<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
=============================================================================
FORM 10-K
Annual Report Pursuant To Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
December 31, 1995 0-17656
===========================
VANGUARD REAL ESTATE FUND II, A Sales-Commission-Free Income Properties Fund
- ----------------------------
(Exact Name of Registrant as specified in its charter)
Massachusetts 23-2482429
- ------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Vanguard Financial Center, Malvern, PA 19355
- -------------------------------------- -----
(Address of principal executive offices) (Zip Code)
610-669-1000
------------
(Registrant's telephone number, including area code)
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial Interest, no par value
</TABLE>
===========================
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 .
--- ---
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 the 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/
The aggregate market value of the registrant's outstanding shares of
beneficial interest held by non-affiliates on February 29, 1996 was $17,642,972
based upon the last sale price of the shares on February 29, 1996.
As of February 29, 1996, 6,432,626 shares of beneficial interest were
outstanding.
===========================
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<S> <C>
Annual Report to Shareholders for fiscal year ended December 31, 1995 Part II (Items 6-8)
Portions of the definitive Proxy Statement, filed pursuant
to Regulation 14A, to be issued in connection with the Annual
Meeting of Shareholders to be held on April 24, 1996 Part III (Items 10-13)
</TABLE>
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
ITEM NO. PAGE NO.
<S> <C>
Cover Page..................................................................................-
Index.......................................................................................1
PART I
1. Business...........................................................................2
2. Properties.........................................................................4
3. Legal Proceedings..................................................................8
4. Submission of Matters to a Vote of Security Holders................................8
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters................................................................8
6. Selected Financial Data............................................................9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................9
8. Financial Statements and Supplementary Data........................................9
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................9
PART III
10. Directors and Executive Officers of the Registrant................................10
11. Executive Compensation............................................................10
12. Security Ownership of Certain Beneficial Owners
and Management....................................................................10
13. Certain Relationships and Related Transactions....................................10
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................................10
Exhibit Index.....................................................................32
Exhibits..........................................................................33
SIGNATURES.................................................................................31
</TABLE>
1
<PAGE> 3
PART I
Item 1. Business
Vanguard Real Estate Fund II, A Sales-Commission-Free Income Properties
Fund (the "Fund"), was organized on September 24, 1987 as a Massachusetts
business trust and is a qualified finite-life real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. The Fund has no
employees. The Fund's Declaration of Trust precludes the Fund from reinvesting
net proceeds from the sale or repayment of its real estate investments after
December 31, 1994 and contemplates the liquidation of all the Fund's investments
after a period of approximately seven to twelve years following the completion
of its initial public offering, or between 1995 and 2000, respectively.
On December 8, 1995, the Fund's Board of Trustees adopted a Plan of
Liquidation and Termination (the "Liquidation Plan"). The Trustee's decision to
adopt the Liquidation Plan at this point in the Fund's initially contemplated
liquidation period was driven by several factors, including real estate market
conditions affecting each investment in the Fund's portfolio and tax
considerations affecting real estate investment trusts. The Liquidation Plan
provides that the Fund will dispose of all of its assets, wind up its affairs,
pay or adequately provide for the payment of all of its liabilities and
distribute for the benefit of its shareholders all of the Fund's assets over 24
months, in complete cancellation and redemption of all issued and outstanding
shares of beneficial interest. Under the Liquidation Plan, the Fund's Adviser
(Aldrich, Eastman and Waltch, L.P.), Trustees and officers are authorized and
directed to take any and all actions as may be necessary or convenient to market
the assets of the Fund and convert them into a form that may be distributed to
shareholders. The Liquidation Plan provides that the Fund's assets may be sold,
conveyed, transferred or otherwise disposed of when and on such terms and
conditions as are deemed by the Trustees to be in the best interests of the Fund
and the shareholders.
The Fund is currently in the process of liquidating its real estate
investments with the intention of distributing the net proceeds to its
shareholders in accordance with the Liquidation Plan. At December 31, 1995, the
Fund held investments in two income-producing properties, consisting of one
industrial park and one shopping center. The Fund also holds a limited
partnership interest in a limited partnership that owns an income producing
office building. It is contemplated that the Fund will be completely liquidated
and dissolved by December 12, 1997. To the extent that the Fund has not disposed
of all of its assets or made provision for all of its liabilities on December
12, 1997, the Fund intends to form a liquidating trust, the beneficiaries of
which will be the shareholders of the Fund. All assets and liabilities of the
Fund not previously disposed of and discharged will be transferred to the
liquidating trust. Shares of the Fund would no longer be traded and the
beneficial interests in the liquidating trust would not be readily transferable.
On April 13, 1995, the Fund exercised its call right on its Bayside
Business Center mortgage loan investment ("Bayside") and the entire balance of
the loan became due and payable on October 18, 1995. The Fund and the borrower
reached agreement to satisfy in full the obligations due under the loan balance
by means of a discounted payoff of $7,600,000. The Fund also agreed to provide
the borrower 120 days to obtain financing to make the payoff in exchange for a
commitment to transfer title to the Fund in lieu of foreclosure if the borrower
could not make the discounted payoff. The borrower was unable to secure the
necessary financing and, accordingly, the Fund took title to Bayside in late
February 1996. The former borrower remained current on all interest payments
due on the loan.
On March 7, 1996, the Fund sold its Arapahoe Village Investment
("Arapahoe") in Boulder, Colorado for a gross contract price of $17,550,000.
The Fund reported in November 1995 that it had then been recently advised by
Aldrich, Eastman and Waltch, L.P. ("AEW") that soil and groundwater samples
extracted from the site revealed the presence of constituents of gasoline and
dry-cleaning fluid in the soil and groundwater. The samples were taken as part
of an environmental assessment undertaken at the request of a contract
purchaser in connection with a contemplated sale of the property. AEW
subsequently engaged on the Fund's behalf attorneys and environmental
consultants in an effort to further assess the scope and magnitude of the
possible contamination. Pursuant to the terms of an amended sale agreement, the
Fund completed the sale of Arapahoe to the same contract purchaser. The sale of
Arapahoe generated a net gain to the Fund of approximately $4,100,000 over the
investment's carrying cost, after payment by the Fund of applicable transaction
costs, including a disposition fee payable to AEW in the amount of $250,000,
Such gain will be recognized in the first quarter of 1996.
Pending disposition of the Fund's real estate investments pursuant to
the Liquidation Plan, the Fund's real estate investments will continue to be
subject to competition from existing commercial, industrial, and residential
properties and will be subject to competition from properties that are developed
in the future. The REIT provisions of the Internal Revenue Code of 1986 ("the
Code") impose certain financial, investment and operational restrictions that
are not applicable to competing entities that are not REITs.
Pursuant to the Liquidation Plan, in disposing of real estate
investments, the Fund is in competition with other domestic institutional
investors, including commercial banks and other financial institutions,
insurance companies, pensions and other retirement funds, mortgage bankers,
other real estate investment trusts, real estate brokers, developers and various
types of foreign investors who may be seeking to dispose of real estate
investments. The principal factors of competition for the disposition of the
mortgage loan receivable include the base interest rate, contingent interest
rate and the amount of loan relative to the value of the underlying property. In
the case of leased properties which the Fund owns or which secure Fund
investments, the marketability of the investments is also affected by how rental
rates, lease terms, free rent concessions and tenant improvement allowances
compare with those in local markets.
At present, of the Fund's three remaining real estate investments at
December 31, 1995, one has been sold (Arapahoe) and the Fund, through its
Adviser, is actively marketing for sale or negotiating the disposition of the
other two. Based on information provided by the Adviser, it is possible that
both investments could be sold during 1996. However, there can be no assurance
that such sales can be completed during 1996. Upon sale of these two remaining
investments, the Fund's Trustees and management intend to complete the Fund's
Liquidation Plan as soon as practicable thereafter. In addition to liquidating
the Fund's assets, settling all of the Fund's liabilities, making a final
distribution(s) to shareholders and dissolving the Fund, such activities are
expected to include, but not necessarily be limited to, (i) delisting the
Fund's shares from trading on the American Stock Exchange, (ii) deregistering
the Fund's shares under the Securities Exchange Act of 1934, (iii) making
provision for contingent liabilities of the Fund, if any, and (iv) obtaining
any necessary insurance coverages.
2
<PAGE> 4
Pursuant to a Services Agreement dated January 19, 1988 (the "Services
Agreement") between the Fund and The Vanguard Group, Inc. (the "Sponsor"), the
Sponsor has been retained to provide administrative services for the Fund,
including the maintenance of financial records, oversight of the performance of
outside service providers and the preparation and distribution of communications
to shareholders, etc., and to supervise its day-to-day business affairs.
Pursuant to an Advisory Agreement dated December 23, 1986 (as amended, the
"Advisory Agreement") between the Fund and Aldrich, Eastman & Waltch, Inc. (the
"Adviser"), the Adviser has been retained to advise the Fund in connection with
the evaluation, selection, management and disposition of its real estate
investments. For additional information concerning the Sponsor, the Adviser, the
Services Agreement and the Advisory Agreement, see Item 8, Financial Statements
and Supplementary Data - Notes to Financial Statements, and Item 13, Certain
Relationships and Related Transactions.
