UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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
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(Exact name of registrant as specified in its charter)
Virginia 04-2918819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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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 July 21, 1986, as supplemented Part IV
Current Report on Form 8-K of
registrant, dated July 2, 1998 Part IV
Current Report on Form 8-K of
registrant, dated November 20, 1998 Part IV
Current Report on Form 8-K of
registrant, dated December 21, 1998 Part IV
Current Report on Form 8-K of
registrant, dated May 14, 1999 Part IV
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
1999 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-4
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 7A Market Risk Disclosures II-9
Item 8 Financial Statements and Supplementary Data II-9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-9
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-2
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-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-7 of
this Form 10-K.
PART I
Item 1. Business
PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is
a limited partnership formed on May 16, 1986, under the Uniform Limited
Partnership Act of the State of Virginia to invest in a diversified portfolio of
existing, newly-constructed or to-be-built income-producing real properties such
as apartments, shopping centers, hotels, office buildings and industrial
buildings. The Partnership had authorized the issuance of a maximum of
150,000,000 Partnership Units (the "Units") at $1 per Unit, pursuant to a
Registration Statement on Form S-11 filed under the Securities Act of 1933
(Registration No. 33-5929). On June 2, 1988, the offering of Units in the
Partnership was completed and gross proceeds of $134,425,741 had been received
by the Partnership. Limited Partners will not be required to make any additional
capital contributions.
As of March 31, 1999 the Partnership owned, through joint venture
partnership, interests in the operating properties set forth in the following
table, which consisted of one commercial office building and two retail shopping
centers.
<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>
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
Daniel/Metcalf Associates 19 acres; 9/30/87 Fee ownership of land
Partnership 142,363 net and improvements
Gateway Plaza Shopping leasable (through joint venture)
Center square feet
Overland Park, Kansas
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
</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. 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.
On July 2, 1998, Richmond Gables Associates, a joint venture in which the
Partnership had an interest, sold the property known as The Gables at Erin
Shades Apartments located in Richmond, Virginia, to an unrelated third party for
$11.5 million. The Partnership received net proceeds of approximately $5,153,000
after deducting closing costs of approximately $286,000, closing proration
adjustments of approximately $33,000, the repayment of the existing mortgage
note of approximately $4,977,000 and a prepayment penalty of approximately
$472,000 and a payment of approximately $579,000 to the Partnership's co-venture
partner for its share of the sale proceeds in accordance with the joint venture
agreement.
On November 20, 1998, Hacienda Park Associates, a joint venture in which
the Partnership had an interest, sold the Hacienda Business Park property
located in Pleasanton, California, to an unrelated third party for $25 million.
The Hacienda Park property consisted of one building known as Saratoga Center
and two attached buildings known as Gibraltar Center. The Partnership received
net proceeds of approximately $20,861,000 after deducting closing costs of
approximately $278,000, net closing proration adjustments of approximately
$89,000, the repayment of the existing first mortgage note of approximately
$3,769,000 and accrued interest of approximately $3,000.
On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership had an interest, sold the property known as the Asbury Commons
Apartments located in Atlanta, Georgia, to an unrelated third party for $13.345
million. The Partnership received net proceeds of approximately $5,613,000 after
deducting closing costs of approximately $291,000, closing proration adjustments
of approximately $90,000, the repayment of the existing mortgage note of
approximately $6,598,000, accrued interest of approximately $10,000 and a
prepayment penalty of approximately $743,000. The Partnership received 100% of
the net sale proceeds in accordance with the terms of the joint venture
agreement.
In addition, subsequent to year-end, on May 14, 1999, West Ashley Shoppes
Associates, a joint venture in which the Partnership had an interest, sold the
property known as West Ashley Shoppes located in Charleston, South Carolina, to
an unrelated third party, for $8.1 million. On May 12, 1999, West Ashley Shoppes
Associates had sold an adjacent outparcel of land to another unrelated third
party for $280,000. The May 14 transaction involved the remaining real estate
owned by the joint venture. Accordingly, the joint venture will be liquidated
once the final operating expenses have been paid and the remaining net cash
assets have been distributed to the Partnership. The Partnership received total
net proceeds from the two sale transactions of approximately $8,070,000 after
deducting closing costs of approximately $225,000 and net closing proration
adjustments of approximately $85,000.
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, 1999, the Limited Partners had received cumulative cash
distributions totalling approximately $117,129,000, or $901 per original $1,000
investment for the Partnership's earliest investors. This return includes
distributions 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, $57 per original $1,000 investment from the sale of the
Highland Village Apartments in May 1990, $39 per original $1,000 investment from
the sale of The Gables at Erin Shades Apartments in July 1998, $145 per original
$1,000 investment from the sale of the Hacienda Business Park in November 1998
and $48 per original $1,000 from the sale of the Asbury Commons Apartments in
December 1998. In addition, subsequent to year-end, on June 15, 1999 the
Partnership made a special capital distribution of $61 per original $1,000
investment which represented the net proceeds from the sale of the West Ashley
Shoppes property. 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,
totalling $551.25 per original $1,000 investment for the Partnership's earliest
investors, have been from net rental income, and a substantial portion of such
distributions has been sheltered from current federal income tax liability. As
reported in the Partnership's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, the sales of Asbury Commons Apartments, Hacienda
Business Park and The Gables Apartments significantly reduced the distributable
cash flow to be received by the Partnership during fiscal 1999. As a result, the
payment of a regular quarterly distribution has been discontinued beginning with
the quarter ended March 31, 1999. The final regular quarterly distribution
payment was made on February 12, 1999 for the quarter ended December 31, 1998.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of the two
remaining investments. 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. Management has been focusing
on potential disposition strategies for the remaining investments in the
Partnership's portfolio. Subsequent to the sale of West Ashley Shoppes, the
remaining investments consist of joint venture interests in the Gateway Plaza
Shopping Center and the 625 North Michigan Office Building. Although no
assurances can be given, it is currently contemplated that sales of the
Partnership's remaining assets, which would be followed by a liquidation of the
Partnership, could be completed by the end of calendar year 1999.
Both of the Partnership's remaining investment properties are located in
real estate markets in which they face significant competition for the revenues
they generate. The Partnership's shopping center and office building 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, 1999, the Partnership had interests in three 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 1999, along with an
average for the year, are presented below for each property in which the
Partnership had an interest during fiscal 1999.
Percent Occupied At
------------------------------------------------
Fiscal
1999
6/30/98 9/30/98 12/31/98 3/31/99 Average
------- ------- -------- ------- -------
625 North Michigan Avenue 95% 95% 96% 93% 95%
Gateway Plaza Shopping Center 94% 94% 95% 87% 93%
West Ashley Shoppes (1) 95% 95% 95% 98% 96%
The Gables at Erin Shades (2) 93% N/A N/A N/A N/A
Saratoga Center & EG&G Plaza (3) 90% 95% N/A N/A N/A
Asbury Commons Apartments (4) 92% 93% N/A N/A N/A
(1) The property was sold subsequent to year-end, on May 14, 1999, as described
in Item 1.
(2) The property was sold on July 2, 1998, as described in Item 1.
(3) The property was sold on November 20, 1998, as described in Item 1.
(4) The property was sold on December 21, 1998, as described in Item 1.
Item 3. Legal Proceedings
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, 1999, there were 8,251 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.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1999.
Item 6. Selected Financial Data
PaineWebber Equity Partners Two Limited Partnership
For the years ended March 31, 1999, 1998, 1997, 1996 and 1995
(in thousands, except for per Unit data)
Years ended March 31,
-----------------------------------------------------
1999 (1) 1998 1997 (2) 1996 1995
------- ---- -------- ---- ----
Revenues $ 5,754 $ 5,487 $ 5,369 $ 5,069 $ 4,729
Operating loss $ (1,262) $ (991) $ (3,667) $ (1,508) $ (2,229)
Partnership's share of
unconsolidated
ventures' income $ 657 $ 728 $ 383 $ 185 $ 1,818
Partnership's share of
loss on impairment
of operating
investment property $ (2,517) - - - -
Interest income on note
receivable from
unconsolidated venture - - - $ 80 $ 107
Gain on sale of operating
investment properties $ 9,930 - - - -
Partnership's share of
gains on sale of
unconsolidated operating
investment properties $ 6,031 - - $ 6,766 -
Net income (loss) $ 13,170 $ (263) $ (3,266) $ 5,523 $ (304)
Per 1,000 Limited
Partnership Units:
Net income (loss) $ 97.00 $ (1.94) $ (24.04) $ 40.68 $ (2.26)
Cash distributions
from operations $ 8.84 $ 8.84 $ 8.84 $ 16.52 $ 34.20
Cash distributions
from sale
transactions $ 232.00 - - $ 61.00 -
Long-term debt $ 9,132 $ 21,540 $ 21,947 $ 22,315 $ 22,635
Total assets $ 39,989 $ 72,274 $ 74,278 $ 78,722 $ 84,148
(1) The Partnership's net income for the year ended March 31, 1999 includes an
impairment loss of $2,517,000 related to the operating investment property
owned by the unconsolidated Gateway Plaza joint venture. See Note 5 to the
accompanying financial statements for a further discussion of this
write-down.
