UNITED STATES 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, 1998
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
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 04-2918819
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (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
1998 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-10
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-10
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-37
<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-8 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, 1998 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 Type of
Location Size of Interest Ownership (1)
- ------------------------- ---- ----------- ----------------------
<S> <C> <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, 1998, the Limited Partners had received cumulative cash
distributions totalling approximately $84,752,000, or $660 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 original $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 with the payment made on
February 15, 1996 for the quarter ended December 31, 1995. As of March 31, 1998,
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, 1998, 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 continued to
recover during fiscal 1998 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 1998 although estimated market values in some
markets appear 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 remaining 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 a significant increase in the funds available in the capital
markets for investment in real estate and by the lack of significant new
construction activity in the multi-family apartment market over most of this
period. Over the past two years, 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, 1998, 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 1998, along with an
average for the year, are presented below for each property:
Percent Occupied At
----------------------------------------------
Fiscal
1998
6/30/97 9/30/97 12/31/97 3/31/98 Average
------- ------- -------- ------- -------
625 North Michigan Avenue 87% 89% 89% 88% 88%
The Gables at Erin Shades 96% 96% 95% 93% 95%
Gateway Plaza Shopping Center 89% 89% 89% 89% 89%
Saratoga Center & EG&G Plaza 100% 100% 100% 94% 99%
West Ashley Shoppes 64% 94% 95% 95% 87%
Asbury Commons Apartments 84% 96% 92% 91% 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 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 had been delayed pending the
resolution of an appeal of the settlement by two of the plaintiff class members.
In July 1997, the United States Court of Appeals for the Second Circuit upheld
the settlement over the objections of the two 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 during fiscal 1998.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management believes that the resolution of
these matters will not have a material impact on the Partnership's financial
statements, taken as a whole.
The Partnership is not subject to any 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, 1998, there were 8,626 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. Upon request the Managing
General Partner will endeavor to assist a Unitholder desiring to transfer his
Units and may utilize the services of PWI in this regard. The price to be paid
for the Units will be subject to negotiation by the Unitholder. The Managing
General Partner will not redeem or repurchase Units.
The Partnership had a Distribution Reinvestment Plan designed to enable
Unitholders to have their distributions from the Partnership invested in
additional Units of the Partnership. The Distribution Reinvestment Plan was
discontinued during fiscal 1998. 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 1998.
Item 6. Selected Financial Data
PaineWebber Equity Partners Two Limited Partnership
For the years ended March 31, 1998, 1997, 1996, 1995 and 1994
(in thousands, except for per Unit data)
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------------------
1998 1997 (1) 1996 1995 (2) 1994
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 5,487 $ 5,369 $ 5,069 $ 4,729 $ 4,338
Operating loss $ (991) $ (3,667) $ (1,508) $ (2,229 $ (2,391)
Partnership's share of
unconsolidated ventures' incom $ 728 $ 383 $ 18 $ 1,818 $ 2,207
Interest income on note
receivable from unconsolidated
venture - - $ 80 $ 107 $ 106
Partnership's share of gains on
sale of unconsolidated operating
investment properties - - $ 6,766 - -
Net income (loss) $ (263) $ (3,266) $ 5,523 $ (304) $ (78)
Per 1,000 Limited Partnership Units:
Net income (loss) $ (1.94) $ (24.04) $ 40.68 $ (2.26) $ (0.57)
Cash distributions from
operations $ 8.84 $ 8.84 $ 16.52 $ 34.20 $ 49.52
Cash distributions from
sale transactions - - $ 61.00 - -
Total assets $ 72,274 $ 74,278 $78,722 $ 84,148 $ 103,391
Long-term debt $ 21,540 $ 21,947 $22,315 $ 22,635 $ 36,828
</TABLE>
(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.
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, 1998,
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 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 an 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. As part of that plan, as discussed
further below, The Gables Apartments is being actively marketed for sale now and
the Hacienda Business Park property is expected to be marketed for sale sometime
during the second half of calendar 1998. In addition, management is working with
each property's leasing and management team to develop and implement programs
that will protect and enhance value and maximize cash flow at each property.
These programs include pursuing a new leasing opportunity at the 625 North
Michigan Office Building, completing the leasing programs which are currently
underway at Gateway Plaza and West Ashley Shoppes, and improving operating
efficiency and implementing property enhancements at the Asbury Commons
Apartments. These programs are expected to result in higher net sale prices for
these four assets than could otherwise be achieved if these properties were sold
today. 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 previously reported, 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. During the
third quarter of fiscal 1998, bid application packages were distributed to
pre-qualified contractors. The construction contracts were executed during the
fourth quarter, and the repair and replacement work has commenced. This work is
expected to be completed by late Fall 1998. During the first quarter of fiscal
1998, the Partnership filed a warranty claim against the manufacturer of the
wood-composite siding used throughout Asbury Commons. During the second quarter,
the Partnership filed a warranty claim against the manufacturer of the
fiberglass-composite roofing shingles installed when the property was built.
Subsequent to year-end, the manufacturer of the roofing shingles agreed to
provide the Partnership with the materials to replace the existing roofing
shingles. While there can be no assurances regarding the Partnership's ability
to successfully recover any further damages relating to the siding and roofing
shingles, the Partnership will diligently pursue these and other potential
recovery sources. During the fourth quarter of fiscal 1998, the Partnership
reached a settlement agreement with the original developer of the Asbury Commons
property whereby the original developer agreed to pay the Partnership $200,000.
Under the terms of this agreement, the Partnership received a payment of
$100,000 during the fourth quarter of 1998, and received a final payment of
$100,000 subsequent to year-end. The Partnership believes that it has adequate
cash reserves to fund the repair work at Asbury Commons regardless of whether
any additional recoveries are realized.
The average occupancy level at the Asbury Commons Apartments was 91% for
the year ended March 31, 1998, unchanged from the prior fiscal year. In March
1997, a national property management firm was hired to take over management at
Asbury Commons effective April 1, 1997. The property's management and leasing
team is confident that the property will perform at average occupancies similar
to comparable properties in the market, including newly constructed communities,
once the repair program discussed above has been completed. The team has also
indicated that effective rents can be increased at Asbury Commons through
improved signage, targeted advertising and promotion, and selected unit interior
upgrades. In order to attract prospective tenants, the property's management and
leasing team has undertaken a number of marketing efforts which are expected to
increase the number of prospective tenants looking to lease units at the
property and retain as much of the existing resident base as possible. These
efforts include the targeting of potential tenants at area corporations and
relocation departments. In order to minimize tenant turnover, modest rental rate
increases of 2% are being implemented as current leases are renewed. In
addition, new tenants are being offered one month of free rent as an incentive
to sign a 12-month lease on certain difficult to lease unit types in order to
maximize the occupancy level.
