negotiations between the Partnership and the co-venturer to reach a
resolution of the default were ongoing until fiscal 1992, when the ventures
reached a settlement agreement. During fiscal 1992, the co-venturer
assigned its remaining joint venture interest to the Managing General
Partner of the Partnership. The co-venturer also executed a five-year
promissory note in the initial face amount of $300,000 payable to the
Partnership without interest. Unless prepaid, the balance of the note
escalates as to the principal balance annually up to a maximum of $600,000.
In exchange, it was agreed that the co-venturer or its affiliates will have
no further liability to the Partnership for any guaranteed preference
payments. Due to the uncertainty regarding the collection of the note
receivable, such compensation will be recognized as payments are received.
Any amounts received will be reflected as reductions to the carrying value
of the operating investment properties. No payments have been received to
date. Concurrent with the execution of the settlement agreement, the
property's management contract with an affiliate of the co-venturer was
terminated.
Per the terms of the joint venture agreement, net cash flow of the joint
venture is to be distributed monthly in the following order of priority: (1)
the Partnership will receive a cumulative preferred return of 9.25% on its
net investment until December 31, 1989, 9.75% for the next two years, and
10% per annum thereafter, (2) to pay any capital expenditures and leasing
costs, as defined (3) to the co-venturer in an amount up to their mandatory
contribution, (4) to capital reserves (5) to pay interest on accrued
preferences and unpaid advances, and (6) the balance will be distributed 75%
to the Partnership and 25% to the co-venturer.
Net proceeds from sales or refinancings shall be distributed as follows:
(1) to the Partnership to the extent of any unpaid preferred return and
accrued interest thereon; (2) to the Partnership to the extent of its net
investment plus $2,400,000 and (3) 75% to the Partnership and 25% to the co-
venturer. The co-venturer and the Partnership will also receive pro rata,
any outstanding advances, including interest thereon, from proceeds from
sales or refinancings prior to a return of capital.
Net income from operations shall be allocated first to the Partnership to
the extent of its preference return and then 75% to the Partnership and 25%
to the co-venturer. Net losses from operations shall be allocated 75% to
the Partnership and 25% to the co-venturer.
Atlanta Asbury Partnership
On March 12, 1990, the Partnership acquired an interest in Atlanta Asbury
Partnership (the "joint venture"), a Georgia general partnership organized
in accordance with a joint venture agreement between the Partnership and
Asbury Commons/Summit Limited Partnership, an affiliate of Summit Properties
(the "co-venturer"). The joint venture was organized to own and operate
Asbury Commons Apartments, a newly constructed 204-unit residential
apartment complex located in Atlanta, Georgia. The aggregate cash investment
by the Partnership for its interest was $14,417,791 (including an
acquisition fee of $50,649 payable to PWPI and certain closing costs of
$67,142).
During the Guaranty Period, from March 13, 1990 to March 15, 1992, as
defined, the co-venturer had agreed to unconditionally guarantee to fund any
deficits and to ensure that the joint venture could distribute to the
Partnership its preference return, (as defined below). The co-venturer was
not in compliance with the mandatory payment provisions of the Partnership
agreement for the period from November 30, 1990 to February 14, 1992. On
February 14, 1992, a settlement agreement between the Partnership and the
co-venturer was executed whereby the co-venturer agreed to do the following:
1) pay the Partnership $275,000; (2) release all escrowed purchase price
funds, amounting to $230,489, to the joint venture; (3) assign 99% of its
joint venture interest to the Partnership and 1% of its joint venture
interest to the Managing General Partner and withdraw from the joint
venture; and 4) reimburse the Partnership for legal expenses up to $10,000.
In return the co-venturer was released from its obligations under the joint
venture agreement.
Subsequent to the withdrawal of the original co-venture partner and the
assignments of its interest in the venture to the Partnership and the
Managing General Partner, on September 26, 1994, the joint venture agreement
was amended and restated. The terms of the amended and restated venture
agreement call for net cash flow from operations of the joint venture to be
distributed as follows: (1) to the Partnership until the Partnership has
received a cumulative non-compounded return of 10% on the Partnership's net
investment and any additional contributions made by the Partnership (2) to
the Partners in proportion to their joint venture interests.
Proceeds from the sale or refinancing of the property will be distributed
in the following order of priority: (1) to the Partnership an amount of
gain equal to the aggregate negative capital account of the Partnership, (2)
to the Managing General Partner in an amount of gain equal to the negative
capital account of the Managing General Partner, (3) to the Partnership
until the Partnership has been allocated an amount equal to a 10% cumulative
non-compounded return on the Partnership's net investment and any additional
contributions made by the Partnership, (4) to the Partnership until the
Partnership has received an amount equal to 1.10 times the Partnership's net
investment and any additional contributions made by the Partnership, and (5)
any remaining gain shall be allocated 99% to the Partnership and 1% to the
Managing General Partner. Net losses from the sale or refinancing of the
property will be allocated to the Partners in the following order of
priority: (1) to the Partnership in an amount of loss equal to the positive
capital account of the Partnership, (2) to the Managing General Partner in
an amount of loss equal to the positive capital account of the Managing
General Partner, and (3) to the extent the net losses exceed the aggregate
capital accounts of the Partners, all losses in excess of such capital
accounts shall be allocated to the Partnership.
Net income will be allocated as follows: (1) 100% to the Partnership
until the Partnership has been allocated an amount equal to a 10% cumulative
non-compounded return on the Partnership's net investment and any additional
contributions made by the Partnership, and (2) thereafter, 99% to the
Partnership and 1% to the Managing General Partner. Losses will be
allocated 99% to the Partnership and 1% to the Managing General Partner.
West Ashley Shoppes Associates
On March 10, 1988 the Partnership acquired an interest in West Ashley
Shoppes Associates (the "joint venture"), a South Carolina general
partnership organized in accordance with a joint venture agreement between
the Partnership and Orleans Road Development Company, an affiliate of the
Leo Eisenberg Company (the "co-venturer"). The joint venture was organized
to own and operate West Ashley Shoppes, a newly constructed shopping center
located in Charleston, South Carolina. The property consists of 134,000 net
rentable square feet on approximately 17.25 acres of land. One tenant
occupies 55,850 square feet, representing approximately 41% of the total
shopping center. This tenant, Phar-Mor, Inc., is in Chapter 11 Bankruptcy
Reorganization as of March 31, 1995.
The aggregate cash investment by the Partnership for its interest was
$10,503,841 (including an acquisition fee of $365,000 paid to PWPI and
certain closing costs of $123,841). During the Guaranty Period, from March
10, 1988 to March 10, 1993, the co-venturer had agreed to unconditionally
guarantee to fund any deficits and to ensure that the joint venture could
distribute to the Partnership its preference return. During fiscal 1990,
the co-venturer defaulted on its guaranty obligation. On April 25, 1990,
the Partnership and the co-venturer entered into the second amendment to the
joint venture agreement. In accordance with the amendment, the Partnership
contributed $300,000 to the joint venture, in exchange for the co-venturer's
transfer of rights to certain out-parcel land. The $300,000 was then repaid
to the Partnership as a distribution to satisfy the co-venturer's obligation
to fund net cash flow shortfalls in arrears at December 31, 1989.
Subsequent to the amendment to the joint venture agreement, the co-venturer
defaulted on the guaranty obligations again. Net cash flow shortfall
contributions of approximately $1,060,000 were in arrears at December 31,
1993. During 1991, the Partnership had filed suit against the co-venturer
and the individual guarantors to collect the amount of the cash flow
shortfall contributions in arrears. In May 1994, the Partnership and the
co-venturer executed a settlement agreement to resolve their outstanding
disputes regarding the net cash flow shortfall contributions described
above. Under the terms of the settlement agreement, the co-venturer
assigned 96% of its interest in the joint venture to the Partnership and the
remaining 4% of its interest in the joint venture to Second Equity Partners,
Inc. (SEPI), Managing General Partner of the Partnership. In return for
such assignment, the Partnership agreed to release the co-venturer from all
claims regarding net cash flow shortfall contributions owed to the joint
venture. In conjunction with the assignment of its interest and withdrawal
from the joint venture, the co-venturer agreed to release certain
outstanding counter claims against the Partnership. The Partnership and
SEPI intend to continue the operations of the joint venture as a going
concern. The settlement agreement effectively gives the Partnership
complete control over the affairs of the joint venture. Accordingly,
beginning in fiscal 1995, the financial position and results of operations
of the venture are presented on a consolidated basis in the Partnership's
financial statements. Prior to fiscal 1995, the Partnership's investment in
the joint venture was accounted for on the equity method (see Note 5).
In connection with the consolidation of West Ashley Shoppes Associates into
the Partnership's financial statements, the following assets and liabilities
(in thousands) of the joint venture at January 1, 1994 were recorded in the
Partnership's balance sheet at April 1, 1994 (see Note 2).
Cash $ 240
Escrowed cash 19
Accounts receivable, net 223
Prepaid expenses 5
Operating investment property, net 8,727
Deferred rent receivable 99
Deferred expenses, net 73
Accounts payable (165)
Tenant security deposits (20)
Distribution paid to PWEP2 subsequent to 12/31/93 (96)
Minority interest in net assets of
consolidated joint venture (21)
Investment in West Ashley Shoppes
Associates, at equity, at April 1, 1994 $ 9,084
Subsequent to the settlement agreement and assignment of joint venture
interest described above, the terms of the joint venture agreement calls for
net cash flow from operations of the joint venture to be distributed as
follows: (1) the Partnership will receive a preference return of 10% per
annum on its net cash investment; (2) next to the partners on a pro rata
basis to repay unpaid additional contribution returns and return on accrued
preference, as defined; (3) net, until all additional contributions, tenant
improvement contributions and accrued preference returns have been paid in
full, 50% of remaining cash flow to the partners on a pro rata basis to
repay such items, 49.5% to the Partnership, and 0.5% to the co-venturer; and
(4) thereafter, any remaining cash would be distributed 99% to the
Partnership and 1% to the co-venturer.
Proceeds from the sale or refinancing of the property will be distributed
in the following order of priority: (1) the Partnership will receive the
aggregate amount of its cumulative annual preferred return not previously
paid, (2) to the Partnership and co-venturer to pay additional
contributions, (3) the Partnership will receive an amount equal to the
Partnership's net investment and (4) thereafter, any remaining proceeds
will be distributed 99% to the Partnership and 1% to the co-venturer.
Net income or loss will be allocated to the Partnership and the co-venturer
in the same proportion as cash distributions except for certain items which
are specifically allocated to the partners, as defined, in the joint venture
agreement. Such items include amortization of acquisition fee and
organization expenses and allocation of depreciation related to recording of
the building at fair value based upon its purchase price.
The following is a combined summary of property operating expenses for the
consolidated joint ventures for the years ended December 31, 1994, 1993 and
1992 (in thousands):
1994 (1) 1993 1992
Property operating expenses:
Utilities $ 225 $ 187 $ 172
Repairs and maintenance 382 264 257
Salaries and related costs 147 175 181
Administrative and other 367 154 167
Insurance 47 37 42
Management fees 134 113 138
$ 1,302 $ 930 $ 957
(1)Property operating expenses of West Ashley Shoppes Associates are
included in the combined totals for 1994 only.
5. Investments in Unconsolidated Joint Ventures
The Partnership has investments in five unconsolidated joint venture
partnerships which own operating investment properties at March 31, 1995 (six at
March 31, 1994). As discussed further in Note 4, during the first quarter of
fiscal 1995, the Partnership obtained control over the affairs of the West
Ashley Shoppes joint venture. Accordingly, the joint venture is presented on a
consolidated basis for the year ended March 31, 1995. As discussed in Note 2,
these joint ventures report their operations on a calendar year basis.
