U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1996
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
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
1996 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
PART II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-7
PART III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-52
<PAGE>
PART I
Item 1. Business
PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is a
limited partnership formed on May 16, 1986, under the Uniform Limited
Partnership Act of the State of Virginia to invest in a diversified portfolio of
existing, newly-constructed or to-be-built income-producing real properties such
as apartments, shopping centers, hotels, office buildings and industrial
buildings. The Partnership had authorized the issuance of a maximum of
150,000,000 Partnership Units (the "Units") at $1 per Unit, pursuant to a
Registration Statement on Form S-11 filed under the Securities Act of 1933
(Registration No. 33-5929). On June 2, 1988, the offering of Units in the
Partnership was completed and gross proceeds of $134,425,741 had been received
by the Partnership. Limited Partners will not be required to make any additional
capital contributions.
As of March 31, 1996 the Partnership owned, through joint venture
partnership, interests in the operating properties set forth in the following
table:
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- ------------------------- -------- ------------ ------------------
Chicago-625 Partnership .38 acres; 12/16/86 Fee ownership of land
625 North Michigan Avenue 324,829 net and improvements
Office Tower leasable (through joint
Chicago, Illinois square feet venture)
Richmond Gables Associates 15.55 acres; 9/1/87 Fee ownership of land
The Gables at Erin Shades 224 units and improvements
Apartments (through joint
Richmond, Virginia venture)
Daniel/Metcalf Associates 19 acres; 9/30/87 Fee ownership of land
Partnership 142,363 net and improvements
Loehmann's Plaza Shopping leasable (through joint
Center square feet venture)
Overland Park, Kansas
Hacienda Park Associates 12.6 acres; 2/24/87 Fee ownership of land
Saratoga Center & EG&G Plaza 184,905 net and improvements
Office Buildings leasable (through joint
Pleasanton, California square feet venture)
West Ashley Shoppes 17.25 acres; 3/10/88 Fee ownership of land
Associates 134,406 net and improvements
West Ashley Shoppes leasable (through joint
Charleston, South Carolina square feet venture)
Atlanta Asbury Partnership 5.87 acres; 4/7/88 Fee ownership of land
Asbury Commons Apartments 204 units and improvements
Atlanta, GA (through joint
venture)
(1) See Notes to the Financial Statements of the Registrant filed with this
Annual Report for a description of the agreements through which the
Partnership has acquired these real estate investments.
Originally, the Partnership had interests in ten joint venture
partnerships, two of which have since been liquidated through sale transactions
with two additional joint ventures in the final phases of liquidation following
the sales of their operating investment properties in fiscal 1996. On November
2, 1995, the joint venture which owned the Richmond Park Apartments and Richland
Terrace Apartments sold the properties to a third party for $11 million. The
Partnership received net proceeds of approximately $8 million after deducting
closing costs, the co-venturer's share of the proceeds and repayment of a $2
million loan which encumbered the property. In addition, on December 29, 1995
the joint venture which owned the Treat Commons II Apartments sold the property
to a third party for approximately $12.1 million. The Partnership received net
proceeds of approximately $4.1 million after deducting closing costs and the
repayment of the existing mortgage note of approximately $7.3 million. On May
31, 1990, the joint venture that owned the Highland Village Apartments sold the
property at a gross sales price of $8.5 million. Net proceeds from the sale were
split between the Partnership and its co-venture partner, with the Partnership
receiving approximately $7.7 million. As a result of these sale transactions,
the Partnership no longer owns any interest in the Richmond Park Apartments,
Richland Terrace Apartments, Treat Commons II Apartments and Highland Village
Apartments. Also, on November 29, 1989, the Partnership entered into an
agreement with Awbrey's Road II Associates Limited Partnership (ARA) to sell the
rights to its interest in Ballston Place Phase II Associates which was to own
and operate Ballston Place - Phase II, an apartment complex in Arlington,
Virginia. The Partnership received the return of $9 million which had been
funded into escrow during the construction phase of the project. In addition,
the Partnership received certain other compensation in connection with this
transaction. As a result, the Partnership has no remaining interest in the
Ballston Place property.
The Partnership's investment objectives are to invest the proceeds raised
from the offering of limited partnership units in a diversified portfolio of
income-producing properties in order to:
(1) preserve and protect Limited Partners' capital;
(2) provide the Limited Partners with quarterly cash distributions, a portion
of which will be sheltered from current federal income tax liability; and
(3) achieve long-term capital appreciation in the value of the Partnership's
investment properties.
Through March 31, 1996, the Limited Partners had received cumulative cash
distributions totalling approximately $82,377,000, or $642 per original $1,000
investment for the Partnership's earliest investors. This return includes a
distribution of $38 per original $1,000 investment from the sale of the Richland
Terrace Apartments and Richmond Park Apartments in November 1995, $23 per
original $1,000 investment from the sale of the Treat Commons II Apartments in
December 1995 and $57 per $1,000 investment from the sale of the Highland
Village Apartments in May 1990. The proceeds of the Ballston Place transaction
described above were retained by the Partnership to pay down debt and to bolster
reserves in light of expected future capital needs. The remaining cash
distributions have been from net rental income, and a substantial portion of
such distributions has been sheltered from current federal income tax liability.
As a result of the reduction in Partnership cash flow resulting from the fiscal
1996 sale transactions described above, the Partnership reduced the annualized
distribution rate from 2% to 1% effective for the payment made on February 15,
1996 for the quarter ended December 31, 1995. As of March 31, 1996, the
Partnership was paying regular quarterly distributions at a rate of 1% per annum
on remaining invested capital of $905 per original $1,000 investment. In
addition, the Partnership retains its ownership interest in six of its ten
original investment properties.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of the
remaining investments, which comprise 73% of the Partnership's original
investment portfolio. The amount of such proceeds will ultimately depend upon
the value of the underlying investment properties at the time of their
liquidation, which cannot presently be determined. As of March 31, 1996, the
Partnership's portfolio of real estate investments consists of two retail
shopping centers, two office/R&D properties and two multi-family apartment
complexes. While market values for commercial office buildings have generally
stabilized over the past two years, such values continue to be depressed due to
the residual effects of the overbuilding which occurred in the late 1980's and
the trend toward corporate downsizing and restructurings which occurred in the
wake of the last national recession. In addition, at the present time real
estate values for retail shopping centers in certain markets have begun to be
affected by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. The market for multi-family residential
properties in most markets throughout the country continued its trend of gradual
improvement during fiscal 1996, as the ongoing absence of significant new
construction activity further improved upon the supply and demand
characteristics facing existing properties. Management's plans are presently to
hold the majority of the remaining investment properties for long-term
investment purposes and to direct the management of the operations of the
properties to maximize their long-term values.
All of the Partnership's investment properties are located in real estate
markets in which they face significant competition for the revenues they
generate. The apartment complexes compete with numerous projects of similar type
generally on the basis of price and amenities. Apartment properties in all
markets also compete with the local single family home market for prospective
tenants. The continued availability of low interest rates on home mortgage loans
has increased the level of this competition over the past few years. However,
the impact of the competition from the single-family home market has been offset
by the lack of significant new construction activity in the multi-family
apartment market over this period. The Partnership's shopping centers and
office/R&D buildings also compete for long-term commercial tenants with numerous
projects of similar type generally on the basis of price, location and tenant
improvement allowances.
The Partnership has no real property investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment, therefore presentation of information about industry segments is not
applicable.
The Partnership has no employees; it has, however, entered into an Advisory
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Second
Equity Partners, Inc., and Properties Associates 1986, L.P. Second Equity
Partners, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. is the managing general partner of the Partnership.
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 and the Adviser, is the associate general partner of
the Partnership.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of March 31, 1996, the Partnership had interests in six operating
properties through joint venture partnerships. These joint venture partnerships
and the related properties are referred to under Item 1 above to which reference
is made for the name, location and description of each property.
Occupancy figures for each fiscal quarter during 1996, along with an
average for the year, are presented below for each property:
Percent Occupied At
----------------------------------------------
Fiscal
1996
6/30/95 9/30/95 12/31/95 3/31/96 Average
------- ------- -------- ------- -------
625 North Michigan Avenue 88% 90% 88% 89% 89%
The Gables at Erin Shades
Apartments 94% 96% 93% 94% 94%
Loehmann's Plaza Shopping Center 96% 87% 76% 74% 83%
Saratoga Center & EG&G Plaza 95% 95% 100% 100% 98%
Treat Commons Phase II Apartments 98% 99% N/A (1) N/A (1) N/A (1)
Richland Terrace and Richmond Park
Apartments 93% 96% N/A (2) N/A (2) N/A (2)
West Ashley Shoppes 68% 68% 71% 70% 69%
Asbury Commons Apartments 95% 95% 91% 96% 94%
(1) The joint venture which owned the Treat Commons II Apartments sold the
property to an unrelated third party on December 29, 1995 (see Item 7 for a
further discussion)
(2) The joint venture which owned the Richland Terrace and Richmond Park
Apartments sold the properties to an unrelated third party on November 2,
1995 (see Item 7 for a further discussion)
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Second Equity Partners, Inc. and Properties
Associates 1986, L.P. ("PA1986"), which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in PaineWebber Equity Partners
Two Limited Partnership, PaineWebber, Second Equity Partners, Inc. and PA1986
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purport to be suing on behalf of all persons who invested in PaineWebber Equity
Partners Two Limited Partnership., also allege that following the sale of the
partnership interests, PaineWebber, Second Equity Partners, Inc. and PA1986
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Second Equity
Partners, Inc. and PA1986 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
unspecified damages, including reimbursement for all sums invested by them in
the partnerships, as well as disgorgement of all fees and other income derived
by PaineWebber from the limited partnerships. In addition, the plaintiffs also
seek treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in PaineWebber Equity Partners Two
Limited Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
The eventual outcome of this litigation and the potential impact, if any, on the
Partnership's unitholders cannot be determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint is substantially similar to the
complaint in the Abbate action described above, and seeks compensatory damages
of $3.4 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the Managing General Partner cannot estimate the impact, if
any, of the potential indemnification claims on the Partnership's financial
statements, taken as a whole. Accordingly, no provision for any liability which
could result from the eventual outcome of these matters has been made in the
accompanying financial statements of the Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1996, there were 9,318 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for the Units will develop. The Managing General Partner
will not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1996.