(2) 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.
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, 1999,
seven of these investments had been sold, including three during fiscal 1999. In
addition, subsequent to year-end, on May 14, 1999 the West Ashley Shoppes
property was sold, as described below. Following this sale, the Partnership
retains an interest in two operating properties, which consist of an office
complex and a retail shopping center. The Partnership does not have any
commitments for additional investments but may be called upon to fund its
portion of operating deficits or capital improvement costs of its joint venture
investments in accordance with the respective joint venture agreements.
As previously reported, in light of the continued strength in the national
real estate market and the improvements in the office/R&D property markets,
management believes that is an opportune time to sell the Partnership's
remaining operating investment properties. As a result, management has been
focusing on potential disposition strategies for the remaining investments in
the Partnership's portfolio. With regard to the two remaining commercial office
and retail properties, the Partnership 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 while at the same time
exploring potential sale opportunities. Although there are no assurances, it is
currently contemplated that sales of the Partnership's remaining assets could be
completed prior to the end of calendar year 1999. The sale of the two remaining
real estate investments would be followed by the liquidation of the Partnership.
On July 2, 1998, Richmond Gables Associates, a joint venture in which the
Partnership held an interest, sold The Gables at Erin Shades Apartments to an
unrelated third party for $11,500,000. After deducting closing costs and
property adjustments of $320,000, The Gables joint venture received net sale
proceeds of $11,180,000. These net sale proceeds were split between the
Partnership and its co-venture partner in accordance with the terms of The
Gables joint venture agreement. The Partnership received $10,602,000 and the
non-affiliated co-venture partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original zero coupon loan secured by the property and the related prepayment
fee, the sum of which was $5,449,000. Despite incurring a sizable prepayment
penalty on the repayment of the outstanding first mortgage loan, management
believed that a current sale of The Gables property was in the best interests of
the Limited Partners due to the exceptionally strong market conditions that
exist at the present time and which resulted in the achievement of a very
favorable selling price. In addition, management was concerned that the rate of
job and population growth in the Richmond, Virginia area could lead to an
increase in new development activity in the near future. The Partnership
distributed the $5,153,000 of net proceeds from the sale of The Gables, along
with an amount of cash reserves that exceeded expected future requirements, in
the form of a special distribution totalling approximately $5,243,000, or $39
per original $1,000 investment, which was paid on July 20, 1998. The joint
venture recognized a gain of $6,400,000 on the sale of the Gables property. The
Partnership's share of such gain amounted to $6,031,000.
On November 20, 1998, Hacienda Park Associates, a joint venture in the
Partnership had an interest, sold the Hacienda Business Park property located in
Pleasanton, California, to an unrelated third party for $25 million. The
Hacienda Park property consisted of one building known as Saratoga Center and
two attached buildings known as Gibraltar Center. The Partnership received net
proceeds of approximately $20,862,000 after deducting closing costs of
approximately $278,000, net closing proration adjustments of approximately
$88,000, the repayment of the existing first mortgage note of approximately
$3,769,000 and accrued interest of approximately $3,000. As a result of the sale
of the Hacienda Park property, the Partnership made a special distribution
totalling approximately $19,492,000, or $145 per original $1,000 investment, on
December 4, 1998. Approximately $1,370,000 of the total net proceeds from the
sale of the Hacienda Park property was added to the Partnership's cash reserves
for potential investment in 625 North Michigan Avenue because of the recently
approved retail development rights for this property. Given the current strength
of the local Pleasanton market conditions, during the quarter ended June 30,
1998 management interviewed potential real estate brokers and selected a
national real estate firm that is a leading seller of R&D/office properties to
market Hacienda Park for sale. A marketing package was subsequently finalized,
and comprehensive sales efforts began in June. As a result of those efforts,
several offers were received. After completing an evaluation of these offers and
the relative strength of the prospective purchasers, the Partnership selected an
offer. A purchase and sale agreement was signed on September 21, 1998 with an
unrelated third-party prospective buyer and a non-refundable deposit of
$1,500,000 was made on October 21, 1998. The prospective buyer completed its due
diligence work in early November and closed on this transaction on November 20,
1998, as described above. The Partnership recorded a gain of $8,389,000 on the
sale of the Hacienda Park operating investment property.
On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership had an interest, sold the property known as the Asbury Commons
Apartments located in Atlanta, Georgia, to an unrelated third party for $13.345
million. The Partnership received net proceeds of approximately $5,613,000 after
deducting closing costs of approximately $291,000, closing proration adjustments
of approximately $90,000, the repayment of the existing mortgage note of
approximately $6,598,000, accrued interest of approximately $10,000 and a
prepayment penalty of approximately $743,000. Despite incurring a sizable
prepayment penalty on the repayment of the outstanding first mortgage loan,
management believed that a current sale of the Asbury Commons property was in
the best interests of the Limited Partners due to the exceptionally strong
market conditions that exist at the present time and which resulted in a very
favorable sale price. As previously reported, the Partnership had selected a
regional real estate firm with a strong background in selling apartment
properties to market the Asbury Commons property for sale. Sales materials were
finalized and an extensive marketing campaign began in September 1998. As a
result of these sale efforts, seven offers were received. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership and its co-venture partner selected an offer and
negotiated a purchase and sale agreement. A purchase and sale agreement was
signed on November 9, 1998, and the buyer made a deposit of $250,000. After the
completion of the buyer's due diligence, the transaction closed as described
above on December 21, 1998. The Partnership recorded a gain of $1,541,000 on the
sale of the Asbury Commons operating investment property. The Partnership
distributed the net proceeds from the sale of the Asbury Commons property in the
form of a special capital distribution of approximately $6,453,000, or $48 per
original $1,000 investment, paid on February 12, 1999, along with the regular
quarterly distribution for the quarter ended December 31, 1998. This special
distribution included $42.18 per original $1,000 investment, or approximately
$5,613,000, of net sale proceeds from the sale of Asbury Commons, along with
$5.82 per original $1,000 investment, or approximately $840,000, which
represented $783,000 of property escrows received subsequent to the November 20,
1998 sale of Hacienda Business Park and $57,000 of Partnership reserves that
exceeded expected future requirements. With the sale of the Asbury Commons
Apartments, Hacienda Business Park and The Gables Apartments properties during
fiscal 1999 and the resulting reduction in distributable cash flow to be
received by the Partnership, the payment of a regular quarterly distribution was
discontinued beginning with the quarter ended March 31, 1999. A final regular
quarterly distribution of $2.21 per original $1,000 investment was made on
February 12, 1999 for the quarter ended December 31, 1998.
Subsequent to year-end, on May 14, 1999, West Ashley Shoppes Associates, a
joint venture in which the Partnership had an interest, sold the property known
as West Ashley Shoppes located in Charleston, South Carolina, to an unrelated
third party, for $8.1 million. In addition, on May 12, 1999, West Ashley Shoppes
Associates had sold an adjacent outparcel of land to another unrelated third
party for $280,000. The May 14 transaction involved the remaining real estate
owned by the joint venture. Accordingly, the joint venture will be liquidated
once the final operating expenses have been paid and the remaining net cash
assets have been distributed to the Partnership. The Partnership received total
net proceeds from the two sale transactions of approximately $8,070,000 after
deducting closing costs of approximately $225,000 and net closing proration
adjustments of approximately $85,000. As previously reported, with a strong
occupancy level and a stable base of tenants, the Partnership believed it was
the opportune time to sell West Ashley Shoppes. As part of a plan to market the
property for sale, the Partnership selected a national real estate firm that is
a leading seller of this property type. Preliminary sales materials were
prepared and initial marketing efforts were undertaken. A marketing package was
then finalized and comprehensive sale efforts began in November 1998. As a
result of these efforts, ten offers were received. After completing an
evaluation of those offers and the relative strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
negotiated with an unrelated third-party prospective buyer and a non-refundable
deposit of $150,000 was made on January 29, 1999. This prospective buyer
completed its due diligence review work and the transaction closed on May 14,
1999, as described above. As a result of the sale of West Ashley Shoppes, the
Partnership made a Special Distribution of approximately $8,200,000, or $61 per
original $1,000 investment, on June 15, 1999 to unitholders of record on May 14,
1999. The Partnership will recognize a gain of approximately $2.5 million in
fiscal 2000 in connection with the sale of the West Ashley Shoppes property.
