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, 1997
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 Parts II and IV
July 21, 1986, as supplemented
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
1997 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-9
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-9
PART III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-2
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-39
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-7 of
this Form 10-K.
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, 1997 the Partnership owned, through joint venture
partnership, interests in the operating properties set forth in the following
table:
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- -------- ---- ----------- ---------------------
<S> <C> <C> <C>
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 venture)
Chicago, Illinois square feet
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 venture)
Richmond, Virginia
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 venture)
Center square feet
Overland Park, Kansas
Hacienda Park Associates 12.6 acres; 12/24/87 Fee ownership of land
Saratoga Center & EG&G Plaza 184,905 net and improvements
Office Buildings leasable (through joint venture)
Pleasanton, California square feet
West Ashley Shoppes Associates 17.25 acres; 3/10/88 Fee ownership of land
West Ashley Shoppes 134,406 net and improvements
Charleston, South Carolina leasable (through joint venture)
square feet
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)
</TABLE>
(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, four of which have since been liquidated following the sales of
their operating investment properties. 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. 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 $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 of these sale transactions, the Partnership no longer
owns any interest in the Richmond Park Apartments, Richland Terrace Apartments,
Treat Commons II Apartments, Highland Village Apartments or Ballston Place -
Phase II Apartments.
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, 1997, the Limited Partners had received cumulative cash
distributions totalling approximately $83,564,000, or $652 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, 1997, the
Partnership was paying regular quarterly distributions at a rate of 1% per annum
on remaining invested capital of $882 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, 1997, 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
begun to recover after several years of depressed conditions, such values, for
the most part, remain below the levels which existed in the mid-1980's, which is
when the Partnership's properties were acquired. Such conditions are due, in
part, 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 are being
adversely impacted by the effects of overbuilding and consolidations among
retailers which have resulted in an oversupply of space and by the generally
flat rate of growth in retail sales. The market for multi-family residential
properties in most markets throughout the country remained strong during fiscal
1997 although estimated market values in some markets appeared to have plateaued
as a result of the increase in development activity referred to below.
Management is currently focusing on potential disposition strategies for the
investments in its portfolio. Although no assurances can be given, it is
currently contemplated that sales of the Partnership's remaining assets could be
completed within the next 2- to- 3 years.
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 generally
been offset by the lack of significant new construction activity in the
multi-family apartment market over most of this period. In the past 12 months,
development activity for multi-family properties in many markets has escalated
significantly. 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, 1997, 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 1997, along with an
average for the year, are presented below for each property:
Percent Occupied At
----------------------------------------------
Fiscal
1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ---------------
625 North Michigan Avenue 89% 89% 86% 84% 87%
The Gables at Erin Shades 94% 95% 90% 91% 93%
<PAGE>
Percent Occupied At
----------------------------------------------
Fiscal
1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ---------------
(continued)
Loehmann's Plaza Shopping Center 74% 79% 84% 84% 80%
Saratoga Center & EG&G Plaza 100% 100% 100% 100% 100%
West Ashley Shoppes 71% 68% 70% 68% 69%
Asbury Commons Apartments 93% 93% 89% 87% 91%
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 PaineWebber 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 alleged
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
purported to be suing on behalf of all persons who invested in PaineWebber
Equity Partners Two Limited Partnership, also alleged 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 alleged that PaineWebber, Second Equity
Partners, Inc. and PA1986 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought 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 sought 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. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
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 alleged, 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 sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
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 plaintiffs'
purchases of various limited partnership interests, including those offered by
the Partnership. The complaint was very similar to the Abbate action described
above and sought compensatory damages of $3.4 million plus punitive damages
against PaineWebber. In September 1996, the court dismissed many of the
plaintiffs' claims in both the Abbate and Bandrowski actions as barred by
applicable securities arbitration regulations. Mediation with respect to the
Abbate and Bandrowski actions was held in December 1996. As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached which
provided for the complete resolution of both actions. Final releases and
dismissals with regard to these actions were received subsequent to March 31,
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
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, 1997, there were 9,023 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.
The Partnership has a Distribution Reinvestment Plan designed to enable
Unitholders to have their distributions from the Partnership invested in
additional Units of the Partnership. The terms of the Plan are outlined in
detail in the Prospectus, a copy of which Prospectus, as supplemented, is
incorporated herein by reference.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1997.
Item 6. Selected Financial Data
PaineWebber Equity Partners Two Limited Partnershi
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands, except for per Unit data)
Years ended March 31,
------------------------------------------------
1997 (1) 1996 1995 (2) 1994 1993
-------- ---- -------- ---- ----
Revenues $ 5,369 $ 5,069 $ 4,729 $ 4,338 $ 4,792
Operating loss $ (3,667) $(1,508) $(2,229) $(2,391) $ (1,549)
Interest income on note
receivable from
unconsolidated
venture - $ 80 $ 107 $ 106 $ 107
Partnership's share
of unconsolidated
ventures' income $ 383 $ 185 $ 1,818 $ 2,207 $ 2,592
Partnership's share of
gains on sale of
unconsolidated operating
investment properties - $ 6,766 - - -
Net income (loss) $ (3,266) $ 5,523 $ (304) $ (78) $ 1,150
Per 1,000 Limited
Partnership Units:
Net income (loss) $ (24.04) $ 40.68 $ (2.26) $(0.57) $ 8.47
Cash distributions
from operations $ 8.84 $ 16.52 $ 34.20 $49.52 $ 49.52
Cash distributions
from sale
transactions - $ 61.00 - - -
Total assets $ 74,278 $ 78,722 $ 84,148 $103,391 $107,382
Long-term debt $ 21,947 $ 22,315 $ 22,63 $ 36,828 $ 33,845
(1) The Partnership's operating loss for fiscal 1997 reflects a loss of
$2,700,000 recognized to reflect an impairment in the carrying value of one
of the consolidated operating investment properties. See Note 4 to the
accompanying financial statements for a further discussion.
(2) 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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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. 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, 1997,
four of these investments had been sold. 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. Other than
the guaranty related to the Loehmann's Plaza mortgage loan discussed further
below, 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.
In light of the continued strength in the national real estate market with
respect to multi-family apartment properties and the recent improvements in the
office/R&D property markets, management believes that this may be the opportune
time to sell the Partnership's portfolio of properties. As a result, management
is currently focusing on potential disposition strategies for the remaining
investments in the Partnership's portfolio. Although there are no assurances, it
is currently contemplated that sales of the Partnership's remaining assets could
be completed within the next 2-to-3 years.