The Gateway Plaza Shopping Center (formerly Loehmann's Plaza) in Overland
Park, Kansas was 89% occupied throughout fiscal 1998, compared to an average
level of 80% achieved during fiscal 1997. As previously reported, during fiscal
1997 the property's leasing team signed a 13,410 square foot lease, representing
9% of the Center's leasable area, with Gateway 2000 Country Stores to occupy the
former Loehmann's space. Gateway 2000 Country Stores, a manufacturer and
retailer of personal computers, opened its new store on June 30, 1997. The
property's management team reports that customer traffic levels in the Center
have increased since the openings of both the 13,410 square foot Gateway store
and the re-opening of the expanded 13,000 square foot Alpine Hut store during
the first quarter of fiscal 1998. During the third quarter of fiscal 1998, the
property's leasing team signed a lease expansion and extension agreement with an
existing 3,815 square foot tenant to occupy 4,830 square feet. The 1,015 square
foot expansion area was carved out of the rear portion of an adjacent 2,958
square foot space that has been available for lease for over two years. The
2,958 square foot space has been difficult to lease due to its narrow but very
deep configuration. With the signing of this expansion agreement, the leasing
team is now marketing the more attractive 1,943 square foot front portion of
this space. Subsequent to year-end, the leasing team also completed final
negotiations with a tenant to lease a vacant 4,980 square foot space. Now that
this lease is executed, only three spaces, comprising 5,879 square feet, or less
than 4% of the Center remain available for lease.
A portion of the funds required to pay for the capital improvement work
related to the leasing and expansion projects at Gateway 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 had the right to apply the balance of the
escrow account to the payment of loan principal. In addition, the lender
required that the Partnership unconditionally guaranty up to $1,400,000 of the
loan obligation. This guaranty was to be released in the event that the joint
venture satisfied 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. Once the Gateway store opened for business during
fiscal 1998, the joint venture met the occupancy and rental income thresholds
specified in the escrow agreement. Despite not meeting the thresholds in
accordance with the timing set forth in the escrow agreement, during the third
quarter of fiscal 1998 management requested and received the release of the
Renovation and Occupancy Escrow Funds and the termination of the unconditional
guaranty. The escrow funds, along with accumulated interest earnings, were
distributed to the Partnership and were used to replenish cash reserves.
During the second quarter of fiscal 1998, the leasing team at the West
Ashley Shoppes Shopping Center signed a lease for the previously vacant 36,416
square foot former Children's Palace space. As previously reported, Children's
Palace closed its retail store at the center in May 1991 and subsequently filed
for bankruptcy protection from creditors. This anchor space at West Ashley
Shoppes had been vacant for the past six and a half years. The new tenant,
Waccamaw, a national home goods retailer, opened its new store in March 1998
which brought the occupancy level at the property up to 95%. As Waccamaw should
generate significant additional customer traffic into the Center, the leasing
team anticipates stronger interest from prospective tenants for the remaining
available 7,350 square feet of shop space.
The 625 North Michigan Office Building in Chicago, Illinois, was 88%
leased on average for the year ended March 31, 1998, up slightly from the
average of 87% achieved for fiscal 1997. As previously reported, the property's
leasing team had been negotiating a lease with a prospective new tenant which
would occupy approximately 22,000 square feet of space. Subsequent to year-end,
a lease was signed with this prospective tenant for 24,276 square feet. The
space is now being renovated in preparation for the tenant's expected occupancy
in September 1998. Once this tenant moves into the building, the property's
occupancy level will increase by 7%. Over the next year, ten leases representing
a total of 22,024 square feet will expire. The property's leasing team expects
that eight of these tenants occupying a total of 17,262 square feet will renew,
and that the remaining space will be leased to new tenants. The downtown Chicago
real estate market continues to display an improving trend. A competitive office
property within the local market has recently obtained approvals to convert its
lower floors into a hotel. This should result in the removal of 290,000 square
feet of office space from the market. In addition, an office tenant at that
property has recently completed a 62,000 square foot expansion, which brings the
occupancy level in the building's office portion to 100%. In this local market,
where there is no current or planned new construction of office space, this
reduction in vacant office space has resulted in a reduction in the market
vacancy level at March 31, 1998 to 12% and places more upward pressure on rental
rates. The higher effective rents currently being achieved at 625 North Michigan
are expected to increase cash flow and value as new tenants sign leases and
existing tenants sign lease renewals in calendar year 1998. Retail and hotel
development in the local market continues, as evidenced by plans for a
Nordstrom's-anchored 95,000 square foot retail development which recently
received preliminary approval from the city. This proposed development, which
will be located two blocks from 625 North Michigan, is part of a master plan
that includes several new hotels, entertainment and parking facilities
encompassing five city blocks. Management continues to analyze a potential
project for the property which includes an upgrade to the building lobby and the
addition of a major retail component to the building's North Michigan Avenue
frontage. Rental rates paid by high-end retailers on North Michigan Avenue are
substantially greater than those paid by office tenants. While the costs of such
a project would be substantial, it could have a significantly positive effect on
the market value of the 625 North Michigan property. A comprehensive
cost-benefit analysis of this potential project is expected to be completed over
the next several months.
The four buildings comprising the Hacienda Business Park investment
property in Pleasanton, California, were 94% leased to four tenants at the end
of fiscal 1998. The overall market remains strong with increasing rental rates
and a low vacancy level. Selective development in the area is continuing as a
result of this low vacancy level. Construction of two new Pleasanton
build-to-suit office developments, totalling 410,000 square feet, was completed
during the fourth quarter of fiscal 1998. Two other office projects totalling
435,000 square feet are under construction in this market. One of these
properties is 100% pre-leased and the other is 95% pre-leased. In addition,
Peoplesoft Corporation, a major employer in the local market, purchased 17 acres
in Hacienda Business Park and has begun construction of an owner/user campus
totalling 350,000 square feet. The project is expected to be completed within
the next several months. The existing rental rates on the leases at Hacienda
Park are significantly below current market rates. Provided there is not a
dramatic increase in either planned speculative development or build-to-suit
development with current tenants in the local market, the Partnership would be
expected to achieve a materially higher sale price for the Hacienda Park
property as the existing leases with below-market rental rates approach their
expiration dates. The Partnership had been planning to hold the Hacienda Park
property over the near term in order to capture this expected increase in value.