The Fund has elected to be treated as a REIT under the Code. The Fund
intends to operate in a manner that will continue to maintain its qualification
as a REIT during its liquidation period.
For additional information regarding the Fund's Liquidation Plan,
investments, operations, and other significant events, see Item 2, Properties,
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, and Item 8, Financial Statements and Supplementary Data.
The following table sets forth the names and positions with the Fund of
the executive officers of the Fund:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- --------------------------------- -------- -----------------------------------------------
<S> <C> <C>
John C. Bogle 66 Trustee and Chairman of the Board
John J. Brennan 41 President
Ralph K. Packard 51 Vice President and Controller
Richard F. Hyland 58 Treasurer
Raymond J. Klapinsky 57 Secretary
</TABLE>
All executive officers of the Fund also serve as executive officers of
Vanguard Real Estate Fund I, A Sales-Commission-Free Income Properties Fund
("VREFI"). All executive officers of the Fund, with the exceptions of Mr.
Packard, who was elected as an officer of the Fund in May 1988, and Mr.
Klapinsky, who was elected as an officer of the Fund in May 1989, have served
since the Fund's inception. Under the Fund's Declaration of Trust, the officers
of the Fund serve at the pleasure of the Trustees. There are no family
relationships between any Trustee or executive officer.
Mr. Bogle is Chairman of The Vanguard Group, Inc. (the Sponsor of the
Fund) and each of the investment companies in The Vanguard Group. Mr. Bogle has
served in such capacity during each of the past five years. Mr. Bogle also
serves as a Director of The Mead Corporation and General Accident Insurance
Companies.
Mr. Brennan is President of The Vanguard Group, Inc. and has served in
such capacity for each of the last five years. On January 31, 1996, Mr. Brennan
assumed title of Chief Executive Officer of the Fund, The Vanguard Group, Inc.
and each of the investment companies in The Vanguard Group. Mr. Brennan also
serves as a Director (Trustee) of The Vanguard Group, Inc., and each of the
investment companies in The Vanguard Group.
Mr. Packard is Senior Vice President and Chief Financial Officer of
The Vanguard Group, Inc. and has served in such capacity during each of the
past five years.
Mr. Hyland is, and has served for each of the past five years as,
Treasurer of The Vanguard Group, Inc. and each of the investment companies
in The Vanguard Group.
Mr. Klapinsky is, and has served for each of the past five years as,
Senior Vice President and Secretary of The Vanguard Group, Inc. and each of the
investment companies in The Vanguard Group.
3
<PAGE> 5
Item 2. Properties
As of December 31, 1995, the Fund held the following real estate investments:
EQUITY INVESTMENT
<TABLE>
<CAPTION>
Nature of Initial
Title Total Acquisition Mortgage
to/Interest Date Square Cost Debt
Property & Location in Property Description Acquired Footage (000) (000)
- ------------------- ----------- ----------- -------- -------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Boulder, Colorado Leveraged Shopping Center 12-27-89 159,068 $13,116 $6,115
Arapahoe Village Ownership ======= ======
</TABLE>
Information concerning the Arapahoe investment is included in Notes H and N
to the Fund's Financial Statements, included in Item 8, Financial
Statements and Supplementary Data, and in Schedule XI to Item 14, Exhibits,
Financial Statement Schedules, and Reports on Form 8-K.
JOINT VENTURE
<TABLE>
<CAPTION>
Total Capital Mortgage
Date Square Contribution Debt
Property and Location Description Acquired Footage Occupancy Rate (000)** (000)
- ---------------------- ----------- -------- ------- -------------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Mountain View, California
Mountain View Place, Plymouth
Street, L.P. Office 9-1-89 79,308 100% ($1,856) $16,000
</TABLE>
** Net of capital proceed distributions of $8,756,000, $4,612,000, and
$931,000 received in 1992-1994 as a result of scheduled advances under the
refinancing of the underlying property on December 31, 1992.
Information concerning the Mountain View investment, including the terms of
the Plymouth Street, L.P. Partnership agreement, is included in Note 1 to the
Plymouth Street L.P. Financial Statements, which are summarized in a footnote
to the Fund's Financial Statements, and which are included in Item 14,
Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
4
<PAGE> 6
MORTGAGE INVESTMENTS
<TABLE>
<CAPTION>
Nature of Title Total Square Mortgage
--------------- -------------- ----------
Property/Location Description to/Interest In Date Acquired Footage/Unit Receivable Funds Advanced Mortgage Debt
- ----------------- ----------- -------------- ------------- ------------ ---------- -------------- -------------
(000)**
<S> <C> <C> <C> <C> <C> <C> <C>
Bayside Business Industrial Park Fixed Rate and 6/30/89 73,042 $7,490 $7,600 $0
Center,San Carlos, Shared
California Appreciation
Mortgages
</TABLE>
** At December 31, 1994, a provision for possible losses of $800,000 was
recorded to write down Bayside's carrying value (remaining loan balance plus a
deferred interest receivable pursuant to a shared-appreciation feature of the
mortgage) to the estimated fair value of the collateral securing the mortgage
loan less estimated selling costs.
Information concerning the Bayside Investment is included in Note F
to the Fund's Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, and in Schedule XII to Item 14, Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.
Set forth below is a summary of the general competitive conditions
for those properties whose book value is ten percent or more of the Fund's total
assets as of December 31, 1995, or whose gross revenues are ten percent or more
of the aggregate gross revenues of the Fund for the year ended December 31,
1995.
Bayside Business Center
Bayside Business Center is a mixed-use industrial project comprised of
three single-story R&D and retail/service buildings located in San Carlos,
California, part of the San Francisco metropolitan area. The San Francisco
metropolitan area job growth for the 1994-1995 was just under 1%, an improvement
over the previous year. Employment is expected to drop slightly over the next
few years. Market vacancy rates have increased to 7% but rents are still
expected to rise slightly. Market rents range from $.50-$1.25 per square foot
per month. In 1996, rents may be expected to increase slightly over the course
of the year. The property is currently achieving rents at $.95 per square foot
per month on a triple net basis.
Arapahoe Village
Arapahoe Village is a neighborhood shopping center located in Boulder,
Colorado. Population in the area is expected to grow during the rest of
the decade, averaging 2.4% growth per year. The Boulder retail market continues
to be tight with a 3-5% vacancy range. With little competitive supply in
the trade area and limited proposed construction due to the City of Boulder's
growth policies, the outlook for future market rental rates is positive. Market
rents range from $12.00-$18.00 per square foot annually.
5
<PAGE> 7
Occupancy Rates at December 31:
<TABLE>
<CAPTION>
Bayside Arapahoe
Bus. Ctr. Village
--------- -------
<S> <C> <C>
1995 100% 99%
1994 100% 100%
1993 98% 99%
1992 100% 93%
1991 95% 97%
</TABLE>
Avg. Effective Rental/Sq.Ft./Year:
<TABLE>
<CAPTION>
Bayside Arapahoe
Bus. Ctr. Village
--------- --------
<S> <C> <C>
1995 $11.77 $9.72
1994 $12.26 $9.46
1993 $13.19 $8.89
1992 $12.56 $8.58
1991 $12.51 $8.61
</TABLE>
Real Estate Tax/Fiscal Year:
<TABLE>
<CAPTION>
Bayside Arapahoe
Effective Rate Per Bus. Ctr. Village
------------------ --------- --------
<S> <C> <C>
$1000 of
Assessed Value $11.40 $77.42
Annual Taxes $71,211 $330,819
</TABLE>
Tenants Occupying 10% or more of rentable square footage:
<TABLE>
<CAPTION>
Rental Expiration Renewal
Property Major Tenants Sq.Ft. Principal Business Sq.Ft./Yr. Date Options
- -------- ------------- ------ ------------------ ---------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Bayside Business Center Benefits Consultants 31,380 Telemarketing Firm $11.85 7/31/00 None
Benefits Consultants 33,740 Telemarketing Firm $11.85 7/31/03 None
Arapahoe Village Safeway 43,500 Supermarket $6.28 11/29/01 6-5yr options
So-Fro Fabrics 17,258 Fabric Retailer $6.04 10/31/02 None
</TABLE>
6
<PAGE> 8
Lease Expirations during the next ten years:
By Square Foot
<TABLE>
<CAPTION>
Total Sq.Ft.
Property Expiring 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005+
- -------- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bayside
Business
Center 73,042 3,320 3,132 0 1,470 31,380 0 0 33,740 0 0
Arapahoe
Village 157,268 39,175 12,360 5,628 15,189 600 43,500 27,205 13,611 0 0
</TABLE>
By Annual Rental
<TABLE>
<CAPTION>
Total
Property Expirations 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005+
-------- ----------- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bayside
Bus. Ctr.