Item 6. Selected Financial Data
PaineWebber Equity Partners Two Limited Partnership
For the years ended March 31, 1996, 1995, 1994, 1993 and 1992
(in thousands, except for per Unit data)
Years ended March 31,
1996 1995 (1) 1994 1993 1992
---- -------- ---- ---- ----
Revenues $ 5,069 $ 4,729 $ 4,338 $ 4,792 $ 4,628
Operating loss $ (1,508) $ (2,229) $ (2,391) $(1,549)$ (2,658)
Interest income on note
receivable from
unconsolidated
venture $ 80 $ 107 $ 106 $ 107 $ 116
Partnership's share of
unconsolidated ventures'
income $ 185 $ 1,818 $2,207 $2,592 $2,493
Partnership's share of gains on
sale of operating investment
properties $ 6,766 - - - -
Net income (loss) $ 5,523 $ (304) $ (78) $ 1,150 $ (49)
Per 1,000 Limited Partnership Units:
Net income (loss) $ 40.68 $ (2.26) $ (0.57) $ 8.47 $ (0.36)
Cash distributions
from operations $ 16.52 $ 34.20 $ 49.52 $ 49.52 $ 49.52
Cash distributions from
sale transactions $ 61.00 - - - -
Total assets $ 78,722 $ 84,148 $103,391 $107,382 $110,655
Long-term debt $ 22,315 $ 22,635 $ 36,828 $ 33,845 $ 31,041
(1) During fiscal 1995, as further discussed in Note 4 to the accompanying
financial statements, the Partnership assumed control of the joint venture
which owns and operates the West Ashley Shoppes Shopping Center.
Accordingly, this joint venture, which had been accounted for under the
equity method in prior years, has been consolidated in the Partnership's
financial statements beginning in fiscal 1995.
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per 1,000 Limited Partnership Units information is based upon the
134,425,741 Limited Partnership Units outstanding during each year.
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, 1996, four of these investments had been sold, including two during
fiscal 1996. The Partnership retains an interest in six operating properties,
which are comprised of two 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.
As previously reported, in light of the current strength of the national
real estate market with respect to multi-family apartment properties, management
had examined the operations of the Partnership's four apartment properties to
identify whether a current sale of one or more of these properties might be in
the Partnership's best interests. Based on such analysis, the Richmond
Park/Richland Terrace and Treat Commons II properties were determined to be
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 are expected to lead to
increased levels of development activity in the Richmond Park and Richland
Terrace sub-market which could limit the current favorable trends in the market
for existing apartment properties. Accordingly, management believed that the
market value of Richmond Park and Richland Terrace was at or near its peak for
the current market cycle and began to actively market the property for sale in
fiscal 1995. On November 2, 1995, the Partnership sold the Richmond Park and
Richland Terrace properties to a third party for $11 million. The Partnership
received net sale proceeds of approximately $8 million after deducting closing
costs, the co-venture partner's share of the proceeds and repayment of the $2
million short-term note discussed further below. The Partnership distributed
approximately $5.1 million of this amount, or $38 per original $1,000
investment, to the Limited Partners in a Special Distribution made on December
27, 1995. The remaining sale proceeds were retained by the Partnership to be
used for the capital needs of its commercial properties.
In the case of Treat Commons, the Partnership owned 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 believed there were
advantages to a joint marketing effort of both phases which could maximize the
sale proceeds to the Partnership and began working with the Phase I owner to
actively market the property for sale during fiscal 1996. On December 29, 1995,
the Partnership sold the Treat Commons II Apartments to a third party for
approximately $12.1 million. The Partnership received net sale proceeds of
approximately $4.1 million after deducting closing costs and the repayment of
the existing mortgage note on the property of approximately $7.3 million. The
Partnership distributed approximately $3.1 million of this amount, or $23 per
original $1,000 investment, to the Limited Partners in a Special Distribution
made on February 15, 1996. The remaining sale proceeds of approximately $1
million were retained by the Partnership for potential reinvestment in the
Loehmann's Plaza property where a significant renovation and re-leasing program
is currently underway, as discussed further below. If these funds are not needed
for use at Loehmann's Plaza, management will likely distribute them to the
Limited Partners sometime during fiscal 1997.
As a result of the reduction in Partnership cash flow resulting from the
fiscal 1996 sale transactions described above, management determined that it
would be necessary to reduce the Partnership's distribution rate from its level
of 2% on remaining invested capital to 1% effective for the payment made on
February 15, 1996 for the quarter ended December 31, 1995. Distributions are
expected to remain at this level until the leasing status of the commercial
properties has been stabilized.
During fiscal 1995, the Partnership secured a new tenant, under a
seven-year lease, for the vacant 31,000 square foot building at Hacienda Park.
Tenant improvements and leasing commissions paid by the Partnership related to
this lease totalled approximately $630,000. During the first quarter of fiscal
1996, the Partnership leased an additional 10,808 square foot space at Hacienda
Park to this same tenant. During the third quarter of fiscal 1996, the
Partnership leased the remaining 10,027 square feet of available space at
Hacienda Park to an existing tenant. In addition, a 31,000 square foot tenant
executed a 5-year renewal of its lease obligation, which was due to expire in
March 1996. As a result of these developments, the Hacienda Park investment
property, which was 89% leased as of March 31, 1995, was fully leased as of
March 31, 1996. At Loehmann's Plaza, management is in the process of completing
a major capital enhancement and repositioning program which is scheduled for
completion in the Fall of 1996. The improvement program, which is expected to
cost a total of $2 million, is necessary in order for the property to remain
competitive in its market. As part of the repositioning program, management
believed it would significantly enhance the value of the shopping center to
replace the property's anchor tenant, Loehmann's, which occupied 15,000 square
feet, or approximately 10%, of the property's net leasable area. Loehmann's,
which is no longer a prominent retailer in the Kansas City area, was not serving
as a major draw for the center and was paying a substantially below market
rental rate. On November 7, 1995, the Partnership completed the negotiation of
an agreement whereby Loehmann's consented to terminate its lease, vacate the
property and relinquish control of its space to the Partnership in return for a
payment of $75,000. As a result of the termination of the Loehmann's lease, the
property was 74% leased as of March 31, 1996. Management is currently in
discussions with a number of potential replacement anchor tenants for the entire
Loehmann's space. A lease with a national or strong regional credit anchor
tenant would greatly enhance the position of the property in its marketplace,
resulting in increased cash flow and an improved ability to lease vacant shop
space. Tenant improvement costs to lease the Loehmann's space are likely to be
significant and would be in addition to the $2 million for the capital
enhancement and repositioning program referred to above. A portion of the funds
required to pay for the capital improvement work at Loehmann's Plaza was
expected to come from a $550,000 Renovation and Occupancy Escrow withheld by the
lender from the proceeds of $4 million loan secured by the property 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. It appears unlikely that the Partnership
will satisfy the requirements for the release of these escrow funds by the
required date in August 1996. As a result, these funds are expected to be
applied against the mortgage loan payable obligation during fiscal 1997, and the
$1.4 million recourse obligation will likely remain in place until the property
is sold or refinanced. In order to have sufficient funds to proceed with the
Loehmann's Plaza renovation program prior to the sale of the Richmond Park and
Richland Terrace properties, management had secured a short term loan in the
amount of $2 million. The note, which was obtained in August 1995, had an August
2, 1996 maturity date and required monthly interest-only payments at a variable
interest rate of the lender's prime plus one percent per annum. On November 2,
1995, the Partnership repaid this note with the proceeds from the sale
transaction discussed above. The funds required to pay for the remaining portion
of the improvement program and the expected re-leasing costs at Loehmann's Plaza
will be provided by the proceeds retained by the Partnership from the sale of
the Richmond Park, Richland Terrace and Treat Commons II properties.