Condensed combined financial statements of these unconsolidated joint
ventures, for the periods indicated, are as follows:
CONDENSED COMBINED BALANCE SHEETS
December 31, 1994 and 1993
(in thousands)
Assets
1994 1993
Current assets $ 1,346 $ 3,390
Operating investment properties, net 71,357 82,291
Other assets 4,415 3,999
$ 77,118 $ 89,680
Liabilities and Venturers' Capital
Current liabilities $ 3,043 $ 4,457
Other liabilities 228 201
Note payable to venturer 1,000 1,000
Long-term debt 13,127 -
Partnership's share of venturers' capital 40,217 63,367
Co-venturers' share of venturers' capital 19,503 20,655
$ 77,118 $ 89,680
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the years ended December 31, 1994, 1993 and 1992
(in thousands)
1994 1993 1992
Rental revenues and expense
reimbursements $ 12,204 $13,547 $13,508
Interest income 289 41 44
12,493 13,588 13,552
Property operating and other expenses 4,170 4,486 3,830
Real estate taxes 2,565 3,082 2,983
Interest on long-term debt 300 62 73
Interest on note payable to partner 100 100 100
Depreciation and amortization 3,430 3,573 3,592
10,565 11,303 10,578
Net income $ 1,928 $ 2,285 $ 2,974
Net income:
Partnership's share of
combined income $ 1,899 $ 2,305 $ 2,690
Co-venturers' share of
combined income (loss) 29 (20) 284
$ 1,928 $ 2,285 $ 2,974
Reconciliation of Partnership's Investment
March 31, 1995 and 1994
(in thousands)
1995 1994
Partnership's share of capital at December 31,
as shown above $ 40,217 $ 63,367
Partnership's share of ventures' current
liabilities and long-term debt 1,068 1,574
Excess basis due to investments in
joint ventures, net (1) 1,728 2,195
Deficit fundings (2) - (689)
Timing differences (3) (3,126) (928)
Investments in unconsolidated
joint ventures, at equity at March 31 $ 39,887 $ 65,519
(1) At March 31, 1995 and 1994, the Partnership's investment exceeds its
share of the joint venture partnerships' capital accounts by approximately
$1,728,000 and $2,195,000, respectively. This amount, which relates to
certain costs incurred by the Partnership in connection with acquiring its
joint venture investments, is being amortized over the estimated useful
life of the investment properties (generally 30 years).
(2)Deficit fundings represented cash contributed to the West Ashley Shoppes
joint venture by the Partnership's co-venturer pursuant to a guaranty
agreement. The joint venture recorded such contributions as an increase
to the Partnership's capital account for financial reporting purposes.
(3)The timing differences between the Partnership's share of capital account
balances and its investments in joint ventures consist of capital
contributions made to joint ventures and cash distributions received from
joint ventures during the period from January 1 to March 31 in each year.
These differences result from the lag in reporting period discussed in
Note 2.
Reconciliation of Partnership's Share of Operations
For the years ended December 31, 1994, 1993 and 1992
(in thousands)
1994 1993 1992
Partnership's share of operations,
as shown above $ 1,899 $ 2,305 $ 2,690
Amortization of excess basis (81) (98) (98)
Partnership's share of
unconsolidated ventures' income $ 1,818 $ 2,207 $ 2,592
Investments in unconsolidated joint ventures, at equity is the
Partnership's net investment in the joint venture partnerships. These joint
ventures are subject to Partnership agreements which determine the
distribution of available funds, the disposition of the venture's assets and
the rights of the partners, regardless of the Partnership's percentage
ownership interest in the venture. Substantially all of the Partnership's
investments in these joint ventures are restricted as to distributions.
Investments in unconsolidated joint ventures, at equity on the balance
sheet is comprised of the following investment carrying values (in
thousands):
1995 1994
Chicago-625 Partnership $ 20,394 $ 21,415
Richmond Gables Associates 711 6,037
Daniel/Metcalf Associates Partnership 10,670 13,194
TCR Walnut Creek Limited Partnership 1,204 8,527
Portland Pacific Associates 5,908 6,262
West Ashley Shoppes Associates - 9,084
38,887 64,519
Note receivable:
Note receivable from TCR Walnut
Creek Limited Partnership
(see discussion below) 1,000 1,000
Investments in unconsolidated
joint ventures $ 39,887 $ 65,519
The Partnership received cash distributions from the unconsolidated
ventures during the years ended March 31, 1995, 1994 and 1993 as set forth
below (in thousands):
1995 1994 1993
Chicago-625 Partnership $ 1,114 $ 1,252 $ 918
Richmond Gables Associates 5,573 600 565
Daniel/Metcalf Associates Partnership 3,374 1,080 1,145
TCR Walnut Creek Limited Partnership 7,803 770 862
Portland Pacific Associates 885 660 699
West Ashley Shoppes Associates - 380 423
$ 18,749 $ 4,742 $ 4,612
A description of the ventures' properties and the terms of the joint venture
agreements are summarized as follows:
a. Chicago - 625 Partnership
The Partnership acquired an interest in Chicago - 625 Partnership (the
"joint venture"), an Illinois general partnership organized on December 16,
1986 in accordance with a joint venture agreement between the Partnership,
an affiliate of the Partnership and Michigan-Ontario Limited, an Illinois
limited partnership and an affiliate of Golub & Company (the "co-venturer"),
to own and operate 625 North Michigan Avenue Office Tower (the "property").
The property is a 27-story commercial office tower containing an aggregate
of 324,829 square feet of leasable space on approximately .38 acres of
land. The property is located in Chicago, Illinois.
The aggregate cash investment made by the Partnership for its current
interest was $26,010,000 (including an acquisition fee of $1,316,600 paid to
PWPI and certain closing costs of $223,750). At the same time the
Partnership acquired its interest in the joint venture, PaineWebber Equity
Partners One Limited Partnership (PWEP1), an affiliate of the Managing
General Partner with investment objectives similar to the Partnership's
investment objectives, acquired an interest in this joint venture. PWEP1's
cash investment for its current interest was $17,278,000 (including an
acquisition fee of $383,400 paid to PWPI).
During 1990, the joint venture agreement was amended to allow the
Partnership and PWEP1 the option to make contributions to the joint venture
equal to total costs of capital improvements, leasehold improvements and
leasing commissions ("Leasing Expense Contributions") incurred since April
1, 1989, not in excess of the accrued and unpaid Preference Return due to
the Partnership and PWEP1. The Partnership made Leasing Expense
Contributions totalling $2,935,000 through March 31, 1993. The Partnership
made no Leasing Expense Contributions during fiscal 1995 or 1994.
The joint venture agreement provides for aggregate distributions of cash
flow and sale or refinancing proceeds to the Partnership and PWEP1. These
amounts are then distributed to the Partnership and PWEP1 based on their
respective cash investments in the joint venture exclusive of acquisition
fees. As a result of the transfers of the Partnership's interests to PWEP1
as discussed above, cash flow distributions and sale or refinancing proceeds
will now be split approximately 59% to the Partnership and 41% to PWEP1.
Net cash flow will be distributed as follows: First, a preference return,
payable monthly, to the Partnership and PWEP1 of 9% of their respective net
cash investments, as defined. Second, to the payment of any unpaid accrued
interest and principal on all outstanding default notes. Third, to the
payment of any unpaid accrued interest and principal on all outstanding
operating notes. Fourth, 70% in total to the Partnership and PWEP1 and 30%
to the co-venturer. The cumulative unpaid and unaccrued Preference Return
due to the Partnership totalled $6,323,036 at December 31, 1994.
Profits for each fiscal year shall be allocated, to the extent that such
profits do not exceed the net cash flow for such fiscal year, in proportion
to the amount of such net cash flow distributed to the Partners for such
fiscal year. Profits in excess of net cash flow shall be allocated 99% in
total to the Partnership and PWEP1 and 1% to the co-venturer. Losses shall
be allocated 99% in total to the Partnership and PWEP1 and 1% to the co-
venturer.
Proceeds from the sale or refinancing of the property shall be allocated as
follows:
First, to the payment of all unpaid accrued interest and principal on all
outstanding default notes. Second, to the Partnership, PWEP1 and the co-
venturer for the payment of all unpaid accrued interest and principal on all
outstanding operating notes. Third, 100% to the Partnership and PWEP1 until
they have received the aggregate amount of their respective Preference
Return not yet paid. Fourth, 100% in total to the Partnership and PWEP1
until they have received an amount equal to their respective net
investments. Fifth, 100% to the Partnership and PWEP1 until they have
received an amount equal to the PWEP Leasing Expense Contributions less any
amount previously distributed, pursuant to this provision. Sixth, 100% to
the co-venturer until it has received an amount equal to $6,000,000, less
any amount of proceeds previously distributed to the co-venturer, as
defined. Seventh, 100% to the co-venturer until it has received an amount
equal to any reduction in the amount of net cash flow that it would have
received had the Partnership not incurred indebtedness in the form of
operating notes. Eighth, 100% in total to the Partnership and PWEP1 until
they have received $2,067,500, less any amount of proceeds previously
distributed to the Partnership and PWEP1, pursuant to this provision.
Ninth, 75% in total to the Partnership and PWEP1 and 25% to the co-venturer
until the Partnership and PWEP1 have received $20,675,000, less any amount
previously distributed to the Partnership and PWEP1, pursuant to this
provision. Tenth, 100% to the Partnership and PWEP1 until the Partnership
and PWEP1 have received an amount equal to a cumulative return of 9% on the
PWEP Leasing Expense Contributions. Eleventh, any remaining balance will be
distributed 55% in total to the Partnership and PWEP1 and 45% to the co-
venturer.
Gains resulting from the sale of the property shall be allocated as
follows:
First, capital profits shall be allocated to Partners having negative
capital account balances, until the balances of the capital accounts of such
Partners equal zero. Second, any remaining capital profits up to the amount
of capital proceeds distributed to the Partners pursuant to distribution of
proceeds of a sale or refinancing with respect to the capital transaction
giving rise to such capital profits shall be allocated to the Partners in
proportion to the amount of capital proceeds so distributed to the Partners.
Third, capital profits in excess of capital proceeds, if any, shall be
allocated between the Partners in the same proportions that capital proceeds
of a subsequent capital transaction would be distributed if the capital
proceeds were equal to the remaining amount of capital profits to be
allocated.
Capital losses shall be allocated as follows:
First, capital losses shall be allocated to the Partners in an amount up to
and in proportion to their respective positive capital balances. Then, all
remaining capital losses shall be allocated 70% in total to the Partnership
and PWEP1 and 30% to the co-venturer.
The Partnership has a property management agreement with an affiliate of
the co-venturer that provides for management and leasing commission fees to
be paid to the property manager. The management fee is 4% of gross rents
and the leasing commission is 7%, as defined. The property management
contract is cancellable at the Partnership's option upon the occurrence of
certain events and is currently cancellable by the co-venturer at any time.
b) Richmond Gables Associates
On September 1, 1987 the Partnership acquired an interest in Richmond
Gables Associates (the "joint venture"), a Virginia general partnership
organized in accordance with a joint venture agreement between the
Partnership and Richmond Erin Shades Company Limited Partnership, an
affiliate of The Paragon Group (the "co-venturer"). The joint venture was
organized to own and operate the Gables at Erin Shades, a newly constructed
apartment complex located in Richmond, Virginia. The property consists of
224 units with approximately 156,000 net rentable square feet on
approximately 15.6 acres of land.
The aggregate cash investment by the Partnership for its interest was
$9,076,982 (including an acquisition fee of $438,500 paid to PWPI and
certain closing costs of $84,716). On November 7, 1994, the joint venture
obtained a $5,200,000 first mortgage note payable which bears interest at
8.72% per annum. Principal and interest payments of $42,646 are due monthly
through October 15, 2001 at which time the entire unpaid balance of
principal and interest is due. The net proceeds of the loan were recorded
as distributions to the Partnership by the joint venture. The Partnership
used the proceeds of the loan in conjunction with the retirement of the zero
coupon loans described in Note 6. The Partnership has indemnified the joint
venture and the related co-venture partners, against all liabilities, claims
and expenses associated with the borrowing.