# of
leases 6 1 1 0 1 2 0 0 1 0 0
annual $ 859,448 33,864 36,776 0 17,088 371,892 0 0 399,828 0 0
annual % 100.0 3.9 4.3 0 2.0 43.3 0 0 46.5 0 0
Arapahoe
Village
# of
leases 25 8 3 3 5 1 1 3 1 0 0
annual $ 1,528,914 444,723 204,334 75,929 198,244 10,500 273,000 226,387 95,797 0 0
annual % 100.0 29.1 13.4 5.0 13.0 .7 17.8 14.8 6.2 0 0
</TABLE>
A mortgage loan payable, secured by the Arapahoe Village property, is
outstanding at December 31, 1995. Information concerning the principal,
interest, amortization and maturity provisions is included in Note H to the
Fund's Financial Statements, incorporated by reference in Item 8, Financial
Statements and Supplementary Data.
Information concerning the interest rates, shared-appreciation
features, and other terms of the Fund's mortgage investments is included in Note
F to the Fund's Financial Statements, included in Item 8, Financial Statements
and Supplementary Data, and in Schedule XII to Item 14.
The Fund believes that its direct ownership property and the property
underlying its mortgage and joint venture investments, are well maintained, in
good repair, suitable for their intended uses and are adequately covered by
insurance. For additional information regarding the Fund's real estate
investments, see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Item 8, Financial Statements and
Supplementary Data, and Schedules XI and XII to Item 14.
Information concerning the Federal tax basis and depreciation method
and lives of the Fund's properties and components thereof and on which
depreciation is taken is included in Notes A and E to the Fund's Financial
Statements, included in Item 8, Financial Statements and Supplementary Data, and
in Schedule XI to Item 14. All real estate owned has been depreciated over 40
years for both financial and tax reporting purposes on a straight-line basis
except for leasehold improvements, which are depreciated over the term of the
respective lease for financial reporting purposes.
7
<PAGE> 9
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Fund's shares of beneficial interest ("Shares") are traded on the
American Stock Exchange (AMEX) under the symbol "VRT". The Shares have been
traded on the AMEX since August 20, 1991. From August 7, 1990 to August 19,
1991, the Fund's shares were traded on the over the counter market and were
quoted by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). Prior to August 7, 1990, there was no trading market for the
Shares. As of February 29, 1996, there were approximately 8,862 holders of
record of the Fund's Shares.
Set forth below is certain information regarding the Fund's Shares for
each of the eight fiscal quarters in the two-year period ended December 31,
1995:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1994
---- ----
Share Prices Share Prices
---------------------------- -------------------------------
High Low High Low
------ ----- ------ -----
<S> <C> <C> <C> <C>
For the Quarter Ended:
March 31 $4-5/8 $3-5/8 $6-7/8 $6-1/8
June 30 $3-13/16 $3-1/4 $6-1/4 $5-3/4
September 30 $3-7/8 $3-1/8 $6-7/8 $6.0
December 31 $3-7/8 $2-1/2* $6-1/2 $3-7/8**
</TABLE>
*A Liquidating dividend of $1.25 per share was paid on December 28, 1995.
**A dividend of $2.00 per share, of which $1.96 per share represented a return
of capital distribution, was paid on December 29, 1994.
The tables below indicate the amount of cash dividends per
share declared and paid during the years ended December 31, 1995 and
1994.
<TABLE>
<CAPTION>
Record Distribution
Date Per Share
------------------------------ -----------------
<S> <C>
03-31-95 $.075
06-30-95 .075
09-29-95 .075
12-26-95 1.250
-----
Total Distributions - 1995 $1.475
======
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
Record Distribution
Date Per Share
------------------------------ -----------------
<S> <C>
03-31-94 $.15
06-30-94 .15
09-30-94 .15
12-27-94 2.00
-----
Total Distributions - 1994 $2.45
=====
</TABLE>
<TABLE>
<CAPTION>
Status of Distributions 1995 1994
----------------------- ---- ----
<S> <C> <C>
Ordinary Income $.000 $.30
Return of Capital .225 1.96
Long-Term Capital Gain .000 .19
Liquidating 1.25O .00
------ -----
Total $1.475 $2.45
====== =====
</TABLE>
Except during its offering period, the Fund has historically paid
distributions on a quarterly basis and there are currently no contractual
restrictions on the Fund's present or future ability to make distributions to
shareholders. For additional information regarding the Fund's distributions and
its ability and intent to pay distributions during the liquidation period, see
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 6. Selected Financial Data
The information required by this Item is included on page 21 of the
Fund's 1995 Annual Report to Shareholders and is incorporated herein by
reference thereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is included on pages 23
through 31 of the Fund's 1995 Annual Report to Shareholders and is incorporated
herein by reference thereto.
Item 8. Financial Statements and Supplementary Data
The Fund's financial statements at December 31, 1995 and 1994, and for
each of the three years in the period ended December 31, 1995, are included on
pages 5-19 of the Fund's 1995 Annual Report to Shareholders and are incorporated
herein by reference thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
9
<PAGE> 11
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to Trustees is
included in the Fund's definitive Proxy Statement filed with the Securities and
Exchange Commission on March 15, 1996 for its Annual Meeting of Shareholders to
be held on April 24, 1996, which is incorporated herein by reference thereto.
Information with respect to executive officers of the Fund is included in Item
1.
Item 11. Executive Compensation
The information required by this Item is included in the Fund's
definitive Proxy Statement filed with the Securities and Exchange Commission on
March 15, 1996 for its Annual Meeting of Shareholders to be held on April 24,
1996, which is incorporated herein by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included in the Fund's
definitive Proxy Statement filed with the Securities and Exchange Commission on
March 15, 1996 for its Annual Meeting of Shareholders to be held on April 24,
1996, which is incorporated herein by reference thereto.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is included in the Fund's
definitive Proxy Statement filed with the Securities and Exchange Commission on
March 15, 1996 for its Annual Meeting of Shareholders to be held on April 24,
1996, which is incorporated herein by reference thereto.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
The following financial statements as of, and for the
years ended, December 31, 1995, 1994 and 1993 are incorporated
in Item 8 herein by reference from the following pages of the
Fund's 1995 Annual Report to Shareholders, which is filed as
an Exhibit hereto.
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NO.
<S> <C>
Balance Sheets......................................................5
Statements of Operations............................................6
Statements of Cash Flows..........................................7-8
Statements of Changes in Shareholders' Equity.......................9
Notes to Financial Statements...................................10-19
Report of Independent Accountants..................................20
</TABLE>
10
<PAGE> 12
The following financial statements of Plymouth
Street, L.P., in which the Fund holds a limited partnership
interest, as of December 31, 1995 and 1994, and for the years
ended December 31, 1995, 1994 and 1993 are filed as part of
this Report on Form 10-K.
<TABLE>
<CAPTION>
FORM 10-K
PAGE NO.
<S> <C>
Report of Independent Accountants..............................20
Balance Sheet..................................................21
Statement of Operations........................................22
Statement of Changes in Partner's Equity.......................23
Statement of Cash Flows........................................24
Notes to Consolidated Financial Statements..................25-29
</TABLE>
2. Financial Statement Schedules:
The financial statement schedules included in Part IV
of this report should be read in conjunction with the Fund's
financial statements incorporated by reference in Item 8 of
this report.
<TABLE>
<CAPTION>
FORM 10-K
SCHEDULE PAGE NO.
<S> <C> <C>
XI Real Estate and Accumulated Depreciation.....................15-16
XII Mortgage Loans on Real Estate................................17-18
Report of Independent Accountants...............................30
</TABLE>
All other schedules have been omitted since the required
information is presented in the financial statements, the
related notes, or is not applicable.
3. Exhibits:
Exhibit No. Description
- ----------- -----------
2 Plan of Liquidation and Termination, dated December 8, 1995.
3.1(a) Amended and Restated Declaration of Trust, dated as of
January 8, 1988, filed as exhibit 3 to the Fund's
Registration Statement on Form S-11, SEC Registration
#33-17854, and incorporated herein by reference.
3.1(b) Amendment #1 to Amended and Restated Declaration of Trust,
dated as of January 19, 1988, filed as exhibit 3.1(b) to
the Fund's Annual Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by reference.
3.2 By-laws, dated September 19, 1987, filed as exhibit 3 to
the Fund's Registration Statement on Form S-11, SEC Registration
#33-17854, and incorporated herein by reference.
10.1 Advisory Agreement between the Registrant and Aldrich, Eastman &
Waltch, Inc. dated January 19, 1988, filed as exhibit 10.1 to the
Fund's Annual Report on Form 10-K for the year ended
December 31, 1988, and incorporated herein by reference.
10.2 Services Agreement between the Registrant and The Vanguard Group,
Inc. dated January 19, 1988, filed as exhibit 10.2 to the fund's
Annual Report on Form 10-K for the year ended December 31,
1988, and incorporated herein by reference.
11
<PAGE> 13
10.3(a) First Promissory Note from Brown Associates in favor of
Lawrence W. Doyle, Richard F. Burns, and J. Grant Monahon,
Trustees of AEW #160 Trust, established by Declaration of
Trust dated December 29, 1988, dated January 12, 1989,
filed as exhibit 10.3(a) to the fund's Annual
Report on Form 10-K for the year ended December 31, 1988
and incorporated herein by reference.
10.3(b) Second Promissory Note from Brown Associates in favor of
Lawrence W. Doyle, Richard F. Burns, and J. Grant Monahon,
Trustees of AEW #160 Trust, established by Declaration of
Trust dated December 19, 1988, dated January 12, 1989,
filed as exhibit 10.3(b) to the Fund's Annual
Report on Form 10-K fro the year ended December 31, 1988
and incorporated herein by reference.