As reported in the Partnership's quarterly report for the period ended
December 31, 1996, management discovered the existence of certain potential
construction problems at the Asbury Commons Apartments during fiscal 1997. The
initial analysis of the construction problems at Asbury Commons revealed
extensive deterioration of the wood trim and evidence of potential structural
problems affecting the exterior breezeways, the decks of certain apartment unit
types and the stairway towers. A design and construction team was organized to
further evaluate the potential problems, make cost-effective remediation
recommendations and implement the repair program. Based on this evaluation, the
structural problems may be more extensive and cost significantly more than
originally estimated. It will also require further investigation which together
with eventual construction repair work may result in disruptions to property
operations while units are possibly taken out of service for testing and
repairs. The cost of the repair work required to remediate this situation is
currently estimated at between approximately $1.5 to $2 million. The Partnership
is currently exploring all of its options with regard to potential claims for
recovery of damages caused by these circumstances. However, the prospects for
any future recoveries from such claims are uncertain at the present time. The
Partnership believes that it has adequate cash reserves to fund the repair work
at Asbury Commons regardless of whether any recoveries are realized.
Nonetheless, because of the seriousness of the construction problems at Asbury
Commons, the Partnership has suspended the distribution increase which was
planned to begin in the fourth quarter of fiscal 1997. The Partnership had
planned to increase the distribution rate from 1% to 2.5% per annum on a Limited
Partner's remaining capital account of $882 per original $1,000 investment.
However, in light of the magnitude of the repair work required at Asbury
Commons, as well as other potential near-term capital needs of the Partnership's
commercial properties, as discussed further below, management concluded that it
would be prudent to continue distributions at a conservative level for the
foreseeable future.
The average occupancy level at the Asbury Commons Apartments was 87% for
the quarter ended March 31, 1997, compared to 89% for the prior quarter and 96%
for the same period one year ago. With nearly 2,000 recently completed
apartments still in lease-up at the end of fiscal year 1997, average occupancy
levels in the Sandy Springs/Dunwoody local market area decreased to 92% from 98%
at the end of the prior year and effective rental rates declined by 6%. In
addition to the 2,000 units in lease-up, two additional communities comprising
536 additional units are under construction. Therefore, no growth in effective
rental rates is projected during the next year. Nonetheless, Atlanta's
population is projected to continue to grow at twice the national average, and
the Sandy Springs/Dunwoody local market is considered a highly desirable
residential area. It is anticipated that occupancy levels and rental rates will
improve at Asbury Commons when the newly constructed units are substantially
leased. In March 1997, a national property management firm was hired to take
over management at Asbury Commons effective April 1, 1997.
Loehmann's Plaza remained 84% leased at March 31, 1997, unchanged from the
quarter ended December 31, 1996. However, physical occupancy increased to 80%
from 74% the previous quarter, as a new 8,526 square foot tenant that had signed
a lease during the third quarter of fiscal 1997 took occupancy in February 1997.
Furthermore, construction of a 6,102 square foot expansion, representing 4% of
the Center's leasable area, of an existing 7,058 square foot tenant is underway.
When the expansion is completed, this tenant will occupy a total of 13,160
square feet. In addition, subsequent to year-end the property's leasing team
signed a 13,410 square foot lease with Gateway 2000, a manufacturer and retailer
of personal computers, to occupy the anchor space formerly occupied by
Loehmann's. This addition of Gateway 2000 will bring the Center to 93% leased
and is expected to result in increased customer traffic levels and improved shop
tenant sales. Once Gateway 2000 takes occupancy of this anchor space and the
expansion referred to above is completed, the property should be in a position
to be marketed for a potential sale.
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 a $4 million loan secured by
the property which was obtained in February 1995. Funds were to 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 satisfied certain
requirements, which included specified occupancy and rental income thresholds.
If such requirements were not met within 18 months from the date of the loan
closing, the lender would have the right to apply the balance of the escrow
account to the payment of loan principal. As of August 1996, 18 months from the
date of the loan closing, such requirements had not been met. Therefore, the
lender may apply the balance of the escrow account to the payment of loan
principal. As of March 31, 1997, such application of escrow funds by the lender
had not occurred. 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.
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. As previously reported, Children's Palace closed its
retail store at the center in May 1991 and subsequently filed for bankruptcy
protection from creditors. 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. On September 9, 1996, Phar-Mor
announced plans to merge with ShopKo, another major pharmacy store chain.
Subsequent to year-end, such merger plans were terminated. Because Phar-Mor
leases 52,000 square feet at West Ashley Shoppes, the property's leasing team is
attempting to ascertain Phar-Mor's future plans for their store at the Center.
The property's leasing team continues to focus its efforts on finding another
national credit tenant or tenants to fill the vacant Children's Palace space at
West Ashley Shoppes. The leasing team is also developing for the Partnership's
review a new marketing plan for this anchor tenant space which has several
alternative approaches including non-retail uses. In light of the lack of
leasing progress at West Ashley Shoppes in recent years, the Partnership
concluded during fiscal 1997 that the carrying value of the West Ashley Shoppes
operating investment property was impaired in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." Accordingly, an
impairment loss of $2,700,000 was recognized in the current year to write down
the net carrying value of the West Ashley Shoppes property to its current
estimated fair market value, as determined by an independent appraisal.
625 North Michigan Avenue in Chicago, Illinois, was 84% leased at March
31, 1997, compared to 89% at the end of the prior year. This decrease is mainly
the result of the loss of a 15,639 square foot tenant which had occupied 5% of
the building's rentable area. This tenant vacated the property at the end of its
lease term to move to another building which was better able to accommodate the
tenant's need to expand and its desire to be on one floor. In addition, this
tenant's new space had been recently and expensively improved by a previous
tenant with a similar use. Although the building's current occupancy level
reflects the loss of a few larger tenants with recent lease expirations, the
local office market has been improving and its average occupancy level has risen
to 86%. As a result, management is cautiously optimistic that ongoing leasing
efforts will lead to improved occupancy at the property over the near term. In
fiscal 1998, eight tenants occupying a total of 15,053 square feet have leases
that will expire. The property's leasing team expects four of these tenants to
renew their leases. The modernization of the building's elevator controls is
currently underway, with work on two of the eight elevator cars now completed.
This work is expected to continue for the remainder of calendar year 1997 at an
estimated total cost of approximately $700,000.