A significant amount of funds may also be needed to pay for tenant
improvement costs to re-lease the vacant 36,000 square foot 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. Although the negotiations during
fiscal 1996 with a strong national retailer to occupy approximately one-half of
the old Children's Palace space did not materialize, management is encouraged by
the improving economic conditions in the Charleston market and is optimistic
that a national credit tenant will be identified to lease the vacant anchor
tenant space at West Ashley Shoppes. West Ashley's other major anchor tenant,
Phar-Mor, emerged from the protection of Chapter 11 of the U.S. Bankruptcy Code
during fiscal 1996. While Phar-Mor closed a number of its stores nationwide as
part of its bankruptcy reorganization, the company remains obligated under a
lease at West Ashley which runs through August 2002. During fiscal 1996,
management of Phar-Mor inquired about the possibility of downsizing their store
at West Ashley by vacating their current 52,000 square foot space and relocating
into the former Children's Palace space. Subsequent to year-end, management
signed a letter of intent with a national credit tenant which would lease the
current Phar-Mor space if the downsizing and relocation of the Phar-Mor store at
West Ashley could be accomplished. Management believes that securing this new
tenant in conjunction with a relocation of the Phar-Mor store into the smaller
vacant anchor space would significantly enhance the value of the shopping
center. However, there are no assurances that Phar-Mor will agree to move to the
Children's Palace space on terms that are acceptable to the Partnership. Capital
improvement and leasing costs at 625 North Michigan 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 competitive conditions which exist
in the market for downtown Chicago office space. Significant capital
improvements are planned at 625 North Michigan over the next two years,
including the completion of facade repairs, common area enhancements, elevator
control system upgrading and a possible lobby area retail space expansion and
renovation. The 625 North Michigan Office Building was 89% occupied as of March
31, 1996.
While market values for commercial office buildings have generally
stabilized over the past two years, such values continue to be depressed due to
the residual effects of the overbuilding which occurred in the late 1980's and
the trend toward corporate downsizing and restructurings which occurred in the
wake of the last national recession. In addition, at the present time real
estate values for retail shopping centers in certain markets have begun to be
affected by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. As a result of these market conditions,
the current estimated market values of the Partnership's four commercial
properties are significantly below their acquisition prices. In light of such
circumstances, in fiscal 1996 the Partnership elected early application of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). In accordance with SFAS 121, an impairment loss with respect to an
operating investment property is recognized when the sum of the expected future
net cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset. An impairment loss is measured as the amount by
which the carrying amount of the asset exceeds its fair value, where fair value
is defined as the amount at which the asset could be bought or sold in a current
transaction between willing parties, that is other than a forced or liquidation
sale. Based on management's analysis, the estimated fair values of the Hacienda
Park, 625 North Michigan, Loehmann's Plaza and West Ashley Shoppes properties
were below their net carrying amounts as of the related ventures' year-end of
December 31, 1995. Management's estimates of undiscounted cash flows for all
four properties indicate that such carrying amounts are expected to be
recovered, but, in the case of 625 North Michigan and Hacienda Park, the
reversion values could be less that the carrying amounts at the time of
disposition. As a result of such assessment, the 625 North Michigan joint
venture commenced recording an additional annual depreciation charge of $350,000
in calendar 1995. The Partnership's share of such amount is reflected in the
Partnership's share of unconsolidated ventures' income in the fiscal 1996
statement of operations. The Hacienda Park joint venture commenced recording an
additional annual depreciation charge of $250,000 in calendar 1995 which is
reflected on the Partnership's consolidated statement of operations for fiscal
1996. Such annual charges will continue to be recorded in future periods. Based
on management's analysis, no changes to the depreciation on Loehmann's Plaza or
West Ashley Shoppes were required.
The Partnership has no current plans to market any of its remaining
operating investment properties for sale. As discussed further above, the market
for office properties in general has just begun to stabilize after several years
of decline and the market for retail properties is considered weak at the
present time. For these reasons, the Partnership's strategy, at present, would
be to hold the office and retail properties until the respective markets recover
sufficiently to provide favorable sales opportunities. Notwithstanding this, it
is unlikely that the values of the Partnership's office and retail properties
will fully recover to their levels of the mid-to-late 1980's within the
Partnership's remaining holding period. With respect to the Partnership's two
apartment properties, while the market for sales of multi-family properties in
most markets has been strong over the past two years, the Gables and Asbury
Commons properties, which represent a combined 18% of the original investment
portfolio, generate a stable cash flow which contributes to the payment of the
Partnership's operating costs and operating cash flow distributions. As a
result, the Partnership will most likely delay any active sales efforts for
these two apartment properties until conditions become more favorable for
potential dispositions of the four commercial properties. Management's hold
versus sell decisions will continue to be based on an assessment of the best
expected overall returns to the Limited Partners.
At March 31, 1996, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $5,126,000. Such cash and
cash equivalents amounts will be utilized for the working capital requirements
of the Partnership, 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 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
1996 Compared to 1995
The Partnership reported a net income of $5,523,000 for the fiscal year
ended March 31, 1996 as compared to a net loss of $304,000 for the prior year.
This favorable change in the Partnership's net operating results is primarily
due to the gains recognized on the sales of the Richland Terrace/Richmond Park
and Treat Commons II properties during fiscal 1996. The sale of the Richland
Terrace and Richmond Park Apartments generated a gain of $4,774,000 for the
unconsolidated joint venture which owned the properties. The sale of the Treat
Commons II Apartments resulted in a gain of $3,594,000 for the related
unconsolidated joint venture. The Partnership's share of such gains (including
the write-off of unamortized excess basis) was $4,344,000 and $2,422,000,
respectively. Also contributing to the favorable change in net operating results
was a decrease in the Partnership's operating loss of $721,000 in the current
year.
The Partnership's operating loss decreased primarily due to the change in
the entity reporting the interest expense associated with the borrowings secured
by the Partnership's operating investment properties and the lower interest
rates on the refinanced loans. As discussed further in the notes to the
Partnership's financial statements which accompany this Annual Report, all of
the zero coupon loans secured by the operating investment properties, except for
the loan secured by the 625 North Michigan Office Building, were refinanced by
the respective joint venture partnerships in fiscal 1995. As part of such
refinancing transactions, the proceeds of new loans issued in the names of the
joint ventures were used to repay debt which had been issued in the name of the
Partnership, which effectively decreased the Partnership's interest expense
while at the same time increasing the interest expense of the respective joint
ventures. For the unconsolidated joint ventures, such increase in interest
expense is reflected in the Partnership's share of unconsolidated ventures'
income on the Partnership's fiscal 1996 consolidated statement of operations.
The Partnership's operating loss, prior to the effect of the change in interest
expense, increased by $34,000 primarily due to an increase in rental revenues
which was partially offset by an increase in depreciation and amortization
expense. Rental revenues increased at the consolidated Hacienda Park joint
venture by $228,000 primarily due to increases in average occupancy from a level
of 85% in calendar 1994 to 95% for calendar 1995. Rental revenues at Asbury
Commons increased by $166,000 primarily due to increases in rental rates over
the past two years made possible by the strong Atlanta market. The average
occupancy level at the Asbury Commons Apartments actually declined from 96% for
calendar 1994 to 94% for calendar 1995. Revenues at West Ashley Shoppes improved
by $100,000 in calendar 1995, as compared to the prior year, due to a slight
increase in average occupancy and an increase in tenant reimbursement income.
Depreciation and amortization expense increased by $378,000 in the current year
due to the acceleration of depreciation on the consolidated Hacienda Park
property, as discussed further above, and the capitalized tenant improvements
and leasing commissions associated with the increased leasing activity at
Hacienda Park.
The Partnership's share of unconsolidated ventures' income, excluding the
gains recognized from the sale of Treat Commons II, Richland Terrace and
Richmond Park, decreased by $1,633,000 primarily due to an increase of
$1,226,000 in interest expense recorded by the unconsolidated joint ventures
associated with the refinancings discussed above. In addition, the combined
effect of a decrease in rental revenues and an increase in depreciation and
amortization expense contributed to the unfavorable change in the Partnership's
share of unconsolidated ventures' income. Rental revenues decreased by $360,000
due to a decrease in average occupancy levels at Loehmann's Plaza, from 96% for
calendar 1994 to 89% for calendar 1995, primarily due to the buyout of the
anchor tenant lease as discussed further above. In addition, the current year
results include less than twelve months of operations for the Richland Terrace
and Richmond Park properties which were sold on November 2, 1995. Increases in
occupancy at 625 North Michigan and Treat Commons II, as well as increases in
rental rates at Richmond Gables, helped offset a portion of the above decrease
in rental revenues. Average occupancy at 625 North Michigan increased from 83%
in calendar 1994 to 88% in calendar 1995 due to a strengthening Chicago office
market. Increases in average occupancy at Treat Commons II resulted from the
strong local market which contributed to management's decision to sell the
property. Depreciation and amortization expense increased by $274,000 mainly due
to an acceleration of the depreciation rate at 625 North Michigan and additional
capital improvements made to the Loehmann's Plaza property during the past year.
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 was 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 in the
footnotes to the financial statements accompanying this Annual Report, the
Partnership assumed 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. In fiscal 1994, the results of the West
Ashley joint venture are reflected on the equity method.
The Partnership's share of unconsolidated ventures' income decreased mainly
due to the change in the basis of presentation of the operating results of the
West Ashley Shoppes joint venture in fiscal 1995. The Partnership's share of
unconsolidated ventures' income in fiscal 1994 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 fiscal 1995
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 fiscal 1995. Rental revenues at the Portland Pacific joint venture
(Richmond Park and Richland Terrace) increased in calendar 1994 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 for fiscal 1995 decreased mainly due to a
combination of a decrease in interest expense and the inclusion 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 fiscal 1995 due to the refinancing and
payoff of the zero coupon loans between May 1994 and February of 1995. The
Partnership's operating loss in fiscal 1995 includes net income of $217,000
attributable the West Ashley joint venture, 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 resulted 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 for calendar 1994
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 calendar 1993. 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 calendar 1995.