Gateway Plaza Shopping Center, a 143,300 square foot retail property
located in Overland Park (Kansas City), Kansas, was 87% leased and 81% occupied
at March 31, 1999. This compared with 95% leased and occupied at the end of the
prior quarter and 91% leased and 89% occupied one year ago. Approximately 19,000
square feet in 5 shop spaces remains to be leased. As reported in the third
quarter report, the tenant that operated the 13,000 square foot Alpine Hut store
at Gateway Plaza closed its business at the end of January 1999. The property's
leasing team has been actively negotiating with prospective tenants to lease
this space and has signed leases with 2 new tenants to occupy approximately
8,000 square feet of the 13,000 square foot total. One of these new tenants will
operate a 5,967 square foot delicatessen which is expected to open in September
1999. The other is an existing tenant which will expand into 2,231 square feet
of the former Alpine Hut space by July 31, 1999. This tenant has also expanded
into an additional 780 square feet of previously vacant space. During the fourth
quarter of fiscal 1999, a tenant which operated a 7,830 square foot men's store
exercised their option to close its store at Gateway Plaza. The property's
leasing team continues to pursue prospective tenants for this vacant space. The
property's leasing team is also working on lease renewals with two tenants
occupying a total of 3,627 square feet. Both are expected to sign these renewals
during the first quarter of fiscal 2000. Over the next twelve months, three
leases representing a total of 15,510 square feet are scheduled to expire.
As previously reported, during fiscal 1999 the Partnership selected a
national real estate firm that is a leading seller of this property type to
market Gateway Plaza for sale. Preliminary sales materials were prepared and
initial marketing efforts were undertaken in March 1999. A marketing package was
then finalized and comprehensive sale efforts began in early April 1999. As of
April 30, 1999, four offers were received. To reduce the prospective buyer's due
diligence work and the time required to complete it, updated operating reports
as well as environmental information on the property were provided to the top
prospective buyers, who were asked to submit best and final offers. After
completing an evaluation of these offers and the relative strength of the
prospective purchasers, the Partnership selected an offer and negotiated a
purchase and sale agreement in May 1999. However, subsequently the prospective
buyer decided to terminate the sales contract at the conclusion of its due
diligence period. The Partnership is currently in the process of remarketing the
property. As a result of the marketing efforts undertaken to date, it would
appear as though the drop in occupancy at Gateway Plaza during fiscal 1999 has
adversely affected the property's market value. Consequently, the venture
recorded a reduction in the net carrying value of the Gateway Plaza operating
property totalling $2,517,000 during the current year. This impairment loss is
included in the Partnership's share of unconsolidated ventures' losses on the
accompanying statement of operations for the year ended March 31, 1999. In order
to facilitate a sale transaction, on March 29, 1999 the Partnership paid the
co-venturer an amount equal to $141,000 in return for the co-venturer's
agreement to exit the joint venture. In connection with the transaction, the
co-venturer assigned its interest in the joint venture to Second Equity
Partners, Inc., the Managing General Partner of the Partnership. This will
enable the Partnership to control the marketing and sales process for the
Gateway Plaza property.
The 625 North Michigan Office Building in Chicago, Illinois, was 95%
leased on average for the year ended March 31, 1999, up from the average of 88%
achieved for fiscal 1998. Approximately 21,000 square feet in five suites remain
to be leased. During the fourth quarter of fiscal 1999, a new tenant signed a
lease and took occupancy on 1,500 square feet of space. As previously reported,
during fiscal 1999 an existing tenant that occupied approximately 8,000 square
feet relocated and expanded into a total of 10,200 square feet. The space was
renovated in preparation for the tenant's occupancy, which occurred in March
1999. In addition, two tenants expanded their existing suites by a total of
2,724 square feet during the fourth quarter. Over the next year, twelve leases
representing a total of 20,770 square feet are scheduled to expire. The
property's leasing team expects that five of these tenants occupying 7,817
square feet will renew, and that the remaining space will be leased to new
tenants. The property's leasing team continues to negotiate with two prospective
tenants that would lease a total of approximately 6,500 square feet. As
previously reported, the local market continues to display an improving trend.
In this local market, where there is no current or planned new construction of
office space, the market vacancy level at March 31, 1999 has been reduced to
10.1%, which places more upward pressure on rental rates. The higher effective
rents currently being achieved at 625 North Michigan Avenue are expected to
increase cash flow and value as new tenants sign leases and existing tenants
sign lease renewals in calendar year 1999. The Partnership has been actively
working with the co-venture partner on potential redevelopment and leasing
opportunities with specialty and fashion retailers looking to locate stores near
the building. These retailers pay significantly higher rental rates than office
rental rates. Formal approval received from the City Council during fiscal 1999
to enclose the arcade sections of the first floor will greatly improve the
chances of adding a major retail component to the building's North Michigan
Avenue frontage. Now that this approval has been obtained, the Partnership is
simultaneously exploring potential opportunities to sell this property with the
development rights.
At March 31, 1999, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $6,181,000. Such cash and
cash equivalent amounts will be utilized for the working capital requirements of
the Partnership, including the capital needs of the Partnership's remaining
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 prior to the end
of calendar year 1999. 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
1999 Compared to 1998
- ---------------------
The Partnership had net income of $13,170,000 for the year ended March 31,
1999 as compared to a net loss of $263,000 in the prior year. The large change
in the Partnership's net operating results is a result of the gains realized on
the sales of three operating investment properties during fiscal 1999. As
discussed further above, the Partnership realized gains on the sales of the
consolidated Hacienda Business Park and Asbury Commons properties of $8,389,000
and $1,541,000, respectively. In addition, the Partnership's share of the gain
from the sale of the unconsolidated Gables at Erin Shades Apartments was
$6,031,000.
The gains realized on the sales of the three operating investment
properties were partially offset by an increase in the Partnership's operating
loss of $271,000, the Partnership's share of the fiscal 1999 Gateway Plaza
impairment loss of $2,517,000 (as discussed further above) and an unfavorable
change in the Partnership's share of unconsolidated ventures' income of $71,000.
The Partnership's operating loss increased primarily due to the increase in
interest expense of $641,000. Interest expense increased as a result of the
prepayment penalty of $743,000 incurred on the repayment of the outstanding
first mortgage loan secured by the Asbury Commons Apartments. The increase in
interest expense was partially offset by an increase in interest and other
income of $294,000. Interest and other income increased due to the interest
income earned on the temporary investment of the proceeds from the sales of the
three operating investment properties during fiscal 1999 pending the special
distributions to the Limited Partners. The Partnership's share of unconsolidated
ventures' income declined during fiscal 1999 primarily due to an increase in
interest expense. Interest expense increased as a result of the prepayment
penalty of $472,000 incurred on the repayment of the outstanding first mortgage
loan secured by The Gables at Erin Shades Apartments. In addition, interest
expense increased at Gateway Plaza by $166,000 as a result of $171,000 of
interest expense being capitalized during the prior year as part of construction
loan costs. The increases in interest expense at The Gables at Erin Shades
Apartments and at Gateway Plaza were partially offset by an increase in net
income at 625 North Michigan Avenue. Net income increased at 625 North Michigan
Avenue due to an increase in rental income and a decrease in real estate taxes.
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 was 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 fiscal 1998 in order to maintain
occupancy levels at the property. 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
fiscal 1997. 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. 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. In addition,
net income increased at The Gables joint venture by $59,000 during fiscal 1998.
Net income increased at this joint venture due to an increase in rental income
resulting from an increase in average occupancy during fiscal 1998. 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 fiscal 1998.
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. 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 included 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.
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.
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. Limited new construction and healthy economic growth have
significantly improved the supply and demand fundamentals for office buildings
in many markets throughout the country over the past year. The commercial office
segment has begun to experience 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 continues to suffer from an oversupply of
space in many markets resulting from overbuilding in recent years and the trend
of consolidations and bankruptcies among retailers prompted by the generally
flat rate of growth in overall retail sales. There are no assurances that these
competitive pressures will not adversely affect the operations and/or market
values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of the remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price. In the case of the Gateway Plaza joint venture, subsequent to year-end,
the Partnership bought out the subordinated interest of the co-venture partner
and assigned it to the Managing General Partner of the Partnership. As a result,
no such conflicts should exist on this investment.
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 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.
<PAGE>
Inflation
- ---------
The Partnership completed its twelfth full year of operations in fiscal
1999. 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 center and office
building contain rental escalation and/or expense reimbursement clauses based on
increases in tenant sales or property operating expenses. 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 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 7A. Market Risk Disclosures
As discussed further in the notes to the accompanying financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents and mortgage notes payable. The cash equivalents are invested
exclusively in short-term money market instruments and the long-term debt
consists exclusively of fixed rate obligations. The Partnership does not invest
in derivative financial instruments or engage in hedging transactions. In light
of these facts, and due to the Partnership's expected liquidation by the end of
calendar year 1999, management does not believe that the Partnership's financial
instruments have any material exposure to market risk factors.