10.3(c) Loan Agreement by and between Brown Associates and Lawrence
W. Doyle, Richard F. Burns, and J. Grant Monahon, Trustee
of AEW #160 Trust, established by Declaration of trust
dated December 29,1988, dated January 12, 1989, filed as
exhibit 10.3(c) to the Fund's Annual Report on Form
10-K for the year ended December 31, 1988, and incorporated
herein by reference.
10.3(d) Declaration of Trust, AEW #160 Trust and Schedule of
Beneficial Interest dated January 12, 1989, filed as
exhibit 10.3(d) to the Fund's Annual Report on Form 10-K
for the year ended December 31, 1988, and incorporated herein
by reference.
10.4(a) Purchase and Sale Agreement of the Penn Warner Properties,
between Millie C. Cassidy, Lewis W. Kresch and Michael J. Weinberger
as Trustees of SRE Real Estate Fund and J. Grant Monahon,
Lee H. Sandwen and Richard F. Burns, Trustees of AEW #165
Trust dated March 7, 1989 dated June 8, 1989, filed as exhibit
10.1(a) to the Fund's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, and incorporated herein by reference.
10.4(b) Declaration of Trust, AEW #165 Trust and Schedule of
Beneficial Interest, dated March 7, 1989, filed as exhibit
10.1(b) to the Fund's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, and incorporated herein by reference.
10.5(a) Promissory Note from Harris Trust and Savings Bank, as
Trustee under Trust #43584 in favor of J. Grant Monahon,
Richard F. Burns and Lee H. Sandwen, as Trustees of AEW
#169 Trust dated April 25, 1989, dated June 26, 1989, filed
as exhibit 10.2(a) to the Fund's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1989, and
incorporated here by reference.
10.5(b) Declaration of Trust, AEW #169 Trust and Schedule of
Beneficial Interest, dated April 15, 1989, filed as exhibit
10.2(b) to the Fund's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, and incorporated herein by reference.
10.6(a) First Promissory Note from Bayside Business Center in favor
of J. Grant Monahon, Richard F. Burns and Bruce H.
Freedman, Trustees of AEW #172 Trust dated June 12, 1989,
dated June 29, 1989, filed as exhibit 10.3(a) to the Fund's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989, and incorporated herein by reference.
10.6(b) First Deed of trust from Bayside Business Center for the
use and benefit of J. Grant Monahon, Richard F. Burns and
Bruce H. Freedman, Trustees of AEW #172 Trust dated June
12, 1989, dated June 29, 1989, filed as exhibit 10.3(b) to
the Fund's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, and incorporated herein by reference.
106.(c) Second Promissory Note from Bayside Business Center in
favor of J. Grant Monahon, Richard F. Burns and Bruce H.
Freedman Trustees of AEW #172 Trust dated June 12, 1989,
dated June 29, 1989, filed as exhibit 10.3(c) to the Fund's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1989, and incorporated herein by reference.
12
<PAGE> 14
10.6(d) Second Deed of Trust from Bayside Business Center for the
use and benefit of J. Grant Monahon, Richard F. Burns and
Bruce H. Freedman Trustees of AEW #172 Trust dated June 12,
1989, dated June 19, 1989, filed as exhibit 10.3(d) to the
Fund's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, and incorporated herein by reference.
10.6(e) Declaration of Trust, AEW #172 Trust and Schedule of
Beneficial Interest, dated June 12, 1989, filed as exhibit
10.3(e) to the Fund's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, and incorporated herein by reference.
10.7(a) Agreement of Limited Partnership of Plymouth Street, L.P.,
by and between Mountain View Place Investors, a California
general partnership, as general partner, and J. Grant
Monahon, Richard F. Burns and Bruce H. Freedman, Trustees
of AEW #171 Trust, established by a Declaration of Trust
dated August 21, 1989, as limited partner, dated August 30,
1989, filed as exhibit 10.1(a) to the fund's Current Report
on Form 8-K dated September 1, 1989, and incorporated
herein by reference.
10.7(b) Environmental Indemnification Agreement by Mountain View
Place Investors, a California general partnership, to and
for the benefit of J. Grant Monahon, Richard F. Burns and
Bruce H. Freedman, Trustees of AEW #171 Trust established
by Declaration of Trust dated August 21, 1989, and Plymouth
Street, L.P., and Delaware Limited partnership, dated
August 30, 1989, filed as exhibit 10.1(b) to the Fund's
Current Report on Form 8-K, dated September 1, 1989, and
incorporated herein by reference.
10.7(c) Declaration of Trust, #171 Trust and Schedule of Beneficial
Interest, dated August 21, 1989, filed as exhibit 10.1(c)
to the Fund's Current Report on Form 8-K dated September 1,
1989, and incorporated herein by reference.
10.8 Purchase and Sale Agreement between Boulder Arapahoe Mall
Associates, LTD and Aldrich, Eastman & Waltch, Inc., agent
for VREFII, dated November 18, 1989, filed as exhibit 10.8
to the Fund's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989 and incorporated herein by reference.
10.9 Agreement for deed in lieu of foreclosure of mortgaged
property made on May 19, 1992, by and among Harris Trust
and Savings Bank, as Trustee under Trust #43584, Landmark
Holdings, an Illinois general partnership, and J. Grant
Monahon, Richard F. Burns and Glenn L. Burdick, as Trustees
of AEW #169 Trust under Declaration of Trust dated as of
April 15, 1989, filed as exhibit 10.9 to the Fund's
Quarterly Report on Form 10-Q for the quarter ended June
30,1992, and incorporated herein by reference.
10.10 Lease/Purchase agreement made on October 12, 1992, by and
between William J. Beitel and Maryann W. Beitel, husband
and wife, and J. Grant Monahon, Lee H. Sandwen and Richard
F. Burns, Trustees of AEW #165 Trust, established under
Declaration of Trust dated March 7, 1989, filed as exhibit
10.10 to the Fund's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992, and incorporated herein
by reference.
10.11 Deed granted by Brown Associates, a California general
partnership, to Eastrich #101 Corporation, a California
partnership, pursuant to bankruptcy proceedings on the
Sequoia Commerce Center, dated March 12, 1993, and incorporated
herein by reference.
10.12 Purchase and Sale Agreement between Evans Withycombe
Residential, Inc. and Aldrich, Eastman & Waltch Inc., agent
for VREFII, dated August 16, 1994, filed as exhibit 10.12
to the Fund's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 and incorporated herein by
reference.
13 1995 Annual Report to Shareholders. (With the exception of
the information and data incorporated by reference in Items
6, 7, and 8 of this Annual Report on Form 10-K, no
13
<PAGE> 15
information or data appearing in the 1995 Annual Report to
Shareholders is to be deemed filed as part of this report.)
27 Financial Data Schedule. A Financial Data Schedule for
the year ended December 31, 1995, was submitted in electronic
format only.
99.1(a) Current Report on Form 8-K dated June 30, 1993, relating to
the Fund's acquisition of Shadow Brook Apartments,
incorporated herein by reference.
99.1(b) Report on Form 8, Amendment No. 1 to Current Report on Form
8-K dated June 30, 1992, relating to the acquisition of
Shadow Brook Apartments, incorporated herein by reference.
99.1(c) Current Report on Form 8-K dated August 16, 1994, relating to
the fund's sale of Shadow Brook Apartment, incorporated
herein by reference.
(b) Reports on Form 8-K
During the third quarter ended September 30, 1995, the Fund filed a
Report on Form 8-K, dated June 16, 1995, reporting, in Item 5, the sale of its
Raleigh Office Building. During the fourth quarter ended December 31, 1995, the
Fund filed a Report on Form 8-K, dated December 22, 1995, in Item 5, the sale of
its Penn Warner investment and a Report on Form 8-K dated December 8, 1995,
reporting in Item 5, the adoption of the Fund's formal Plan of Liquidation and
Termination.
14
<PAGE> 16
SCHEDULE XI
VANGUARD REAL ESTATE FUND II,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Arapahoe Village
Shopping Center,
Description Boulder, CO
----------- ----------------
<S> <C>
Encumbrances $6,115
Initial Cost to Fund
Land (000) $6,000
Buildings and Improvements (000) 7,116
-----
Total Acquisition Costs $13,116
Costs Capitalized Subsequent to
Acquisition
Improvements (000) $1,076
Gross Amount at which Carried
at Close of Period (a)
Land (000) $6,000
Building and Improvements (000) 8,192
-----
Total (000) (b) $14,192
=======
Accumulated Depreciation (000) (c) $1,255
Date of Construction 1957
Renovation Date 1980
Date Acquired 12/89
Depreciable Life (d) 40 years
</TABLE>
(a) The aggregate cost of wholly-owned real estate for federal income tax
purposes at December 31, 1995 was $12,957,100.