However, during the quarter ended September 30, 1997, a 51,683 square foot
tenant occupying 28% of the property's leasable area relocated from Hacienda
Business Park and consolidated its operations into a newly-constructed building
in the local market. This tenant has several leases with expiration dates in
1998, 1999 and 2001 and fully leases one of the four buildings comprising the
Hacienda Park investment plus 10,027 square feet in an adjoining building. While
this tenant has the right to sublease the space, subject to various approval
rights, it remains responsible for rental payments and its contractual share of
operating expenses until the leases expire. During the fourth quarter of fiscal
1998, the Partnership accepted a net payment of $34,000 from this tenant in
return for a release from all of the tenant's obligations under the 10,027
square foot lease that was scheduled to expire in January 2001. In addition,
this tenant waived its sub-lease and renewal rights on the remaining five leases
which expire within the next 12 months. This lease termination agreement is
expected to provide the property's leasing team with more flexibility in
re-leasing the space and may provide the Partnership with an opportunity to
capture a significant portion of the expected increase in the value of Hacienda
Park sooner than had been anticipated. In light of this situation, and given the
current strength of the local market conditions, management is currently
reviewing the Pleasanton office market and has interviewed potential real estate
brokers in preparation for a possible marketing effort during the second half of
calendar 1998.
The average occupancy level at The Gables Apartments was 95% for the year
ended March 31, 1998, compared to 93% for the previous year. The high occupancy
figures, coupled with favorable rental rate growth over the past year, reflect a
healthy demand for apartments resulting from strong job, household formation and
population growth in the Richmond, Virginia market. As job growth is projected
to continue during the next few years, the economic outlook for Richmond remains
positive. Two significant new employers in the Richmond market include the White
Oaks semiconductor plant, which is nearly completed and projected to employ
1,500 people, and the recently completed Capital One credit facility, which will
employ up to 1,000 people. While there are three apartment communities,
comprising approximately 900 units, under construction in the local market, only
one 280-unit community is considered competition for The Gables Apartments. The
other communities are located at least five miles from The Gables and offer
larger units at significantly higher rents. Given the currently favorable market
conditions in Richmond and for apartment properties in general, management has
decided to market The Gables Apartments for sale in calendar year 1998. During
the quarter ended March 31, 1998, the Partnership and its co-venture partner
held discussions concerning marketing strategies for selling The Gables
Apartments. As a follow-up to these discussions, the Partnership and its
co-venture partner solicited marketing proposals from area real estate brokerage
firms. After reviewing these proposals and conducting interviews, the
Partnership and its co-venture partner selected a regional brokerage firm
subsequent to year-end. A marketing package has been prepared, and comprehensive
sale efforts began in late May 1998.
At March 31, 1998, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $6,202,000. 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.
As noted above, the Partnership expects to be liquidated within the next
2- to -3 years. Notwithstanding this, the Partnership believes that it has made
all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership reported a net loss of $263,000 for fiscal 1998 as
compared to a net loss of $3,266,000 in fiscal 1997. This $3,003,000 decrease in
net loss is a result of a decrease in the Partnership's operating loss of
$2,676,000 and an increase in the Partnership's share of unconsolidated
ventures' income of $345,000. The decrease in operating loss was primarily a
result of the recognition of an impairment loss of $2,700,000 on the carrying
value of the consolidated West Ashley Shoppes property during fiscal 1997. In
addition, rental income and expense reimbursements from the consolidated joint
ventures increased by $73,000 and depreciation expense decreased by $64,000.
Rental income and expense reimbursements increased as a result of an increase in
rental income of $54,000 and an increase in expense reimbursements of $166,000
at the Hacienda Park joint venture. These increases were the result of an
increase in rental rates and the timing of certain real estate tax
reimbursements and expense escalation billings. This increase in rental income
and expense reimbursements at Hacienda Park was partially offset by a decrease
in rental income at Asbury Commons of $125,000 which was partly due to an
increase in leasing concessions granted during the current year in order to
maintain occupancy levels at the property, as discussed further above.
Depreciation expense decreased mainly as a result of a decrease in deprecation
at West Ashley Shoppes. Depreciation decreased at this consolidated joint
venture due to the lower depreciable basis of the venture's operating property
due to the impairment loss recognized in the prior year. The decrease in
impairment loss, the increase in rental income and expense reimbursements and
the decrease in depreciation expense were partially offset by increases in
general and administrative and property operating expenses of $104,000 and
$91,000, respectively. General and administrative expenses increased primarily
due to an increase in certain required professional fees, including legal fees
related to the examination of potential recovery sources for repair costs at the
Asbury Commons Apartments, as discussed further above. Property operating
expenses increased primarily due to increases in repairs and maintenance
expenses at Hacienda Park and West Ashley Shoppes and administrative expenses at
Asbury Commons. Repairs and maintenance expense increased at Hacienda Park due
to the replacement of an aging lawn sprinkler system. Repairs and maintenance
increased at West Ashley Shoppes due to roof repairs. Administrative expenses
increased at Asbury Commons mainly as a result of an increase in advertising
costs.
The increase in the Partnership's share of unconsolidated ventures' income
of $345,000 was primarily the result of an increase in the Partnership's share
of income from the Gateway Plaza Shopping Center (formerly Loehmann's Plaza) of
$349,000. The increase in net income from Gateway Plaza was the result of an
increase in rental income of $316,000. Rental income increased mainly due to the
13,410 square foot lease, representing 9% of the Center's leasable area, signed
with Gateway 2000 Country Stores which took occupancy in June 1997, as discussed
further above. In addition, net income increased at The Gables joint venture by
$59,000 for the current year. Net income increased at this joint venture due to
an increase in rental income resulting from an increase in average occupancy
during the year. The increases in net income at Gateway Plaza Shopping Center
and The Gables were partially offset by a decrease in net income at 625 North
Michigan of $54,000. Net income at 625 North Michigan decreased as a result of
increases in real estate taxes and repairs and maintenance expenses of $147,000
and $149,000, respectively. Real estate taxes increased due to an increase in
the assessed value of the 625 North Michigan property. Repairs and maintenance
expense increased mainly due to the modernization of the building's elevator
controls which was completed during the current year.
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 was primarily
due to the gains recognized on the sales of the Richland Terrace/Richmond Park
and Treat Commons II properties during fiscal 1996 and the loss on the
impairment of the West Ashley Shoppes property recognized in fiscal 1997, 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, during fiscal 1997 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 fiscal 1997 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 fiscal 1997. 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 fiscal 1996. 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 fiscal 1996 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 during fiscal
1997.