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 39 8/22/96
Terrence E. Fancher Director 45 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 51 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 56 4/17/85 *
Thomas W. Boland Vice President and Controller 36 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.
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, 1999, 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 remained through the quarter ended December 31, 1998. The sales of Asbury
Commons Apartments, Hacienda Business Park and The Gables Apartments during
fiscal 1999 significantly reduced the distributable cash flow to be received by
the Partnership. As a result, the payment of a regular quarterly distribution
has been discontinued beginning with the quarter ended March 31, 1999. The final
regular quarterly distribution payment was made on February 12, 1999 for the
quarter ended December 31, 1998. Furthermore, 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, 1999. 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,
1999 is $236,000, 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 $21,000 included in general and administrative expenses for managing the
Partnership's cash assets during fiscal 1999. 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. However, a Current Report on Form 8-K dated May 14, 1999 was filed
by the Partnership subsequent to year-end to report the sale of West
Ashley Shoppes and is hereby incorporated herein by reference.
(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 28, 1999
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 28 , 1999
--------------------------- --------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 28, 1999
--------------------------- -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<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 pursuant
dated July 21, 1986, as to Rule 424(c) and incorporated
supplemented, with particular herein by reference.
reference to the 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 all incorporated herein by reference.
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
1999 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of Part I of his
Report Page I-1, to which eference
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>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
PaineWebber Equity Partners Two Limited Partnership:
Report of independent auditors F-2
Consolidated balance sheets as of March 31, 1999 and 1998 F-3
Consolidated statements of operations for the years ended
March 31, 1999, 1998 and 1997 F-4
Consolidated statements of changes in partners' capital (deficit)
for the years ended March 31, 1999, 1998 and 1997 F-5
Consolidated statements of cash flows for the years ended
March 31, 1999, 1998 and 1997 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, 1998 and 1997 F-27
Combined statements of income and changes in venturers' capital
for the years ended December 31, 1998, 1997 and 1996 F-28
Combined statements of cash flows for the years ended
December 31, 1998, 1997 and 1996 F-29
Notes to combined financial statements F-30
Schedule III - Real Estate and Accumulated Depreciation F-37
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, 1999 and
1998, 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, 1999. 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, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999, 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 18, 1999
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(In thousands, except for per Unit data)
ASSETS
1999 1998
---- ----
Operating investment properties:
Land $ 2,342 $ 7,351
Building and improvements 5,437 40,616
--------- ---------
7,779 47,967
Less accumulated depreciation (2,307) (14,044)
--------- ---------
5,472 33,923
Investments in unconsolidated joint
ventures, at equity 27,774 30,237
Cash and cash equivalents 6,181 6,202
Escrowed cash - 398
Accounts receivable 346 236
Prepaid expenses 6 31
Deferred rent receivable 135 737
Deferred expenses, net of accumulated
amortization of $165 ($883 in 1998) 58 510
Other assets 17 -
--------- ---------
$ 39,989 $ 72,274
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 170 $ 427
Net advances from consolidated ventures 156 115
Tenant security deposits - 111
Bonds payable - 2,171
Mortgage notes payable 9,132 19,369
Other liabilities - 331
--------- ---------
Total liabilities 9,458 22,524
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 288 158
Cumulative cash distributions (725) (713)
Limited Partners ($1 per Unit;
134,425,741 Units issued):
Capital contributions, net of offering costs 119,747 119,747
Cumulative net income 28,349 15,309
Cumulative cash distributions (117,129) (84,752)
--------- ---------
Total partners' capital 30,531 49,750
--------- ---------
$ 39,989 $ 72,274
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1999, 1998 and 1997
(In thousands, except for per Unit data)
1999 1998 1997
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 5,057 $ 5,084 $ 5,011
Interest and other income 697 403 358
--------- --------- --------
5,754 5,487 5,369
Expenses:
Loss on impairment of operating
investment property - - 2,700
Interest expense 2,602 1,961 1,990
Depreciation expense 1,944 1,889 1,953
Property operating expenses 1,301 1,370 1,279
Real estate taxes 484 521 479
General and administrative 640 632 528
Amortization expense 45 105 107
--------- --------- --------
7,016 6,478 9,036
--------- --------- --------
Operating loss (1,262) (991) (3,667)
Gain on sale of operating investment
properties 9,930 - -
Other expense 331 - 18
Investment income:
Partnership's share of unconsolidated
ventures' income 657 728 383
Partnership's share of loss on impairment
of operating investment property (2,517) - -
Partnership's share of gain on
sale of unconsolidated operating
investment property 6,031 - -
--------- --------- --------
4,171 728 383
--------- --------- --------
Net income (loss) $ 13,170 $ (263) $ (3,266)
========= ========= ========
Net income (loss) per 1,000
Limited Partnership Units $ 97.00 $ (1.94) $ (24.04)
========= ======== ========
Cash distributions per 1,000
Limited Partnership Units $ 240.84 $ 8.84 $ 8.84
========= ======== ========
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, 1999, 1998 and 1997
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (12) (32,377) (32,389)
Net income 130 13,040 13,170
-------- ------- -------
Balance at March 31, 1999 $ (436) $30,967 $30,531
======== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1999, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,170 $ (263) $ (3,266)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss on impairment of operating investment property - - 2,700
Gain on sale of operating investment properties (9,930) - -
Consolidated venture partners' share of operations (331) - -
Partnership's share of unconsolidated ventures' income (657) (728) (383)
Partnership's share of loss on impairment of operating
investment property 2,517 - -
Partnership's share of gains on sale of unconsolidated
operating investment properties (6,031) - -
Depreciation and amortization 1,989 1,994 2,060
Amortization of deferred financing costs 26 44 44
Changes in assets and liabilities:
Escrowed cash 398 (119) (129)
Accounts receivable (110) (85) 110
Accounts receivable - affiliates - - 15
Prepaid expenses 25 19 (21)
Deferred rent receivable 72 95 (101)
Other assets (17) - -
Accounts payable and accrued expenses (257) 156 (12)
Advances to/from consolidated ventures 41 (285) 478
Tenant security deposits (111) (5) 20
Other liabilities - - (18)
--------- ------- ---------
Total adjustments (12,376) 1,086 4,763
--------- ------- ---------
Net cash provided by operating activities 794 823 1,497
--------- ------- ---------
Cash flows from investing activities:
Net proceeds from sales of operating investment properties 37,776 - -
Distributions from unconsolidated ventures 7,771 3,240 2,744
Additional investments in unconsolidated ventures (1,137) (965) (1,939)
Additions to operating investment properties (1,862) (598) (444)
Payment of leasing commissions and other deferred expenses (591) (13) (94)
--------- ------- ---------
Net cash provided by investing activities 41,957 1,664 267
--------- ------- ---------
Cash flows from financing activities:
Distributions to partners (32,389) (1,200) (1,200)
Repayment of principal on notes payable (10,237) (281) (257)
Payments on district bond assessments (146) (126) (111)
--------- ------- ---------
Net cash used in financing activities (42,772) (1,607) (1,568)
--------- ------- ---------
Net (decrease) increase in cash and cash equivalents (21) 880 196
Cash and cash equivalents, beginning of year 6,202 5,322 5,126
--------- ------- ---------
Cash and cash equivalents, end of year $ 6,181 $ 6,202 $ 5,322
========= ======= =========
Supplemental disclosures:
Cash paid during the year for interest $ 2,576 $ 1,917 $ 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, 1999, seven of these investments had been sold, including
three during fiscal 1999. In addition, subsequent to year-end, on May 14, 1999
the Partnership sold the West Ashley Shoppes property (see Note 4). After this
sale transaction, the Partnership retains an interest in two operating
properties, which consist an office complex and a retail shopping center. The
Partnership 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 by the end of calendar year 1999. The sale of the remaining
investments would be followed by a liquidation of the Partnership.
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, 1999 and 1998 and revenues and expenses for each
of the three years in the period ended March 31, 1999. 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,
accordingly, operations of the ventures are 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 additional annual charges to depreciation
expense to adjust the carrying value of the Hacienda Park property such that it
will match the expected reversion value at the time of disposition. 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, 1999 and 1998 include deferred commissions
of West Ashley Shoppes Associates, which are being amortized on a straight-line
basis over the term of the respective lease. Deferred expenses at March 31, 1998
included loan costs incurred in connection with the Asbury Commons and Hacienda
Park mortgage notes payable described in Note 6, which were being amortized
using the effective interest method over their respective terms. The
amortization of such costs was included in interest expense on the accompanying
statements of operations. Deferred expenses at March 31, 1998 also included
legal fees associated with the organization of the Hacienda Park joint venture,
which were amortized on the straight-line basis over a sixty-month term, and
deferred commissions and lease cancellation fees of Hacienda Park Associates,
which were being amortized on a straight-line basis over the term of the
respective lease.