The four buildings comprising the Hacienda Business Park investment
property in Pleasanton, California, remained 100% leased to four tenants at the
end of the fiscal year. The local market experienced continued rental rate
growth during fiscal 1997, and the market occupancy level increased to 98%,
largely due to the resurgence in the growth of the high technology industries in
California. Leasing activity within the local market area should benefit further
from the opening in early May 1997 of a new BART (Bay Area Rapid Transit)
station which will serve this Pleasanton office market. During fiscal 1997, one
of the property's tenants announced that it will relocate from Hacienda Business
Park into a new building under construction in the local market. This tenant
occupies a total of 51,683 square feet in two buildings, or 28% of the
property's leasable area, under several leases with expiration dates in 1998,
1999 and 2001. One of the buildings contains 41,656 square feet and is fully
leased by this tenant. The tenant's remaining 10,027 square feet is leased in an
adjoining building. As previously reported, the tenant will consolidate its
operations into a competing building which is expected to be completed in early
1998. This tenant will remain responsible for rental payments and its
contractual share of operating expenses until the leases expire. The property's
leasing team is diligently working to secure replacement tenants for the 51,683
square feet. In addition, a 59,445 square foot tenant, representing 32% of the
property's leasable area, has one final right to terminate its lease in March
1998 by providing notice by July 19, 1997. Because the existing rental rates on
the leases of these two tenants are significantly below current market rates, it
may be in the best interest of the Partnership if either one or both tenants
move from Hacienda Business Park prior to the expiration of their leases. This
would provide the Partnership with the opportunity to re-lease any vacated space
at the higher prevailing market rental rates. In any event, provided there is no
dramatic increase in either planned speculative development or build-to-suit
development with current tenants in the local market, the Partnership can be
expected to achieve a materially higher sale price for the Hacienda Park
property as the existing below-market leases approach their expiration dates.
The average occupancy level at The Gables Apartments was 91% for the
quarter ended March 31, 1997, compared to 90% for the prior quarter. The
occupancy level for the month of March 1997 had increased to 96%, from a level
of 90% in February and 88% in January. The upward trend reflects a strong local
economy, the seasonal increase in the number of prospective tenants looking to
rent apartments, and the moderate level of newly constructed apartments being
offered for rent in the local market. As a result of improving average occupancy
levels throughout the local apartment market, the significant concessions
offered during the holiday season are no longer necessary to attract tenants to
The Gables. As job growth is projected to continue during the next few years,
the economic outlook for Richmond remains strong. The area's largest new
employer would be a planned 7,500-employee Motorola semiconductor chip plant.
While the plant is not projected to be completed until 1999, an adjacent
Motorola office building is under construction and should be completed by the
fall of 1998. Two other significant employers include the White Oaks
semiconductor plant, which is under construction and projected to employ 1,500
people, and the nearly completed Capital One credit facility, which will employ
1,000 people. The primary property improvements scheduled at The Gables for the
remainder of calendar 1997 include exterior wood-trim replacement in preparation
for a complete painting of the building exteriors.
At March 31, 1997, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $5,322,000. Such cash and
cash equivalent amounts will be utilized for the working capital requirements of
the Partnership, for reinvestment in certain of the Partnership's properties
including the anticipated construction repair work at Asbury Commons and the
capital needs of the Partnership's commercial properties (as discussed further
above) 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
1997 Compared to 1996
- ---------------------
The Partnership reported a net loss of $3,266,000 for the fiscal
year ended March 31, 1997 as compared to net income of $5,523,000 for the prior
year. This unfavorable 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 the prior year and
the loss on the impairment of the West Ashley Shoppes property recognized in the
current year, as discussed further above. The Partnership's share of the gains
on the sale of the Richland Terrace/Richmond Park and Treat Commons II
properties in fiscal 1996 (including the write-off of unamortized excess basis)
was $4,344,000 and $2,422,000, respectively. As noted above, in the current year
the Partnership recognized an impairment loss on the carrying value of the
consolidated West Ashley Shoppes property of $2,700,000.
These unfavorable changes in the Partnership's net operating results were
partially offset by an increase in rental income and expense reimbursements and
reductions in interest expense and property operating expenses from the
consolidated joint ventures, along with a decline in Partnership general and
administrative expenses. Rental revenues increased primarily due to a $280,000
increase in income at Hacienda Park due to an increase in both the property's
average occupancy level and rental rates. Occupancy at Hacienda Park averaged
100% for the current year as compared to 98% for the prior year while the
property's average rental rate increased substantially due to the expansion of a
major tenant and a lease renewal of another major tenant, both at substantially
higher rates. Small increases in rental revenues at the other two consolidated
properties, Asbury Commons and West Ashley Shoppes, also contributed to the
increase in total rental revenues for the current year. Interest expense
declined mainly due to the write off of certain unamortized deferred loan costs
attributable to the pay off zero coupon loans refinanced in the prior year. The
decline in property operating expenses was mainly attributable to a reduction in
repairs and maintenance costs at the consolidated West Ashley Shoppes joint
venture. Partnership general and administrative expenses decreased primarily due
to the additional professional fees incurred in the prior year associated with
the sales of the Treat Commons, Richland Terrace and Richmond Park properties,
as well as a reduction in certain other required professional fees in the
current year.
The Partnership's share of unconsolidated ventures' income, excluding the
gains recognized from the sale of Treat Commons II, Richland Terrace and
Richmond Park in the prior year, increased by $198,000 primarily due to an
increase of $81,000 in rental revenues from The Gables Apartments, an increase
in other income of $71,000 at the 625 North Michigan joint venture, a reduction
of $86,000 in interest expense from the Loehmann's Plaza joint venture and
declines in property operating expenses at all three remaining unconsolidated
joint ventures. This favorable change occurred despite the fact that the
Partnership's share of unconsolidated ventures' income in the prior year
included the operations of the Richland Terrace and Richmond Park properties
which were sold on November 2, 1995 and Treat Commons II which was sold on
December 29, 1995. Rental revenues at The Gables improved due to increases in
both average occupancy and rental rates due to the improving market conditions
referred to above. Rental revenues were down slightly at both 625 North Michigan
and Loehmann's Plaza due to declines in occupancy. The reduction in interest
expense at the Loehmann's Plaza joint venture was due to the fact that a portion
of the venture's interest costs were capitalized in the current year as a result
of the property expansion and renovation project discussed further above. The
declines in property operating expenses include a $114,000 reduction in bad debt
expense at Loehmann's Plaza, a decrease of $35,000 in repairs and maintenance
expenses at 625 North Michigan and declines in salary and utility expenses
totalling $49,000 at The Gables. The favorable changes in rental revenues, other
income, interest expense and property operating expenses were partially offset
by an increase of $207,000 in real estate tax expense of the 625 North Michigan
joint venture in the current year.
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 fiscal 1995. This
favorable change in the Partnership's net operating results was 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 fiscal 1996.
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 was 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 in
calendar 1994 and 1995 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 calendar 1994, due to a slight
increase in average occupancy and an increase in tenant reimbursement income.
Depreciation and amortization expense increased by $378,000 in fiscal 1996 due
to the acceleration of depreciation on the consolidated Hacienda Park property,
as discussed further in the noes to the accompanying financial statements, 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 referred to 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 a buyout of the
property's anchor tenant lease. In addition, the fiscal 1996 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 fiscal 1996.
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 fiscal 1994. 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.