Net cash flow from operations of the joint venture will be distributed in
the following order of priority: first, a preference return, payable
monthly, to the Partnership of 9% on its net cash investment as defined;
second, to pay interest on additional capital contributions; thereafter, 70%
to the Partnership and 30% to the co-venturer.
Proceeds from the sale or refinancing of the property will be distributed
in the following order of priority: (1) the Partnership will receive the
aggregate amount of its cumulative annual preferred return not previously
paid, (2) the Partnership will receive an amount equal to the Partnership's
net investment, (3) $450,000 each to the Partnership and the co-venturer,
(4) the Partnership and co-venturer will receive proceeds in proportion to
contribution loans made plus accrued interest, (5) 70% to the Partnership
and 30% to the co-venturer until the Partnership has received an additional
$5,375,000; and (6) thereafter, any remaining proceeds will be distributed
60% to the Partnership and 40% to the co-venturer.
Net income and loss will be allocated as follows: (1) depreciation will be
allocated to the Partnership, (2) income will be allocated to the
Partnership and co-venturer in the same proportion as cash distributions.
Losses will be allocated in amounts equal to the positive capital accounts
of the Partnership and co-venturer and (3) all other profits and losses will
be allocated 70% to the Partnership and 30% to the co-venturer.
During the Guaranty Period, which expired in September 1990, the co-
venturer agreed to unconditionally guarantee to fund any deficits and to
ensure that the joint venture could distribute to the Partnership its
preference return. Total mandatory payments contributed by the co-venturer
amounted to $152,048 in 1990. At December 31, 1994, there was a cumulative
unpaid preferred distribution payable to the Partnership of $866,120. This
amount will be paid to the Partnership if and when there is available cash
flow.
The joint venture has entered into a management contract with an affiliate
of the co-venturer which is cancellable at the option of the Partnership
upon the occurrence of certain events. The annual management fee is 5% of
gross rents, as defined.
c) Daniel/Metcalf Associates Partnership
The Partnership acquired an interest in Daniel/Metcalf Associates
Partnership (the "joint venture"), a Virginia general partnership organized
on September 30, 1987 in accordance with a joint venture agreement between
the Partnership and Plaza 91 Investors, L.P., an affiliate of Daniel Realty
Corp., organized to own and operate Loehmann's Plaza, a community shopping
center located in Overland Park, Kansas. The property consists of ap-
proximately 142,000 net rentable square feet on approximately 19 acres of
land.
The aggregate cash investment by the Partnership for its interest was
$15,488,352 (including an acquisition fee of $689,000 paid to PWPI and
certain closing costs of $64,352). On February 10, 1995, the joint venture
obtained a first mortgage loan secured by the operating investment property
in the initial principal amount of $4,000,000. The proceeds of the loan,
along with additional funds contributed by the Partnership, were used to
repay the portion of the zero coupon note liability of the Partnership which
was secured by the operating property (see Note 6). In addition, a portion
of the proceeds were used to repay, the $700,000 mortgage loan of the joint
venture and to establish a Renovation and Occupancy Escrow in the amount of
$550,000 as required by the new mortgage loan. The new first mortgage loan
was issued in the name of the joint venture, bears interest at an annual
rate of 9.04% and matures on February 15, 2003. The loan requires monthly
principal and interest payments of $33,700.
Funds may be released from the Renovation and Occupancy Escrow to reimburse
the joint venture for the costs of certain of the planned renovations in the
event that the joint venture satisfies certain requirements which include
specified occupancy and rental income thresholds. If such requirements have
not been met within 18 months from the date of the loan closing, the lender
may apply the balance of the escrow account to the payment of loan
principal. In addition, the lender required that the Partnership
unconditionally guaranty up to $1,400,000 of the loan obligation. This
guaranty will be released in the event that the joint venture satisfies the
requirement for the release of the Renovation and Occupancy Escrow funds or
upon the repayment, in full, of the entire outstanding mortgage loan
liability.
The closing of this financing transaction was executed in conjunction with
an amendment to the Partnership Agreement. The purpose of the amendment was
to establish the portion of the new first mortgage loan which was used to
repay the borrowing of the Partnership described in Note 6 (the
``Partnership Component') as the sole responsibility of the Partnership.
Accordingly, any debt service payments attributable to the Partnership
Component will be deducted from the Partnership's share of operating cash
flow distributions or sale or refinancing proceeds. Furthermore, all
expenses associated with such portion of the new borrowing will be
specifically allocated to the Partnership. The Partnership has agreed to
indemnify the joint venture and co-venture partner against all losses,
damages, liabilities, claims, costs, fees and expenses incurred in
connection with the Partnership Component of the first mortgage loan. The
portion of the new first mortgage loan which was used to repay the joint
venture's $700,000 mortgage loan and to establish the Renovation and
Occupancy Escrow will be treated as a joint venture borrowing subject to the
terms and conditions of the original joint venture agreement.
Net cash flow of the joint venture is to be distributed monthly in the
following order of priority: (1) the Partnership will receive a cumulative
preferred return (the "Preferred Return") of 9.25% on its initial net
investment of $14,300,000 from October, 1987 through September, 1989, 9.75%
from October, 1989 through September, 1990 and 10% thereafter, (2) to the
Partnership and co-venturer for the payment of all unpaid accrued interest
and principal on all outstanding notes. Any additional cash flow shall be
distributed 75% to the Partnership and 25% to the co-venturer.
The co-venturer agreed to contribute to the joint venture all funds that
were necessary so the joint venture could distribute to the Partnership its
preference return for 36 months from the date of closing (the "Guaranty
Period"). Contributions for the final 12 months of the Guaranty Period,
which ended September 30, 1990, were in the form of mandatory loans. Such
loans are non-interest bearing and will be repaid upon sale or refinancing
of the Property. The Partnership's cumulative unpaid preferential return as
of December 31, 1994 amounted to $2,022,245. If the joint venture requires
additional funds after the Guaranty Period, and such funds are not available
from third party sources, they are to be provided in the form of operating
and capital deficit loans, 75% by the Partnership and 25% by the co-
venturer. At December 31, 1994, the co-venturer was obligated to make
additional capital contributions of a least $88,644 with respect to
cumulative unfunded shortfalls in the Partnership's preferential return
through September 30, 1990.
Proceeds from the sale or refinancing of the property will be distributed
in the following order of priority: (1) to the Partnership and to the co-
venturer, to repay any additional capital contributions and loans and unpaid
preferential returns, (2) $15,015,000 to the Partnership, (3) $200,000 to
the co-venturer and (4) 75% to the Partnership and 25% to the co-venturer.
Taxable income will be allocated to the Partnership and the co-venturer in
any year in the same proportions as actual cash distributions, except to the
extent partners are required to make capital contributions, as defined, then
an amount equal to such contribution will be allocated to the partners.
Profits in excess of net cash flow are allocated 75% to the Partnership and
25% to the co-venturer. Losses are allocated 99% to the Partnership and 1%
to the co-venturer. Contributions or loans made to the joint venture by the
Partnership or co-venturer will result in a loss allocation to the
Partnership or co-venturer of an equal amount.
The joint venture has entered into a management contract with an affiliate
of the co-venturer cancellable at the option of the Partnership upon the
occurrence of certain events. The annual management fee is equal to 1.5% of
gross rents, as defined. In addition, the affiliate of the co-venturer also
earns a subordinated management fee of 2% of gross rents during any year in
which the net cash flow of the operating property exceeds the Partnership's
preference return. Otherwise the fee is accrued subject to a maximum amount
of $50,000 and payable only from the proceeds of a capital transaction.
d) TCR Walnut Creek Limited Partnership
The Partnership acquired an interest in TCR Walnut Creek Limited
Partnership (the "joint venture"), a Texas limited partnership organized on
December 24, 1987 in accordance with a joint venture agreement between the
Partnership and Trammell S. Crow (the "co-venturer") organized to own and
operate Treat Commons Phase II Apartments, an apartment complex located in
Walnut Creek, California. The property consists of 160 units on
approximately 3.98 acres of land.
The aggregate cash investment by the Partnership for its interest was
$13,143,079 (including an acquisition fee of $602,400 payable to PWPI and
certain closing costs of $40,679). The initial cash investment also
includes the sum of $1,000,000 that was contributed in the form of a
permanent nonrecourse loan to the venture on which the Partnership receives
interest payments at the rate of 10% per annum until the commencement of the
guaranty period, 9.5% per annum during the guaranty period and 10% per annum
thereafter. The balance of the permanent loan is included in the
Partnership's investment in the joint venture on the accompanying balance
sheet. On September 27, 1994, the joint venture obtained a $7,400,000
first mortgage note payable which bears interest at 8.54% per annum.
Principal and interest payments of $31,598 are due monthly through September
2001 at which time the entire unpaid balance of principal and interest is
due. The net proceeds of the loan were recorded as distributions to the
Partnership by the joint venture. The Partnership used the proceeds of the
loan in conjunction with the retirement of the zero coupon loans described
in Note 6. The Partnership has indemnified the joint venture and the
related co-venture partners, against all liabilities, claims and expenses
associated with the borrowing.
Net cash flow from operations of the Joint Venture will be distributed
quarterly in the following order of priority: (1) first, to repay accrued
interest and principal on any optional loans, (2) second, a preference
return to the Partnership of an interest rate equal to a rate obtainable on
a six-month jumbo certificate of deposit for the period ending six months
after the earlier of the date construction commenced or August 15, 1987 on
its net cash investment, then 9.5% until the end of the guaranty period and
10% thereafter, and (3) third, the balance, 75% to the Partnership and 25%
to the co-venturer. The cumulative unpaid preference return as of December
31, 1994 is $1,695,489.
Proceeds from the sale or refinancing of the property will be distributed
in the following order of priority: (1) first, to repay accrued interest
and principal on any optional loans, (2) second, 100% to the Partnership
until the Partnership has received cumulative distributions, as defined, and
(3) third, the balance, 75% to the Partnership and 25% to the co-venturer.
Net income will be allocated to the Partnership to the extent of net cash
flow from operations. Any excess income or all net income, in the event
there is no net cash flow from operations, will be allocated 75% to the
Partnership and 25% to the co-venturer. In general, net loss will be
allocated as follows: (i) prior to January 1, 1988, 1% to the Partnership
and 99% to the co-venturer, and (ii) subsequent to December 31, 1987, 99% to
the Partnership and 1% to the co-venturer. During the guaranty period, from
September 1, 1988 to August 31, 1990, the co-venturer agreed to contribute
to the joint venture all funds that were necessary to cover any deficits and
to ensure that the joint venture could distribute the Partnership's
preference return.
The joint venture has entered into a management contract with an affiliate
of the co-venturer which is cancellable at the option of the Partnership
upon the occurrence of certain events. The annual management fee is 5% of
gross revenues, as defined.
e) Portland Pacific Associates
On January 12, 1988 the Partnership acquired an interest in Portland
Pacific Associates (the "joint venture"), a California limited partnership
organized in accordance with a joint venture agreement between the
Partnership and Pacific Union Investment Corporation (the "co-venturer").
The joint venture was organized to own and operate Richland Terrace and
Richmond Park Apartments located in Portland, Oregon. The property consists
of a total of 183 units located on 9.52 acres of land.
The aggregate cash investment by the Partnership for its interest was
$8,251,500 (including an acquisition fee of $380,000 paid to PWPI and
certain closing costs of $33,500).