Escrowed cash at March 31, 1998 included 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. Upon sale or
disposition of the Partnership's investments, the taxable gain or the tax loss
incurred will be allocated among the partners. The principal difference between
the Partnership's accounting on a federal income tax basis and the accompanying
financial statements prepared in accordance with generally accepted accounting
principals (GAAP) relates to the methods used to determine the depreciation
expense on the consolidated and unconsolidated operating investment properties.
As a result of the difference in depreciation, the gains calculated upon the
sale of the operating investment properties for GAAP purposes differ from those
calculated for federal income tax purposes.
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, 1999 and 1998 due to the
short-term maturities of these instruments. It was 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).
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, 1999, 1998 and 1997, 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, 1999, 1998 and 1997 is $236,000, $230,000 and $224,000, 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 $21,000, $17,000, and $13,000 (included in general and administrative
expenses) for managing the Partnership's cash assets during fiscal 1999, 1998
and 1997, respectively.
4. Operating Investment Properties
-------------------------------
The Partnership's balance sheet at March 31, 1999 includes one operating
investment property (three at March 31, 1998): the West Ashley Shoppes Shopping
Center, owned by West Ashley Shoppes Associates. As discussed further below, on
November 20, 1998 Hacienda Park Associates, a joint venture in which the
Partnership had an interest, sold its operating investment properties to an
unrelated third party. On December 31, 1998, Atlanta Asbury Partnership, a joint
venture in which the Partnership had an interest, sold the Asbury Commons
Apartments to an unrelated third party. 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 Hacienda Park and Asbury
Commons 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. Descriptions of the operating investment
properties and the agreements through which the Partnership acquired its
interests in the properties are provided below.
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).
On November 20, 1998, Hacienda Park Associates sold the Hacienda Business
Park property to an unrelated third party for $25 million. The Partnership
received net proceeds of approximately $20,862,000 after deducting closing costs
of approximately $278,000, net closing proration adjustments of approximately
$88,000, the repayment of the existing first mortgage note of approximately
$3,769,000 and accrued interest of approximately $3,000. As a result of the sale
of the Hacienda Park property, the Partnership made a special distribution
totalling approximately $19,492,000, or $145 per original $1,000 investment, on
December 4, 1998. Approximately $1,370,000 of the total net proceeds from the
sale of the Hacienda Park property were added to the Partnership's cash reserves
for potential investment in the 625 North Michigan joint venture (see Note 5)
because of the recently approved retail development rights for this property.
Given the current strength of the local Pleasanton market conditions, during the
quarter ended June 30, 1998 management interviewed potential real estate brokers
and selected a national real estate firm that is a leading seller of R&D/office
properties to market Hacienda Park for sale. A marketing package was
subsequently finalized, and comprehensive sales efforts began in June. As a
result of those efforts, several offers were received. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
signed on September 21, 1998 with an unrelated third-party prospective buyer and
a non-refundable deposit of $1,500,000 was made on October 21, 1998. The
prospective buyer completed its due diligence work in early November and closed
on this transaction on November 20, 1998, as described above. The Partnership
recognized a gain of $8,389,000 on the sale of the Hacienda Plaza property in
fiscal 1999.
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. 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 2000. However, there are no
assurances that any portion of this balance will be collected.
Per the terms of the joint venture agreement, net income from operations
was to 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 were to 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. The
cost of the repair work required to remediate this situation was estimated at
approximately $1.5 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 was completed during
fiscal 1999. During fiscal 1998, the Partnership filed a warranty claim against
the manufacturer of the fiberglass-composite roofing shingles installed when the
property was built. During fiscal 1999, the manufacturer of the roofing shingles
agreed to provide the Partnership with the materials to replace the existing
roofing shingles. Also during fiscal 1999, 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 during fiscal
1999. The payments were recorded as reductions in the carrying value of the
operating investment property during fiscal 1999.
On December 21, 1998, Atlanta Asbury Partnership sold the property known
as the Asbury Commons Apartments located in Atlanta, Georgia, to an unrelated
third party for $13.345 million. The Partnership received net proceeds of
approximately $5,613,000 after deducting closing costs of approximately
$291,000, closing proration adjustments of approximately $90,000, the repayment
of the existing mortgage note of approximately $6,598,000, accrued interest of
approximately $10,000 and a prepayment penalty of approximately $743,000.
Despite incurring a sizable prepayment penalty on the repayment of the
outstanding first mortgage loan, management believed that a current sale of the
Asbury Commons property was in the best interests of the Limited Partners due to
the exceptionally strong market conditions that exist at the present time and
which resulted in a very favorable sale price. The Partnership had selected a
regional real estate firm with a strong background in selling apartment
properties to market the Asbury Commons property for sale. Sales materials were
finalized and an extensive marketing campaign began in September 1998. As a
result of these sale efforts, seven offers were received. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership and its co-venture partner selected an offer and
negotiated a purchase and sale agreement. A purchase and sale agreement was
signed on November 9, 1998, and the buyer made a deposit of $250,000. After the
completion of the buyer's due diligence, the transaction closed as described
above on December 21, 1998. The Partnership recorded a gain of $1,541,000 on the
sale of the Asbury Commons property during fiscal 1999. The Partnership
distributed the net proceeds from the sale of the Asbury Commons property in the
form of a special capital distribution of approximately $6,453,000, or $48 per
original $1,000 investment, which was paid on February 12, 1999, along with the
regular quarterly distribution for the quarter ended December 31, 1998. This
special distribution included $42.18 per original $1,000 investment, or
approximately $5,613,000, of net sale proceeds from the sale of Asbury Commons,
along with $5.82 per original $1,000 investment, or approximately $840,000,
which represented $783,000 of property escrows received subsequent to the
November 20, 1998 sale of Hacienda Business Park and $57,000 of Partnership
reserves that exceeded expected future requirements.
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
assignment 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 called for
net income to be allocated as follows: (1) 100% to the Partnership until the
Partnership had 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 were to 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 year-end, on May 14, 1999, West Ashley Shoppes Associates
sold the West Ashley Shoppes property to an unrelated third party for $8.1
million. In addition, on May 12, 1999, West Ashley Shoppes Associates had sold
an adjacent outparcel of land to another unrelated third party for $280,000. The
May 14 transaction involved the remaining real estate owned by the joint
venture. Accordingly, the joint venture will be liquidated once the final
operating expenses have been paid and the remaining net cash assets have been
distributed to the Partnership. The Partnership received total net proceeds from
the two sale transactions of approximately $8,070,000 after deducting closing
costs of approximately $225,000 and net closing proration adjustments of
approximately $85,000. With a strong occupancy level and a stable base of
tenants, the Partnership believed it was the opportune time to sell West Ashley
Shoppes. As part of a plan to market the property for sale, the Partnership
selected a national real estate firm that is a leading seller of this property
type. Preliminary sales materials were prepared and initial marketing efforts
were undertaken. A marketing package was then finalized and comprehensive sale
efforts began in November 1998. As a result of these efforts, ten offers were
received. After completing an evaluation of those offers and the relative
strength of the prospective purchasers, the Partnership selected an offer. A
purchase and sale agreement was negotiated with an unrelated third-party
prospective buyer and a non-refundable deposit of $150,000 was made on January
29, 1999. This prospective buyer completed its due diligence review work and the
transaction closed on May 14, 1999, as described above. As a result of the sale
of West Ashley Shoppes, the Partnership made a Special Distribution of
approximately $8,200,000, or $61 per original $1,000 investment, on June 15,
1999 to unitholders of record on May 14, 1999. The Partnership will recognize a
gain of approximately $2.5 million in fiscal 2000 in connection with the sale of
the West Ashley Shoppes property.
The terms of the joint venture agreement called for net income or loss to
be allocated to the Partnership and the co-venturer in the same proportion as
cash distributions, except for certain items which were to be specifically
allocated to the partners, as defined, in the joint venture agreement. Such
items included the amortization of acquisition fees 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, 1998 (through the
date of sale for Hacienda Park Associates and Atlanta Asbury Partnership), 1997
and 1996 (in thousands):
1998 1997 1996
---- ---- ----
Property operating expenses:
Utilities $ 87 $ 207 $ 205
Repairs and maintenance 855 451 425
Salaries and related costs 30 224 210
Administrative and other 221 282 225
Insurance 31 53 53
Management fees 77 153 161
-------- -------- --------
$ 1,301 $ 1,370 $ 1,279
======== ======== ========
5. Investments in Unconsolidated Joint Ventures
--------------------------------------------
The Partnership had investments in two unconsolidated joint venture
partnerships which own operating investment properties at March 31, 1999 (three
at March 31, 1998). As discussed further below, on July 2, 1998, Richmond Gables
Associates, a joint venture in which the Partnership had an interest, sold The
Gables at Erin Shades Apartments to an unrelated third party.