<PAGE>
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Remediation of Construction Defects. As discussed further above, during
fiscal 1997 management discovered the existence of certain structural problems
at the Asbury Commons Apartments. Based upon an initial evaluation, the
remediation of these problems may involve the disruption of property operations
while apartment units are possibly taken out of service for testing and repairs.
The magnitude of the repairs have been preliminarily estimated to cost between
approximately $1.5 million to $2 million to complete. The prospects for any
recoveries of these costs from insurance or from the building materials
manufacturers are uncertain at the present time. Furthermore, while management
believes that these problems can be remediated without a long-term impact on the
market value of the property, there can be no assurances that the disruption of
property operations and the repair process itself will not adversely impact the
Partnership's ability to realize the fair market value of the investment
property within the next 2- to- 3 years, which is the expected time frame for
the completion of a liquidation of the Partnership.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has surged in the past 12 months. Existing apartment
properties in such markets have generally experienced increased vacancy levels,
declines in effective rental rates and, in some cases, declines in estimated
market values as a result of the increased competition. The commercial office
segment has begun to experience limited new development activity in selected
areas after several years of virtually no new supply being added to the market.
The retail segment of the real estate market is currently suffering from an
oversupply of space in many markets resulting from overbuilding in recent years
and the trend of consolidations and bankruptcies among retailers prompted by the
generally flat rate of growth in overall retail sales. There are no assurances
that these competitive pressures will not adversely affect the operations and/or
market values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of the remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such properties at the time of their final dispositions. Demand by
buyers of multi-family apartment, office and retail properties is affected by
many factors, including the size, quality, age, condition and location of the
subject property, the quality and stability of the tenant roster, the terms of
any long-term leases, potential environmental liability concerns, the liquidity
in the debt and equity markets for asset acquisitions, the general level of
market interest rates and the general and local economic climates.
INFLATION
- ---------
The Partnership completed its tenth full year of operations in fiscal 1997.
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 resulting from inflation. As noted above, the West Ashley
Shoppes, Loehmann'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
---- ------ --- ----------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 54 4/17/85 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 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:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher previously
worked for a major law firm in New York City. He has a J.D. from Harvard Law
School, an M.B.A. from Harvard Graduate School of Business Administration and
an A.B. from Harvard College.
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.
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, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
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 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. 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.
<PAGE>
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, 1997. 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,
1997 is $224,000, 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 $13,000 included in general and administrative expenses for managing the
Partnership's cash assets during fiscal 1997. 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
1997.
(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/ Bruce J. Rubin
------------------
Bruce J. Rubin
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 30, 1997
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/ Bruce J. Rubin Date: June 30, 1997
----------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 30, 1997
----------------------- -------------
Terrence E. Fancher
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 herein
reference to the Restated by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with all Act of 1934 and incorporated
such contracts filed as exhibits of herein by reference.
previously filed Forms 8-K and Forms
10-K are hereby incorporated herein
by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal
year 1997 has been sent to
the Limited Partners. An
Annual Report will besent 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-2
Consolidated balance sheets as of March 31, 1997 and 1996 F-3
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995 F-4
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1997, 1996 and 1995 F-5
Consolidated statements of cash flows for the years ended
March 31, 1997, 1996 and 1995 F-6
Notes to consolidated financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-26
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership:
Report of independent auditors F-27
Combined balance sheets as of December 31, 1996 and 1995 F-28
Combined statements of income and changes in venturers'
capital for the years ended December 31, 1996, 1995 and 1994 F-29
Combined statements of cash flows for the years ended
December 31, 1996, 1995 and 1994 F-30
Notes to combined financial statements F-31
Schedule III - Real Estate and Accumulated Depreciation F-39
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, 1997 and 1996, 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, 1997. 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 consolidated statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners Two Limited Partnership at March 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 20, 1997
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
1997 1996
---- ----
Operating investment properties:
Land $ 7,351 $ 8,808
Building and improvements 40,018 41,396
---------- ----------
47,369 50,204
Less accumulated depreciation (12,155) (10,781)
---------- ----------
35,214 39,423
Investments in unconsolidated joint
ventures, at equity 31,784 32,206
Cash and cash equivalents 5,322 5,126
Escrowed cash 279 150
Accounts receivable 151 261
Accounts receivable - affiliates - 15
Net advances to consolidated ventures - 78
Prepaid expenses 50 29
Deferred rent receivable 832 731
Deferred expenses, net of accumulated
amortization of $640 ($583 in 1996) 646 703
---------- ----------
$ 74,278 $ 78,722
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 271 $ 283
Net advances from consolidated ventures 400 -
Tenant security deposits 116 96
Bonds payable 2,297 2,408
Mortgage notes payable 19,650 19,907
Other liabilities 331 349
----------- ----------
Total liabilities 23,065 23,043
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 161 193
Cumulative cash distributions (701) (688)
Limited Partners ($1 per Unit;
134,425,741 Units issued):
Capital contributions, net of offering costs 119,747 119,747
Cumulative net income 15,569 18,803
Cumulative cash distributions (83,564) (82,377)
----------- ----------
Total partners' capital 51,213 55,679
----------- ----------
$ 74,278 $ 78,722
=========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1997, 1996 and 1995
(In thousands, except for per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 5,011 $ 4,706 $ 4,211
Interest and other income 358 363 518
-------- ------- --------
5,369 5,069 4,729
Expenses:
Loss on impairment of operating
investment property 2,700 - -
Interest expense 1,990 2,083 2,838
Depreciation expense 1,953 1,886 1,493
Property operating expenses 1,279 1,320 1,302
Real estate taxes 479 422 473
General and administrative 528 729 700
Amortization expense 107 137 152
--------- ------- --------
9,036 6,577 6,958
--------- ------- --------
Operating loss (3,667) (1,508) (2,229)
Venture partner's share of consolidated
venture's operations 18 - -
Investment income:
Interest income on note receivable from
unconsolidated venture - 80 107
Partnership's share of unconsolidated
ventures' income 383 185 1,818
Partnership's share of gains on
sale of unconsolidated operating
investment properties - 6,766 -
--------- -------- --------
383 7,031 1,925
--------- -------- --------
Net income (loss) $ (3,266) $ 5,523 $ (304)
========= ======== ========
Net income (loss) per 1,000
Limited Partnership Units $(24.04) $40.68 $(2.26)
======= ====== ======
Cash distributions per 1,000
Limited Partnership Units $ 8.84 $77.52 $34.20
======= ====== ======
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, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (13) (1,187) (1,200)
Net loss (32) (3,234) (3,266)
------- --------- --------
Balance at March 31, 1997 $ (539) $ 51,752 $ 51,213
======= ========= ========