During the guaranty period, from January 14, 1988 through February 1, 1991,
the co-venturer agreed to unconditionally guarantee to fund any deficits and
to ensure that the joint venture could distribute to the Partnership its
preference return. The Partnership shall receive a preferred annual return
of 9.25% of the Partnership's net investment for the two-year period
commencing on the date of closing, 9.75% during the subsequent two years and
10% commencing on the fourth anniversary date and extending until the
termination and dissolution of the joint venture. The computation of the
preferred return is based upon the Partnership's net investment of
$7,700,000, as defined in the joint venture agreement.
Net cash flow from operations of the joint venture will be distributed in
the following order of priority: during the guaranty period 1) to the
Partnership until it has received its cumulative preference return, as
defined, (2) to the partners to pay any guaranty period operating loans or
advances and accrued interest, (3) to the co-venturer to pay guaranty
preference loans, (4) to the co-venturer until the co-venturer has received
the cumulative amount of $60,000, and (5) then 50% to the Partnership and
50% to the co-venturer. Following the guaranty period, until all guaranty
period preference loans and related accrued interest have been paid in full,
50% of the net cash flow is to be distributed to the co-venturer to the
extent necessary to repay any principal and accrued interest and 37.5% to
the Partnership and 12.5% to the co-venturer. After all guaranty period
preference loans and accrued interest have been paid in full, 50% to the
Partnership to pay any accrued preference and 37.5% to the Partnership and
12.5% to the co-venturer. Then 50% to the manager for unpaid management
fees and 37.5% to the Partnership and 12.5% to the co-venturer, and
thereafter 75% to the Partnership and 25% to the co-venturer. The
Partnership's cumulative unpaid preference return as of December 31, 1994
was $212,974.
Proceeds from the sale or refinancing of the property will be distributed
in the following order of priority: (1) the Partnership will receive the
aggregate amount of its cumulative annual preferred return not previously
paid, (2) to the Partnership and co-venturer in proportion to any guaranty
period loans, (3) to the Partnership until it has received an amount equal
to its net investment plus $380,000, (4) to the co-venturer until all
principal and accrued preference return on guaranty period loans have been
repaid (5) to pay any unpaid subordinated management fees and (6)
thereafter, any remaining proceeds will be distributed 80% to the
Partnership and 20% to the co-venturer.
Net income and loss will be allocated as follows: (1) income will be
allocated to the Partnership and co-venturer in the same proportion as cash
distributions (2) then 75% to the Partnership and 25% to the co-venturer.
Losses will be allocated in proportion to net cash flow distributed.
The joint venture has entered into a management contract with an affiliate
of the co-venturer which is cancellable at the option of the Partnership
upon the occurrence of certain events. The annual management fee is 5% of
gross rents.
6. Notes Payable
Notes payable and deferred interest on the consolidated balance sheet of
the Partnership at March 31, 1995 and 1994 consist of the following (in
thousands):
1995 1994
9.125% mortgage note payable to an
insurance company secured by the 625 North
Michigan Avenue operating investment
property. The loan requires monthly
principal and interest payments of $55,000
through maturity on May 1, 1999. The
terms of the note were modified effective
May 31, 1994 (see discussion below). $ 9,657 $10,404
8.75% mortgage note payable to an
insurance company secured by the Asbury
Commons operating investment property. The
loan requires monthly principal and
interest payments of $88,000 through
maturity on October 15, 2001 (see
discussion below). 6,980 -
9.04% mortgage note payable to an
insurance company secured by the Saratoga
Center and EG&G Plaza operating investment
property. The loan requires monthly
principal and interest payments of $36,000
through maturity on January 20, 2002 (see
discussion below). 3,500 -
Zero coupon notes payable to a third party
secured by Saratoga Center and EG&G Plaza,
Loehmann's Plaza, Richland Terrace and
Richmond Park, West Ashley Shoppes, The
Gables, Treat Commons Phase II and Asbury
Commons operating investment properties.
Interest accrued at rate of 10%,
compounded annually with principal and
accrued interest due at maturity in June
1995 (see discussion of refinancing
below). - 23,560
$20,137 $33,964
On April 29, 1988, the Partnership borrowed $6,000,000 in the form of a
zero coupon loan which had a scheduled maturity date in May of 1995. The
note bore interest at an effective compounded annual rate of 9.8% and was
secured by the 625 North Michigan Avenue Office Building. Payment of all
interest was deferred until maturity, at which time principal and interest
totalling approximately $11,556,000 was to be due and payable. The carrying
value on the Partnership's balance sheet at March 31, 1994 of the loan plus
accrued interest aggregated approximately $10,404,000. The terms of the loan
agreement required that if the loan ratio, as defined, exceeded 80%, the
Partnership was required to deposit additional collateral in an amount
sufficient to reduce the loan ratio to 80%. During fiscal 1994, the lender
informed the Partnership that based on an interim property appraisal, the
loan ratio exceeded 80% and that a deposit of additional collateral was
required. Subsequently, the Partnership submitted an appraisal which
demonstrated that the loan ratio exceeded 80% by an amount less than
previously demanded by the lender. In December 1993, the Partnership
deposited additional collateral of $208,876 in accordance with the higher
appraised value. The lender accepted the Partnership's deposit of additional
collateral (included in escrowed cash on the accompanying balance sheet at
March 31, 1994) but disputed whether the Partnership had complied with the
terms of the loan agreement regarding the 80% loan ratio. During the quarter
ended June 30, 1994, an agreement was reached with the lender of the zero
coupon loan on a proposal to refinance the loan and resolve the outstanding
disputes. The terms of the agreement called for the Partnership to make a
principal pay down of $801,000, including the application of the additional
collateral referred to above. The maturity date of the loan, which now
requires principal and interest payments on a monthly basis as set forth
above, was extended to May 31, 1999. The terms of the loan agreement also
required the establishment of an escrow account for real estate taxes, as
well as a capital improvement escrow which is to be funded with monthly
deposits from the Partnership aggregating approximately $1 million through
the scheduled maturity date. Formal closing of the modification and
extension agreement occurred on May 31, 1994.
On June 20, 1988, the Partnership borrowed $17,000,000 in the form of
zero coupon loans due in June of 1995. These notes bore interest at an
annual rate of 10%, compounded annually. As of March 31, 1994, such loans
had an outstanding balance, including accrued interest, of approximately
$23,560,000 and were secured by Saratoga Center and EG&G Plaza, Loehmann's
Plaza Shopping Center, Richland Terrace and Richmond Park Apartments, West
Ashley Shoppes, The Gables Apartments, Treat Commons Phase II Apartments and
Asbury Commons Apartments. During fiscal 1991, the Partnership had repaid
the portion of the zero coupon loans which had been secured by the Highland
Village Apartments, which was sold in May of 1990. The aggregate amount of
principal and accrued interest repaid on May 31, 1990 amounted to
approximately $1,660,000. Additionally, a paydown of principal and accrued
interest, totalling approximately $2,590,000, was made on August 20, 1990.
This paydown represented a mandatory repayment of the full amount of the
principal and accrued interest which had been secured by the Ballston Place
property, which was sold in fiscal 1990, and an optional partial prepayment
of the principal and accrued interest secured by The Gables Apartments.
During fiscal 1995, the remaining balances of the zero coupon loans were
repaid from the proceeds of five new conventional mortgage loans issued to
the Partnership's joint venture investees, together with funds contributed
by the Partnership, as set forth below.
On September 27, 1994, the Partnership refinanced the portion of the zero
coupon loan secured by the Treat Commons Phase II apartment complex, of
approximately $3,353,000, with the proceeds of a new $7.4 million loan
obtained by the TCR Walnut Creek Limited Partnership joint venture. The
$7.4 million loan is secured by the Treat Commons apartment complex, carries
an annual interest rate of 8.54% and matures in 7 years. The loan requires
monthly principal and interest payments of $59,786. On September 28, 1994,
the Partnership repaid the portion of the zero coupon loan secured by the
Asbury Commons apartment complex, of approximately $3,836,000, with the
proceeds of a new $7 million loan obtained by the consolidated Asbury
Commons joint venture. The $7 million loan is secured by the Asbury Commons
apartment complex, carries an annual interest rate of 8.75% and matures in 7
years. The loan requires monthly principal and interest payments of
$87,575. On October 22, 1994, the Partnership applied a portion of the
excess proceeds from the refinancings of the Treat Commons and Asbury
Commons properties described above and repaid the portion of the zero coupon
loan which had been secured by West Ashley Shoppes of approximately
$2,703,000 and made a partial prepayment toward the portion of the zero
coupon loan secured by Hacienda Business Park of $3,000,000. On November 7,
1994, the Partnership repaid the portion of the zero coupon loans secured by
The Gables Apartments and the Richland Terrace and Richmond Park apartment
complexes of approximately $2,353,000 and $2,106,000, respectively, with the
proceeds of a new $5.2 million loan secured by The Gables Apartments. The
new $5.2 million loan bears interest at 8.72% and matures in 7 years. The
loan requires monthly principal and interest payments of $42,646. On
February 9, 1995, the Partnership repaid the portion of the zero coupon loan
secured by the Hacienda Business Park, of approximately $3,583,000, with the
proceeds of a new $3.5 million loan obtained by the consolidated Hacienda
Park Associates joint venture along with additional funds contributed by the
Partnership. The $3.5 million loan is secured by the Hacienda Business
Park, carries an annual interest rate of 9.04% and matures in 7 years. The
loan requires monthly principal and interest payments of $35,620. On
February 10, 1995, the Partnership repaid the portion of the zero coupon
loan secured by the Loehmann's Plaza shopping center, of approximately
$4,093,000, with the proceeds of a new $4 million loan obtained by the
Daniel/Metcalf Associates Partnership joint venture along with additional
funds contributed by the Partnership. The $4 million loan is secured by the
Loehmann's Plaza shopping center, carries an annual interest rate of 9.04%
and matures on February 15, 2003. The loan requires monthly principal and
interest payments of $33,700. Legal liability for the repayment of the new
mortgage loans secured by the Treat Commons, Gables and Loehmann's
properties rests with the respective joint ventures. Accordingly the
mortgage loan liabilities are recorded on the books of the joint ventures.
The Partnership has indemnified TCR Walnut Creek Limited Partnership,
Richmond Gables Associates and Daniel/Metcalf Associates Partnership and the
related co-venture partners, against all liabilities, claims and expenses
associated with these borrowings. The net proceeds of these loans were
recorded as distributions to the Partnership by the joint ventures.
The scheduled annual principal payments to retire notes payable are as
follows (in thousands):
1995 $ 224
1996 254
1997 278
1998 305
` 1999 333
Thereafter 18,743
$20,137
7. Bonds Payable
Bonds payable consist of the Hacienda Park joint venture's share of
liabilities for bonds issued by the City of Pleasanton, California for
public improvements that benefit Hacienda Business Park and the operating
investment property and are secured by liens on the operating investment
property. The bonds for which the operating investment property is subject
to assessment bear interest at rates ranging from 5% to 7.87%, with an
average rate of approximately 7.2%. Principal and interest are payable in
semi-annual installments and mature in years 2004 through 2017. In the
event the operating investment property is sold, the Hacienda Park joint
venture will no longer be liable for the bond assessments.
Future scheduled principal payments on bond assessments are as follows (in
thousands):
1995 $ 84
1996 91
1997 101
1998 110
1999 119
Thereafter 1,993
$ 2,498
8. Rental Revenue
The buildings owned by Hacienda Park Associates and West Ashley Shoppes
Associates are leased under noncancellable, multi-year leases. Minimum
future rentals due under the terms of these leases at December 31, 1994 are
as follows (in thousands):
Future
Minimum
Contractual
Payments
1995 $ 2,197
1996 2,197
1997 2,209
1998 1,968
1999 1,160
Thereafter 2,657
$ 12,388
9. Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse
effect on the Partnership's financial statements, taken as a whole.