(b) The activity in wholly-owned real estate investments is summarized
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Year ended December 31, 1995 1994 1993 1992 1991 1990 1989
(000) (000) (000) (000) (000) (000) (000)
---------- ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $31,999 $55,113 $25,493 $25,368 $25,227 $24,673 $0
Additons during the year:
Property purchases 0 0 12,493 0 0 0 24,334
Property improvements 196 963 906 325 141 554 339
Foreclosures 0 0 17,000 2,300 0 0 0
Deletions during the year:
Sales of properties, net of write-downs (18,003) (16,126) 0 0 0
Write-downs 0 (7,850) (750) (2,500) 0 0 0
Write-off of tenant improvements 0 (101) (29) 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------- ------------
Balance at end of year $14,192 $31,999 $55,113 $25,493 $25,368 $25,227 $24,673
========== ========== ========== ========== ========== =========== ============
</TABLE>
15
<PAGE> 17
(c) Reconciliation of accumulated depreciation is summarized as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Year ended December 31, 1995 1994 1993 1992 1991 1990 1989
(000) (000) (000) (000) (000) (000) (000)
----------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $2,820 $2,492 $1,523 $1,013 $555 $135 $0
Add:
Depreciation for the year 392 902 973 510 458 420 135
Deduct:
Accumulated depreciation of
real estate sold (1,957) (518) 0 0 0 0 0
Write-off of tenant improvements 0 (56) (4) 0 0 0 0
----------- --------- ---------- ---------- ---------- ---------- ------------
Balance at end of year $1,255 $2,820 $2,492 $1,523 $1,013 $555 $135
=========== ========= ========== ========== ========== ========== ===========
</TABLE>
(d) Prior to June 30, 1995, depreciation on real estate owned was computed using
the straight-line method over 40 years for buildings and costs incurred in
conjunction with the acquisition of real estate investments were deferred and
amortized on a straight-line basis over the life of the loan for mortgage loan
investments and the life of the property for equity investments. After June 30,
1995, no depreciation or amortization expense related to the Fund's owned real
estate and acquisition costs is recognized since the Fund's real estate
investments are considered to be held-for-sale assets.
VANGUARD REAL ESTATE FUND II,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
REAL ESTATE JOINT VENTURE INVESTMENT
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Initial Accumulated Cumulative Gross amount at
Capital Equity in Cash which carried at
Contribution Joint Venture Distributions close of period Date of Date
Description Encumbrances (000) Net Income (b) (000) Construction Acquired
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Plymouth Street, L.P.
Mountain View Place,
Office Building,
Mountain View, CA (a) None $14,000 $3,175 ($19,031) ($1,856) 1987 9-89
===========================================================================
</TABLE>
(a) As described in Note K of the Fund's 1995 Financial Statements,
incorporated in this Form 10-K by reference, the Partnership has entered
into a Loan Agreement and Put Option Agreement, the proceeds of which are
to be distributed in accordance with the terms of the Partnership
Agreement. As of December 31, 1995, the Fund has received aggregate
distributions of proceeds in excess of its carrying value of the
investment. Such excess distributions are recorded on the Fund's balance
sheet as of December 31, 1995 as Deferred Revenue - Mountain View and will
be recognized by the Fund upon sale of the underlying property or the
disposition of its investment in the Partnership.
(b) Net of acquisition fees and costs paid.
16
<PAGE> 18
SCHEDULE XII
VANGUARD REAL ESTATE FUND II,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Description Bayside Business Center Industrial Park, San Carlos, CA (a)
Effective Rate 10.5%
Pay Rate 10.5
Maturity Date 1996
Call Date 1994
Periodic Payment Terms Interest only, principal due upon maturity or call date.
Prior Liens None
Face Amount of Mortgage $4,000,000
Carrying Amount of Mortgage (b) $4,000,000
Principal Amount of Loan
Subject to Delinquent Principal
or Interest None
Description Bayside Business Center Industrial Park, San Carlos, CA (a)
Effective Rate 12.4%
Pay Rate 7.35%-8.4%
Maturity Date 1996
Call Date 1994
Periodic Payment Terms Interest only, principal due upon maturity or call date.
Prior Liens (a)
Face Amount of Mortgage $3,600,000
Carrying Amount of Mortgage (a)(b) $3,600,000
Deferred Interest Receivable (a)(b) $690,000
Principal Amount of Loan
Subject to Delinquent Principal
or Interest None
</TABLE>
(a) Bayside is a fixed-rate, senior mortgage loan and a shared-appreciation,
junior loan, both secured by the Bayside Business Center. Upon repayment of the
Bayside junior loan, the Fund is entitled to receive an amount equal to the
greater of (i) an amount sufficient to generate a 12.4% internal rate of return
on the junior loan, or (ii) 50% of Bayside's fair market value in excess of $9
million, as described in Note F of the Fund's 1995 Financial Statements,
incorporated in this Form 10-K by reference. In anticipation of the Fund
exercising a call option in early 1995, at December 31, 1994, Fund management,
based on: (i) an evaluation of the borrower's remaining equity in the Bayside
property securing the mortgage loans and; (ii) the economic prospects of the
borrower and Bayside property over its expected remaining holding period,
reduced the loan's carrying value (remaining loan balance plus the deferred
interest receivable pursuant to the shared-appreciation feature of the
mortgage) to the then-estimated fair value of the collateral less estimated
selling costs.
17
<PAGE> 19
<TABLE>
<CAPTION>
--------------------------------------
1995 1994 1993
(b) (000) (000) (000)
--------------------------------------
<S> <C> <C> <C>
Balance at beginning
of year $7,630 $8,286 $16,842
Additions during the year:
Deferred interest receivable 0 144 144
Deductions during the year:
Foreclosures (c) 0 0 (8,700)
Allowance for possible losses 0 (800) 0
Payment on deferred interest
receivable (140) 0 0
======================================
Balance at end of year $7,490 $7,630 $8,286
======================================
</TABLE>
(c) Represents a transfer of the property in lieu of foreclosure on the Fund's
mortgage loan on the Raleigh Building, and Sequoia Commerce Center on June 5,
1992, and March 12, 1993, respectively.
The aggregate cost of the Fund's mortgage loan investments for federal income
tax purposes at December 31, 1995 was $8,290,000.
18
<PAGE> 20
PLYMOUTH STREET, L.P.
(A LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
DECEMBER 31, 1995
19
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Plymouth Street, L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Plymouth Street, L.
P. at December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 10, 1996
20
<PAGE> 22
PLYMOUTH STREET, L. P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
ASSETS
<S> <C> <C>
Investment in Mountain View Place:
Land $ 5,060,000 $ 5,060,000
Buildings, net of accumulated depreciation of
$1,258,359 and $1,059,671, respectively 6,689,177 6,887,865
Tenant improvements, net of accumulated amortization
of $2,009,958 and $1,696,582, respectively 676,929 990,305
Cash 15,711 10,519
Accounts receivable 577,479 751,510
Lease commissions, net of accumulated amortization of
$264,435 and $222,682, respectively 90,465 132,218
Prepaid loan costs, net of accumulated amortization
of $90,986 and $60,657, respectively 90,987 121,316
Other assets 10,162 7,967
--------------- ---------------
$ 13,210,910 $ 13,961,700
=============== ===============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable $ 315,922 $ 310,482
Security deposits 97,323 97,323
Debt obligation 16,000,000 15,500,000
--------------- ----------
16,413,245 15,907,805
--------------- ----------
Partners' equity (deficit):
General Partner (1,091,007) 129,737
Limited Partner (2,111,328) (2,075,842)
-------------- --------------
(3,202,335) (1,946,105)
-------------- --------------
$ 13,210,910 $ 13,961,700
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
PLYMOUTH STREET, L. P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Rental income $ 1,899,347 $ 1,948,684 $ 1,876,344
Interest income 612 555 2,601
------------- ------------- -------------
1,899,959 1,949,239 1,878,945
------------- ------------- -------------
Expenses:
Property taxes and insurance 231,574 221,391 305,470
Utilities 68,095 62,690 63,456
Administrative 53,975 35,229 54,913
Maintenance 72,223 84,255 73,509
Interest 1,575,204 1,525,205 1,375,219
Depreciation and amortization 584,146 588,879 588,879
------------- ------------- -------------
2,585,217 2,517,649 2,461,446
------------- ------------- -------------
Net loss $ (685,258) $ (568,410) $ (582,501)
============= ============= =============
Allocation of net loss:
General Partner $ (685,258) $ (568,410) $ (582,501)
Limited Partner - - -
------------- ------------- -------------
$ (685,258) $ (568,410) $ (582,501)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
PLYMOUTH STREET, L. P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
<S> <C> <C> <C>
Balance at December 31, 1992 $ 2,484,522 $ 3,780,440 $ 6,264,962
Distributions - operating (107,177) (269,117) (376,294)
Distributions - net capital proceeds (500,000) (4,612,396) (5,112,396)
Net loss (582,501) - (582,501)
-------------- ------------- --------------
Balance at December 31, 1993 1,294,844 (1,101,073) 193,771
Distributions - net capital proceeds (568,546) (931,454) (1,500,000)
Distribution - operating (28,151) (43,315) (71,466)
Net loss (568,410) - (568,410)
-------------- ------------- --------------
Balance at December 31, 1994 129,737 (2,075,842) (1,946,105)
Distributions - net capital proceeds (500,000) - (500,000)
Distribution - operating (35,486) (35,486) (70,972)
Net loss (685,258) - (685,258)
-------------- ------------- --------------
Balance at December 31, 1995 $ (1,091,007) $ (2,111,328) $ (3,202,335)
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
PLYMOUTH STREET, L. P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (685,258) $ (568,410) $ (582,501)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 584,146 588,879 588,879
Changes in assets and liabilities:
Decrease in accounts receivable 174,031 48,024 124,802
Increase in prepaid loan costs - - (87,602)
Increase in other assets (2,195) (2,618) (520)
Increase (decrease) in accounts payable 5,440 (14,434) 266,154
-------------- ------------- -------------
Net cash provided by operating activities 76,164 51,441 309,212
-------------- ------------- -------------
Cash flows from financing activities:
Distributions - operating (70,972) (71,466) (376,294)
Distributions - net capital proceeds (500,000) (1,500,000) (5,112,398)
Advances under loan agreement 500,000 1,500,000 5,200,000
-------------- ------------- -------------
Net cash used in financing activities (70,972) (71,466) (288,692)
-------------- ------------- -------------
Net increase (decrease) in cash 5,192 (20,025) 20,520
Cash at beginning of year 10,519 30,544 10,024
-------------- ------------- -------------
Cash at end of year $ 15,711 $ 10,519 $ 30,544
============== ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 1,570,958 $ 1,512,465 $ 1,225,976
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 26
PLYMOUTH STREET, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Plymouth Street, L. P. (the "Partnership") was formed on August 30, 1989
and organized as a Delaware Limited Partnership with Mountain View Place
Investors ("the General Partner") as the general partner and Vanguard Real
Estate Fund II ("the Limited Partner") as the limited partner. The
Partnership was formed in order to own and operate Mountain View Place, two
office buildings located in Mountain View, California. These buildings have
approximately 78,000 square feet of commercial space. A single tenant
occupies 58,390 square feet and accounted for 98% of rental income for
1995, 1994 and 1993.