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 fiscal 1996, 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 fiscal 1996 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 improving market conditions. 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 during fiscal 1997 as a result of the property expansion and
renovation project. 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 during fiscal 1997.
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 notes 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.
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, beyond the $200,000 recovered from the original
developer during fiscal 1998, 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 increased significantly over the past two years.
Existing apartment properties in such markets could be expected to experience
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 certain 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. In the cases of the Hacienda Park, Asbury Commons and West Ashley Shoppes
joint ventures, the co-venture partner is the Managing General Partner of the
Partnership as a result of certain prior assignment transactions. No such
conflicts should exist on these investments.
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 existing
debt structure, 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 eleventh full year of operations in fiscal
1998. 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, Gateway Plaza and 625 North Michigan properties have, or have had in
recent years, 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 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 50 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 55 4/17/85 *
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President and Controller 35 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 and Controller of the Managing
General Partner and a Vice President and Controller 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, 1998, 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 with
the payment for the quarter ended December 31, 1995, the annualized distribution
rate was reduced to 1% on a Limited Partner's remaining capital account, where
it has remained through fiscal 1998. However, the Partnership's Limited
Partnership Units are not actively traded on any organized exchange, and
accordingly, no accurate price information exists for these Units. Therefore, a
presentation of historical Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
Managing General Partner, Second Equity Partners Fund, Inc. is owned by
PaineWebber. Properties Associates 1986, L.P., the Associate General Partner, is
a Virginia limited partnership, certain limited partners of which are also
officers of the Managing General Partner. No limited partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) The directors and officers of the Managing General Partner do not
directly own any Units of limited partnership interest of the Partnership. No
director or officer of the Managing General Partner, nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have received an amount equal to a
7.5% noncumulative annual return on their adjusted capital contributions. The
General Partners will then receive distributions until they have received an
amount equal to 1.01% of total distributions of distributable cash which has
been made to all partners and PWPI has received an amount equal to 3.99% of all
distributions to all partners. The balance will be distributed 95% to the
Limited Partners, 1.01% to the General Partners and 3.99% to PWPI. Payments to
PWPI represent asset management fees for PWPI's services in managing the
business of the Partnership. No management fees were earned for the fiscal year
ended March 31, 1998. 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,
1998 is $230,000, 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 $17,000 included in general and administrative expenses for managing the
Partnership's cash assets during fiscal 1998. 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
1998.
(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 and Controller
Dated: June 26, 1998
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 26, 1998
--------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 26, 1998
----------------------------- -------------
Terrence E. Fancher
Director
<PAGE>
<TABLE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
----------- ----------------------- -------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated July 21, 1986, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Amended and
Restated Certificate and
Agreement of Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant
filed as exhibits to registration to Section 13 or 15(d) of the
statements and amendments thereto Securities Act of 1934 and
of the registrant together with incorporated herein by reference.
all such contracts filed as
exhibits of previously filed
Forms 8-K and Forms 10-K are
hereby incorporated herein by
reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal year
1998 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of Part 1 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.
</TABLE>
<PAGE>
<TABLE>
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
<CAPTION>
Reference
---------
<S> <C>
PaineWebber Equity Partners Two Limited Partnership:
Report of independent auditors F-2
Consolidated balance sheets as of March 31, 1998 and 1997 F-3
Consolidated statements of operations for the years ended March 31, 1998,
1997 and 1996 F-4
Consolidated statements of changes in partners' capital (deficit) for the
years ended March 31, 1998, 1997 and 1996 F-5
Consolidated statements of cash flows for the years ended March 31, 1998,
1997 and 1996 F-6
Notes to consolidated financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-25
Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership:
Report of independent auditors F-26
Combined balance sheets as of December 31, 1997 and 1996 F-27
Combined statements of income and changes in venturers' capital for the
years ended December 31, 1997, 1996 and 1995 F-28
Combined statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-29
Notes to combined financial statements F-30
Schedule III - Real Estate and Accumulated Depreciation F-37
</TABLE>
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, 1998 and
1997, 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, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners Two Limited Partnership at March 31, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 1998, 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 12, 1998
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(In thousands, except for per Unit data)
ASSETS
1998 1997
---- ----
Operating investment properties:
Land $ 7,351 $ 7,351
Building and improvements 40,616 40,018
--------- ----------
47,967 47,369
Less accumulated depreciation (14,044) (12,155)
--------- ----------
33,923 35,214
Investments in unconsolidated joint ventures,
at equity 30,237 31,784
Cash and cash equivalents 6,202 5,322
Escrowed cash 398 279
Accounts receivable 236 151
Prepaid expenses 31 50
Deferred rent receivable 737 832
Deferred expenses, net of accumulated
amortization of $883 ($734 in 1997) 510 646
--------- ----------
$ 72,274 $ 74,278
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 427 $ 271
Net advances from consolidated ventures 115 400
Tenant security deposits 111 116
Bonds payable 2,171 2,297
Mortgage notes payable 19,369 19,650
Other liabilities 331 331
--------- ----------
Total liabilities 22,524 23,065
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 158 161
Cumulative cash distributions (713) (701)
Limited Partners ($1 per Unit;
134,425,741 Units issued):
Capital contributions, net of offering costs 119,747 119,747
Cumulative net income 15,309 15,569
Cumulative cash distributions (84,752) (83,564)
--------- ----------
Total partners' capital 49,750 51,213
--------- ----------
$ 72,274 $ 74,278
========= ==========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1998, 1997 and 1996
(In thousands, except for per Unit data)
1998 1997 1996
---- ---- ----
Revenues:
Rental income and expense reimbursements $ 5,084 $ 5,011 $ 4,706
Interest and other income 403 358 363
------- -------- -------
5,487 5,369 5,069
Expenses:
Loss on impairment of operating
investment property - 2,700 -
Interest expense 1,961 1,990 2,083
Depreciation expense 1,889 1,953 1,886
Property operating expenses 1,370 1,279 1,320
Real estate taxes 521 479 422
General and administrative 632 528 729
Amortization expense 105 107 137
------- -------- -------
6,478 9,036 6,577
------- -------- -------
Operating loss (991) (3,667) (1,508)
Venture partner's share of consolidated
venture's operations - 18 -
Investment income:
Partnership's share of unconsolidated
ventures' income 728 383 185
Interest income on note receivable from
unconsolidated venture - - 80
Partnership's share of gains on
sale of unconsolidated operating
investment properties - - 6,766
------- -------- -------
728 383 7,031
------- -------- -------
Net income (loss) $ (263) $ (3,266) $ 5,523
======= ======== =======
Net income (loss) per 1,000
Limited Partnership Units $ (1.94) $(24.04) $40.68
======= ======= ======
Cash distributions per 1,000
Limited Partnership Units $ 8.84 $ 8.84 $77.52
======= ======= ======
The above per 1,000 Limited Partnership Units 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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (12) (1,188) (1,200)
Net loss (3) (260) (263)
------ ------- --------
Balance at March 31, 1998 $ (554) $50,304 $ 49,750
====== ======= ========
See accompanying notes.