<PAGE>
Condensed combined financial statements of the unconsolidated joint
ventures, for the periods indicated, are as follows:
Condensed Combined Balance Sheets
December 31, 1998 and 1997
(in thousands)
Assets
1998 1997
---- ----
Current assets $ 1,261 $ 1,234
Operating investment properties, net 46,512 54,902
Other assets 4,471 4,367
-------- --------
$ 52,244 $ 60,503
======== ========
Liabilities and Venturers' Capital
Current liabilities $ 2,297 $ 2,740
Other liabilities 310 318
Long-term debt 3,742 8,720
Partnership's share of venturers' capital 27,142 29,874
Co-venturers' share of venturers' capital 18,753 18,851
-------- --------
$ 52,244 $ 60,503
======== ========
Condensed Combined Summary of Operations
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental revenues and expense
reimbursements $ 9,870 $ 9,814 $ 9,297
Interest and other income 410 481 343
-------- -------- --------
10,280 10,295 9,640
Expenses:
Loss due to impairment of
operating investment property 2,517 - -
Property operating and other
expenses 2,828 3,230 3,009
Real estate taxes 1,868 2,323 2,212
Interest on long-term debt 1,061 661 663
Interest on note payable to venturer - - -
Depreciation and amortization 3,273 3,177 3,158
-------- -------- --------
11,547 9,391 9,042
-------- -------- --------
Operating income (loss) (1,267) 904 598
Gains on sale of operating
investment properties 6,400 - -
-------- -------- --------
Net income $ 5,133 $ 904 $ 598
======== ======== ========
Net income:
Partnership's share of
combined income $ 4,250 $ 786 $ 441
Co-venturers' share of
combined income 883 118 157
-------- -------- --------
$ 5,133 $ 904 $ 598
======== ======== ========
Reconciliation of Partnership's Investment
March 31, 1999 and 1998
(in thousands)
1999 1998
---- ----
Partnership's share of capital at
December 31, as shown above $ 27,142 $ 29,874
Excess basis due to investments in joint
ventures, net (1) 1,011 1,036
Timing differences (2) (379) (673)
-------- ---------
Investments in unconsolidated joint
ventures, at equity at March 31 $ 27,774 $ 30,237
======== =========
<PAGE>
(1)At March 31, 1999 and 1998, the Partnership's investment exceeds its
share of the joint venture partnerships' capital accounts by
approximately $1,011,000 and $1,036,000, 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, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
---- ---- ----
Partnership's share of operations,
as shown above $ 4,250 $ 786 $ 441
Amortization of excess basis (79) (58) (58)
-------- --------- --------
Partnership's share of
unconsolidated ventures'
net income $ 4,171 $ 728 $ 383
======== ========= ========
The Partnership's share of the net income of the unconsolidated joint
ventures is presented as follows in the accompanying statements of operations:
1999 1998 1997
---- ---- ----
Partnership's share of
unconsolidated ventures'
income $ 657 $ 728 $ 383
Partnership's share of loss on
impairment of operating
investment property (2,517) - -
Partnership's share of gain on
sale of unconsolidated operating
investment property 6,031 - -
-------- --------- --------
$ 4,171 $ 728 $ 383
======== ========= ========
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):
1999 1998
---- ----
Chicago-625 Partnership $ 18,148 $ 18,131
Richmond Gables Associates - (244)
Daniel/Metcalf Associates Partnership 9,626 12,350
---------- --------
Investments in unconsolidated joint ventures $ 27,774 $ 30,237
========== ========
The Partnership received cash distributions from the unconsolidated
ventures during the years ended March 31, 1999, 1998 and 1997 as set forth below
(in thousands):
1999 1998 1997
---- ---- ----
Chicago-625 Partnership $ 1,441 $ 1,504 $ 1,689
Richmond Gables Associates 5,211 206 198
Daniel/Metcalf Associates
Partnership 1,119 1,530 641
TCR Walnut Creek Limited
Partnership - - 182
Portland Pacific Associates - - 34
---------- --------- --------
$ 7,771 $ 3,240 $ 2,744
========== ========= ========
<PAGE>
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. Through December 31, 1998, the Partnership had made additional
contributions totalling $5,442,000 to cover these leasing expenses. The
repayment of Leasing Expense Contributions has a specific priority in the
distribution of net sale or refinancing proceeds in accordance with the terms of
the amended joint venture agreement, as discussed further below.
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 additional annual depreciation
charges 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 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 $9,365,000 at December 31, 1998.
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.
On July 2, 1998, Richmond Gables Associates sold The Gables at Erin Shades
Apartments to an unrelated third party for $11,500,000. After deducting closing
costs and property adjustments of $320,000, The Gables joint venture received
net sale proceeds of $11,180,000. These net sale proceeds were split between the
Partnership and its co-venture partner in accordance with the terms of The
Gables joint venture agreement. The Partnership received $10,602,000 and the
non-affiliated co-venture partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original zero coupon loan secured by the property and the related prepayment
fee, the sum of which was $5,449,000. Despite incurring a sizable prepayment
penalty on the repayment of the outstanding first mortgage loan, management
believed that a current sale of The Gables property was in the best interests of
the Limited Partners due to the exceptionally strong market conditions that
exist at the present time and which resulted in the achievement of a very
favorable selling price. The Partnership distributed the $5,153,000 of net
proceeds from the sale of The Gables, along with an amount of cash reserves that
exceeded expected future requirements, in the form of a special distribution
totalling approximately $5,243,000, or $39 per original $1,000 investment, which
was paid on July 20, 1998. The joint venture recognized a gain of $6,400,000 on
the sale of the Gables property in fiscal 1999. The Partnership's share of such
gain amounted to $6,031,000.
Net income and loss were to be allocated as follows: (1) depreciation was
to be allocated to the Partnership, (2) income was to be allocated to the
Partnership and co-venturer in the same proportion as cash distributions. Losses
were to be allocated in amounts equal to the positive capital accounts of the
Partnership and co-venturer and (3) all other profits and losses were to be
allocated 70% to the Partnership and 30% to the co-venturer.
The joint venture had entered into a management contract with an affiliate
of the co-venturer which was cancellable at the option of the Partnership upon
the occurrence of certain events. The annual management fee was 5% of gross
rents, 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, which was 87% leased and 81% occupied as of March 31, 1999, consists
of approximately 142,000 net rentable square feet on approximately 19 acres of
land.
During fiscal 1999 the Partnership selected a national real estate firm
that is a leading seller of this property type to market Gateway Plaza for sale.
Preliminary sales materials were prepared and initial marketing efforts were
undertaken in March 1999. A marketing package was then finalized and
comprehensive sale efforts began in early April 1999. As of April 30, 1999, four
offers were received. To reduce the prospective buyer's due diligence work and
the time required to complete it, updated operating reports as well as
environmental information on the property were provided to the top prospective
buyers, who were asked to submit best and final offers. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership selected an offer and negotiated a purchase and sale
agreement in May 1999. However, subsequently the prospective buyer decided to
terminate the sales contract at the conclusion of its due diligence period. The
Partnership is currently in the process of remarketing the property. As a result
of the marketing efforts undertaken to date, it would appear as though a drop in
occupancy at Gateway Plaza during fiscal 1999 has adversely affected the
property's market value. Consequently, the venture recorded a reduction in the
net carrying value of the Gateway Plaza operating property totalling $2,517,000
during the current year. This impairment loss is included in the Partnership's
share of unconsolidated ventures' losses on the accompanying statement of
operations for the year ended March 31, 1999. In order to facilitate a sale
transaction, on March 29, 1999 the Partnership paid the co-venturer an amount
equal to $141,000 in return for the co-venturer's agreement to exit the joint
venture. In connection with the transaction, the co-venturer assigned its
interest in the joint venture to Second Equity Partners, Inc., the Managing
General Partner of the Partnership. This will enable the Partnership to control
the marketing and sales process for the Gateway Plaza property. As a result of
the assignment, the Gateway Plaza joint venture will be presented on a
consolidated basis in the Partnership's financial statements beginning in fiscal
2000.
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 Partnership's cumulative unpaid
preferential return as of December 31, 1998 amounted to $3,763,000. 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.
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 original 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.
6. Mortgage Notes Payable
----------------------
Mortgage notes payable on the consolidated balance sheets of the
Partnership at March 31, 1999 and 1998 consist of the following (in thousands):
1999 1998
---- ----
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, 1999 and 1998. $ 9,132 $ 9,282
8.75% mortgage note payable to an
insurance company secured by the
Asbury Commons operating investment
property (see discussion below).