10.Subsequent Events
On May 15, 1995 the Partnership distributed $634,508 to the Limited
Partners and $6,409 to the General Partners for the quarter ended March 31,
1995.
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTIONS>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1995
(In Thousands)
Cost
Initial Cost to Capitalized Life on Which
Consolidated (Removed) Depreciation
Joint Subsequent toGross Amount at Which Carried at in Latest
VenturesAcquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
Charleston, SC $ - $4,243 $ 5,669 $ 530 $ 3,799 $ 6,644 $10,443 $ 1,748 1988 3/10/88 5- 31.5 yrs.
Business Center
Pleasanton, CA 5,998 3,315 23,337 (811) 3,370 22,470 25,840 4,892 1985 12/24/87 5 - 31.5 yr
Apartment Complex
Atlanta, GA 6,980 1,702 11,950 (152) 1,639 11,861 13,500 2,255 1990 3/12/90 10 - 27.5 yr
$12,978 $9,260 $40,956 $ (433) $8,808 $40,975 $49,783 $8,895
Notes
(A) The aggregate cost of real estate owned at December 31, 1994 for Federal income tax purposes is approximately $53,158.
(B) See Notes 6 and 7 to the Financial Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1994 1993 1992
Balance at beginning of period $ 41,524 $ 41,433 $ 42,004
Consolidation of West Ashley joint venture 10,208 - -
Acquisitions and improvements 1,077 91 261
Write-offs due to disposals (3,026) - (832)
Balance at end of period $ 49,783 $ 41,524 $ 41,433
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 8,947 $ 7,723 $ 7,347
Consolidation of West Ashley joint venture 1,481 - -
Depreciation expense 1,493 1,224 1,207
Write-offs due to disposals (3,026) - (832)
Balance at end of period $ 8,895 $ 8,947 $ 7,722
(E) Costs removed subsequent to acquisition includes $3,026 of fully depreciated tenant improvements of the Hacienda joint venture
written off in calendar 1994, as well as certain guaranty payments received from the co-venturers in the consolidated joint
ventures (see Note 4).
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying combined balance sheets of the 1994 Combined
Joint Ventures of PaineWebber Equity Partners Two Limited Partnership as of
December 31, 1994 and the related combined statements of income and changes in
venturers' capital and cash flows for the year then ended. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the 1994 Combined
Joint Ventures of PaineWebber Equity Partners Two Limited Partnership at
December 31, 1994, and the combined results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 16, 1995
1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEET
December 31, 1994
(In Thousands)
Assets
1994
Current assets:
Cash and cash equivalents $ 249
Accounts receivable, net of
allowance for doubtful accounts
of $50,000 1,036
Prepaid expenses 14
Other current assets 47
Total current assets 1,346
Operating investment properties:
Land 19,999
Buildings, improvements and equipment 72,217
Construction in progress 112
92,328
Less accumulated depreciation (20,971)
71,357
Escrowed funds 1,281
Due from affiliates 269
Deferred expenses, net of accumulated
amortization of $904 1,423
Other assets 1,442
$ 77,118
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 414
Accounts payable - affiliates 101
Accrued real estate taxes 2,309
Distributions payable to venturers 65
Current portion - notes payable 154
Total current liabilities 3,043
Tenant security deposits 178
Subordinated management fee payable to affiliate 50
Note payable to venturer 1,000
Long-term debt 13,127
Venturers' capital 59,720
$ 77,118
See accompanying notes.
1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENT OF INCOME AND CHANGES IN VENTURERS' CAPITAL
For the year ended December 31, 1994
(In Thousands)
1994
REVENUES:
Rental income and expense reimbursements $ 12,204
Interest and other income 289
12,493
EXPENSES:
Real estate taxes 2,565
Depreciation and amortization 3,421
Property operating expenses 760
Repairs and maintenance 1,037
Management fees 463
Professional fees 122
Salaries 844
Advertising 64
Interest expense on long-term debt 309
Interest on note payable to venturer 100
General and administrative 485
Bad debt expense 317
Other 78
10,565
Net income 1,928
Contributions from venturers 385
Distributions to venturers (17,146)
Venturers' capital, beginning of year 74,553
Venturers' capital, end of year $ 59,720
See accompanying notes.
1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOW
For the year ended December 31, 1994
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1994
Cash flows from operating activities:
Net income $ 1,928
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,421
Amortization of deferred financing costs 11
Changes in assets and liabilities:
Accounts receivable 125
Prepaid expenses 1
Other current assets 13
Escrowed funds (1,219)
Deferred expenses (230)
Other assets 297
Accounts payable and accrued expenses (12)
Accounts payable - affiliates (67)
Tenant security deposits 47
Accrued real estate taxes (183)
Total adjustments 2,204
Net cash provided by operating activities 4,132
Cash flows from investing activities:
Additions to operating investment properties (1,171)
Purchase of investment securities (534)
Proceeds from sale of investment securities 1,264
Net cash used for investing activities (441)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 12,600
Principal payments on long-term debt (19)
Distributions to venturers (17,122)
Capital contributions from venturers 385
Payment of deferred loan costs (249)
Net cash used for financing activities (4,405)
Net decrease in cash and cash equivalents (714)
Cash and cash equivalents, beginning of year 963
Cash and cash equivalents, end of year $ 249
Cash paid during the year for interest $ 164
See accompanying notes.
1. Organization
The accompanying financial statements of the 1994 Combined Joint Ventures
of PaineWebber Equity Partners Two Limited Partnership (Combined Joint
Ventures) include the accounts of Chicago-625 Partnership, an Illinois
general partnership; Richmond Gables Associates, a Virginia general
partnership; Daniel/Metcalf Associates Partnership, a Kansas general
partnership; TCR Walnut Creek Limited Partnership, a Texas limited
partnership; Portland Pacific Associates, a California general partnership
and West Ashley Shoppes Associates, a Virginia limited partnership. The
financial statements of the Combined Joint Ventures are presented in
combined form due to the nature of the relationship between each of the co-
venturers and PaineWebber Equity Partners Two Limited Partnership ("EP2").
The financial statements of the Combined Joint Ventures have been prepared
based on the periods that EP2 held an interest in the individual joint
ventures. The dates of EP2's acquisition of interests in the joint ventures
are as follows:
Date of Acquisition
Joint Venture of Interest
Chicago-625 Partnership December 16, 1986
Richmond Gables Associates September 1, 1987
Daniel/Metcalf Associates Partnership September 30, 1987
TCR Walnut Creek
Limited Partnership December 24, 1987
Portland Pacific Associates January 12, 1988
2. Summary of significant accounting policies
Operating investment properties
The operating investment properties are carried at the lower of cost,
reduced by accumulated depreciation, or net realizable value. The net
realizable value of a property held for long-term investment purposes is
measured by the recoverability of the investment from expected future cash
flows on an undiscounted basis, which may exceed the property's current
market value. The net realizable value of a property held for sale
approximates its market value. All of the operating investment properties
owned by the Combined Joint Ventures were considered to be held for long-
term investment purposes as of December 31, 1994. The Combined Joint
Ventures capitalized property taxes and interest incurred during the
construction period of the projects along with the costs of identifiable
improvements. The Combined Joint Ventures also capitalized certain
acquisition, construction and guaranty fees paid to affiliates. In certain
circumstances the carrying values of the operating properties have been
adjusted for mandatory payments received from venture partners (see Note 2).
Depreciation expense is computed on a straight-line basis over the estimated
useful life of the buildings, improvements and equipment, generally 5 to
31.5 years.
The Combined Joint Ventures have reviewed FAS No. 121 ``Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,'' which is effective for financial statements for years beginning after
December 15, 1995, and believe this new pronouncement will not have a
material effect on the financial statements of the Combined Joint Ventures.
Deferred expenses
Deferred expenses include capitalized debt issuance costs which are being
amortized on a straight-line basis over the terms of the related loans.
Amortization of deferred loan costs is included in interest expense on the
accompanying statement of income. Deferred expenses also include
organization costs which are being amortized over 5 years and lease
commissions and rental concessions which are being amortized over the life
of the applicable leases.
Income tax matters
The Combined Joint Ventures are comprised of entities which are not
taxable and, accordingly, the results of their operations are included on
the tax returns of the various partners. Accordingly, no income tax
provision is reflected in the accompanying combined financial statements.
Cash and cash equivalents
For purposes of reporting cash flows, the Combined Joint Ventures consider
all highly liquid investments, money market funds and certificates of
deposit purchased with original maturities of three months or less to be
cash equivalents.
Rental revenues
Certain joint ventures have long-term operating leases with tenants which
provide for fixed minimum rents and reimbursements of certain operating
costs. Rental revenues are recognized on a straight-line basis over the
term of the related lease agreements.
3. Joint Ventures
See Note 5 to the financial statements of EP2 included in this Annual
Report for a more detailed description of the joint ventures. Descriptions
of the ventures' properties are summarized below:
a. Chicago-625 Partnership
The joint venture owns and operates 625 North Michigan Avenue, a 325,000
square foot office building located in Chicago, Illinois.
b. Richmond Gables Associates
The joint venture owns and operates The Gables of Erin Shades, a 224-unit
apartment complex located in Richmond, Virginia.
c. Daniel/Metcalf Associates Partnership
The joint venture owns and operates Loehmann's Plaza, a 142,000 square
foot shopping center located in Overland Park, Kansas.
d. TCR Walnut Creek Limited Partnership
The joint venture owns and operates Treat Commons Phase II Apartments, a
160-unit apartment complex located in Walnut Creek, California.
e. Portland Pacific Associates
The joint venture owns and operates two apartment complexes, Richmond
Park Apartments and Richland Terrace Apartments, which contain a total of
183 units located in Washington County, Oregon.
The following description of the joint venture agreements provides
certain general information.
Allocations of net income and loss
Except for certain items which are specifically allocated to the
partners, as defined in the joint venture agreements, the joint venture
agreements generally provide that profits up to the amount of net cash flow
distributable shall be allocated between EP2 and the co-venturers in
proportion to the amount of net cash flow distributed to each partner for
such year. Profits in excess of net cash flow shall be allocated between 59%
-99% to EP2 and 1% - 41% to the co-venturers. Losses are allocated in
varying proportions 59% - 100% to EP2 and 0% - 41% to the co-venturers as
specified in the joint venture agreements.
Gains or losses resulting from sales or other dispositions of the
projects shall be allocated as specified in the joint venture agreements.
Distributions
The joint venture agreements provide that distributions will generally be
paid from net cash flow monthly or quarterly, equivalent to 9% - 10% per
annum return on EP2's net investment in the joint ventures. Any remaining
cash flow is generally to be distributed first, to repay accrued interest
and principal on certain loans and second, to EP2 and the co-venturers until
they have received their accrued preference returns. The balance of any net
cash flow is to be distributed in amounts ranging from 59% - 75% to EP2 and
25% - 41% to the co-venturers as specified in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the
projects shall be made in accordance with formulas provided in the joint
venture agreements.
Guaranty Period
The joint venture agreements provided that during the Guaranty Periods
(as defined in the joint venture agreements), in the event that net cash
flow was insufficient to fund operations including amounts necessary to pay
EP2 preferred distributions, the co-venturers were to be required to fund
amounts equal to such deficiencies. The co-venturers' obligation to fund
such amounts pursuant to their guarantees was generally to be in the form of
capital contributions to the joint ventures. For a specified period of time
subsequent to the Guaranty Period, one of the joint venture agreements
required that mandatory loans be made to the joint venture by the co-
venturer to the extent that operating revenues were insufficient to pay
operating expenses.
The Guaranty and Mandatory Loan Periods of the joint ventures were
generally from the date EP2 entered a joint venture for a period ranging
from one to five years.