<PAGE>
<TABLE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (263) $ (3,266) $ 5,523
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on impairment of operating investment property - 2,700 -
Partnership's share of unconsolidated ventures' income (728) (383) (185)
Partnership's share of gains on sale of unconsolidated
operating investment properties - - (6,766)
Depreciation and amortization 1,994 2,060 2,023
Amortization of deferred financing costs 44 44 44
Changes in assets and liabilities:
Escrowed cash (119) (129) (93)
Accounts receivable (85) 110 (132)
Accounts receivable - affiliates - 15 63
Prepaid expenses 19 (21) (1)
Deferred rent receivable 95 (101) (255)
Accounts payable and accrued expenses 156 (12) (151)
Advances to/from consolidated ventures (285) 478 (107)
Tenant security deposits (5) 20 (7)
Other liabilities - (18) 1
------- --------- ---------
Total adjustments 1,086 4,763 (5,566)
------- --------- ---------
Net cash provided by (used in)
operating activities 823 1,497 (43)
------- --------- ---------
Cash flows from investing activities:
Distributions from unconsolidated ventures 3,240 2,744 15,566
Additional investments in unconsolidated ventures (965) (1,939) (934)
Additions to operating investment properties (598) (444) (421)
Payment of leasing commissions (13) (94) (128)
------- --------- ---------
Net cash provided by investing activities 1,664 267 14,083
------- --------- ---------
Cash flows from financing activities:
Distributions to partners (1,200) (1,200) (10,443)
Repayment of principal on notes payable (281) (257) (230)
Refund of deferred financing costs - - 22
Payments on district bond assessments (126) (111) (90)
------- --------- ---------
Net cash used in financing activities (1,607) (1,568) (10,741)
------- --------- ---------
Net increase in cash and cash equivalents 880 196 3,299
Cash and cash equivalents, beginning of year 5,322 5,126 1,827
------- --------- ---------
Cash and cash equivalents, end of year $ 6,202 $ 5,322 $ 5,126
======= ========= ========
Supplemental disclosures:
Cash paid during the year for interest $ 1,917 $ 1,974 $ 1,974
======= ========= ========
</TABLE>
See accompanying notes.
<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, 1998, 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, 1998 and 1997 and revenues and expenses for each
of the three years in the period ended March 31, 1998. 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. 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 ($1,457,000), building and improvements
($1,822,000) and related accumulated depreciation ($579,000).
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 the estimated useful lives of the operating
investment properties, generally five years for the furniture and fixtures and
thirty-one and a half years for the buildings and improvements. 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 1998, 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, 1998 and 1997 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,
which approximates the effective interest 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, 1998 and 1997 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 (see Note 6).
Certain prior year amounts have been reclassified to conform to the fiscal
1998 presentation.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partners of the Partnership are Second Equity Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber") and Properties Associates 1986, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Managing General Partner. Affiliates of the
General Partners will receive fees and compensation determined on an agreed-upon
basis, in consideration of various services performed in connection with the
sale of the Units and the acquisition, management, financing and disposition of
Partnership properties. The Managing General Partner and its affiliates are
reimbursed for their direct expenses relating to the offering of Units, the
administration of the Partnership and the acquisition and operations of the
Partnership's operating property investment.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have received an amount equal to a
7.5% noncumulative annual return on their adjusted capital contributions. The
General Partners will then receive distributions until they have received an
amount equal to 1.01% of total distributions of distributable cash which has
been made to all partners and PWPI has received an amount equal to 3.99% of all
distributions to all partners. The balance will be distributed 95% to the
Limited Partners, 1.01% to the General Partners and 3.99% to PWPI. Payments to
PWPI represent asset management fees for PWPI's services in managing the
business of the Partnership. Due to the reduction in the Partnership's quarterly
distribution rate to 2% during fiscal 1992, no management fees were earned for
the fiscal years ended March 31, 1998, 1997 and 1996, 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, 1998, 1997 and 1996 is $230,000, $224,000 and $260,000, 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 $17,000, $13,000 and $4,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1998, 1997 and 1996,
respectively.
4. Operating Investment Properties
-------------------------------
The Partnership's balance sheets at March 31, 1998 and 1997 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.
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 1999. 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. During fiscal 1998, the Partnership distributed bid application
packages to pre-qualified contractors and executed construction contracts for
the repair work. Repair and replacement work commenced subsequent to year-end.
Also during fiscal 1998, the Partnership filed a warranty claim against the
manufacturer of the wood-composite siding used throughout the Asbury Commons
property and filed a warranty claim against the manufacturer of the
fiberglass-composite roofing shingles installed when the property was built.
Subsequent to year-end, the manufacturer of the roofing shingles agreed to
provide the Partnership with the materials to replace the existing roofing
shingles. While there can be no assurances regarding the Partnership's ability
to successfully recover any further damages relating to the siding and roofing
shingles, the Partnership will diligently pursue these and other potential
recovery sources. Subsequent to year-end, the Partnership reached a settlement
agreement with the original developer of the Asbury Commons property whereby the
developer agreed to pay the Partnership $200,000. Under the terms of this
agreement, the Partnership received a payment of $100,000 during the fourth
quarter of fiscal 1998, and received a final payment of $100,000 subsequent to
year-end. The Partnership believes that it has adequate cash reserves to fund
the repair work at Asbury Commons regardless of whether any additional
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.