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
referred to 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.
Inflation
The Partnership completed its ninth full year of operations in fiscal 1996.
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. As noted above, the West Ashley Shoppes, Loehamann's Plaza
and 625 North Michigan properties presently have a significant amount of
unleased space. During a period of significant inflation, increased operating
expenses attributable to space which remained unleased at such time would not be
recoverable and would adversely affect the Partnership's net cash flow.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Second Equity Partners,
Inc., a Virginia corporation, which is a wholly-owned subsidiary of PaineWebber
Group, Inc. The Associate General Partner of the Partnership is Properties
Associates 1986, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Managing General Partner. The Managing General
Partner has overall authority and responsibility for the Partnership's
operations.
(a) and (b) The names and ages of the directors and principal executive officers
of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
Lawrence A. Cohen President and Chief Executive Officer 42 5/15/91
Albert Pratt Director 85 4/17/85 *
J. Richard Sipes Director 49 6/9/94
Walter V. Arnold Senior Vice President and Chief
Financial Officer 48 10/29/85
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 43 6/6/88
David F. Brooks First Vice President and Assistant
Treasurer 53 4/17/85 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 33 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors or
executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and executive officers have been elected to serve until
the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated serves as the
investment adviser. The business experience of each of the directors and
principal executive officers of the Managing General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of the Adviser which
he joined in January 1989. He is also a member of the Board of Directors and the
Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty Partners where he was responsible for origination and
structuring of real estate investment programs and for managing national
broker-dealer relationships. He is a member of the New York Bar and is a
Certified Public Accountant.
Albert Pratt is a Director of the Managing General Partner, a Consultant of
PWI and a limited partner of the Associate General Partner. Mr. Pratt joined PWI
as Counsel in 1946 and since that time has held a number of positions including
Director of both the Investment Banking Division and the International Division,
Senior Vice President and Vice Chairman of PWI and Chairman of PaineWebber
International, Inc.
<PAGE>
J. Richard Sipes is a Director of the Managing General Partner and a
Director of the Adviser. Mr. Sipes is an Executive Vice President at
PaineWebber. He joined the firm in 1978 and has served in various capacities
within the Retail Sales and Marketing Division. Before assuming his current
position as Director of Retail Underwriting and Trading in 1990, he was a
Branch Manager, Regional Manager, Branch System and Marketing Manager for a
PaineWebber subsidiary, Manager of Branch Administration and Director of
Retail Products and Trading. Mr. Sipes holds a B.S. in Psychology from
Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President and Member of the Investment Committee of the
Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation where he served as
the Vice President of Asset Sales prior to re-joining PWPI. From February 1989
to October 1990, he was President of Kan Am Investors, Inc., a real estate
investment company. During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser which he joined in June 1988. Mr.
Watts has had over 17 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser which he joined in March 1980. From 1972 to 1980, Mr. Brooks was
an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March
1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which
provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General
Partner and Vice President and Treasurer of the Adviser which he joined in 1986.
From June 1988 to August 1989, Mr. Medlock served as the Controller of the
Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and
a Vice President and Manager of Financial Reporting of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended March 31, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described in
Item 13.
The Partnership has paid cash distributions to the Limited Partners on a
quarterly basis at a rate of 5.25% per annum on invested capital from January 1,
1991 through the quarter ended June 30, 1994 and at a rate of 2% per annum on
invested capital from July 1, 1994 through September 30, 1995. As discussed
further in Item 7, effective for the quarter ended December 31, 1995, the
annualized distribution rate was reduced to 1% on a Limited Partner's remaining
capital account. However, the Partnership's Limited Partnership Units are not
actively traded on any organized exchange, and accordingly, no accurate price
information exists for these Units. Therefore, a presentation of historical
Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
Managing General Partner, Second Equity Partners Fund, Inc. is owned by
PaineWebber. Properties Associates 1986, L.P., the Associate General Partner, is
a Virginia limited partnership, certain limited partners of which are also
officers of the Managing General Partner. No limited partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) The directors and officers of the Managing General Partner do not
directly own any Units of limited partnership interest of the Partnership. No
director or officer of the Managing General Partner, nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
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. No management fees were earned for the fiscal year
ended March 31, 1996. 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.
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.
An affiliate of the Adviser performs certain accounting, tax preparation,
securities law compliance and investor communications and relations services for
the Partnership. The total costs incurred by this affiliate in providing such
services are allocated among several entities, including the Partnership.
Included in general and administrative expenses for the year ended March 31,
1996 is $260,000, representing reimbursements to this affiliate of the Managing
General Partner for providing such 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 $4,000 included in general and administrative expenses for managing the
Partnership's cash assets during fiscal 1996. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of the
PWPI.
<PAGE>
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
1996.
(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.
<PAGE>
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/ Lawrence A. Cohen
Lawrence A. Cohen
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Albert Pratt Date: June 28, 1996
--------------- -------------
Albert Pratt
Director
By: /s/ J. Richard Sipes Date: June 28, 1996
--------------------- -------------
J. Richard Sipes
Director
<PAGE>
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
reference to the Restated herein 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 all Act of 1934 and
such contracts filed as exhibits of incorported herein
previously filed Forms 8-K and by reference.
Forms 10-K are hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the
fiscal year 1996 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.
(27) Financial Data Schedule Filed as the last page
of EDGAR submission
following the Financial
Statements and Financial
Statement Schedule required
by Item 14.
<PAGE>
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, 1996 and 1995 F-4
Consolidated statements of operations for the years
ended March 31, 1996, 1995 and 1994 F-5
Consolidated statements of changes in partners' capital (deficit)
for the years ended March 31, 1996, 1995 and 1994 F-6
Consolidated statements of cash flows for the years ended
March 31, 1996, 1995 and 1994 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-28
1995 and 1994 Combined Joint Ventures of PaineWebber Equity Partners Two
Limited Partnership:
Report of independent auditors F-29
Combined balance sheets as of December 31, 1995 and 1994 F-30
Combined statements of income and changes in venturers'
capital for the years ended December 31, 1995 and 1994 F-31
Combined statements of cash flows for the years ended
December 31, 1995 and 1994 F-32
Notes to combined financial statements F-33
Schedule III - Real Estate and Accumulated Depreciation F-41
1993 Combined Joint Ventures of PaineWebber Equity Partners Two Limited
Partnership:
Report of independent auditors F-42
Combined balance sheets as of December 31, 1993 and 1992 F-43
Combined statements of income and changes in venturers' capital
for the years ended December 31, 1993, 1992 and 1991 F-44
<PAGE>
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
Combined statements of cash flows for the years ended
December 31, 1993, 1992 and 1991 F-45
Notes to combined financial statements F-46
Schedule III - Real Estate and Accumulated Depreciation F-52
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.
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996, 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.