The expiration dates of the Guaranty and Mandatory Loan Periods for the
joint ventures were as follows:
Mandatory
Guaranty Period Loan Period
Chicago-625 Partnership December 15, 1989 N/A
Richmond Gables Associates September 1, 1990 N/A
Daniel/Metcalf Associates
Partnership September 30, 1989 September 30, 1990
TCR Walnut Creek
Limited Partnership August 31, 1990 N/A
Portland Pacific Associates February 1, 1991 N/A
As of December 31, 1994, the co-venturer in the Daniel/Metcalf Associates
Partnership is obligated to make additional capital contributions of at
least $89,000 (subject to adjustment pending the venture partners'
determination of an additional amount, if any, of working capital reserves
to be funded by the co-venturer) with respect to cumulative unfunded
shortfalls in EP2's preferred return through September 30, 1990. Such
additional capital contributions are not recorded as a receivable in the
accompanying financial statements.
4. Related Party Transactions
The Combined Joint Ventures originally entered into property management
agreements with affiliates of the co-venturers, cancellable at EP2's option
upon the occurrence of certain events. The management fees are equal to
3.5%-5% of gross receipts, as defined in the agreements. Affiliates of
certain co-venturers also receive leasing commissions with respect to new
leases acquired.
Accounts payable - affiliates at December 31, 1994 includes $15,000 owed
to EP2 for organization costs paid in connection with the formation of
Portland Pacific Associates. Accounts payable - affiliates at December 31,
1994 also includes advances totalling $86,000 from the venture partners of
Portland Pacific Associates and $1,000 payable to related parties of
Portland Pacific Associates in connection with services rendered to the
venture.
5. Capital Reserves
The joint venture agreements generally provide that reserves for future
capital expenditures be established and administered by affiliates of the
co-venturers. The co-venturers are to pay periodically into the reserve (as
defined) as funds are available after paying all expenses and the EP2
preferred distribution. No contributions were made to the reserves in 1994.
6. Rental Revenues
Certain joint ventures have operating leases with tenants which provide
for fixed minimum rents and reimbursements of certain operating costs.
Rental revenues are recognized on a straight-line basis over the life of the
related lease agreements.
Minimum rental revenues to be recognized on the straight-line basis in the
future on noncancellable leases are as follows (in thousands):
1995 $ 6,161
1996 5,474
1997 4,344
1998 4,126
1999 3,897
Thereafter 9,985
$33,987
Leases with four tenants of the 625 North Michigan Office Building
accounted for approximately $2,897,000 (56%) of the rental revenue generated
by that property for 1994.
7. Note Payable to Venturer
Note payable to venturer at December 31, 1994 consists of a permanent loan
provided by EP2 to the Treat Commons joint venture in the amount of
$1,000,000. Interest-only payments on the permanent loan are at 10% per
annum, payable quarterly. Principal is due December 2012. Interest expense
on this note payable was $100,000 in 1994. As a result of the financing
transaction involving the Treat Commons joint venture which occurred during
1994 (as described in Note 8), this note is unsecured.
8. Long-Term Debt
Long term debt payable at December 31, 1994 and 1993 consists of the
following (in thousands):
1994
Variable rate mortgage note payable to a
third party secured by the Loehmann's Plaza
operating investment property. The loan
requires monthly interest payments based on
the prime rate plus 1.5% per annum (9.25%
at December 31, 1994) with an extended
maturity date of February 1995 (see
discussion of subsequent refinancing
below). $ 700
8.54% mortgage note payable to an
insurance company secured by the Treat
Commons II operating investment property.
The loan requires monthly principal and
interest payments of $32,000 through
maturity on October 15, 2001 (see
discussion below). 7,386
8.72% mortgage note payable to an insurance
company secured by the The Gables operating
investment property. The loan requires
monthly principal and interest payments of
$43,000 through maturity on October 15,
2001 (see discussion below). 5,195
13,281
Less: current portion (154)
$ 13,127
On September 27, 1994, a mortgage payable was obtained by the Treat
Commons joint venture in the initial principal amount of $7,400,000. This
loan is secured by a deed of trust on the operating investment property and
a security agreement with a assignment of rents. The net proceeds from this
financing transaction were distributed to EP2 per the agreement of the
partners. EP2 used the proceeds in conjunction with the repayment of the
encumbrances described in Note 9.
On November 7, 1994, a mortgage note payable was obtained by Richmond
Gables Associates in the initial principal amount of $5,200,000. The
mortgage payable is secured by a deed of trust on the venture's operating
investment property and a collateral assignment of the venture's interest in
the leases. The net proceeds from this mortgage note payable were remitted
directly to EP2 per the agreement of the partners. EP2 used the proceeds of
the loan in conjunction with the repayment of the encumbrances described in
Note 9.
Subsequent to year-end, on January 27, 1995 the Loehmann's Plaza joint
venture obtained a first mortgage loan secured by the venture's operating
investment property in the initial principal amount of $4,000,000. The
proceeds of the loan were used to repay, in full, the $700,000 mortgage loan
described above and to establish a Renovation and Occupancy Escrow in the
amount of $550,000. The remainder of the proceeds, along with additional
funds contributed by EP2, were used to repay, in full, the borrowing
described in Note 9. The new first mortgage loan was issued in the name of
the joint venture, bears interest at an annual rate of 9.04% and matures on
February 15, 2003. The loan requires monthly principal and interest
payments of $33,700.
Funds may be released from the Renovation and Occupancy Escrow to
reimburse the venture for the costs of certain of the planned renovations
referred to in Note 10 in the event that the venture satisfies certain
requirements which include specified occupancy and rental income thresholds.
If such requirements has not been met within 18 months from the date of the
loan closing, the lender may apply the balance of the escrow account to the
payment of loan principal. In addition, the lender required that EP2
unconditionally guaranty up to $1,400,000 of the loan obligation. This
guaranty will be released in the event that the venture satisfies the
requirement for the release of the Renovation and Occupancy Escrow funds or
upon the repayment, in full, of the entire outstanding mortgage loan
liability.
The closing of this financing transaction was executed in conjunction with
an amendment to the Joint Venture Agreement. The purpose of the amendment
was to establish the portion of the new first mortgage loan which was used
to repay the borrowing of EP2 described in Note 9 (``the PWEP Component') as
the sole responsibility of EP2. Accordingly, any debt service payments
attributable to the PWEP Component will be deducted from PWEP's share of
operating cash flow distributions or sale or refinancing proceeds.
Furthermore, all expenses associated with such portion of the new borrowing
will be specifically allocated to PWEP. PWEP has agreed to indemnify the
joint venture and Plaza against all losses, damages, liabilities, claims,
costs, fees and expenses incurred in connection with the PWEP Component of
the first mortgage loan. The portion of the new first mortgage loan which
was used to repay the venture's $700,000 mortgage loan and to establish the
Renovation and Occupancy Escrow will be treated as a joint venture borrowing
subject to the terms and conditions of the original Joint Venture Agreement.
The scheduled annual principal payments to retire long-term debt are as
follows (in thousands):
1995 $ 154
1996 179
1997 181
1998 197
` 1999 215
Thereafter 12,355
$13,281
9. Encumbrances on Operating Investment Properties
Under the terms of the joint venture agreements, EP2 is entitled to use
the joint venture operating properties as security for certain borrowings,
subject to various restrictions. EP2 (together in one instance with an
affiliated partnership) had exercised its options pursuant to this
arrangement by issuing certain zero coupon notes between April and June of
1988. The operating investment properties of all of the Combined Joint
Ventures had been pledged as security for these loans which were scheduled
to mature in 1995. During calendar 1994, the portion of the zero loans
secured by Treat Commons, The Gables, Richmond Park and Richland Terrace
properties were repaid in full from the proceeds of new mortgage loans
obtained by certain of the joint ventures as described in Note 8. The zero
coupon note secured by Loehmann's Plaza with a balance of $4 million as of
December 31, 1994 was due to mature in June of 1995. Subsequent to year-
end, on February 10, 1995 the loan was repaid in full with the proceeds of a
loan obtained by this joint venture (see Note 8). As discussed further
below, the zero coupon loan secured by the 625 North Michigan Office
Building was modified and extended during 1994. The remaining zero coupon
note secured by Loehmann's Plaza and the refinanced mortgage note secured by
the 625 North Michigan Office Building are direct obligations of EP2 and its
affiliate and, therefore, are not reflected in the accompanying financial
statements. At December 31, 1994, the aggregate indebtedness of EP2 (and
its affiliated partnership) under these loan agreements, including accrued
interest, was approximately $20,189,000. Under these borrowing
arrangements, EP2 is required to make all loan payments and has indemnified
the joint ventures and the other partners against all liabilities, claims
and expenses associated with the borrowings.
The zero coupon loan secured by the 625 North Michigan Office Building
required that if the loan ratio, as defined, exceeded 80%, then EP2,
together with its affiliated partnership, was required to deposit additional
collateral in an amount sufficient to reduce the loan ratio to 80%. During
1993, the lender informed EP2 and its affiliated partnership that based on
an interim property appraisal, the loan ratio exceeded 80% and demanded that
additional collateral be deposited. Subsequently, EP2 and its affiliated
partnership submitted an appraisal which demonstrated that the loan ratio
exceeded 80% by an amount less than previously demanded by the lender and
deposited additional collateral in accordance with the higher appraised
value. The lender accepted the deposit of additional collateral, but
disputed whether EP2 and its affiliated partnership had complied with the
terms of the loan agreement regarding the 80% loan ratio. On May 31, 1994,
an agreement was reached with the lender to refinance the loan and resolve
the outstanding disputes. The terms of the agreement extended the maturity
date of the loan to May 1999. The new principal balance of the loan, after
a principal paydown of $1,342,000, which was funded by EP2 and its
affiliated partnership in the ratios of 59% and 41%, respectively, was
$16,225,000. The new loan bears interest at a rate of 9.125% per annum and
requires the current payment of interest and principal on a monthly basis
based on a 25-year amortization period. The terms of the loan agreement
also required the establishment of an escrow account for real estate taxes,
as well as a capital improvement escrow which is to be funded with monthly
deposits from EP2 and its affiliated partnership aggregating $1,750,000
through the scheduled maturity date of the loan. Such escrow accounts are
recorded on the books of the joint venture and are included in the balance
of escrowed cash on the accompanying balance sheet
10.Property Renovation
During 1994, the Loehmann's Plaza joint venture incurred certain
architectural, engineering and other costs relating to a major renovation of
its operating property. These costs have been capitalized and are included
in the construction in progress account in the accompanying balance sheet.
The total cost of the renovation is estimated to be between $1,500,000 and
$2,000,000. EP2 is expected to make a capital contribution sufficient to
cover the cost of this renovation.
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(In Thousands)
Cost
Initial Cost to Capitalized Life on Which
Combined (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Office Building
Chicago, IL $ 17,006 $ 8,112 $35,682 $5,315 $8,112 $40,998 $49,110 $11,662 1968 12/16/86 5 - 30 yrs
Shopping Center
Overland Park,
KS 4,383 6,265 8,874 1,242 6,265 10,116 16,381 2,564 1980 9/30/87 7 - 31.5 yrs
Apartment Complex
Richmond, VA 2,169 963 7,906 (403) 895 7,572 8,467 2,698 1987 9/1/87 10 - 27.5 yrs
Apartment Complex
Walnut Creek,
CA 4,124 3,984 1,112 5,185 3,995 6,285 10,280 2,062 1988 12/24/87 5 - 27.5 yrs
Apartment Complex
Portland, OR 1,942 732 7,268 90 732 7,357 8,089 1,985 1986 1/12/88 5 - 27.5 yrs
$29,624 $20,056 $60,842 $11,429 $ 19,999 $72,328 $92,327 $20,971
Notes
(A)The aggregate cost of real estate owned at December 31, 1994 for Federal income tax purposes is approximately $92,958.
(B)See Notes 7, 8 and 9 to the Combined Financial Statements for a description of the terms of the debt encumbering the
properties.