The following is a combined summary of property operating expenses for the
consolidated joint ventures for the years ended December 31, 1997, 1996 and 1995
(in thousands):
1997 1996 1995
---- ---- ----
Property operating expenses:
Utilities $ 207 $ 205 $ 219
Repairs and maintenance 451 425 385
Salaries and related costs 224 210 216
Administrative and other 282 225 300
Insurance 53 53 51
Management fees 153 161 149
-------- -------- ---------
$ 1,370 $ 1,279 $ 1,320
======== ======== =========
5. Investments in Unconsolidated Joint Ventures
--------------------------------------------
The Partnership has investments in three unconsolidated joint venture
partnerships which own operating investment properties at March 31, 1998 and
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, 1997 and 1996
(in thousands)
Assets
1997 1996
---- ----
Current assets $ 1,234 $ 1,264
Operating investment properties, net 54,902 55,402
Other assets 4,367 4,992
-------- --------
$ 60,503 $ 61,658
======== ========
Liabilities and Venturers' Capital
Current liabilities $ 2,740 $ 2,515
Other liabilities 318 315
Long-term debt 8,720 8,857
Partnership's share of venturers' capital 29,874 30,726
Co-venturers' share of venturers' capital 18,851 19,245
-------- --------
$ 60,503 $ 61,658
======== ========
<PAGE>
Condensed Combined Summary of Operations
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental revenues and expense
reimbursements $ 9,814 $ 9,297 $ 11,844
Interest and other income 481 343 330
--------- --------- ---------
10,295 9,640 12,174
Expenses:
Property operating and other expenses 3,230 3,009 4,177
Real estate taxes 2,323 2,212 2,248
Interest on long-term debt 661 663 1,535
Interest on note payable to venturer - - 100
Depreciation and amortization 3,177 3,158 3,704
--------- --------- ---------
9,391 9,042 11,764
--------- --------- ---------
Operating income 904 598 410
Gains on sale of operating
investment properties - - 8,368
--------- --------- ---------
Net income $ 904 $ 598 $ 8,778
========= ========= =========
Net income:
Partnership's share of
combined income $ 786 $ 441 $ 7,512
Co-venturers' share of
combined income 118 157 1,266
--------- --------- ---------
$ 904 $ 598 $ 8,778
========= ========= =========
Reconciliation of Partnership's Investment
March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
Partnership's share of capital at
December 31, as shown above $ 29,874 $ 30,726
Excess basis due to investments in
joint ventures, net (1) 1,036 1,094
Timing differences (2) (673) (36)
-------- ---------
Investments in unconsolidated joint
ventures, at equity at March 31 $ 30,237 $ 31,784
======== ========
(1)At March 31, 1998 and 1997, the Partnership's investment exceeds its
share of the joint venture partnerships' capital accounts by
approximately $1,036,000 and $1,094,000, 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 March 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Partnership's share of operations,
as shown above $ 786 $ 441 $ 7,512
Amortization of excess basis (58) (58) (561)
------- -------- --------
Partnership's share of
unconsolidated ventures'
net income $ 728 $ 383 $ 6,951
======= ======== ========
<PAGE>
The Partnership's share of the net income of the unconsolidated joint
ventures is presented as follows in the accompanying statements of operations:
1998 1997 1996
---- ---- ----
Partnership's share of unconsolidated
ventures' income $ 728 $ 383 $ 185
Partnership's share of gains on
sale of unconsolidated operating
investment properties - - 6,766
------- ------- --------
$ 728 $ 383 $ 6,951
======= ======= ========
Investments in unconsolidated joint ventures, at equity, is the
Partnership's net investment in the joint venture partnerships. These joint
ventures are subject to Partnership agreements which determine the distribution
of available funds, the disposition of the venture's assets and the rights of
the partners, regardless of the Partnership's percentage ownership interest in
the venture. As a result, substantially all of the Partnership's investments in
these joint ventures are restricted as to distributions.
Investments in unconsolidated joint ventures, at equity, on the
accompanying balance sheets is comprised of the following equity method carrying
values (in thousands):
1998 1997
---- ----
Chicago-625 Partnership $ 18,131 $ 18,937
Richmond Gables Associates (244) 34
Daniel/Metcalf Associates Partnership 12,350 12,813
-------- --------
Investments in unconsolidated joint ventures $ 30,237 $ 31,784
======== ========
The Partnership received cash distributions from the unconsolidated
ventures during the years ended March 31, 1998, 1997 and 1996 as set forth below
(in thousands):
1998 1997 1996
---- ---- ----
Chicago-625 Partnership $ 1,504 $ 1,689 $ 1,158
Richmond Gables Associates 206 198 158
Daniel/Metcalf Associates Partnership 1,530 641 600
TCR Walnut Creek Limited Partnership - 182 3,216
Portland Pacific Associates - 34 10,434
------- ------- --------
$ 3,240 $ 2,744 $ 15,566
======= ======= ========
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
$3,748,000 through December 31, 1997.
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 $8,704,000 at December 31, 1997.
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, 1997, there was a cumulative unpaid preferred
distribution payable to the Partnership of $1,096,000. 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 Gateway Plaza Shopping Center (formerly 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 were to
be released from the Renovation and Occupancy Escrow to reimburse the Gateway
Plaza joint venture for the costs of certain planned renovations in the event
that the joint venture satisfied certain requirements which included 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 had the right to apply the balance of the escrow account
to the payment of loan principal. In addition, the lender required that the
Partnership unconditionally guaranty up to $1,400,000 of the loan obligation.
This guaranty was to be released in the event that the joint venture satisfied
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.
During fiscal 1998, the venture achieved the aforementioned occupancy and rental
income thresholds. During the third quarter of fiscal 1998, management requested
and received the release of the Renovation and Occupancy Escrow Funds and the
termination of the unconditional guaranty. The escrow funds were distributed to
the Partnership and were used to replenish cash reserves.
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, 1997 amounted to $3,797,000. 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, 1997,
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 3% 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 included the
sum of $1,000,000 that was contributed in the form of a permanent nonrecourse
loan to the venture on which the Partnership received 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.
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 future capital
requirements.
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 a $2
million borrowing secured by the Partnership's share of the proceeds. 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, 1998 and 1997 consist of the following (in thousands):
1998 1997
---- ----
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, 1998 and 1997. $ 9,282 $ 9,418
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 $58
through maturity on October 15,
2001. The fair value of the
mortgage note approximated its
carrying value at December 31, 1997
and 1996. 6,707 6,806
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 $29 through
maturity on January 20, 2002. The
fair value of the mortgage note
approximated its carrying value at
December 31, 1997 and 1996. 3,380 3,426
------- -------
$19,369 $19,650
======= =======
The scheduled annual principal payments to retire mortgage notes payable
are as follows (in thousands):
Year ended March 31,
1999 $ 308
2000 9,305
2001 189
2002 6,417
2003 3,150
-------
$19,369
=======
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
remaining 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 property, 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 Gateway 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
Gateway 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 Gateway Plaza 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.