As discussed in Note 2 to the consolidated financial statements, in fiscal
1996 the Partnership adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 26, 1996
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995
(In thousands, except for per Unit data)
ASSETS
1996 1995
---- ----
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,396 40,975
--------- --------
50,204 49,783
Less accumulated depreciation (10,781) (8,895)
--------- --------
39,423 40,888
Investments in unconsolidated joint
ventures, at equity 32,206 39,887
Cash and cash equivalents 5,126 1,827
Escrowed cash 150 57
Accounts receivable 261 129
Accounts receivable - affiliates 15 78
Net advances to consolidated ventures 78 -
Prepaid expenses 29 28
Deferred rent receivable 731 476
Deferred expenses, net of accumulated
amortization of $583 ($402 in 1995) 703 778
--------- --------
$ 78,722 $ 84,148
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 283 $ 434
Net advances from consolidated ventures - 29
Tenant security deposits 96 103
Bonds payable 2,408 2,498
Mortgage notes payable 19,907 20,137
Other liabilities 349 348
--------- --------
Total liabilities 23,043 23,549
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 193 138
Cumulative cash distributions (688) (666)
Limited Partners ($1 per Unit;
134,425,741 Units issued):
Capital contributions, net of offering costs 119,747 119,747
Cumulative net income 18,803 13,335
Cumulative cash distributions (82,377) (71,956)
--------- --------
Total partners' capital 55,679 60,599
---------- ----------
$ 78,722 $ 84,148
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1996, 1995 and 1994
(In thousands, except for per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense reimbursements $ 4,706 $ 4,211 $ 4,158
Interest and other income 363 518 180
------- ------- -------
5,069 4,729 4,338
Expenses:
Interest expense 2,083 2,838 3,267
Depreciation and amortization 2,023 1,645 1,474
Property operating expenses 1,320 1,302 930
Real estate taxes 422 473 355
General and administrative 729 700 703
------- ------- -------
6,577 6,958 6,729
------- ------- -------
Operating loss (1,508) (2,229) (2,391)
Investment income:
Interest income on note receivable from
unconsolidated venture 80 107 106
Partnership's share of unconsolidated
ventures' income 185 1,818 2,207
Partnership's share of gains on
sale of operating investment properties 6,766 - -
------- ------- -------
7,031 1,925 2,313
------- ------- -------
Net income (loss) $ 5,523 $ (304) $ (78)
======== ======== ========
Net income (loss) per 1,000
Limited Partnership Units $40.68 $(2.26) $(0.57)
====== ====== ======
Cash distributions per 1,000
Limited Partnership Units $77.52 $34.20 $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.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended March 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
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
Cash distributions (22) (10,421) (10,443)
Net income 55 5,468 5,523
------- --------- ---------
Balance at March 31, 1996 $ (494) $ 56,173 $ 55,679
====== ========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 5,523 $ (304) $ (78)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Partnership's share of unconsolidated
ventures' income (185) (1,818) (2,207)
Partnership's share of gains on sale of
operating investment properties (6,766) - -
Interest expense on zero coupon loans - 1,610 3,075
Depreciation and amortization 2,023 1,645 1,474
Amortization of deferred financing costs 44 164 -
Changes in assets and liabilities:
Escrowed cash (93) 205 (218)
Accounts receivable (132) 55 103
Accounts receivable - affiliates 63 53 (10)
Prepaid expenses (1) (1) (9)
Deferred rent receivable (255) (119) 45
Accounts payable and accrued expenses (151) 58 26
Advances to/from consolidated ventures (107) (455) (170)
Tenant security deposits (7) (3) 17
Accounts payable - affiliates - - (45)
Other liabilities 1 (4) -
-------- -------- --------
Total adjustments (5,566) 1,390 2,081
-------- -------- --------
Net cash provided by (used in)
operating activities (43) 1,086 2,003
Cash flows from investing activities:
Distributions from unconsolidated ventures 15,566 18,749 4,742
Additional investments in unconsolidated
ventures (934) (383) -
Additions to operating investment properties (421) (1,077) (91)
Payment of leasing commissions (128) (303) (43)
-------- -------- --------
Net cash provided by investing
activities 14,083 16,986 4,608
Cash flows from financing activities:
Distributions to partners (10,443) (4,644) (6,724)
Payment of principal and deferred interest
on notes payable (230) (25,937) -
Proceeds from issuance of notes payable - 10,500 -
Refund (payment) of deferred financing costs 22 (328) -
District bond assessments - 85 -
Payments on district bond assessments (90) (451) (92)
-------- -------- --------
Net cash used in financing activities (10,741) (20,775) (6,816)
--------- ---------- --------
Net increase (decrease) in cash and
cash equivalents 3,299 (2,703) (205)
Cash and cash equivalents, beginning of year 1,827 4,290 4,495
Cash and cash equivalents, West Ashley
Shoppes, beginning of year - 240 -
-------- -------- --------
Cash and cash equivalents, end of year $ 5,126 $ 1,827 $ 4,290
======== ======== =======
Cash paid during the year for interest $ 1,974 $ 956 $ 192
======== ======== ========
Write-off of fully depreciated tenant
improvements $ - $ 3,026 $ -
======= ========= ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of March 31, 1996 and 1995 and revenues
and expenses for each of the three years in the period ended March 31, 1996.
Actual results could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investment in eight joint venture partnerships which own or owned operating
properties. Except as described below, the Partnership accounts for its
investments in 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 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 control of
Hacienda Park Associates on December 10, 1991 and the Atlanta Asbury
Partnership on February 14, 1992. Accordingly, these joint ventures are
presented on a consolidated basis in the accompanying financial statements.
In addition, the Partnership acquired 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 to and from
consolidated ventures on the accompanying balance sheets.
Effective for fiscal 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," to account for its operating investment properties. In accordance with
SFAS 121, an impairment loss with respect to an operating investment
property is recognized when the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds its fair value, where fair value is
defined as the amount at which the asset could be bought or sold in a
current transaction between willing parties, that is other than a forced or
liquidation sale. Prior to fiscal 1996, the operating investment properties
were carried at the lower of adjusted cost or net realizable value. No
impairment losses were recognized in conjunction with the application of
SFAS 121 in fiscal 1996.
Through March 31, 1995, depreciation expense on the operating investment
properties carried on the Partnership's consolidated balance sheet was
computed using the straight-line method over estimated useful lives of five
to thirty-one and a half years. During fiscal 1996, circumstances indicated
that the consolidated Hacienda Park operating investment property might be
impaired. The Partnership's estimate of undiscounted cash flows indicated
that the property's carrying amount was expected to be recovered, but that
the reversion value could be less than the carrying amount at the time of
disposition. As a result of such assessment, the joint venture commenced
recording an additional annual charge to depreciation expense of $250,000 in
calendar 1995 to adjust the carrying value of the Hacienda Park property
such that it will match the expected reversion value at the time of
disposition. Such amount is included in depreciation and amortization on the
accompanying fiscal 1996 consolidated statement of operations. Such an
annual charge will continue to be recorded in future periods. 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 operating investment properties on
the accompanying consolidated balance sheets. Maintenance and repairs are
charged to expense when incurred.
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, 1996 and 1995 include loan costs incurred
in connection with the Asbury Commons and Hacienda Park mortgage notes
payable described in Note 6, which are being amortized using the
straight-line method over their respective terms. 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 and West Ashley Shoppes
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 Hacienda Park
consolidated joint ventures.
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.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
The cash and cash equivalents, escrowed cash, receivables, advances to
consolidated ventures, prepaid expenses, accounts payable and accrued
expenses, bonds payable and mortgage notes payable appearing on the
accompanying consolidated balance sheets represent financial instruments for
purposes of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." With the exception
of bonds payable and mortgage notes payable, the carrying amount of these
assets and liabilities approximates their fair value as of March 31, 1996
due to the short-term maturities of these instruments. It is not practicable
for management to estimate the fair value of the bonds payable without
incurring excessive costs due to the unique nature of such obligations. The
fair value of mortgage notes payable is estimated using discounted cash flow
analysis, based on the current market rates for similar types of borrowing
arrangements.
Certain prior year amounts have been reclassified to conform to the
fiscal 1996 presentation.
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, 1996, 1995 and 1994, 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, 1996, 1995 and 1994 is $260,000, $268,000 and $268,000, 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 $4,000, $13,000 and $8,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996, 1995 and 1994, respectively.
Accounts receivable - affiliates at both March 31, 1996 and 1995 includes
$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, 1995 also included $63,000 due from the TCR Walnut
Creek Limited Partnership for certain investor services fees as specified in
the joint venture agreement.
4. Operating Investment Properties
The Partnership's balance sheets at March 31, 1996 and 1995 include three
operating investment properties; 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 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. Prior to
fiscal 1995, the results of the West Ashley joint venture were accounted for
under the equity method (see Note 2). 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. The
$600,000 balance of the note receivable will become due and payable on
October 31, 1996. The Partnership will pursue collection of this balance
during fiscal 1997. However, there are no assurances that any portion of
this balance will be collected. 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 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 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.
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.
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, 1995, 1994
and 1993 (in thousands):
1995 (1) 1994 (1) 1993
-------- -------- ----
Property operating expenses:
Utilities $ 219 $ 225 $ 187
Repairs and maintenance 385 382 264
Salaries and related costs 216 147 175
Administrative and other 300 367 154
Insurance 51 47 37
Management fees 149 134 113
--------- --------- ------
$ 1,320 $ 1,302 $ 930
========= ======== ======
(1)Property operating expenses of West Ashley Shoppes Associates are
included in the combined totals for 1995 and 1994.
5. Investments in Unconsolidated Joint Ventures
The Partnership has investments in five unconsolidated joint venture
partnerships which own operating investment properties at both March 31,
1996 and 1995. 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 in fiscal 1996 and 1995. As discussed in Note 2, these
joint ventures report their operations on a calendar year basis.
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, are as follows:
Condensed Combined Balance Sheets
December 31, 1995 and 1994
(in thousands)
Assets
1995 1994
Current assets $ 1,568 $ 1,299
Operating investment properties, net 56,092 71,357
Other assets 4,935 4,462
--------- ---------
$ 62,595 $ 77,118
========= =========
Liabilities and Venturers' Capital
Current liabilities $ 2,505 $ 3,043
Other liabilities 303 228
Note payable to venturer - 1,000
Long-term debt 8,982 13,127
Partnership's share of venturers' capital 31,060 40,217
Co-venturers' share of venturers' capital 19,745 19,503
--------- ---------
$ 62,595 $ 77,118
========= =========
<PAGE>
Condensed Combined Summary of Operations
For the years ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Revenues:
Rental revenues and expense
reimbursements $ 11,844 $ 12,204 $13,547
Interest income 330 289 41
--------- -------- -------
12,174 12,493 13,588
Expenses:
Property operating and other expenses 4,177 4,170 4,486
Real estate taxes 2,248 2,565 3,082
Interest on long-term debt 1,535 300 62
Interest on note payable to venturer 100 100 100
Depreciation and amortization 3,704 3,430 3,573
---------- -------- ---------
11,764 10,565 11,303
---------- -------- --------
Operating income $ 410 $ 1,928 $ 2,285
Gains on sale of operating
investment properties 8,368 - -
---------- -------- --------
Net income $ 8,778 $ 1,928 $ 2,285
========== ======== ========
Net income:
Partnership's share of
combined income $ 7,512 $ 1,899 $ 2,305
Co-venturers' share of
combined income (loss) 1,266 29 (20)
---------- ------- --------
$ 8,778 $ 1,928 $ 2,285
========== ======== ========
Reconciliation of Partnership's Investment
March 31, 1996 and 1995
(in thousands)
1996 1995
---- ----
Partnership's share of capital at December 31,
as shown above $ 31,060 $ 40,217
Partnership's share of ventures' current
liabilities and long-term debt - 1,068
Excess basis due to investments in joint
ventures, net (1) 1,152 1,728
Timing differences (2) (6) (3,126)
--------- ---------
Investments in unconsolidated joint ventures,
at equity at March 31 $ 32,206 $ 39,887
========= =========
(1)At March 31, 1996 and 1995, the Partnership's investment exceeds its
share of the joint venture partnerships' capital accounts by
approximately $1,152,000 and $1,728,000, 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)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.