The General Partner's initial contribution to the Partnership, in the form
of property, was valued at $2.5 million and the Limited Partner's initial
cash contribution was $14 million. Under certain circumstances defined in
the Partnership Agreement, the General Partner and Limited Partner may be
required to make additional capital contributions.
All distributable cash flows from operations (as defined in the Partnership
Agreement) shall be distributed quarterly as follows: the General Partner
shall receive 1% and the Limited Partner 99% until the Limited Partner
receives an amount necessary to generate a 10.1% cumulative preferred
annual return, compounded monthly (as defined in the Partnership
Agreement); and, thereafter, each shall receive 50% of such cash flows.
Net capital proceeds (as defined in the Partnership Agreement) shall be
distributed as follows: first to the Limited Partner in an amount equal to
its contributed capital, plus any unrecovered preferred annual return and
an amount equal to the greater of 50% of the capital proceeds in excess of
$16.5 million or the amount necessary to generate an 11.5% annual internal
rate of return. Any remaining proceeds will be distributed to the General
Partner. Under the terms of the First Modification of Agreement of Limited
Partnership dated December 30, 1994, the General Partner was entitled to
and received a priority distribution equal to the proceeds of the July 1,
1994 and 1995 loan advances under the Loan Agreement (Note 3) of $500,000.
The General Partner may exercise a buy/sell option in the event that the
Limited Partner fails to contribute its proportionate share under any Call
Notice (as defined in the Partnership Agreement) relating to funds required
to pay tenant improvements or leasing commissions or fails to fulfill any
of its obligations in connection with a financing (as defined in the
Partnership Agreement).
Net income from operations of the Partnership shall be allocated 1% to the
General Partner and 99% to the Limited Partner. Net loss from operations
shall be allocated between the General Partner and Limited Partner in
proportion to their respective proportionate shares until the capital
account of either Partner is reduced to zero, then, as needed until the
capital accounts of both Partners are reduced to zero and, thereafter,
allocated based on each Partner's minimum gain.
25
<PAGE> 27
PLYMOUTH STREET, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Partnership's significant accounting policies are in accordance with
generally accepted accounting principles.
REAL ESTATE
Real Estate contributed to the Partnership was recorded at its fair market
value on the date of contribution. Major renovations will be capitalized
and routine maintenance and repairs will be charged to expense as incurred.
CASH EQUIVALENTS
The Partnership considers its short-term investments with original
maturities or three months or less when purchased to be cash equivalents.
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Buildings are depreciated over 40 years.
AMORTIZATION
Tenant improvements are being amortized using the straight-line method over
the respective lease terms of three and ten years or the estimated useful
life of the improvements, whichever is shorter. Lease commissions are being
amortized using the straight-line method over the respective lease terms of
three and ten years. Prepaid loan costs will be amortized using the
effective interest method over the life of the loan.
REVENUE RECOGNITION
Rents from leases are accounted for ratably over the terms of each lease.
The difference between accrued rental income and cash received has been
recorded as an account receivable and aggregates $577,479 and $751,510 at
December 31, 1995 and 1994, respectively. In addition, rental income
aggregating $380,372, $359,995 and $343,276 for 1995, 1994, and 1993,
respectively, resulted from billings to tenants for real estate taxes,
certain utilities and insurance paid by the property manager.
CASH EQUIVALENTS
The Partnership considers all highly liquid short-term investments with
original maturities of three months or less to be cash equivalents.
INCOME TAXES
The General Partner and Limited Partner are responsible for reporting to
the taxing authorities their proportionate shares of income or loss from
the Partnership. Therefore, no provision for income taxes is required in
the Partnership's financial statements.
26
<PAGE> 28
PLYMOUTH STREET, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
3. FINANCING ARRANGEMENTS
On December 30, 1993, the Partnership concurrently executed a Loan
Agreement, an Option and Put Agreement and a Lease Agreement with an
unrelated third party.
Under the terms of the Loan Agreement ("Loan"), the Partnership is to
receive scheduled advances totalling $17.5 million over five years. The
Loan requires monthly payments of interest only at an annual rate of 10% on
the outstanding balance. The Loan matures on December 31, 1998. The Loan is
secured by the property and existing leases. Scheduled advances aggregating
$16.0 million have been received by the Partnership and the net proceeds of
approximately $15.9 million were distributed to the limited partner in
accordance with the Partnership Agreement, as amended. The remaining
advances under the terms of the Loan are scheduled as follows:
July 1, 1996 $ 750,000
July 1, 1997 750,000
-------------
$ 1,500,000
=============
The Loan also stipulates that the lender is entitled to receive, as
additional interest, annual payments equal to 50% of the excess, if any, of
adjusted gross receipts of the property over a base amount, as defined. No
additional interest was earned during the years ended 1995, 1994 and 1993.
Under the terms of the Option and Put Agreement, the third party can elect,
during either of two option periods, to purchase the property ("Purchase
Option") from the Partnership for an aggregate purchase price of $19
million. The Purchase Option may be exercised during either of the periods
from January 1, 1995 to November 30, 1997 or from March 1, 1998 to May 30,
1998.
During the period from July 1, 1996 to December 31, 1996, if the Purchase
Option has not yet been exercised, the Partnership can elect to buy back
("Buy Back Option") the Purchase Option for an amount equal to $2,309 per
day plus the cost of all capital improvements made to the property and paid
for by the third party from December 30, 1993 to the date of the closing
under the Buy Back Option.
In addition, during the period from December 7, 1997 to February 28, 1998,
the Partnership can elect to put the property ("Put Option") back to the
third party for an aggregate purchase price of $19 million.
27
<PAGE> 29
PLYMOUTH STREET, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Under the terms of the Lease Agreement, the third party will occupy
approximately 19,600 square feet of the commercial rental space of the
property at an annual rent of approximately $25,000. The lease expires on
December 31, 1998 and the agreement contains option provisions for an
additional three and one-half year period. The terms of the lease are
comparable to other area leases with unrelated parties.
4. LEASES
Minimum future rental revenues on the initial terms of non-cancelable
leases as of December 31, 1995 are:
1996 $ 1,750,032
1997 1,821,738
1998 478,662
-------------
Total $ 4,050,432
=============
5. RELATED PARTY TRANSACTIONS
The Partnership paid property management fees aggregating $50,589, $48,728
and $46,328 for 1995, 1994, and 1993, respectively, to Mountain View Place
Investors, a general partnership, whose managing general partner is also
the General Partner of the Partnership.
6. INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of operations in
different time periods for financial reporting ("book") purposes and for
income tax ("tax") purposes. A reconciliation of the results of operations
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net loss - book $ (685,258) $ (568,410) $ (582,501)
Excess of book over tax depreciation 245,935 242,605 248,671
Excess of book over tax real estate
tax expense - (6,345) 169,495
Excess of book over tax rental income 174,031 112,002 27,480
----------- ----------- -----------
Net loss - tax $ (265,292) $ (220,148) $ (136,855)
=========== =========== ===========
</TABLE>
28
<PAGE> 30
PLYMOUTH STREET, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
A reconciliation between partners' equity (deficit) for book and tax purposes
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Partners' equity (deficit) - book $ (3,202,335) $ (568,410) $ 193,769
Cumulative tax over book income 1,548,880 1,192,889 844,626
Book over tax difference at inception (4,021,851) (4,021,851) (4,021,851)
------------- ------------- -------------
Partners' equity (deficit) - tax $ (5,675,306) $ (3,397,372) $ (2,983,456)
============= ============= =============
</TABLE>
Total assets for tax purposes aggregate $10,574,789 and $10,969,588 at
December 31, 1995 and 1994, respectively.