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,266) $ 5,523 $ (304)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Loss on impairment of operating investment property 2,700 - -
Partnership's share of unconsolidated ventures' income (383) (185) (1,818)
Partnership's share of gains on sale of
operating investment properties - (6,766) -
Interest expense on zero coupon loans - - 1,610
Depreciation and amortization 2,060 2,023 1,645
Amortization of deferred financing costs 44 44 164
Changes in assets and liabilities:
Escrowed cash (129) (93) 205
Accounts receivable 110 (132) 55
Accounts receivable - affiliates 15 63 53
Prepaid expenses (21) (1) (1)
Deferred rent receivable (101) (255) (119)
Accounts payable and accrued expenses (12) (151) 58
Advances to/from consolidated ventures 478 (107) (455)
Tenant security deposits 20 (7) (3)
Other liabilities (18) 1 (4)
---------- -------- ----------
Total adjustments 4,763 (5,566) 1,390
---------- -------- ----------
Net cash provided by (used in)
operating activities 1,497 (43) 1,086
---------- -------- ----------
Cash flows from investing activities:
Distributions from unconsolidated ventures 2,744 15,566 18,749
Additional investments in unconsolidated ventures (1,939) (934) (383)
Additions to operating investment properties (444) (421) (1,077)
Payment of leasing commissions (94) (128) (303)
---------- -------- ---------
Net cash provided by investing activities 267 14,083 16,986
---------- -------- ---------
Cash flows from financing activities:
Distributions to partners (1,200) (10,443) (4,644)
Payment of principal and deferred interest on
notes payable (257) (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 (111) (90) (451)
---------- -------- ---------
Net cash used in financing activities (1,568) (10,741) (20,775)
---------- -------- ---------
Net increase (decrease) in cash and cash equivalents 196 3,299 (2,703)
Cash and cash equivalents, beginning of year 5,126 1,827 4,530
---------- -------- ---------
Cash and cash equivalents, end of year $ 5,322 $ 5,126 $ 1,827
========== ======== =========
Supplemental disclosures:
Cash paid during the year for interest $ 1,974 $ 1,974 $ 956
========= ========= =========
Write-off of fully depreciated tenant improvements $ - $ - $ 3,026
========= ========= =========
See accompanying notes.
</TABLE>
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
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.
The Partnership originally invested approximately $132,200,000 (net of
acquisition fees) in ten operating properties through joint venture
investments. Through March 31, 1997, four of these investments had been
sold. 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 is currently
focusing on potential disposition strategies for the investments in its
portfolio. Although no assurances can be given, it is currently contemplated
that sales of the Partnership's remaining assets could be completed within
the next 2- to 3- years.
2. Use of Estimates and 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, 1997 and 1996 and revenues
and expenses for each of the three years in the period ended March 31, 1997.
Actual results could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in certain 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 in the ventures. 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 discussed further in Note 4, the Partnership acquired control of
Hacienda Park Associates on December 10, 1991 and the Atlanta Asbury
Partnership on February 14, 1992. In addition, the Partnership acquired
control of West Ashley Shoppes Associates in May of 1994. Accordingly, these
joint ventures are presented on a consolidated basis in the accompanying
financial statements. 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.
The operating investment properties owned by the consolidated joint
ventures are carried at cost, net of accumulated depreciation, or an amount
less than cost if indicators of impairment are present in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which the Partnership adopted in fiscal 1996. SFAS No. 121 requires
impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets carrying
amount. The Partnership generally assesses indicators of impairment by a
review of independent appraisal reports on each operating investment
property. Such appraisals make use of a combination of certain generally
accepted valuation techniques, including direct capitalization, discounted
cash flows and comparable sales analysis. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. During
fiscal 1997, the independent appraisal of the West Ashley Shoppes operating
investment property indicated that certain operating assets, consisting of
land and improvements and building and improvements, were impaired. In
accordance with SFAS No. 121, the consolidated West Ashley Shoppes joint
venture recorded a reduction in the net carrying value of such assets
amounting to $2,700,000 relating to the land and improvements ($1,457,254),
building and improvements ($1,821,521) and related accumulated depreciation
($578,775).
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 1997 and 1996 consolidated statements 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, 1997 and 1996 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, 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." The carrying amounts of cash and cash equivalents and escrowed
cash approximate their fair values as of March 31, 1997 and 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 1997 presentation.
<PAGE>
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, 1997, 1996 and 1995, 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, 1997, 1996 and 1995 is $224,000, $260,000 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 $13,000, $4,000 and $13,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1997, 1996 and 1995, respectively.
Accounts receivable - affiliates at March 31, 1996 includes $15,000 due
from certain unconsolidated joint ventures for expenses paid by the
Partnership on behalf of the joint ventures.
4. Operating Investment Properties
The Partnership's balance sheets at March 31, 1997 and 1996 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. The
Partnership obtained controlling interests in the other two joint ventures
during fiscal 1992. Accordingly, all three joint ventures are presented on a
consolidated basis in the accompanying financial statements. The
Partnership's policy is to report the operations of these consolidated joint
ventures on a three-month lag.
<PAGE>
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 venturers
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 would 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 became due and payable on October
31, 1996. The Partnership will continue to pursue collection of this balance
during fiscal 1998. 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 fiscal 1997, the Partnership became aware of certain potential
construction problems at the Asbury Common Apartments. The initial analysis
of the construction problems revealed extensive deterioration of the wood
trim and evidence of potential structural problems affecting the exterior
breezeways, the decks of certain apartment unit types and the stairway
towers. A design and construction team was organized to further evaluate the
potential problems, make cost-effective remediation recommendations and
implement the repair program. Based on this evaluation, the structural
problems may be more extensive and cost significantly more than originally
estimated. It will also require further investigation which together with
eventual construction repair work may result in disruptions to property
operations while units are possibly taken out of service for testing and
repairs. The cost of the repair work required to remediate this situation is
currently estimated at between approximately $1.5 to $2 million. The
Partnership is currently exploring all of its options with regard to
potential claims for recovery of damages caused by these circumstances.
However, the prospects for any future recoveries from such claims are
uncertain at the present time. The Partnership believes that it has adequate
cash reserves to fund the anticipated repair work regardless of whether any
recoveries are realized.
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 call 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.
<PAGE>
The following is a combined summary of property operating expenses for
the consolidated joint ventures for the years ended December 31, 1996, 1995
and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Property operating expenses:
Utilities $ 205 $ 219 $ 225
Repairs and maintenance 266 385 382
Salaries and related costs 172 216 147
Administrative and other 421 300 367
Insurance 54 51 47
Management fees 161 149 134
---------- --------- --------
$ 1,279 $ 1,320 $ 1,302
========== ========= ========
5. Investments in Unconsolidated Joint Ventures
The Partnership has investments in three unconsolidated joint venture
partnerships which own operating investment properties at March 31, 1997
(five at March 31, 1996, including two ventures which were in the process of
liquidating as a result of the sales of their operating investment
properties during calendar 1995).