<PAGE>
Reconciliation of Partnership's Share of Operations
For the years ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Partnership's share of operations,
as shown above $ 7,512 $ 1,899 $ 2,305
Amortization of excess basis (561) (81) (98)
--------- -------- --------
Partnership's share of unconsolidated
ventures' net income $ 6,951 $ 1,818 $ 2,207
======== ======== ========
The Partnership's share of the net income of the unconsolidated joint
ventures is presented as follows in the accompanying statements of
operations:
1995 1994 1993
---- ---- ----
Partnership's share of unconsolidated
ventures' income $ 185 $ 1,818 $ 2,207
Partnership's share of gains on
sale of operating investment
properties 6,766 - -
------- -------- --------
$ 6,951 $ 1,818 $ 2,207
======= ======== ========
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. As a result, 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
accompanying balance sheets is comprised of the following equity method
carrying values (in thousands):
1996 1995
Chicago-625 Partnership $ 19,487 $ 20,394
Richmond Gables Associates 353 711
Daniel/Metcalf Associates Partnership 12,150 10,670
TCR Walnut Creek Limited Partnership 182 1,204
Portland Pacific Associates 34 5,908
--------- ---------
32,206 38,887
Note receivable:
Note receivable from TCR Walnut Creek Limited
Partnership (see discussion below) - 1,000
--------- ----------
Investments in unconsolidated joint ventures $ 32,206 $ 39,887
========== ==========
<PAGE>
The Partnership received cash distributions from the unconsolidated
ventures during the years ended March 31, 1996, 1995 and 1994 as set forth
below (in thousands):
1996 1995 1994
---- ---- ----
Chicago-625 Partnership $ 1,158 $ 1,114 $ 1,252
Richmond Gables Associates 158 5,573 600
Daniel/Metcalf Associates Partnership 600 3,374 1,080
TCR Walnut Creek Limited Partnership 3,216 7,803 770
Portland Pacific Associates 10,434 885 660
West Ashley Shoppes Associates - - 380
--------- --------- --------
$ 15,566 $ 18,749 $ 4,742
========= ========= ========
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. No Leasing Expense Contributions have been made since March
31, 1993.
During calendar 1995, circumstances indicated that Chicago 625
Partnership's operating investment property might be impaired. The joint
venture's estimate of undiscounted cash flows indicated that the property's
carrying amount was expected to be recovered, but that the reversion value
could be less than the carrying amount at the time of disposition. As a
result of such assessment, the venture commenced recording an additional
annual depreciation charge of $350,000 in calendar 1995 to adjust the
carrying value of the operating investment property such that it will match
the expected reversion value at the time of disposition. The Partnership's
share of such amount is reflected in the Partnership's share of
unconsolidated ventures' income in fiscal 1996. Such an annual charge will
continue to be recorded in future periods.
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 $7,549,000 at December 31, 1995.
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% 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% 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
a distribution 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, 1995, there was a cumulative
unpaid preferred distribution payable to the Partnership of $1,529,000. 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.
<PAGE>
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
approximately 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, 1995 amounted to $2,747,000. 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, 1995, the co-venturer was obligated to make
additional capital contributions of at 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. On September 27, 1994, the joint venture obtained a $7,400,000
first mortgage note payable which bore interest at 8.54% per annum.
Principal and interest payments of $31,598 were due monthly through
September 2001 at which time the entire unpaid balance of principal and
interest was to be due. The net proceeds of the loan were recorded as a
distribution to the Partnership by the joint venture in fiscal 1995. The
Partnership used the proceeds of the loan in conjunction with the retirement
of the zero coupon loans described in Note 6.
On December 29, 1995, TCR Walnut Creek Limited Partnership sold the Treat
Commons Phase II Apartments to a third party for approximately $12.1
million. The Partnership received net proceeds of approximately $4.1 million
after deducting closing costs and the repayment of the existing mortgage
note of approximately $7.3 million. The Partnership was entitled to 100% of
the net sale proceeds and cash flow from operations of the venture in
accordance with the joint venture agreement. The Partnership distributed
approximately $3.1 million of these net sale proceeds to the Limited
Partners in a Special Distribution made on February 15, 1996. The remaining
sale proceeds of approximately $1 million were retained by the Partnership
for potential reinvestment in the Loehmann's Plaza property, where a
significant renovation and re-leasing program is currently underway. The
joint venture is presently in the process of winding up its operations and
paying all final expenses. There may be a small distribution of residual
cash to the Partnership during fiscal 1997 in connection with the final
liquidation of the joint venture.
Net income of the joint venture is 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, is allocated
75% to the Partnership and 25% to the co-venturer. In general, net losses
are 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 had entered into a management contract with an affiliate
of the co-venturer which was cancellable at the option of the Partnership
upon the occurrence of certain events. The annual management fee was 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).
On November 2, 1995, Portland Pacific Associates sold the Richmond Park
and Richland Terrace Apartments to a third party for $11 million. The
Partnership received net proceeds of approximately $8 million after
deducting closing costs, the co-venturer's share of the proceeds and
repayment of the $2 million borrowing described in Note 6. The Partnership
distributed approximately $5.1 million of these net proceeds to the Limited
Partners in a Special Distribution made on December 27, 1995. The remaining
sale proceeds were retained by the Partnership for the potential future
capital needs of the Partnership's commercial property investments. The
joint venture is presently in the process of winding up its operations and
paying all final expenses. There may be a small distribution of residual
cash to the Partnership during fiscal 1997 in connection with the final
liquidation of the joint venture.
Net income and loss of the joint venture are allocated as follows: (1)
income is 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 are allocated in proportion to net cash flow
distributed.
The joint venture had entered into a management contract with an affiliate
of the co-venturer which was cancellable at the option of the Partnership
upon the occurrence of certain events. The annual management fee was 5% of
gross rents.
<PAGE>
6. Mortgage Notes Payable
Mortgage notes payable on the consolidated balance sheets of the
Partnership at March 31, 1996 and 1995 consist of the following (in
thousands):
1996 1995
---- ----
9.125% mortgage note payable to an
insurance company secured by the
625 North Michigan Avenue operating
investment property (see discussion
below). 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.
The fair value of the mortgage note
approximated its carrying value at
March 31, 1996. $ 9,542 $ 9,657
8.75% mortgage note payable to an
insurance company secured by the
Asbury Commons operating investment
property (see discussion below).
The loan requires monthly principal
and interest payments of $88,000
through maturity on October 15,
2001. The fair value of the
mortgage note approximated its
carrying value at December 31,
1995. 6,897 6,980
9.04% mortgage note payable to an
insurance company secured by the
Saratoga Center and EG&G Plaza
operating investment property (see
discussion below). The loan
requires monthly principal and
interest payments of $36,000
through maturity on January 20,
2002. The fair value of the
mortgage note approximated its
carrying value at December 31,
1995. 3,468 3,500
------- -------
$19,907 $20,137
======= =======
The scheduled annual principal payments to retire mortgage notes payable
are as follows (in thousands):
Year ended March 31,
1997 $ 262
1998 285
1999 313
2000 9,311
2001 198
Thereafter 9,538
------
$19,907
=======
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 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 was secured by the Treat Commons apartment complex, carried an
annual interest rate of 8.54% and was scheduled to mature in 7 years. As
discussed in Note 5, the Treat Commons property was sold and this loan
obligation was repaid in full on December 29, 1995. 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 $88,000.
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 $43,000. 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 $36,000. 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 $34,000.
Legal liability for the repayment of the new mortgage loans secured by the
Gables and Loehmann's properties rests with the respective joint ventures.
Accordingly the mortgage loan liabilities are recorded on the books of these
unconsolidated joint ventures. The Partnership has indemnified 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 in fiscal 1995.
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):
Year ended December 31,
1996 $ 91
1997 101
1998 110
1999 119
2000 128
Thereafter 1,859
--------
$ 2,408
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, 1995 are
as follows (in thousands):
Future
Minimum
Contractual
Payments
1996 $ 2,485
1997 2,522
1998 2,354
1999 1,508
2000 1,245
Thereafter 1,955
----------
$ 12,069
9. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court
for the Southern District of New York concerning PaineWebber Incorporated's
sale and sponsorship of various limited partnership investments, including
those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together
"PaineWebber"), among others, by allegedly dissatisfied partnership
investors. In March 1995, after the actions were consolidated under the
title In re PaineWebber Limited Partnership Litigation, the plaintiffs
amended their complaint to assert claims against a variety of other
defendants, including Second Equity Partners, Inc. and Properties Associates
1986, L.P. ("PA1986"), which are the General Partners of the Partnership and
affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in PaineWebber Equity
Partners Two Limited Partnership, PaineWebber, Second Equity Partners, Inc.
and PA1986 (1) failed to provide adequate disclosure of the risks involved;
(2) made false and misleading representations about the safety of the
investments and the Partnership's anticipated performance; and (3) marketed
the Partnership to investors for whom such investments were not suitable.