29
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Trustees of
Vanguard Real Estate Fund II
Our audits of the financial statements referred to in our report dated March 15,
1996 appearing on page 20 of the 1995 Annual Report to Shareholders of Vanguard
Real Estate Fund II (which report and financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included audits of the
Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 15, 1996
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
VANGUARD REAL ESTATE FUND II,
A Sales-Commission-Free Income Properties Fund
March 29, 1996 /s/ John J. Brennan
- ---------------------- -------------------------------------
DATE John J. Brennan
President
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
Registrant and in the capacities on the dates indicated.
March 29, 1996 /s/ J. Mahlon Buck, Jr.
- ---------------------- -------------------------------------
DATE J. Mahlon Buck, Jr.
Trustee
March 29, 1996 /s/ William S. Cashel, Jr.
- ---------------------- -------------------------------------
DATE William S. Cashel, Jr.
Trustee
March 29, 1996 /s/ David C. Melnicoff
- ---------------------- -------------------------------------
DATE David C. Melnicoff
Trustee
March 29, 1996 /s/ J. Lawrence Wilson
- ---------------------- -------------------------------------
DATE J. Lawrence Wilson
Trustee
March 29, 1996 /s/ Ralph K. Packard
- ---------------------- -------------------------------------
DATE Ralph K. Packard
Vice President & Controller
31
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C>
2 Vanguard Real Estate Fund II, A Sales-Commission-Free Income
Properties Fund - Plan of Liquidation and Termination.................33
13 1995 Annual Report to Shareholders.....................................38
</TABLE>
32
<PAGE> 1
VANGUARD REAL ESTATE FUND II
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
SECRETARY'S CERTIFICATE
The undersigned, Raymond J. Klapinsky, being the duly elected and
acting Secretary of Vanguard Real Estate Fund II, A Sales-Commission-Free
Income properties Fund (the "Fund"), hereby certifies that attached hereto as
Exhibit A is a true and correct copy of a Plan of Liquidation and Termination
duly adopted by Unanimous Consent of the Board of Trustees of the Fund on
December 8, 1995. Such resolutions have not been modified or repealed and
remain in full force and effect as of the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand to this Certificate as
of this 21st day of December, 1995.
/s/ Raymond J. Klapinsky
-----------------------------------
Raymond J. Klapinsky, Secretary
Vanguard Real Estate Fund II,
A Sales-Commission-Free Income Properties Fund
<PAGE> 2
VANGUARD REAL ESTATE FUND II,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
PLAN OF LIQUIDATION AND TERMINATION
WHEREAS, Vanguard Real Estate Fund II, A Sales-Commission-Free Income
Properties Fund (the "Fund"), is a business trust organized pursuant to the
laws of the Commonwealth of Massachusetts; and
WHEREAS, the Fund has operated as a "real estate investment trust"
under Sections 856-859 of the Internal Revenue Code of 1986, as amended the
("Code"); and
WHEREAS, the Fund was organized in 1987 as a "finite life" real estate
investment trust, with a then-contemplated duration of between seven and twelve
years; and
WHEREAS, pursuant to Section 8.1 of the Fund's Amended and Restated
Declaration of Trust, dated as of January 8, 1988 (as subsequently amended, the
"Declaration of Trust"), the Trustees of the Fund have the discretion to
determine in good faith whether and when the Fund should be liquidated and
terminated, if and so long as the termination occurs not later than January 8,
2003; and
WHEREAS, the Trustees have determined in good faith that it is in the
best interest of the Fund and the Shareholders for the Fund to be liquidated
and terminated in accordance with the Plan of Liquidation hereby adopted:
NOW THEREFORE, BE AND IT HEREBY IS RESOLVED that the Fund be
completely liquidated in accordance with Section 331 of the Code.
FURTHER RESOLVED, that the Trustees and officers of the Fund be and
they hereby are authorized and directed to complete and carry out the Plan of
Liquidation as hereinafter set forth.
FURTHER RESOLVED, that, without limiting the generality of the
foregoing, the following Plan of Liquidation be and it hereby is adopted:
1. TERMS. All capitalized terms not otherwise defined herein
shall have the meaning set forth in the Declaration of Trust of the Fund.
2. IRS FILING. Within thirty days of the date of the adoption
of this Plan of Liquidation by the Trustees, an IRS Form 966 shall be properly
filed with the appropriate office of the Internal Revenue Service.
68
<PAGE> 3
3. LIQUIDATION OF ASSETS. In furtherance of this Plan of
Liquidation, the Fund shall sell, exchange or otherwise dispose of all of its
assets to the extent, for such consideration and upon such terms and conditions
as the Trustees of the Fund deem expedient and in the best interest of the Fund
and its Shareholders. All assets remaining after the payment of or provision
for the payment or satisfaction of all liabilities or obligations of the Fund
shall, to the extent not already consisting of cash, be converted into cash at
public or private sale.
4. PAYMENT OF DEBTS. Prior to any final distribution to its
Shareholders, the Fund shall promptly pay or provide for the payment or
satisfaction of all debts, expenses, taxes, liabilities (whether known,
unascertained, contingent or unmatured) and all other obligations of the Fund,
including expenses of dissolution, liquidation and termination of existence.
5. LIQUIDATION DISTRIBUTION. Following the payment or provision
for the payment or satisfaction of the Fund's liabilities and obligations
pursuant to paragraph 3 above, the Fund shall distribute its remaining cash and
assets to Shareholders of the Fund in such amounts and at such times as shall
be determined by the Trustees in their sole discretion and consistent with the
Fund's Declaration of Trust and its maintaining its status as a "real estate
investment trust" under the Code. Distributions may be made in installments
from time to time or as a whole. Upon payment of the liquidation distribution
(or final liquidation distribution, if made in installments), each Shareholder
of the Fund shall be given notice to deliver to the Fund, or to a trust to
which the assets of the Fund may have been transferred, the certificates
representing all of the shares of the Fund owned by such Shareholder. The cash
of the Fund as determined under paragraphs 4 and 5 above shall be divided among
the Shareholders on a pro rata basis. If a Shareholder's certificate of shares
of beneficial interest in the Fund has been lost, stolen or destroyed, such
Shareholder may be required to furnish the Fund with satisfactory evidence of
the loss, theft or destruction thereof, together with a reasonable undertaking
or indemnity satisfactory to the Fund, as a condition to the receipt of any
distribution. The complete liquidation of the Fund shall be completed within
24 months of the date of the adoption of this Plan of Liquidation.
6. TERMINATION. As promptly as practicable after the payment of
or provision for the payment or satisfaction of all liabilities and obligations
of the Fund, and upon the taking of any act required to be taken under the laws
of the Commonwealth of Massachusetts, the Fund shall be terminated in
accordance with the laws of the Commonwealth of Massachusetts.
7. CESSATION OF BUSINESS. After the adoption of this Plan of
Liquidation, the Fund shall not engage in any business activities except for
the purposes of preserving the values of its assets, adjusting and winding up
its business affairs, and making any liquidation distribution in accordance
with the Plan of Liquidation. The Trustees now in office and, at their
pleasure, the officers of the Fund, shall continue in office solely for these
purposes. Unless and until the decision to proceed with the Plan of
Liquidation is reversed by the Fund's Trustees, no new business operations will
be explored or undertaken by the Fund.
8. POWER OF THE TRUSTEES. The Trustees and, if authorized by the
Trustees, the officers of the Fund, shall have authority to do or authorize any
and all acts and things as provided for in this Plan of Liquidation and any and
all such further acts and things as they may consider desirable to carry out
the
69
<PAGE> 4
purposes of this Plan of Liquidation, including the execution and filing of all
such certificates, documents, information returns, tax returns, and other
documents which may be necessary or appropriate to implement this Plan of
Liquidation. The Trustees may authorize such variations from or amendments to
the provisions of this Plan of Liquidation as may be necessary or appropriate
to effectuate the complete liquidation, dissolution and termination of
existence of the Fund, and the distribution of its assets to its Shareholders
in accordance with the laws of the Commonwealth of Massachusetts. The death,
resignation, or other disability of any Trustees, or officer of the Fund shall
not impair the authority of the surviving or remaining Trustees or officers to
exercise any of the powers provided for in the Plan of Liquidation. Upon such
death, resignation, or other disability, the surviving or remaining Trustees,
or, if there be none, the surviving or remaining officers, shall have authority
to fill the vacancy or vacancies created, but the failure to fill such vacancy
or vacancies shall not impair the authority of the surviving or remaining
Trustees or officers to exercise any of the powers provided for in this Plan of
Liquidation.