(C) Reconciliation of real estate owned:
1994
Balance at beginning of period $ 92,013
Acquisitions and improvements 1,221
Write-offs due to disposals (906)
Balance at end of period $ 92,328
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 18,785
Depreciation expense 3,092
Write-offs due to disposals (906)
Balance at end of period $ 20,971
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying combined balance sheets of the 1993 and 1992
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership
as of December 31, 1993 and 1992 and the related combined statements of income
and changes in venturers' capital and cash flows for each of the three years in
the period ended December 31,1993. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the 1993 and 1992
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership
at December 31, 1993 and 1992, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1993 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 18, 1994,
except for Note 9,
as to which the
date is May 16, 1994, and
the second paragraph of Note 8,
as to which the date is
June 13, 1994
1993 AND 1992 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1993 and 1992
(In Thousands)
Assets
1993 1992
Current assets:
Cash and cash equivalents $ 1,203 $ 2,300
Investments 730 -
Accounts receivable, net of allowance
for doubtful accounts
of $571 ($331 in 1992) 1,384 1,389
Accounts receivable - affiliates - 116
Prepaid expenses 20 35
Other current assets 53 50
Total current assets 3,390 3,890
Operating investment properties:
Land 24,248 24,248
Buildings, improvements and equipment 78,105 77,489
102,353 101,737
Less accumulated depreciation (20,062) (16,832)
82,291 84,905
Escrow funds 62 58
Due from affiliates 269 269
Deferred expenses, net of accumulated
amortization of $1,753 ($1,445 in 1992) 1,789 1,912
Other assets, net 1,879 1,949
$ 89,680 $ 92,983
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 591 $ 591
Accounts payable - affiliates 168 164
Accrued real estate taxes 2,492 2,432
Distributions payable to venturers 506 474
Current portion - notes payable 700 -
Total current liabilities 4,457 3,661
Tenant security deposits 151 153
Subordinated management fee payable to affiliate 50 50
Notes payable 1,000 1,700
Venturers' capital 84,022 87,419
$ 89,680 $ 92,983
See accompanying notes.
1993 AND 1992 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL
For the years ended December 31, 1993, 1992 and 1991
(In Thousands)
1993 1992 1991
REVENUES:
Rental income and expense
reimbursements $13,547 $13,508 $13,493
Interest income 41 44 69
13,588 13,552 13,562
EXPENSES:
Real estate taxes 3,082 2,983 3,014
Depreciation and amortization 3,573 3,592 3,615
Property operating expenses 810 797 819
Repairs and maintenance 1,170 938 1,069
Management fees 482 478 485
Professional fees 137 104 118
Salaries 765 700 712
Advertising 63 66 70
Interest expense 162 173 204
General and administrative 663 530 519
Bad debt expense 273 97 10
Other 123 120 187
11,303 10,578 10,822
Net income 2,285 2,974 2,740
Contributions from venturers - 295 1,725
Distributions to venturers (5,682) (5,182) (5,665)
Venturers' capital, beginning of year 87,419 89,332 90,532
Venturers' capital, end of year $84,022 $87,419 $89,332
See accompanying notes.
1993 AND 1992 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
For the years ended December 31, 1993, 1992 and 1991
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1993 1992 1991
Cash flows from operating activities:
Net income $ 2,285 $ 2,974 $ 2,740
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,573 3,592 3,615
Changes in assets and liabilities:
Accounts receivable 5 (67) 102
Accounts receivable - affiliates - - (43)
Prepaid expenses 15 (1) (1)
Other current assets (3) 8 (41)
Escrow funds (4) (4) (4)
Other assets 67 (123) (1,134)
Accounts payable and accrued expenses (23) 203 (152)
Accounts payable - affiliates 4 23 -
Tenant security deposits (2) 4 1
Accrued real estate taxes 60 (109) 133
Total adjustments 3,692 3,526 2,476
Net cash provided by
operating activities 5,977 6,500 5,216
Cash flows from investing activities:
Additions to operating
investment properties (648) (513) (1,085)
Increase in deferred expenses (185) (274) (47)
Purchase of investment securities (730) - -
Net cash used for
investing activities (1,563) (787) (1,132)
Cash flows from financing activities:
Distributions to venturers (5,533) (4,964) (5,496)
Proceeds from capital contributions - 281 1,714
Principal payments under capital
lease obligation - (112) (89)
Net cash used for
financing activities (5,533) (4,795) (3,871)
Net increase (decrease) in cash
and cash equivalents (1,119) 918 213
Cash and cash equivalents,
beginning of year 2,322 1,404 1,191
Cash and cash equivalents, end of year $ 1,203 $ 2,322 $ 1,404
Cash paid during the year for interest $ 149 $ 170 $ 196
See accompanying notes.
1. Organization
The accompanying financial statements of the 1993 and 1992 Combined Joint
Ventures of PaineWebber Equity Partners Two Limited Partnership (Combined
Joint Ventures) include the accounts of Chicago-625 Partnership, an Illinois
general partnership; Richmond Gables Associates, a Virginia general
partnership; Daniels/Metcalf Associates Partnership, a Kansas general
partnership; TCR Walnut Creek Limited Partnership, a Texas limited
partnership; Portland Pacific Associates, a California general partnership
and West Ashley Shoppes Associates, a Virginia limited partnership. The
financial statements of the Combined Joint Ventures are presented in
combined form due to the nature of the relationship between each of the co-
venturers and PaineWebber Equity Partners Two Limited Partnership ("EP2").
The financial statements of the Combined Joint Ventures have been prepared
based on the periods that EP2 held an interest in the individual joint
ventures. The dates of EP2's acquisition of interests in the joint ventures
are as follows:
Date of Acquisition
Joint Venture of Interest
Chicago-625 Partnership December 16, 1986
Richmond Gables Associates September 1, 1987
Daniel/Metcalf Associates Partnership September 30, 1987
TCR Walnut Creek
Limited Partnership December 24, 1987
Portland Pacific Associates January 12, 1988
West Ashley Shoppes Associates March 10, 1988
2. Summary of significant accounting policies
Operating investment properties
The operating investment properties are carried at the lower of cost,
reduced by accumulated depreciation, or net realizable value. The net
realizable value of a property held for long-term investment purposes is
measured by the recoverability of the investment from expected future cash
flows on an undiscounted basis, which may exceed the property's current
market value. The net realizable value of a property held for sale
approximates its market value. All of the operating investment properties
owned by the Combined Joint Ventures were considered to be held for long-
term investment purposes as of December 31, 1993 and 1992. The Combined
Joint Ventures capitalized property taxes and interest incurred during the
construction period of the projects along with the costs of identifiable
improvements. The Combined Joint Ventures also capitalized certain
acquisition, construction and guaranty fees paid to affiliates. In certain
circumstances the carrying values of the operating properties have been
adjusted for mandatory payments received from venture partners (see Note 2).
Depreciation expense is computed on a straight-line basis over the estimated
useful life of the buildings, improvements and equipment, generally 5 to
31.5 years.
Deferred expenses
Deferred expenses consist primarily of organization costs which are being
amortized over 5 years and lease commissions and rental concessions which
are being amortized over the life of the applicable leases.
Income tax matters
The Combined Joint Ventures are comprised of entities which are not
taxable and, accordingly, the results of their operations are included on
the tax returns of the various partners. Accordingly, no income tax
provision is reflected in the accompanying combined financial statements.
Cash and cash equivalents
For purposes of reporting cash flows, the Combined Joint Ventures consider
all highly liquid investments, money market funds and certificates of
deposit purchased with original maturities of three months or less to be
cash equivalents.
Investments
Investments consist of United States Treasury Bills with maturities
greater than three months from the date of purchase. The fair value
approximates cost at December 31, 1993.
Rental revenues
Certain joint ventures have operating leases with tenants which provide
for fixed minimum rents and reimbursements of certain operating costs.
Rental revenues are recognized on a straight-line basis over the term of the
related lease agreements.
Reclassifications
Certain 1992 amounts have been reclassified to conform to the 1993
presentation.
3. Joint Ventures
See Note 5 to the financial statements of EP2 included in this Annual
Report for a more detailed description of the joint ventures. Descriptions
of the ventures' properties are summarized below:
a. Chicago-625 Partnership
The joint venture owns and operates 625 North Michigan Avenue, a 325,000
square foot office building located in Chicago, Illinois.
b. Richmond Gables Associates
The joint venture owns and operates The Gables of Erin Shades, a 224-unit
apartment complex located in Richmond, Virginia.
c. Daniel/Metcalf Associates Partnership
The joint venture owns and operates Loehmann's Plaza, a 142,000 square
foot shopping center located in Overland Park, Kansas.
d. TCR Walnut Creek Limited Partnership
The joint venture owns and operates Treat Commons Phase II Apartments, a
160-unit apartment complex located in Walnut Creek, California.
e. Portland Pacific Associates
The joint venture owns and operates two apartment complexes, Richmond
Park Apartments and Richland Terrace Apartments, a total of 183 units
located in Washington County, Oregon.
f. West Ashley Shoppes Associates
The joint venture owns and operates West Ashley Shoppes, a 134,000 square
foot shopping center located in Charleston, South Carolina.
The following description of the joint venture agreements provides
certain general information.
Allocations of net income and loss
Except for certain items which are specifically allocated to the
partners, as defined in the joint venture agreements, the joint venture
agreements generally provide that profits up to the amount of net cash flow
distributable shall be allocated between EP2 and the co-venturers in
proportion to the amount of net cash flow distributed to each partner for
such year. Profits in excess of net cash flow shall be allocated between 59%
-99% to EP2 and 1% - 41% to the co-venturers. Losses are allocated in
varying proportions 59% - 100% to EP2 and 0% - 41% to the co-venturers as
specified in the joint venture agreements.
Gains or losses resulting from sales or other dispositions of the
projects shall be allocated as specified in the joint venture agreements.
Distributions
The joint venture agreements provide that distributions will generally be
paid from net cash flow monthly or quarterly, equivalent to 9% - 10% per
annum return on EP2's net investment in the joint ventures. Any remaining
cash flow is generally to be distributed first, to repay accrued interest
and principal on certain loans and second, to EP2 and the co-venturers until
they have received their accrued preference returns. The balance of any net
cash flow is to be distributed in amounts ranging from 59% - 75% to EP2 and
25% - 41% to the co-venturers as specified in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the
projects shall be made in accordance with formulas provided in the joint
venture agreements.
Guaranty Period
The joint venture agreements provided that during the Guaranty Periods
(as defined in the joint venture agreements), in the event that net cash
flow was insufficient to fund operations including amounts necessary to pay
EP2 preferred distributions, the co-venturers were to be required to fund
amounts equal to such deficiencies. The co-venturers' obligation to fund
such amounts pursuant to their guarantees was generally to be in the form of
capital contributions to the joint ventures. For a specified period of time
subsequent to the Guaranty Period, one of the joint venture agreements
required that mandatory loans be made to the joint venture by the co-
venturer to the extent that operating revenues were insufficient to pay
operating expenses.
The Guaranty and Mandatory Loan Periods of the joint ventures were
generally from the date EP2 entered a joint venture for a period ranging
from one to five years.
The expiration dates of the Guaranty and Mandatory Loan Periods for the
joint ventures were as follows:
Mandatory
Guaranty Period Loan Period
Chicago-625 Partnership December 15, 1989 N/A
Richmond Gables Associates September 1, 1990 N/A
Daniel/Metcalf Associates
Partnership September 30, 1989 September 30, 1990
TCR Walnut Creek
Limited Partnership August 31, 1990 N/A
Portland Pacific Associates February 1, 1991 N/A
West Ashley Shoppes Associates March 10, 1993 N/A
During 1989, the co-venture partner in the West Ashley Shoppes joint
venture defaulted on its guaranty obligation. On April 25, 1990, EP2 and
the co-venturer entered into the second amendment to the joint venture
agreement. In accordance with the amendment, EP2 contributed $300,000 to
the joint venture. In exchange for the $300,000 contributed by EP2, the co-
venturer transferred to EP2 its rights to certain out-parcel land.