The plaintiffs, who purport to be suing on behalf of all persons who
invested in PaineWebber Equity Partners Two Limited Partnership., also
allege that following the sale of the partnership interests, PaineWebber,
Second Equity Partners, Inc. and PA1986 misrepresented financial information
about the Partnership's value and performance. The amended complaint alleges
that PaineWebber, Second Equity Partners, Inc. and PA1986 violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs seek unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also seek treble damages
under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the New York Limited Partnership Actions outlining the
terms under which the parties have agreed to settle the case. Pursuant to
that memorandum of understanding, PaineWebber irrevocably deposited $125
million into an escrow fund under the supervision of the United States
District Court for the Southern District of New York to be used to resolve
the litigation in accordance with a definitive settlement agreement and plan
of allocation which the parties expect to submit to the court for its
consideration and approval within the next several months. Until a
definitive settlement and plan of allocation is approved by the court, there
can be no assurance what, if any, payment or non-monetary benefits will be
made available to investors in PaineWebber Equity Partners Two Limited
Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including
those offered by the Partnership. The complaint alleges, among other things,
that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating
the risks and failing to state material facts concerning the investments.
The complaint seeks compensatory damages of $15 million plus punitive
damages against PaineWebber. The eventual outcome of this litigation and the
potential impact, if any, on the Partnership's unitholders cannot be
determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court
against PaineWebber Incorporated and various affiliated entities concerning
the plaintiff's purchases of various limited partnership interests,
including those offered by the Partnership. The complaint is substantially
similar to the complaint in the Abbate action described above, and seeks
compensatory damages of $3.4 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled
to indemnification for expenses and liabilities in connection with this
litigation. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements.
10. Subsequent Events
On May 15, 1996 the Partnership distributed $297,000 to the Limited
Partners and $3,000 to the General Partners for the quarter ended March 31,
1996.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1996
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Venture 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>
Shopping Center
Charleston,
SC $ - $ 4,243 $ 5,669 $ 541 $ 3,799 $ 6,654 $10,453 $ 1,921 1988 3/10/88 5 - 31.5 yrs.
Business Center
Pleasanton,
CA 5,876 3,315 23,337 (553) 3,370 22,729 26,099 6,029 1985 12/24/87 5 -25 yrs
Apartment Complex
Atlanta, GA 6,897 1,702 11,950 - 1,639 12,013 13,652 2,831 1990 3/12/90 10 - 27.5 yrs
------- ------ ------- ------- ------- -------- ------- -------
$12,773 $9,260 $40,956 $ (12) $8,808 $41,396 $50,204 $10,781
======= ====== ======= ======= ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal income tax purposes is approximately $53,706.
(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:
1995 1994 1993
---- ---- ----
Balance at beginning of period $ 49,783 $ 41,524 $ 41,433
Consolidation of West Ashley joint venture - 10,208 -
Acquisitions and improvements 421 1,077 91
Write-offs due to disposals - (3,026) -
--------- --------- --------
Balance at end of period $ 50,204 $ 49,783 $ 41,524
========= ========= ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 8,895 $ 8,947 $ 7,723
Consolidation of West Ashley joint venture - 1,481 -
Depreciation expense 1,886 1,493 1,224
Write-offs due to disposals - (3,026) -
--------- ---------- ----------
Balance at end of period $ 10,781 $ 8,895 $ 8,947
========= ========== =========
(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>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying combined balance sheets of the 1995 and 1994
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership
as of December 31, 1995 and 1994 and the related combined statements of income
and changes in venturers' capital, and cash flows for the years 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 1995 and 1994
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership
at December 31, 1995 and 1994, and the combined results of their operations and
their cash flows for the years 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.
As discussed in Note 2 to the combined financial statements, in 1995 one of
the Combined Joint Ventures adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of."
/S/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 22, 1996
<PAGE>
1995 and 1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
Assets
1995 1994
Current assets:
Cash and cash equivalents $ 751 $ 249
Accounts receivable, net of allowance
for doubtful accounts of $101 ($50 in 1994) 808 1,036
Prepaid expenses 9 14
-------- ---------
Total current assets 1,568 1,299
Operating investment properties:
Land 15,222 19,999
Buildings, improvements and equipment 59,065 72,217
Construction in progress 1,485 112
--------- ----------
75,772 92,328
Less accumulated depreciation (19,680) (20,971)
--------- ----------
56,092 71,357
Escrowed funds 1,749 1,328
Due from affiliates 269 269
Deferred expenses, net of accumulated
amortization of $1,100 ($904 in 1994) 1,491 1,423
Other assets 1,426 1,442
---------- ----------
$ 62,595 $ 77,118
========= =========
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 270 $ 414
Accounts payable - affiliates 21 101
Accrued real estate taxes 2,047 2,309
Distributions payable to venturers 52 65
Current portion - long-term debt 115 154
---------- ----------
Total current liabilities 2,505 3,043
Tenant security deposits 253 178
Subordinated management fee payable to affiliate 50 50
Note payable to venturer - 1,000
Long-term debt 8,982 13,127
Venturers' capital 50,805 59,720
---------- ----------
$ 62,595 $ 77,118
========= =========
See accompanying notes.
<PAGE>
1995 and 1994 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, 1995 and 1994
(In thousands)
1995 1994
Revenues:
Rental income and expense reimbursements $ 11,844 $ 12,204
Interest and other income 330 289
-------- ----------
12,174 12,493
Expenses:
Real estate taxes 2,248 2,565
Depreciation and amortization 3,704 3,421
Property operating expenses 908 760
Repairs and maintenance 1,093 1,037
Management fees 459 463
Professional fees 88 122
Salaries 882 844
Advertising 71 64
Interest expense on long-term debt 1,535 309
Interest on note payable to venturer 100 100
General and administrative 564 485
Bad debt expense 1 317
Other 111 78
-------- ----------
11,764 10,565
Operating income 410 1,928
Gains on sale of operating investment properties 8,368 -
-------- ----------
Net income 8,778 1,928
Contributions from venturers 1,494 385
Distributions to venturers (19,187) (17,146)
Venturers' capital, beginning of year 59,720 74,553
---------- ----------
Venturers' capital, end of year $ 50,805 $ 59,720
========= =========
See accompanying notes.
<PAGE>
1995 and 1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOW For
the year ended December 31, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994
Cash flows from operating activities:
Net income $ 8,778 $ 1,928
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,704 3,421
Amortization of deferred financing costs 169 11
Gains on sale of operating investment
properties (8,368) -
Changes in assets and liabilities:
Accounts receivable, net 228 125
Prepaid expenses 5 1
Other current assets - 13
Escrowed funds 129 (1,219)
Deferred expenses (269) (230)
Other assets 16 297
Accounts payable and accrued expenses (144) (12)
Accounts payable - affiliates 6 (67)
Tenant security deposits 75 47
Accrued real estate taxes (262) (183)
---------- --------
Total adjustments (4,711) 2,204
---------- --------
Net cash provided by operating
activities 4,067 4,132
Cash flows from investing activities:
Additions to operating investment properties (2,044) (1,171)
Purchase of investment securities - (534)
Proceeds from sale of investment securities - 1,264
Proceeds from sale 15,542 -
Selling costs from sale (587) -
Increase in restricted cash (550) -
--------- ---------
Net cash provided by (used in)
investing activities 12,361 (441)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,829 12,600
Principal payments on long-term debt (891) (19)
Repayment of partner advances (86) -
Repayment of note payable to partner (1,000) -
Distributions to venturers (19,241) (17,122)
Capital contributions from venturers 1,494 385
Payment of deferred loan costs (31) (249)
---------- ---------
Net cash used in financing activities (15,926) (4,405)
---------- ---------
Net increase (decrease) in cash and
cash equivalents 502 (714)
Cash and cash equivalents, beginning of year 249 963
--------- ---------
Cash and cash equivalents, end of year $ 751 $ 249
========= =========
Cash paid during the year for interest $ 1,071 $ 164
========= =========
See accompanying notes.
<PAGE>
1995 AND 1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization
The accompanying financial statements of the 1995 and 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 (1)
Portland Pacific Associates January 12, 1988 (2)
(1) On December 29, 1995, the TCR Walnut Creek Limited Partnership sold its
operating investment property and is presently in the process of winding
up its operations. In accordance with its partnership agreement, the
joint venture will be liquidated during 1996.
(2) On November 2, 1995, Portland Pacific Associates sold its two operating
investment properties and is presently in the process of winding up its
operations. In accordance with its partnership agreement, Portland
Pacific Associates will be liquidated during 1996.