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, are as follows:
Condensed Combined Balance Sheets
December 31, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 1,264 $ 1,454
Operating investment properties, net 55,402 56,092
Other assets 4,992 5,049
-------- ---------
$ 61,658 $ 62,595
======== =========
Liabilities and Venturers' Capital
Current liabilities $ 2,515 $ 2,505
Other liabilities 315 303
Long-term debt 8,857 8,982
Partnership's share of venturers' capital 30,726 31,060
Co-venturers' share of venturers' capital 19,245 19,745
-------- ---------
$ 61,658 $ 62,595
========= =========
Condensed Combined Summary of Operations
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental revenues and expense
reimbursements $ 9,297 $ 11,844 $ 12,204
Interest and other income 343 330 289
--------- --------- --------
9,640 12,174 12,493
Expenses:
Property operating and other expenses 3,009 4,177 4,170
Real estate taxes 2,212 2,248 2,565
Interest on long-term debt 663 1,535 300
Interest on note payable to venturer - 100 100
Depreciation and amortization 3,158 3,704 3,430
--------- --------- --------
9,042 11,764 10,565
--------- --------- --------
Operating income $ 598 $ 410 $ 1,928
Gains on sale of operating
investment properties - 8,368 -
--------- --------- --------
Net income $ 598 $ 8,778 $ 1,928
========= ========= ========
<PAGE>
Net income:
Partnership's share of
combined income $ 441 $ 7,512 $ 1,899
Co-venturers' share of
combined income 157 1,266 29
--------- -------- --------
$ 598 $ 8,778 $ 1,928
========= ======== ========
Reconciliation of Partnership's Investment
March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Partnership's share of capital at December 31,
as shown above $ 30,726 $ 31,060
Excess basis due to investments in joint
ventures, net (1) 1,094 1,152
Timing differences (2) (36) (6)
--------- ---------
Investments in unconsolidated joint
ventures, at equity at March 31 $ 31,784 $ 32,206
========= =========
(1)At March 31, 1997 and 1996, the Partnership's investment exceeds its
share of the joint venture partnerships' capital accounts by
approximately $1,094,000 and $1,152,000, 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.
Reconciliation of Partnership's Share of Operations
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Partnership's share of operations,
as shown above $ 441 $ 7,512 $ 1,899
Amortization of excess basis (58) (561) (81)
-------- -------- --------
Partnership's share of unconsolidated
ventures' net income $ 383 $ 6,951 $ 1,818
======== ======== ========
The Partnership's share of the net income of the unconsolidated joint
ventures is presented as follows in the accompanying statements of
operations:
1996 1995 1994
---- ---- ----
Partnership's share of unconsolidated
ventures' income $ 383 $ 185 $ 1,818
Partnership's share of gains on
sale of unconsolidated operating
investment properties - 6,766 -
------- -------- --------
$ 383 $ 6,951 $ 1,818
======= ======== ========
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.
<PAGE>
Investments in unconsolidated joint ventures, at equity, on the
accompanying balance sheets is comprised of the following equity method
carrying values (in thousands):
1997 1996
---- ----
Chicago-625 Partnership $ 18,937 $ 19,487
Richmond Gables Associates 34 353
Daniel/Metcalf Associates Partnership 12,813 12,150
TCR Walnut Creek Limited Partnership - 182
Portland Pacific Associates - 34
---------- ---------
Investments in unconsolidated
joint ventures $ 31,784 $ 32,206
========== =========
The Partnership received cash distributions from the unconsolidated
ventures during the years ended March 31, 1997, 1996 and 1995 as set forth
below (in thousands):
1997 1996 1995
---- ---- ----
Chicago-625 Partnership $ 1,689 $ 1,158 $ 1,114
Richmond Gables Associates 198 158 5,573
Daniel/Metcalf Associates Partnership 641 600 3,374
TCR Walnut Creek Limited Partnership 182 3,216 7,803
Portland Pacific Associates 34 10,434 885
-------- --------- ---------
$ 2,744 $ 15,566 $ 18,749
======== ========= =========
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 had made Leasing Expense Contributions totalling $2,853,000
through December 31, 1996.
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 1997 and 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 $8,131,000 at December 31, 1996.
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, 1996, there was a cumulative
unpaid preferred distribution payable to the Partnership of $2,086,000. 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.
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 Loehmann's Plaza joint
venture for the costs of certain planned renovations in the event that the
joint venture satisfies certain requirements which include specified
occupancy and rental income thresholds. As of August 1996, eighteen months
subsequent to the date of the loan closing, such requirements had not been
met. Therefore, the lender may apply the balance of the escrow account to
the payment of loan principal. As of March 31, 1997, such application of
escrow funds by the lender had not occurred. 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 the February 1995 financing transaction described above 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, 1996 amounted to $3,334,000. 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, 1996, 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.
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.
6. Mortgage Notes Payable
Mortgage notes payable on the consolidated balance sheets of the
Partnership at March 31, 1997 and 1996 consist of the following (in
thousands):
1997 1996
---- ----
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
$83 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, 1997 and 1996. $ 9,418 $ 9,542
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 $55
through maturity on October 15,
2001. The fair value of the
mortgage note approximated its
carrying value at December 31, 1996
and 1995. 6,806 6,897
9.04% mortgage note payable to an
insurance company secured by the
Saratoga Center and Hacienda Plaza
operating investment property (see
discussion below). The loan
requires monthly principal and
interest payments of $36 through
maturity on January 20, 2002. The
fair value of the mortgage note
approximated its carrying value at
December 31, 1996 and 1995. 3,426 3,468
------- --------
$19,650 $ 19,907
======= ========
The scheduled annual principal payments to retire mortgage notes payable are
as follows (in thousands):
Year ended March 31,
1998 $ 282
1999 308
2000 9,305
2001 189
2002 6,416
Thereafter 3,150
-------
$19,650
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. During the third quarter of fiscal 1994,
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 liability for the bond
assessments would be transferred to the buyer. Accordingly, the Hacienda
Park joint venture would no longer be liable for the bond assessments.
<PAGE>
Future scheduled principal payments on bond assessments are as follows (in
thousands):
Year ended December 31,
1997 $ 101
1998 110
1999 119
2000 128
2001 137
Thereafter 1,702
--------
$ 2,297
========
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, 1996 are
as follows (in thousands):
Future
Minimum
Contractual
Payments
--------
1997 $ 2,995
1998 2,820
1999 1,978
2000 1,720
2001 1,252
Thereafter 877
--------
$ 11,642
========
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 alleged
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 purported to be suing on behalf of all persons who
invested in PaineWebber Equity Partners Two Limited Partnership., also
alleged 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 alleged
that PaineWebber, Second Equity Partners, Inc. and PA1986 violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs sought 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 sought 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. On July 17, 1996, PaineWebber and the class plaintiffs submitted
a definitive settlement agreement which provides for the complete resolution
of the class action litigation, including releases in favor of the
Partnership and PWPI, and the allocation of the $125 million settlement fund
among investors in the various partnerships and REITs at issue in the case.