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.
Future scheduled principal payments on bond assessments are as follows (in
thousands):
Year ended December 31,
1998 $ 110
1999 119
2000 128
2001 137
2002 148
Thereafter 1,529
--------
$ 2,171
========
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, 1997 are as follows
(in thousands):
Future
Minimum
Contractual
Payments
--------
1998 $ 3,029
1999 2,167
2000 1,930
2001 1,446
2002 1,069
Thereafter 1,112
--------
$ 10,753
========
9. Subsequent Events
-----------------
On May 15, 1998, the Partnership paid distributions to the Limited and
General Partners in the amounts of $297,000 and $3,000, respectively, for the
quarter ended March 31, 1998.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1998
(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 $ (2,383) $ 2,342 $ 5,187 $ 7,529 $ 1,977 1988 3/10/88 5 - 31.5 yrs
Business
Center
Pleasanton,
CA 5,551 3,315 23,337 (211) 3,370 23,071 26,441 8,389 1985 12/24/87 5 - 25 yrs
Apartment
Complex
Atlanta, GA 6,707 1,702 11,950 345 1,639 12,358 13,997 3,678 1990 3/12/90 10 -27.5 yrs
------- ------- ------- ------- ------- ------- ------- -------
$12,258 $9,260 $40,956 $ (2,249) $ 7,351 $40,616 $47,967 $14,044
======= ====== ======= ======== ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $54,730.
(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:
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 47,369 $ 50,204 $ 49,783
Acquisitions and improvements 598 444 421
Write off due to permanent impairment (see Note 2) - (3,279) -
--------- --------- --------
Balance at end of period $ 47,967 $ 47,369 $ 50,204
========= ========= ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 12,155 $ 10,781 $ 8,895
Depreciation expense 1,889 1,953 1,886
Write off due to permanent impairment (see Note 2) - (579) -
--------- --------- --------
Balance at end of period $ 14,044 $ 12,155 $ 10,781
========= ========= ========
(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, 1997 and 1996, 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, 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 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, 1997 and 1996, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 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
February 18, 1998
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1997 and 1996
(In thousands)
Assets
1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 395 $ 600
Accounts receivable, net of allowance for
doubtful accounts of $45 ($146 in 1996) 774 637
Prepaid distribution to venturer 37 -
Prepaid expenses 28 27
--------- -------
Total current assets 1,234 1,264
Operating investment properties:
Land 15,222 15,222
Buildings, improvements and equipment 61,649 59,902
Construction in progress 3,161 2,528
--------- -------
80,032 77,652
Less accumulated depreciation (25,130) (22,250)
--------- -------
54,902 55,402
Escrowed funds 1,144 1,747
Due from affiliates 269 269
Deferred expenses, net of accumulated
amortization of $1,767 ($1,428 in 1996) 1,635 1,608
Other assets 1,319 1,368
--------- -------
$ 60,503 $61,658
========= =======
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 481 $ 372
Accrued real estate taxes 2,122 2,017
Distributions payable to venturers - 1
Current portion - long-term debt 137 125
--------- -------
Total current liabilities 2,740 2,515
Tenant security deposits 268 265
Subordinated management fee payable to affiliate 50 50
Long-term debt 8,720 8,857
Venturers' capital 48,725 49,971
--------- -------
$ 60,503 $61,658
========= =======
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, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 9,814 $ 9,297 $ 11,844
Interest and other income 481 343 330
--------- -------- --------
10,295 9,640 12,174
Expenses:
Real estate taxes 2,323 2,212 2,248
Depreciation expense 2,880 2,896 2,756
Property operating expenses 641 602 908
Repairs and maintenance 1,047 879 1,093
Management fees 314 318 459
Professional fees 107 82 88
Salaries 634 591 882
Advertising 60 46 71
Interest expense on long-term debt 661 663 1,535
Interest on note payable to venturer - - 100
General and administrative 417 438 564
Amortization expense 297 262 948
Bad debt expense - 45 1
Other 10 8 111
--------- -------- --------
9,391 9,042 11,764
--------- -------- --------
Operating income 904 598 410
Gains on sale of operating investment
properties - - 8,368
--------- -------- --------
Net income 904 598 8,778
Contributions from venturers 2,160 2,303 1,494
Distributions to venturers (4,310) (3,735) (19,187)
Venturers' capital, beginning of year 49,971 50,805 59,720
--------- -------- --------
Venturers' capital, end of year $ 48,725 $ 49,971 $ 50,805
========= ======== ========
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, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 904 $ 598 $ 8,778
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,177 3,158 3,704
Amortization of deferred financing costs 42 41 169
Gains on sale of operating investment properties - - (8,368)
Changes in assets and liabilities:
Accounts receivable, net (137) 57 228
Prepaid expenses (1) (18) 5
Escrowed funds 43 20 129
Deferred expenses (366) (230) (269)
Other assets 49 172 16
Accounts payable and accrued expenses 109 102 (144)
Accounts payable - affiliates - (21) 6
Tenant security deposits 3 12 75
Accrued real estate taxes 105 (30) (262)
-------- --------- ---------
Total adjustments 3,024 3,263 (4,711)
-------- --------- ---------
Net cash provided by operating activities 3,928 3,861 4,067
-------- --------- ---------
Cash flows from investing activities:
Additions to operating investment properties (2,380) (2,206) (2,044)
Proceeds from sales of operating
investment properties - - 15,542
Selling costs from sale - (190) (587)
Increase in restricted cash 560 (18) (550)
-------- --------- ---------
Net cash (used in) provided by
investing activities (1,820) (2,414) 12,361
-------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - - 3,829
Principal payments on long-term debt (125) (115) (891)
Repayment of partner advances - - (86)
Repayment of note payable to partner - - (1,000)
Distributions to venturers (4,348) (3,786) (19,241)
Capital contributions from venturers 2,160 2,303 1,494
Payment of deferred loan costs - - (31)
-------- --------- ---------
Net cash used in financing activities (2,313) (1,598) (15,926)
-------- --------- ---------
Net (decrease) increase in cash and cash equivalent (205) (151) 502
Cash and cash equivalents, beginning of year 600 751 249
-------- --------- ---------
Cash and cash equivalents, end of year $ 395 $ 600 $ 751
======== ========= =========
Cash paid during the year for interest $ 791 $ 801 $ 1,071
======== ========= =========
</TABLE>
See accompanying notes.