2. Summary of significant accounting policies
Operating investment properties
Effective for 1995, Chicago-625 Partnership elected early application of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). In accordance with SFAS 121, an impairment loss with respect to
an operating investment property is recognized when the sum of the expected
future net cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset. An impairment loss is measured as the
amount by which the carrying amount of the asset exceeds its fair value,
where fair value is defined as the amount at which the asset could be bought
or sold in a current transaction between willing parties, that is other than
a forced or liquidation sale. All of the other joint ventures record their
investments in operating investment properties at the lower of cost, reduced
by accumulated depreciation, or net realizable value. These joint ventures
have reviewed SFAS 121, 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 their financial statements.
Through December 31, 1994, depreciation expense was computed on a
straight-line basis over the estimated useful life of the buildings,
improvements and equipment, generally 5 to 31.5 years. During 1995,
circumstances indicated that Chicago 625 Partnership's operating investment
property might be impaired. The joint venture's estimate of undiscounted
cash flows indicated that the property's carrying amount was expected to be
recovered, but that the reversion value could be less that the carrying
amount at the time of disposition. As a result of such assessment, the
venture commenced recording an additional annual depreciation charge of
$350,000 in 1995 to adjust the carrying value of the operating investment
property such that it will match the expected reversion value at the time of
disposition. Such an annual charge will continue to be recorded in future
periods. 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.
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.
Fair value of financial instruments
The carrying amount of cash and cash equivalents, tenant receivables,
escrowed funds, due from affiliates and other current and long-term
liabilities (with the exception of long-term debt) approximates their
respective fair values at December 31, 1995 due to the short-term maturities
of such instruments. Where practicable, the fair value of long-term debt is
estimated using discounted cash flow analysis, based on the current market
rates for similar types of borrowing arrangements.
<PAGE>
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 formerly owned and operated Treat Commons Phase II
Apartments, a 160-unit apartment complex located in Walnut Creek,
California. On December 29, 1995, TCR Walnut Creek Limited Partnership
sold the Treat Commons Phase II Apartments to a third party for
approximately $12.1 million. EP2 received net proceeds of approximately
$4.1 million after deducting closing costs and the repayment of the
existing mortgage note of approximately $7.3 million. EP2 was entitled
to 100% of the net sale proceeds and cash flow from operations of the
venture in accordance with the joint venture agreement. The joint
venture recognized a gain of $3,594,000 on the sale, representing the
amount by which the sale proceeds exceeded the net carrying amount of
the operating investment property at the date of the sale. The joint
venture is presently in the process of winding up its operations and
paying all final expenses. There may be a small distribution of
residual cash to EP2 during 1996 in connection with the final
liquidation of the joint venture.
e. Portland Pacific Associates
The joint venture formerly owned and operated two apartment complexes,
Richmond Park Apartments and Richland Terrace Apartments, which contain
a total of 183 units located in Washington County, Oregon. On November
2, 1995, Portland Pacific Associates sold the Richmond Park and Richland
Terrace Apartments to a third party for $11 million. EP2 received net
proceeds of approximately $8 million after deducting closing costs, the
co-venturer's share of the proceeds and repayment of a $2 million
borrowing of EP2's which encumbered the property. The joint venture
recognized a gain of $4,774,000 on the sale, representing the amount by
which the sale proceeds exceeded the net carrying amount of the
operating investment properties at the date of the sale. The joint
venture is presently in the process of winding up its operations and
paying all final expenses. There may be a small distribution of residual
cash to EP2 during 1996 in connection with the final liquidation of the
joint venture.
<PAGE>
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:
Guaranty Period Mandatory 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, 1995, 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 both December 31, 1995 and 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, 1995 and 1994 also include $6,000 and $1,000, respectively,
payable to related parties of Portland Pacific Associates in connection with
services rendered to the venture. In addition, accounts payable - affiliates
at December 31, 1994 also includes advances totalling $86,000 from the
venture partners of Portland Pacific Associates.
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 1995
or 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):
1996 $ 6,251
1997 5,223
1998 4,819
1999 4,407
2000 4,233
Thereafter 6,871
---------
$ 31,804
=========
Leases with four tenants of the 625 North Michigan Office Building
accounted for approximately $2,787,000 of the rental revenue generated by
that property for 1995.
7. Note Payable to Venturer
Note payable to venturer at December 31, 1994 consisted of an unsecured
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 were at
10% per annum, payable quarterly. Principal was scheduled to be due December
2012. On December 29, 1995, the Treat Commons joint venture repaid the
$1,000,000 loan to EP2 from the proceeds of the sale of the operating
investment property, as discussed further in Note 3. Interest expense on
this note payable was $100,000 in 1995 and 1994.
8. Long-Term Debt
Long term debt payable at December 31, 1995 and 1994 consists of the
following (in thousands):
1995 1994
---- ----
Variable rate mortgage note
payable to a third party secured by
the Loehmann's Plaza operating
investment property. The loan
required 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
required monthly principal and
interest payments of $32 through
maturity on October 15, 2001 (see
discussion below). - 7,386
9.04% mortgage note payable to
an insurance company secured by the
Loehmann's Plaza operating
investment property. The loan
requires monthly principal and
interest payments of $35 through
maturity on February 15, 2003 (see
discussion below). 3,963 -
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 through maturity on October 15,
2001 (see discussion below). 5,134 5,195
----- ------
9,097 13,281
Less: current portion (115) (154)
------- ---------
$ 8,982 $ 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 was 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. As discussed further in Note 3, this
mortgage note was repaid in full on December 29, 1995 in conjunction with a
sale of the operating investment property.
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. The fair value of this mortgage note approximated its carrying value
as of December 31, 1995.
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. 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. The fair value of this
mortgage note approximated its carrying value as of December 31, 1995.
The closing of the Loehmann's Plaza financing transaction described above
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 the
co-venturer 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 $ 115
1996 125
1997 137
1998 150
` 1999 163
Thereafter 8,407
-------
$ 9,097
=======
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. On
February 10, 1995 the zero coupon note secured by Loehmann's Plaza, due to
mature in June of 1995, was repaid in full with the proceeds of a loan
obtained by this joint venture (see Note 8).
The zero coupon loan secured by the 625 North Michigan Office Building
had 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. Under the terms of the modification and
extension agreement, this loan remains a direct obligations of EP2 and its
affiliate and, therefore, is not reflected in the accompanying financial
statements. EP2 is required to make all loan payments and has indemnified
the joint venture and the other partners against all liabilities, claims and
expenses associated with this borrowing. At December 31, 1995, the aggregate
indebtedness of EP2 and its affiliated partnership which is secured by the
625 North Michigan Office Building was approximately $15,953,000. 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 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 sheets.
10. Property Renovation
During 1994 and 1995, 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 $2,500,000 and
$3,000,000. EP2 is expected to make additional capital contributions, as
needed, sufficient to cover the cost of this renovation.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
1995 AND 1994 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Venture 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 $ 15,953 $ 8,112 $35,682 $5,748 $ 8,112 $41,430 $49,542 $13,731 1968 12/16/86 5 - 17 yrs
Shopping Center
Overland Park,
KS 3,963 6,265 8,874 2,581 6,215 11,505 17,720 2,863 1980 9/30/87 7 - 31.5 yrs
Apartment Complex
Richmond, VA 5,134 963 7,906 (359) 895 7,615 8,510 3,086 1987 9/1/87 10 -27.5 yrs
---------- ------- ------- ------- -------- -------- ------ -------
$25,050 $15,340 $52,462 $7,970 $15,222 $60,550 $75,772 $19,680
======== ======= ======= ====== ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal income tax purposes is approximately $75,020.
(B) See Notes 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:
1995 1994
---- ----
Balance at beginning of period $ 92,328 $ 92,013
Acquisitions and improvements 2,044 1,221
Decrease due to sales (18,600) -
Write-offs due to disposals - (906)
-------- ---------
Balance at end of period $ 75,772 $ 92,328
======== =========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 20,971 $ 18,785
Depreciation expense 2,756 3,092
Decrease due to sales (4,047) -
Write-offs due to disposals - (906)
--------- ----------
Balance at end of period $ 19,680 $ 20,971
========= ==========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
PaineWebber Equity Partners Two Limited Partnership:
We have audited the accompanying combined balance sheets of the 1993 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 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
<PAGE>
1993 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.
<PAGE>
1993 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.
<PAGE>
1993 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENTS 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 in 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 in 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.
<PAGE>
1993 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization
The accompanying financial statements of the 1993 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.
<PAGE>
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.
<PAGE>
The expiration dates of the Guaranty and Mandatory Loan Periods for the
joint ventures were as follows:
Guaranty Period Mandatory 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.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
1993 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Venture 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 $5,116 $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,
1996 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-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5126
<SECURITIES> 0
<RECEIVABLES> 354
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5659
<PP&E> 82410
<DEPRECIATION> 10781
<TOTAL-ASSETS> 78722
<CURRENT-LIABILITIES> 379
<BONDS> 22315
0
0
<COMMON> 0
<OTHER-SE> 55679
<TOTAL-LIABILITY-AND-EQUITY> 78722
<SALES> 0
<TOTAL-REVENUES> 12100
<CGS> 0
<TOTAL-COSTS> 4494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2083
<INCOME-PRETAX> 5523
<INCOME-TAX> 0
<INCOME-CONTINUING> 5523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5523
<EPS-PRIMARY> 40.68
<EPS-DILUTED> 40.68
</TABLE>