The loan required 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. - 6,707
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
<PAGE>
required 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. - 3,380
------- -------
$ 9,132 $19,369
======= =======
The scheduled annual principal payments to retire the remaining mortgage
note payable are as follows (in thousands):
Year ended March 31,
2000 $ 150
2001 8,982
2002 -
2003 -
2004 -
--------
$ 9,132
========
On April 29, 1988, the Partnership borrowed $6,000,000 in the form of a
zero coupon loan secured by the 625 North Michigan Office Building which had a
scheduled maturity date in May of 1995. The terms of the loan agreement required
that if the loan ratio, as defined, exceeded 80%, the Partnership was required
to deposit additional collateral in an amount sufficient to reduce the loan
ratio to 80%. During fiscal 1994, the lender informed the Partnership that based
on an interim property appraisal, the loan ratio exceeded 80% and that a deposit
of additional collateral was required. Subsequently, the Partnership submitted
an appraisal which demonstrated that the loan ratio exceeded 80% by an amount
less than previously demanded by the lender. In December 1993, the Partnership
deposited additional collateral of $208,876 in accordance with the higher
appraised value. The lender accepted the Partnership's deposit of additional
collateral 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. Subsequent to
year-end, the Partnership negotiated a one-year extension of the maturity date
to May 31, 2000. The interest rate of 9.125% and monthly interest payments of
$83,000 remain unchanged. The Partnership paid an extension fee of $46,000 to
obtain the extension.
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. 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 was secured by the Asbury Commons
apartment complex, carried an annual interest rate of 8.75% and was scheduled to
mature in 7 years. The loan required monthly principal and interest payments of
$88,000. As discussed in Note 4, the Asbury Commons property was sold and this
loan obligation was repaid in full on December 21, 1998. 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 bore interest at 8.72% and was scheduled to mature in
7 years. The loan required monthly principal and interest payments of $43,000.
As discussed in Note 5, The Gables Apartments was sold and this loan obligation
was repaid in full on July 2, 1998. 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 was
secured by the Hacienda Business Park property, carried an annual interest rate
of 9.04% and was scheduled to mature in 7 years. The loan required monthly
principal and interest payments of $36,000. As discussed in Note 4, the Hacienda
Business Park property was sold and this loan obligation was repaid in full on
November 20, 1998. 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 loan
secured by the Gateway Plaza property rests with the unconsolidated joint
venture. Accordingly the mortgage loan liability is recorded on the books of the
unconsolidated joint venture. The Partnership has indemnified Daniel/Metcalf
Associates Partnership and the related co-venture partner, against all
liabilities, claims and expenses associated with this borrowing.
7. Bonds Payable
-------------
Bonds payable consisted 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 were secured by liens on the operating investment property. The
bonds for which the operating investment property was subject to assessment bore
interest at rates ranging from 5% to 7.87%, with an average rate of
approximately 7.2%. Principal and interest were payable in semi-annual
installments and were due to mature in years 2004 through 2017. Since the
operating investment property was sold on November 20, 1998, the liability for
the bond assessments has been transferred to the buyer. Therefore, the Hacienda
Park joint venture is no longer liable for the bond assessments.
8. Rental Revenue
--------------
The building owned by West Ashley Shoppes Associates is leased under
noncancellable, multi-year leases. Minimum future rentals due under the terms of
these leases at December 31, 1998 are as follows (in thousands):
Future
Minimum
Contractual
Payments
--------
1999 $ 888
2000 837
2001 756
2002 471
2003 210
Thereafter 1,142
------
$4,304
======
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1999
(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 $(2,133) $2,342 $5,437 $7,779 $2,307 1988 3/10/88 5 - 31.5 yrs
Notes:
(A) The aggregate cost of real estate owned at December 31, 1998 for Federal income tax purposes is approximately $10,314.
(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:
1998 1997 1996
---- ---- ----
Balance at beginning of period $ 47,967 $ 47,369 $ 50,204
Acquisitions and improvements 1,862 598 444
Dispositions (42,050) - -
Write off due to permanent impairment
(see Note 2) - - (3,279)
---------- --------- ---------
Balance at end of period $ 7,779 $ 47,967 $ 47,369
========== ========= =========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 14,044 12,155 $ 10,781
Depreciation expense 1,944 1,889 1,953
Dispositions (13,681) - -
Write off due to permanent impairment
(see Note 2) - - (579)
------------ --------- ---------
Balance at end of period $ 2,307 $ 14,044 $ 12,155
=========== ========= =========
(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, 1998 and 1997, 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, 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 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, 1998 and 1997, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 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
February 5, 1999,
except for Note 10, as to
which the date is
March 29, 1999.
<PAGE>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands)
Assets
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 412 $ 395
Accounts receivable, net of allowance for
doubtful accounts of $45 ($45 in 1997) 837 774
Prepaid distribution to venturer - 37
Prepaid expenses 12 28
---------- --------
Total current assets 1,261 1,234
Operating investment properties:
Land 13,332 15,222
Buildings, improvements and equipment 56,555 61,649
Construction in progress - 3,161
---------- --------
69,887 80,032
Less accumulated depreciation (23,375) (25,130)
---------- --------
46,512 54,902
Escrowed funds 1,325 1,144
Due from affiliates 269 269
Deferred expenses, net of accumulated
amortization of $1,976 ($1,767 in 1997) 1,612 1,635
Other assets 1,265 1,319
---------- --------
$ 52,244 $ 60,503
========== ========
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable and accrued expenses $ 312 $ 481
Accrued real estate taxes 1,922 2,122
Current portion - long-term debt 63 137
---------- --------
Total current liabilities 2,297 2,740
Tenant security deposits 260 268
Subordinated management fee payable to affiliate 50 50
Long-term debt 3,742 8,720
Venturers' capital 45,895 48,725
---------- --------
$ 52,244 $ 60,503
========== ========
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, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 9,870 $ 9,814 $ 9,297
Interest and other income 410 481 343
--------- --------- --------
10,280 10,295 9,640
Expenses:
Loss due to impairment of operating
investment property 2,517 - -
Real estate taxes 1,868 2,323 2,212
Depreciation expense 2,948 2,880 2,896
Property operating expenses 555 641 602
Repairs and maintenance 899 1,047 879
Management fees 297 314 318
Professional fees 71 107 82
Salaries 575 634 591
Advertising 17 60 46
Interest expense on long-term debt 1,061 661 663
General and administrative 408 417 438
Amortization expense 325 297 262
Bad debt expense - - 45
Other 6 10 8
--------- --------- --------
11,547 9,391 9,042
--------- --------- --------
Operating income (loss) (1,267) 904 598
Gain on sale of operating
investment property 6,400 - -
--------- --------- --------
Net income 5,133 904 598
Contributions from venturers 1,772 2,160 2,303
Distributions to venturers (9,735) (4,310) (3,735)
Venturers' capital, beginning of year 48,725 49,971 50,805
--------- --------- --------
Venturers' capital, end of year $ 45,895 $ 48,725 $ 49,971
========= ========= ========
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, 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 $ 5,133 $ 904 $ 598
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss due to impairment of operating
investment property 2,517 - -
Depreciation and amortization 3,273 3,177 3,158
Amortization of deferred financing costs 33 42 41
Gain on sale of operating investment property (6,400) - -
Changes in assets and liabilities:
Accounts receivable, net (63) (137) 57
Prepaid expenses 16 (1) (18)
Escrowed funds (181) 43 20
Deferred expenses (335) (366) (230)
Other assets (54) 49 172
Accounts payable and accrued expenses (169) 109 102
Accounts payable - affiliates - - (21)
Tenant security deposits (8) 3 12
Accrued real estate taxes (200) 105 (30)
-------- --------- ---------
Total adjustments (1,571) 3,024 3,263
-------- --------- ---------
Net cash provided by operating
activities 3,562 3,928 3,861
-------- --------- ---------
Cash flows from investing activities:
Additions to operating investment properties (1,847) (2,380) (2,206)
Proceeds from sale of operating
investment property 11,500 - -
Selling costs from sale (286) - (190)
Increase in restricted cash - 560 (18)
-------- --------- ---------
Net cash provided by (used in)
investing activities 9,367 (1,820) (2,414)
-------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (5,052) (125) (115)
Distributions to venturers (9,679) (4,348) (3,786)
Capital contributions from venturers 1,819 2,160 2,303
-------- --------- ---------
Net cash used in financing activities (12,912) (2,313) (1,598)
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 17 (205) (151)
Cash and cash equivalents, beginning of year 395 600 751
-------- --------- ---------
Cash and cash equivalents, end of year $ 412 $ 395 $ 600
======== ========= =========
Cash paid during the year for interest $ 1,057 $ 791 $ 801
======== ========= =========
</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; and
Daniel/Metcalf Associates Partnership, a Kansas 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 (1)
Daniel/Metcalf Associates Partnership September 30, 1987
(1)On July 2, 1998, Richmond Gables Associates sold its operating
investment property. Richmond Gables Associates was liquidated during
1998.