<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, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended December 31, 1997. 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, which approximates the effective interest
method, over the terms of the related loans. Amortization of deferred loan costs
is included in interest expense on the accompanying statement of income.
Deferred expenses also include organization costs which are being amortized over
5 years and lease commissions and rental concessions which are being amortized
over the life of the applicable leases.
Income tax matters
------------------
The Combined Joint Ventures are comprised of entities which are not
taxable and, accordingly, the results of their operations are included on the
tax returns of the various partners. Accordingly, no income tax provision is
reflected in the accompanying combined financial statements.
Cash and cash equivalents
-------------------------
For purposes of reporting cash flows, the Combined Joint Ventures consider
all highly liquid investments, money market funds and certificates of deposit
purchased with original maturities of three months or less to be cash
equivalents.
Rental revenues
---------------
Certain joint ventures have long-term operating leases with tenants which
provide for fixed minimum rents and reimbursements of certain operating costs.
Rental revenues are recognized on a straight-line basis over the term of the
related lease agreements.
Fair value of financial instruments
-----------------------------------
The carrying amounts of cash and cash equivalents and escrowed funds
approximate their respective fair values at December 31, 1997 and 1996 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.
Through December 31, 1994, depreciation expense was computed on a
straight-line basis over the estimated useful lives of the operating investment
properties, generally 5 years for the equipment and fixtures and 31.5 years for
the buildings and improvements. 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.
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 the Gateway Plaza Shopping Center
(formerly 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, 1997, the co-venturer in the Daniel/Metcalf Associates
Partnership is obligated to make additional capital contributions of at least
$89,000 (subject to adjustment pending the venture partners' determination of an
additional amount, if any, of working capital reserves to be funded by the
co-venturer) with respect to cumulative unfunded shortfalls in EP2's preferred
return through September 30, 1990. Such additional capital contributions are not
recorded as a receivable in the accompanying financial statements.
4. Related Party Transactions
--------------------------
The Combined Joint Ventures originally entered into property management
agreements with affiliates of the co-venturers, cancellable at EP2's option upon
the occurrence of certain events. The management fees are equal to 3.5%-5% of
gross receipts, as defined in the agreements. Affiliates of certain co-venturers
also receive leasing commissions with respect to new leases acquired.
The related property manager for the 625 North Michigan property leases
space in the property under a lease agreement extending through October 31,
2001. The 1997, 1996 and 1995 revenues include $178,000, $175,000 and $236,000,
respectively, relating to this lease.
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 1997, 1996 or 1995.
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):
1998 $ 6,873
1999 6,617
2000 6,034
2001 3,867
2002 2,699
Thereafter 5,876
---------
$ 31,966
=========
Leases with four tenants of the 625 North Michigan Office Building
accounted for approximately $2,234,000, or 44%, of the rental revenue generated
by that property for 1997.
7. Long-Term Debt
--------------
Long term debt payable at December 31, 1997 and 1996 consists of the
following (in thousands):
1997 1996
---- ----
9.04% mortgage note payable to an
insurance company secured by the
Gateway Plaza operating investment
property. The loan requires monthly
principal and interest payments of
$34 through maturity on February
15, 2003 (see discussion below). $ 3,862 $ 3,915
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). 4,995 5,067
------- -------
8,857 8,982
Less: current portion (137) (125)
------- -------
$ 8,720 $ 8,857
======= =======
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,
1997 and 1996.
On January 27, 1995 the Gateway Plaza 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 were used to repay, in
full, a $700,000 mortgage loan outstanding at December 31, 1994 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 new first mortgage loan
bears interest at an annual rate of 9.04% and matures on February 15, 2003. The
loan requires monthly principal and interest payments of $34,000. On October 10,
1997, the renovation and occupancy escrow of $550,000 plus interest of $60,000
was released by the lender to EP2. At December 31, 1997 and 1996, the fair value
of the mortgage note payable approximated its carrying value based on an
estimate of the current market interest rate which would have been charged if
the borrowing had been originated as of such dates.
The closing of the Gateway 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.
The scheduled annual principal payments to retire long-term debt are as
follows (in thousands):
1998 $ 137
1999 150
2000 163
2001 4,810
` 2002 82
Thereafter 3,515
---------
$ 8,857
=========
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 Gateway 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, 1997, the aggregate
indebtedness of EP2 and its affiliated partnership which is secured by the 625
North Michigan Office Building was approximately $15,644,000. 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.
9. Property Renovation
-------------------
During 1997 and 1996, the Gateway 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 has amounted to approximately $3,200,000 as of December
31, 1997. 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, 1997
(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 $ 15,644 $ 8,112 $35,682 $ 7,785 $ 8,112 $43,467 $51,579 $17,693 1968 12/16/86 5 -17 yrs
Shopping Center
Overland Park,
KS 3,862 6,265 8,874 4,526 6,215 13,450 19,665 3,577 1980 9/30/87 7 - 31.5yrs
Apartment Complex
Richmond, VA 4,995 963 7,906 (81) 895 7,893 8,788 3,860 1987 9/1/87 10 -27.5 yrs
-------- ------- ------- ------- ------- -------- ------ -------
$ 24,326 $15,340 $52,462 $12,230 $15,222 $64,810 $80,032 $25,130
======== ======= ======= ======= ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $77,601.
(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:
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 77,652 $ 75,772 $ 92,328
Acquisitions and improvements 2,380 2,206 2,044
Decrease due to sales - - (18,600)
Write-offs due to disposals - (326) -
-------- --------- ---------
Balance at end of period $ 80,032 $ 77,652 $ 75,772
======== ========= =========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 22,250 $ 19,680 $ 20,971
Depreciation expense 2,880 2,896 2,756
Decrease due to sales - - (4,047)
Write-offs due to disposals - (326) -
-------- --------- ---------
Balance at end of period $ 25,130 $ 22,250 $ 19,680
</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, 1998 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,202
<SECURITIES> 0
<RECEIVABLES> 247
<ALLOWANCES> 11
<INVENTORY> 0
<CURRENT-ASSETS> 6,867
<PP&E> 78,204
<DEPRECIATION> 14,044
<TOTAL-ASSETS> 72,274
<CURRENT-LIABILITIES> 653
<BONDS> 21,540
0
0
<COMMON> 0
<OTHER-SE> 49,750
<TOTAL-LIABILITY-AND-EQUITY> 72,274
<SALES> 0
<TOTAL-REVENUES> 6,215
<CGS> 0
<TOTAL-COSTS> 4,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,961
<INCOME-PRETAX> (263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (263)
<EPS-PRIMARY> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