Immediately thereon, the co-venturer satisfied its obligations to fund net
cash flow shortfall contributions in arrears at December 31, 1989. As a
result of this transaction, EP2 will receive an increased preferred return
and is entitled to the first $300,000 in proceeds upon sale and/or
refinancing of the out-parcel land described above. Subsequent to the
amendment to the joint venture agreement, the co-venturer defaulted on the
guaranty obligations again. Net cash flow shortfall contributions owed by
the co-venturer pursuant to the guaranty totalled approximately $1,060,000
at December 31, 1993. During 1991, EP2 filed suit against the co-venturer
and the individual guarantors to collect the amount of the cash flow
shortfall contributions in arrears. As of December 31, 1993, EP2 was
negotiating with the co-venturer and the individual guarantors for their
removal and the collection of all amounts owed by them to the Partnership.
Any uncollected receivable amounts due from the co-venturer are expected to
be offset against the co-venturer's capital account at the conclusion of the
negotiations (see Note 9).
As of December 31, 1993, the co-venturer in the Daniel/Metcalf Associates
Partnership is obligated to make additional capital contributions of at
least $89,000 (subject to adjustment pending the venture partners'
determination of an additional amount, if any, of working capital reserves
to be funded by the co-venturer) with respect to cumulative unfunded
shortfalls in EP2's preferred return through September 30, 1990. Such
additional capital contributions are not recorded as a receivable in the
accompanying financial statements.
4. Related Party Transactions
The Combined Joint Ventures originally entered into property management
agreements with affiliates of the co-venturers, cancellable at EP2's option
upon the occurrence of certain events. The management fees are equal to
3.5%-5% of gross receipts, as defined in the agreements. During 1992, EP2
exercised its option to terminate the management contract for West Ashley
Shoppes and hired third-party management and leasing agents to administer
the day-to-day operations of the property. The new property manager was
hired for a management fee of 3% of gross receipts, as defined. Affiliates
of certain co-venturers also receive leasing commissions with respect to new
leases acquired.
Accounts payable - affiliates at December 31, 1993 includes advances owed
to a partner of Richmond Gables Associates of $48,000 for amounts paid to
the manager of the venture's operating property for reimbursement of
expenses paid on behalf of the joint venture and $15,000 owed to EP2 for
organization costs paid in connection with the formation of Portland Pacific
Associates. Accounts payable - affiliates at December 31, 1993 also
includes advances totalling $86,000 from the venture partners of Portland
Pacific Associates and $19,000 payable to related parties of Portland
Pacific Associates in connection with services rendered to the venture.
Accounts payable - affiliates at December 31,1992 includes advances owed
to a partner of Richmond Gables Associates of $48,000 for amounts paid to
the manager of the venture's operating property for reimbursement of
expenses paid on behalf of the joint venture and $15,000 owed to EP2 for
organization costs paid in connection with the formation of Portland
Pacific Associates. Accounts payable - affiliates at December 31, 1992 also
includes advances totalling $86,000 from the venture partners of Portland
Pacific Associates in connection with services rendered to the venture.
5. Capital Reserves
The joint venture agreements generally provide that reserves for future
capital expenditures be established and administered by affiliates of the
co-venturers. The co-venturers are to pay periodically into the reserve (as
defined) as funds are available after paying all expenses and the EP2
preferred distribution. No contributions were made to the reserves in 1993
and 1992.
6. Rental Revenues
Certain joint ventures have operating leases with tenants which provide
for fixed minimum rents and reimbursements of certain operating costs.
Rental revenues are recognized on a straight-line basis over the life of the
related lease agreements.
Minimum rental revenues to be recognized on the straight-line basis in the
future on noncancellable leases are as follows (in thousands):
1994 $ 7,200
1995 6,169
1996 5,317
1997 4,416
1998 4,280
Thereafter 14,337
$41,719
Leases with four tenants of the 625 North Michigan Office Building
accounted for approximately $2,231,000 (44%) of the rental revenue generated
by that property for 1993. One tenant of West Ashley Shoppes occupies
55,850 square feet, representing approximately 41% of the total shopping
center. This tenant, Phar-Mor, Inc., is in Chapter 11 Bankruptcy
Reorganization as of December 31, 1993. Base rental income from this tenant
for 1993 totalled $348,000. Minimum rents due from this tenant and included
in the above amounts are $348,000 annually for 1994 through 1996, $357,000
for 1997, $375,000 for 1998 and $1,498,000 thereafter.
7. Notes Payable
Notes payable at December 31, 1993 and 1992 include permanent financing
for the Treat Commons joint venture provided by EP2 in the amount of
$1,000,000. The nonrecourse permanent loan is secured by a deed of trust
and security agreement with an assignment of rents. Interest only payments
were 9.5% until the end of the guaranty period (August 31, 1990), and are to
be paid at 10% thereafter. Principal is due December 2012. Interest
expense on this debt was $100,000 in 1993, 1992 and 1991.
In addition, notes payable at December 31, 1993 and 1992 include a
nonrecourse mortgage payable arrangement entered into by Daniel/Metcalf
Associates on January 15, 1990 in the principal sum of $700,000. The
mortgage payable is secured by the joint venture's operating investment
property. The mortgage is due in full December 1, 1994, with interest
payable monthly at the prime rate plus 1.5% per annum (7.5% at December 31,
1993).
8. Encumbrances on Operating Investment Properties
Under the terms of the joint venture agreements, EP2 is entitled to use
the joint venture operating properties as security for certain borrowings,
subject to various restrictions. EP2 (together in one instance with an
affiliated partnership) has exercised its options pursuant to this
arrangement by issuing certain zero coupon notes. The operating investment
properties of all of the Combined Joint Ventures have been pledged as
security for these loans which mature in 1995. These borrowings are direct
obligations of EP2 and its affiliate and, therefore, are not reflected in
the accompanying financial statements. At December 31, 1993, the aggregate
indebtedness of EP2 (and its affiliated partnership) under these loan
agreements, including accrued interest, was approximately $30,424,000
($27,682,000 at December 31, 1992). Under these borrowing arrangements, EP2
is required to make all loan payments and has indemnified the joint ventures
and the other partners against all liabilities, claims and expenses
associated with the borrowings. Based on the loan balances outstanding as
of December 31, 1993, principal and interest on the obligations aggregating
approximately $45.7 million is scheduled to mature in 1995.
One of the zero coupon loans, which is secured by the 625 North Michigan
Office Building, requires that if the loan ratio, as defined, exceeds 80%,
then EP2, together with its affiliated partnership, shall be required to
deposit additional collateral in an amount sufficient to reduce the loan
ratio to 80%. During 1993, the lender informed EP2 and its affiliated
partnership that based on an interim property appraisal, the loan ratio
exceeded 80% and demanded that additional collateral be deposited.
Subsequently, EP2 and its affiliated partnership submitted an appraisal
which demonstrated that the loan ratio exceeded 80% by an amount less than
previously demanded by the lender and deposited additional collateral in
accordance with the higher appraised value. The lender accepted the deposit
of additional collateral, but disputed whether EP2 and its affiliated
partnership had complied with the terms of the loan agreement regarding the
80% loan ratio. Subsequent to year-end, an agreement was reached with the
lender on a proposal to refinance the loan and resolve the outstanding
disputes. The terms of the agreement, which was formally executed in June
1994, extend the maturity date of the loan to May 1999. The new principal
balance of the loan, after a principal paydown to be funded by EP2 and its
affiliated partnership, will be approximately $16,225,000. The new loan
will bear interest at a rate of 9.125% per annum and will require the
current payment of interest and principal on a monthly basis based on a 25-
year amortization period. The terms of the loan agreement also require the
establishment of an escrow account for real estate taxes, as well as a
capital improvement escrow which is to be funded with monthly deposits to be
made by EP2 and its affiliated partnership in the aggregate amount of
$1,750,000 through the scheduled maturity date of the loan.
9. Subsequent Event
In May 1994, EP2 and its co-venture partner in the West Ashley Shoppes
joint venture executed a settlement agreement to resolve their outstanding
disputes, which are described in Note 2. Under the terms of the settlement
agreement, the co-venturer assigned 96% of its interest in the joint venture
to EP2 and the remaining 4% of its interest to the joint venture to Second
Equity Partners, Inc. (SEPI), a Virginia corporation and an affiliate of
EP2. In return for such assignment, EP2 agreed to release the co-venturer
from all claims regarding net cash flow shortfall contributions owed to the
joint venture. In conjunction with the assignment of its interest and
withdrawal from the joint venture, the co-venturer agreed to release certain
outstanding counter claims against EP2. EP2 and SEPI intend to continue the
operations of the joint venture as a going concern. However, the settlement
agreement has effectively given EP2 complete control over the affairs of the
joint venture. Accordingly, beginning in 1994, the joint venture will be
presented on a consolidated basis in the financial statements of EP2.
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
1993 AND 1992 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
(In Thousands)
Cost
Initial Cost Capitalized Life of Which
to Combined (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
COMBINED JOINT VENTURES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Building
Chicago, IL $ 17,006 $ 8,112 $35,682 $5,116 $8,112 $40,799 $48,911 $10,807 1968 12/16/86 5 - 30 yrs
Shopping Center
Overland Park,
KS 4,383 6,265 8,874 1,113 6,265 9,987 16,252 2,193 1980 9/30/87 7 - 31.5 yrs
Apartment
Complex
Richmond, VA 2,169 964 7,906 (378) 901 7,591 8,492 2,289 1987 9/1/87 10 - 27.5 yrs
Apartment
Complex
Walnut
Creek, CA 4,124 3,984 1,112 5,185 3,995 6,285 10,280 1,787 1988 12/24/87 5 - 27.5 yrs
Apartment
Complex
Portland,
OR 1,942 732 7,268 78 732 7,346 8,078 1,709 1986 1/12/88 5 - 27.5 yrs
Shopping
Center
Charleston,
SC 2,499 4,242 5,669 429 4,243 6,097 10,340 1,277 1988 3/10/88 15 - 31.5 yrs
$ 32,123 $24,299 $66,511 $11,543 $ 24,248 $78,105 $102,353 $20,062
Notes
(A)The aggregate cost of real estate owned at December 31, 1993 for Federal income tax purposes is approximately $91,684,000.
(B)See Notes 7 and 8 to the Combined Financial Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1993 1992 1991
Balance at beginning of period $101,737 $101,291 $100,083
Acquisitions and improvements 648 513 1,208
Write-offs due to disposals (32) (67) -
Balance at end of period $102,353 $101,737 $101,291
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 16,832 $ 13,632 $ 10,462
Depreciation expense 3,262 3,268 3,170
Write-offs due to disposals (32) (68) -
Balance at end of period $ 20,062 $ 16,832 $ 13,632
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended March 31, 1995 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 1827
<SECURITIES> 0
<RECEIVABLES> 683
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,119
<PP&E> 89,670
<DEPRECIATION> (8,895)
<TOTAL-ASSETS> 84,148
<CURRENT-LIABILITIES> 566
<BONDS> 22,635
<COMMON> 0
0
0
<OTHER-SE> 60,599
<TOTAL-LIABILITY-AND-EQUITY> 84,148
<SALES> 0
<TOTAL-REVENUES> 6,654
<CGS> 0
<TOTAL-COSTS> 4,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,838
<INCOME-PRETAX> (304)
<INCOME-TAX> 0
<INCOME-CONTINUING> (304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (304)
<EPS-PRIMARY> (2.24)
<EPS-DILUTED> (2.24)
</TABLE>