As part of the settlement, PaineWebber also agreed to provide class members
with certain financial guarantees relating to some of the partnerships and
REITs. The details of the settlement are described in a notice mailed
directly to class members at the direction of the court. A final hearing on
the fairness of the proposed settlement was held in December 1996, and in
March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the
plaintiff class members. As part of the settlement agreement, PaineWebber
has agreed not to seek indemnification from the related partnerships and
real estate investment trusts at issue in the litigation (including the
Partnership) for any amounts that it is required to pay under the
settlement.
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 alleged, 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 sought compensatory damages of $15 million plus punitive
damages against PaineWebber. 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 plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint was
very similar to the Abbate action described above and sought compensatory
damages of $3.4 million plus punitive damages against PaineWebber. In
September 1996, the court dismissed many of the plaintiffs' claims in both
the Abbate and Bandrowski actions as barred by applicable securities
arbitration regulations. Mediation with respect to the Abbate and Bandrowski
actions was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which provided
for the complete resolution of both actions. Final releases and dismissals
with regard to these actions were received subsequent to March 31, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the
class action settlement referred to above, management does not expect that
the resolution of these matters will have a material impact on the
Partnership's financial statements, taken as a whole.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1997
(In thousands)
<CAPTION>
Cost
Initial Cost to Capitalized Life on Which
Consolidated (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
Charleston, SC $ - $4,243 $ 5,669 $(2,660) $ 2,342 $ 4,910 $ 7,252 $ 1,760 1988 3/10/88 5 - 31.5 yrs.
Business Center
Pleasanton, CA 5,723 3,315 23,337 (242) 3,370 23,040 26,410 7,197 1985 12/24/87 5 - 25 yr.
Apartment Complex
Atlanta, GA 6,806 1,702 11,950 55 1,639 12,068 13,707 3,198 1990 3/12/90 10 -27.5 yrs.
------- ------ ------- ------- ------- ------- ------- -------
$12,529 $9,260 $40,956 $(2,847) $ 7,351 $40,018 $47,369 $12,155
======= ====== ======= ======= ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $54,161,000.
(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:
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 50,204 $ 49,783 $ 41,524
Consolidation of West Ashley joint venture - - 10,208
Acquisitions and improvements 444 421 1,077
Write off due to permanent impairment (see Note 2) (3,279) - -
Write-offs due to disposals - - (3,026)
--------- -------- --------
Balance at end of period $ 47,369 $ 50,204 $ 49,783
========= ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 10,781 $ 8,895 $ 8,947
Consolidation of West Ashley joint venture - - 1,481
Depreciation expense 1,953 1,886 1,493
Write off due to permanent impairment (see Note 2) (579) - -
Write-offs due to disposals - - (3,026)
--------- --------- -------
Balance at end of period $ 12,155 $ 10,781 $ 8,895
========= ========= =======
(E)Costs removed subsequent to acquisition includes an impairment writedown on the West Ashley Shoppes property in fiscal 1997
(see Note 2), $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 Combined
Joint Ventures of PaineWebber Equity Partners Two Limited Partnership as of
December 31, 1996 and 1995, 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, 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership
at December 31, 1996 and 1995, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 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.
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 13, 1997
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
Assets
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 600 $ 751
Accounts receivable, net of allowance for
doubtful accounts of $146 ($101 in 1995) 637 694
Prepaid expenses 27 9
------- -------
Total current assets 1,264 1,454
Operating investment properties:
Land 15,222 15,222
Buildings, improvements and equipment 59,902 59,065
Construction in progress 2,528 1,485
------- -------
77,652 75,772
Less accumulated depreciation (22,250) (19,680)
-------- -------
55,402 56,092
Escrowed funds 1,747 1,749
Due from affiliates 269 269
Deferred expenses, net of accumulated
amortization of $1,141 ($1,100 in 1995) 1,608 1,491
Other assets 1,368 1,540
--------- ---------
$ 61,658 $ 62,595
========= =========
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 372 $ 270
Accounts payable - affiliates - 21
Accrued real estate taxes 2,017 2,047
Distributions payable to venturers 1 52
Current portion - long-term debt 125 115
--------- ---------
Total current liabilities 2,515 2,505
Tenant security deposits 265 253
Subordinated management fee payable to affiliate 50 50
Long-term debt 8,857 8,982
Venturers' capital 49,971 50,805
--------- ---------
$ 61,658 $ 62,595
========= =========
See accompanying notes.
<PAGE>
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, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense reimbursements $ 9,297 $ 11,844 $ 12,204
Interest and other income 343 330 289
-------- -------- --------
9,640 12,174 12,493
Expenses:
Real estate taxes 2,212 2,248 2,565
Depreciation expense 2,896 2,756 3,092
Property operating expenses 602 908 760
Repairs and maintenance 879 1,093 1,037
Management fees 318 459 463
Professional fees 82 88 122
Salaries 591 882 844
Advertising 46 71 64
Interest expense on long-term debt 663 1,535 309
Interest on note payable to venturer - 100 100
General and administrative 438 564 485
Amortization expense 262 948 329
Bad debt expense 45 1 317
Other 8 111 78
-------- -------- ---------
9,042 11,764 10,565
-------- -------- ---------
Operating income 598 410 1,928
Gains on sale of operating investment
properties - 8,368 -
-------- -------- ---------
Net income 598 8,778 1,928
Contributions from venturers 2,303 1,494 385
Distributions to venturers (3,735) (19,187) (17,146)
Venturers' capital, beginning of year 50,805 59,720 74,553
-------- -------- ---------
Venturers' capital, end of year $ 49,971 $ 50,805 $ 59,720
======== ======== =========
See accompanying notes.