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, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 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. An
evaluation of the operating assets of Daniel/Metcalf Associates Partnership
indicated that certain operating assets consisting of land and improvements,
building, furniture and fixtures, and tenant improvements were impaired as of
December 31, 1998. In accordance with SFAS No. 121, the joint venture recorded a
reduction in the net carrying value of such assets amounting to $2,517,000
relating to land and improvements ($995,000), buildings ($1,902,000), furniture
and fixtures ($42,000), tenant improvements ($223,000) and related accumulated
depreciation ($645,000).
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 additional annual
depreciation charges 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 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 owned and operated The Gables of Erin Shades, a 224-unit
apartment complex located in Richmond, Virginia. On July 2, 1998, Richmond
Gables Associates sold The Gables at Erin Shades Apartments to an unrelated
third party for $11,500,000. After deducting closing costs and property
adjustments of $320,000, The Gables joint venture received net sale proceeds of
$11,180,000. These net sale proceeds were split between EP2 and its co-venture
partner in accordance with the terms of The Gables joint venture agreement. EP2
received $10,602,000 and the non-affiliated co-venture partner received $578,000
as their share of the sale proceeds. From its share of the proceeds, EP2 prepaid
its refinanced original zero coupon loan secured by the property and the related
prepayment fee, the sum of which was $5,449,000. Despite incurring a sizable
prepayment penalty on the repayment of the outstanding first mortgage loan,
management believed that a current sale of The Gables property was in the best
interests of the Limited Partners of EP2 due to the exceptionally strong market
conditions that exist at the present time and which resulted in the achievement
of a very favorable selling price.
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.
<PAGE>
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
----------------------------------
Except for certain items which are specifically allocated to the partners,
as defined in the joint venture agreements, the joint venture agreements
generally provide that profits up to the amount of net cash flow distributable
shall be allocated between EP2 and the co-venturers in proportion to the amount
of net cash flow distributed to each partner for such year. Profits in excess of
net cash flow shall be allocated between 59% -99% to EP2 and 1% - 41% to the
co-venturers. Losses are allocated in varying proportions 59% - 100% to EP2 and
0% - 41% to the co-venturers as specified in the joint venture agreements.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.
Distributions
-------------
The joint venture agreements provide that distributions will generally be
paid from net cash flow monthly or quarterly, equivalent to 9% - 10% per annum
return on EP2's net investment in the joint ventures. Any remaining cash flow is
generally to be distributed first, to repay accrued interest and principal on
certain loans and second, to EP2 and the co-venturers until they have received
their accrued preference returns. The balance of any net cash flow is to be
distributed in amounts ranging from 59% - 75% to EP2 and 25% - 41% to the
co-venturers as specified in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
Guaranty Period
---------------
The joint venture agreements provided that during the Guaranty Periods (as
defined in the joint venture agreements), in the event that net cash flow was
insufficient to fund operations including amounts necessary to pay EP2 preferred
distributions, the co-venturers were to be required to fund amounts equal to
such deficiencies. The co-venturers' obligation to fund such amounts pursuant to
their guarantees was generally to be in the form of capital contributions to the
joint ventures. For a specified period of time subsequent to the Guaranty
Period, one of the joint venture agreements required that mandatory loans be
made to the joint venture by the co-venturer to the extent that operating
revenues were insufficient to pay operating expenses.
The Guaranty and Mandatory Loan Periods of the joint ventures were
generally from the date EP2 entered a joint venture for a period ranging from
one to five years.
The expiration dates of the Guaranty and Mandatory Loan Periods for the
joint ventures were as follows:
Guaranty Period Mandatory Loan Period
--------------- ---------------------
Chicago-625 Partnership December 15, 1989 N/A
Richmond Gables Associates September 1, 1990 N/A
Daniel/Metcalf Associates
Partnership September 30, 1989 September 30, 1990
As of December 31, 1998, the co-venturer in the Daniel/Metcalf Associates
Partnership was 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 were
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 1998, 1997 and 1996 revenues include $184,000, $178,000 and $175,000,
respectively, relating to this lease.
<PAGE>
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 1998, 1997 or 1996.
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):
1999 $ 6,791
2000 6,364
2001 4,441
2002 3,350
2003 2,815
Thereafter 9,352
--------
$ 33,113
========
Leases with four tenants of the 625 North Michigan Office Building
accounted for approximately $2,310,000, or 45%, of the rental revenue generated
by that property for 1998.
7. Long-Term Debt
--------------
Long term debt payable at December 31, 1998 and 1997 consists of the
following (in thousands):
1998 1997
---- ----
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). $ 3,805 $ 3,862
8.72% mortgage note payable to an
insurance company secured by the
The Gables operating investment
property. The loan required monthly
principal and interest payments of
$43 through maturity on October 15,
2001 (see discussion below). - 4,995
------- -------
3,805 8,857
Less: current portion (63) (137)
------- -------
$ 3,742 $ 8,720
======= =======
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 was 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. As discussed in Note 3, The Gables operating investment property was sold
and this obligation was repaid in full on July 2, 1998.
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, 1998 and 1997, 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):
1999 $ 63
2000 69
2001 75
2002 83
` 2003 3,515
---------
$ 3,805
=========
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 coupon loans secured by The Gables
property was repaid in full from the proceeds of a new mortgage loan obtained by
the Gables joint venture 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, 1998, the aggregate
indebtedness of EP2 and its affiliated partnership which is secured by the 625
North Michigan Office Building was approximately $15,284,000. Subsequent to
year-end, EP2 and the affiliated partnership negotiated a one-year extension of
the maturity date to May 31, 2000. The interest rate of 9.125% and monthly
principal and interest payments remain unchanged. The terms of the loan
agreement also required the establishment of an escrow account for real estate
taxes, as well as a capital improvement escrow which is to be funded with
monthly deposits from EP2 and its affiliated partnership aggregating $1,750,000
through the scheduled maturity date of the loan. Such escrow accounts are
recorded on the books of the joint venture and are included in the balance of
escrowed cash on the accompanying balance sheets.
<PAGE>
9. Property Renovation
-------------------
During 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 at December
31, 1997. The total cost of the renovation amounted to approximately $3,200,000
as of December 31, 1997.
10. Subsequent Event
-----------------
On March 29, 1999, EP2 paid the co-venturer in the Gateway Plaza joint
venture an amount equal to $141,000 in return for the co-venturer's agreement to
exit the joint venture. In connection with the transaction, the co-venturer
assigned its interest in the Gateway Plaza joint venture to Second Equity
Partners, Inc., the Managing General Partner of EP2.
<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, 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>
COMBINED JOINT VENTURES:
Office
Building
Chicago,
IL $15,284 $ 8,112 $35,682 $ 9,511 $ 8,112 $45,193 $53,305 $19,993 1968 12/16/86 5 - 17 yrs
Shopping
Center
Overland
Park, KS 3,805 6,265 8,874 1,443 5,220 11,362 16,582 3,382 1980 9/30/87 7 - 31.5 yrs
------- -------- ------- ------- ------- ------- ------- -------
$19,089 $14,377 $44,556 $10,954 $13,332 $56,555 $69,887 $23,375
======= ======= ======= ======= ======= ======= ======= =======
Notes:
(A) The aggregate cost of real estate owned at December 31, 1998 for Federal income tax purposes is approximately $63,857.
(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:
1998 1997 1996
---- ---- ----
Balance at beginning of period $ 80,032 $ 77,652 $ 75,772
Acquisitions and improvements 1,847 2,380 2,206
Decrease due to sales (8,830) - -
Write-offs due to impairment/disposals (3,162) - (326)
--------- --------- ---------
Balance at end of period $ 69,887 $ 80,032 $ 77,652
========= ========= =========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 25,130 $ 22,250 $ 19,680
Depreciation expense 2,948 2,880 2,896
Decrease due to sales (4,058) - -
Write-offs due to impairment/disposals (645) - (326)
--------- --------- ---------
Balance at end of period $ 23,375 $ 25,130 $ 22,250
========= ========= =========
</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, 1999 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-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 6,181
<SECURITIES> 0
<RECEIVABLES> 481
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,533
<PP&E> 35,553
<DEPRECIATION> 2,307
<TOTAL-ASSETS> 39,989
<CURRENT-LIABILITIES> 326
<BONDS> 9,132
0
0
<COMMON> 0
<OTHER-SE> 30,531
<TOTAL-LIABILITY-AND-EQUITY> 39,989
<SALES> 0
<TOTAL-REVENUES> 22,372
<CGS> 0
<TOTAL-COSTS> 4,414
<OTHER-EXPENSES> (331)
<LOSS-PROVISION> 2,517
<INTEREST-EXPENSE> 2,602
<INCOME-PRETAX> 13,170
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,170
<EPS-BASIC> 97.00
<EPS-DILUTED> 97.00
</TABLE>