<PAGE>
<TABLE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 598 $ 8,778 $ 1,928
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,158 3,704 3,421
Amortization of deferred financing costs 41 169 11
Gains on sale of operating investment properties - (8,368) -
Changes in assets and liabilities:
Accounts receivable, net 57 228 125
Prepaid expenses (18) 5 1
Other current assets - - 13
Escrowed funds 20 129 (1,219)
Deferred expenses (230) (269) (230)
Other assets 172 16 297
Accounts payable and accrued expenses 102 (144) (12)
Accounts payable - affiliates (21) 6 (67)
Tenant security deposits 12 75 47
Accrued real estate taxes (30) (262) (183)
-------- -------- --------
Total adjustments 3,263 (4,711) 2,204
-------- -------- --------
Net cash provided by operating activities 3,861 4,067 4,132
------- -------- --------
Cash flows from investing activities:
Additions to operating investment properties (2,206) (2,044) (1,171)
Purchase of investment securities - - (534)
Proceeds from sale of investment securities - - 1,264
Proceeds from sales of operating
investment properties - 15,542 -
Selling costs from sale (190) (587) -
Increase in restricted cash (18) (550) -
------- -------- --------
Net cash (used in) provided by
investing activities (2,414) 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 (115) (891) (19)
Repayment of partner advances - (86) -
Repayment of note payable to partner - (1,000) -
Distributions to venturers (3,786) (19,241) (17,122)
Capital contributions from venturers 2,303 1,494 385
Payment of deferred loan costs - (31) (249)
------- -------- --------
Net cash used in financing activities (1,598) (15,926) (4,405)
------- -------- --------
Net (decrease) increase in cash and cash equivalent (151) 502 (714)
Cash and cash equivalents, beginning of year 751 249 963
------- -------- --------
Cash and cash equivalents, end of year $ 600 $ 751 $ 249
======= ======== ========
Cash paid during the year for interest $ 801 $ 1,071 $ 164
======= ======== ========
See accompanying notes.
</TABLE>
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization
The accompanying financial statements of the 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 and Portland Pacific Associates, a California general
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. The joint venture was liquidated during
1996.
(2) On November 2, 1995, Portland Pacific Associates sold its two operating
investment properties. Portland Pacific Associates was liquidated during
1996.
2. Summary of Significant Accounting Policies
Use of estimates
----------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended
December 31, 1996.
Actual results could differ from the estimates and assumptions used.
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.
<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.
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 amounts of cash and cash equivalents and escrowed funds
approximate their respective fair values at December 31, 1996 and 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.
Operating investment properties
-------------------------------
Operating investment properties are stated at cost, net of accumulated
depreciation, or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which was adopted in 1995. SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of.
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.
<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.
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 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, 1996, 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.
<PAGE>
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 was $0 and $21,000 at December 31, 1996 and
1995 respectively. Accounts payable- affiliates at December 31, 1995
included $15,000 owed to EP2 for organization costs paid in connection with
the formation of Portland Pacific Associates and $6,000 payable to related
parties of Portland Pacific Associates in connection with services rendered
to the venture. These obligations were settled in 1996 in conjunction with
the liquidation of the joint 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 1996,
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):
1997 $ 5,745
1998 5,286
1999 4,821
2000 4,502
2001 2,533
Thereafter 5,067
---------
$ 27,954
=========
Leases with four tenants of the 625 North Michigan Office Building
accounted for approximately $3,008,000, or 59%, of the rental revenue
generated by that property for 1996.
7. Long-Term Debt
Long term debt payable at December 31, 1996 and 1995 consists of the
following (in thousands):
1996 1995
---- ----
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). $ 3,915 $ 3,963
<PAGE>
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). 5,067
5,134
8,982 9,097
Less: current portion (125) (115)
------- -------
$ 8,857 $ 8,982
======= =======
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 8. The fair value of this mortgage note approximated its carrying value
as of December 31, 1996 and 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, a $700,000 mortgage loan 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 8. The fair value of this
mortgage note approximated its carrying value as of December 31, 1996 and
1995. Funds may be released from the Renovation and Occupancy Escrow to
reimburse the Loehmann's Plaza joint venture for the costs of certain
planned renovations, referred to in Note 9, in the event that the joint
venture satisfies certain requirements which include specified occupancy and
rental income thresholds. As of August 1996, 18 months from the date of the
loan closing, such requirements had not been met. Therefore, the lender may
apply the balance of the escrow account to the payment of loan principal. As
of December 31, 1996, such application of escrow funds by the lender had not
occurred. 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 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 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 8 ("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.
<PAGE>
The scheduled annual principal payments to retire long-term debt are as
follows (in thousands):
1997 $ 125
1998 137
1999 150
2000 163
` 2001 4,810
Thereafter 3,597
--------
$ 8,982
========
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) 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 7. 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 7).
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, 1996, the aggregate
indebtedness of EP2 and its affiliated partnership which is secured by the
625 North Michigan Office Building was approximately $15,868,000. 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.
<PAGE>
9. Property Renovation
During 1996 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 $2,000,000 and
$2,500,000. 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
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
<CAPTION>
Cost
Initial Cost to Capitalized Life on Which
Combined (Removed) Depreciation
Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Office
Building
Chicago, IL $ 15,868 $ 8,112 $35,682 $6,358 $ 8,112 $42,040 $50,152 $15,547 1968 12/16/86 5 -17 yrs.
Shopping
Center
Overland
Park, KS 3,915 6,265 8,874 3,763 6,215 12,687 18,902 3,222 1980 9/30/87 7 - 31.5 yrs
Apartment
Complex
Richmond, VA 5,067 963 7,906 (271) 895 7,703 8,598 3,481 1987 9/1/87 10 - 27.5 yrs
-------- ------- ------- ------ ------- ------- ------- -------
$ 24,850 $15,340 $52,462 $9,850 $15,222 $62,430 $77,652 $22,250
======== ======= ======= ====== ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $75,862,000.
(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:
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 75,772 $ 92,328 $ 92,013
Acquisitions and improvements 2,206 2,044 1,221
Decrease due to sales - (18,600) -
Write-offs due to disposals (326) - (906)
-------- -------- ---------
Balance at end of period $ 77,652 $ 75,772 $ 92,328
======== ======== =========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 19,680 $ 20,971 $ 18,785
Depreciation expense 2,896 2,756 3,092
Decrease due to sales - (4,047) -
Write-offs due to disposals (326) - (906)
-------- -------- ---------
Balance at end of period $ 22,250 $ 19,680 $ 20,971
======== ======== =========
</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, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,322
<SECURITIES> 0
<RECEIVABLES> 204
<ALLOWANCES> 53
<INVENTORY> 0
<CURRENT-ASSETS> 5,802
<PP&E> 79,153
<DEPRECIATION> 12,155
<TOTAL-ASSETS> 74,278
<CURRENT-LIABILITIES> 787
<BONDS> 21,947
0
0
<COMMON> 0
<OTHER-SE> 51,213
<TOTAL-LIABILITY-AND-EQUITY> 74,278
<SALES> 0
<TOTAL-REVENUES> 5,770
<CGS> 0
<TOTAL-COSTS> 4,346
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,700
<INTEREST-EXPENSE> 1,990
<INCOME-PRETAX> (3,266)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,266)
<EPS-PRIMARY> (24.04)
<EPS-DILUTED> (24.04)
</TABLE>