After the effective date of termination of the Fund, the Trustees
shall continue to act as Trustees and shall have full power to wind up and
settle the Fund's affairs, and the Fund shall cease to carry on business except
to the extent necessary for the beneficial winding up thereof. The powers and
duties of the Trustees of the Fund shall include, but are not limited to, the
following acts in the name and on behalf of the Fund: (a) to elect officers
and employ agents and attorneys to liquidate or wind up its affairs; (b) to
continue the conduct of the business of the Fund only insofar as necessary for
the disposal or winding up thereof; (c) to carry out contracts and collect,
pay, compromise and settle debts for or against the Fund; (d) to defend suits
brought against the Fund; (e) to sue in the name of the Fund for all sums due
or owing to the Fund or to recover any of its property; and (f) in general, to
make contracts and to do any and all things in the name of the Fund which may
be proper or convenient for the purposes of winding up, settling and
liquidating the affairs of the Fund.
9. LIQUIDATING TRUST. If advisable for any reason to complete
the liquidation and distribution of the Fund's assets to the Shareholders of
the Fund, and subject to approval of the liquidating trustee by Shareholders of
the Fund if such approval is deemed advisable by the Trustees, the Trustees may
at any time (including after its dissolution) transfer to a liquidating trust
any or all remaining assets of the Fund. The liquidating trust will succeed to
all of the then-remaining assets of the Fund, including the reserve for
contingent or unsatisfied liabilities and obligations of the Fund and any
liabilities and obligations of the Fund expressly not assumed by any purchaser
of the Fund's assets. The sole purposes of the liquidating trust will be to
prosecute and defend suits by or against the Fund, to enable the Fund to settle
and close the business of the Fund, to dispose of and convey the assets of the
Fund, to satisfy the remaining liabilities and obligations of the Fund, and to
distribute the remaining cash to the Fund's Shareholders. The Trustees may
appoint a trustee or trustees to act as trustee or trustees of the liquidating
trust on such terms and conditions as the Trustees determine. It is intended
that any liquidating trust so established qualify as a "liquidating trust", as
such term is defined in Treasury Regulation 301.7701-4(d).
In the event it is determined by a majority of the Trustees that an
entity or entities different in form but similar in purpose to a liquidating
trust, such as an escrow or partnership, is more appropriate to the
administration and completion of the liquidation, then the Trustees shall take
all steps necessary to establish such other entity or entities. Such an entity
or entities shall be administered, to the extent possible, in the same manner
as provided with respect to the liquidating trust contemplated above.
70
<PAGE> 5
10. AMENDMENTS. The Trustees of the Fund may modify or amend
this Plan of Liquidation and, prior to the final termination of the Trust, may
abandon this Plan of Liquidation without further action to the extent permitted
by the laws of the Commonwealth of Massachusetts.
11. INDEMNIFICATION OR INSURANCE. The obligation of the Fund to
indemnify and reimburse its trustees, officers, employees or affiliates
pursuant to Section 7.4 of the Fund's Declaration of Trust or otherwise shall
survive the liquidation and dissolution of the Fund, but may be satisfied only
out of the assets of any reserve fund or liquidating trust which has assumed
the liability therefor or the proceeds of insurance therefor, but not from
distributions made to shareholders. The Trustees shall have the power and
authority after the termination of the Fund to purchase, continue and maintain
insurance as may be necessary to cover the Fund's indemnification obligations,
and the Trustees also shall have the power and authority to satisfy any of the
indemnification obligations of the Fund out of the assets of the Fund,
including assets held by an agent or a trust or other entity.
12. COSTS. The Trustees are authorized, empowered and directed to
pay all legal, accounting, printing, appraisal and other fees and expenses of
persons rendering services to the Fund in connection with adoption and/or
implementation of this Plan of Liquidation.
13. AGENT FOR SHAREHOLDERS. In order to effect a final
distribution of its remaining cash and investments to its Shareholders, the
appropriate officers of the Fund are hereby authorized to appoint an agent for
Shareholders of the Fund, if such action is deemed advisable by the Trustees.
The Fund shall deliver to such agent for the Shareholders the cash to be
distributed to the Shareholders as determined under paragraph 4 above. Such
liquidation distribution will be distributable to the Shareholders by the agent
for Shareholders as soon as practicable after receipt of the funds from the
Fund to those Shareholders who have delivered their certificates representing
shares of the Fund or other satisfactory evidence as provided for in paragraph
4 above. The remainder of such cash will be held for the account of those
Shareholders who have not delivered their share certificates or other
satisfactory evidence. No interest shall accrue at any time on any cash held
by the agent for Shareholders.
14. APPROVAL AND EFFECTIVE DATE. In accordance with the
provisions of Section 8.1 of the Declaration of Trust, this Plan of Liquidation
shall be and become effective upon its approval by a majority of Trustees of
the Fund then in office (including a majority of Unaffiliated Trustees).
71
<PAGE> 1
[LOGO]
VANGUARD
REAL ESTATE
FUND II
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John
J. Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Real Estate Fund II and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of all
the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
[PHOTO AND CAPTIONS]
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our
costs of operation to a minimum, and in retaining our position as the
lowest-cost provider of financial services in the world. He is a true
competitor, who shares Vanguard's dedication to providing highly competitive
returns to our investors relative to the returns provided by other mutual funds
with comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
JCB
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Vanguard Real Estate Fund II is now well into the liquidation phase of its
lifecycle. Several small property holdings were sold during 1995, including
Penn Warner Industrials sold in late December. On December 8, 1995, the Board
of Trustees adopted a formal plan of liquidation, which contemplates disposing
of our remaining property holdings by December 1997. In fact, however, we are
making good progress in finding buyers for our remaining holdings and it is
possible that the Fund will liquidate in the 1996 fiscal year.
FINANCIAL RESULTS
Net income totaled $.54 per share for 1995, which reflects the sale of several
properties above their carrying value and compares favorably to 1994's loss of
($.71) per share. Funds from operations gives a more consistent view of
operating results and totaled $.36 per share in 1995. This figure is less than
the 1994 results of $.50 per share due to the smaller size of the portfolio as
a result of property sales during both 1994 and 1995 and the return of capital
distribution to shareholders at year-end 1994.
Distributions during 1995 totaled $1.475 per share, including three
quarterly payments of $.075 per share and a year-end distribution of $1.25 per
share. For tax purposes, all 1995 distributions were nontaxable (to the extent
a shareholder has a remaining tax cost basis).
THE PROPERTY PORTFOLIO
We began the year with interests in six properties. Three properties were sold
during the year: the Raleigh Building in June for net proceeds of $1.1 million;
Sequoia Commerce Center in September for $1.1 million (after repayment of the
first mortgage); and, finally, in December, Penn Warner Industrials for $4.6
million. Each of these properties was sold at values somewhat in excess of
their carrying values. Nevertheless, each proved a difficult and very
disappointing investment for the Fund as we realized only some 29% of our
original investment in the aggregate on these sales. The primary reason for the
decline in value in each case was the dramatic deterioration in local market
conditions over the course of our holding periods.
Subsequent to the close of the fiscal year, the Fund also completed the
sale of Arapahoe Village, our shopping center in Boulder, Colorado, which was
delayed by the discovery of environmental conditions during the course of the
evaluation by the purchaser. Further testing was completed in December and the
State of Colorado issued "no further action" letters. The sale was completed on
favorable terms to the Fund resulting in net proceeds of $11.1 million (after
repayment of a first mortgage) and a gain of approximately $4.1 million (which
will be recognized in 1996).
With regard to our Bayside Business Center mortgage, we called the loan
and, since the borrower was unable to obtain financing, took title to the
property in late February 1996. The Fund's Adviser is now actively marketing
the property for sale. Once sold, our single remaining holding will be our
participation in the Mountain View office building in California. As you may
recall, we entered into a financing agreement on this property that recouped
more than our initial equity investment. We are currently exploring our options
for receiving an earlier payoff of our residual interests under this
arrangement.
MEASURES OF VALUE
At each year end, we provide you with an update on the estimated value of the
Fund's investments. Traditionally this valuation has been based on the lower of
the opinions provided by independent appraisers and our Adviser. However, for
year-end 1995, we have estimated appraised value using contract price in place
of our standard measure if an investment has been sold subsequent to year end.
This approach provides a more appropriate indicator of value given the status
of the Fund's liquidation. Using this method, the estimated appraised value was
$4.14 per share (before costs of completing real es-
1
<PAGE> 4
TOTAL RETURN
VANGUARD REAL ESTATE FUND II
VS. NCREIF INDEX
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
VREF II 9.4% 5.3% 0.1 -6.1 -1.0 1.6 19.0
NCREIF 6.2% 1.7% -5.4% -4.6% 0.9% 6.7% 7.7%
</TABLE>
tate sales) at year-end 1995. This amount is, of course, lower than the $4.72
per share reported to you at year-end 1994, principally as a result of 1995
distributions from property sales. However, adjusting the year-end valuation
for 1995 distributions in excess of funds from operations ($1.12 per share),
the Fund's appraised value increased by $.54 per share from 1994 to 1995. This
increase was principally due to net proceeds from 1995 and 1996 property sales
in excess of their appraised value at year-end 1994, most notably from Arapahoe
and Sequoia.
We have also provided, on page 30, an estimate of the Fund's net
realizable value taking into account the substantial costs of completing real
estate sales. Based on the appraised value of $4.14 per share, we would expect
the Fund to net approximately $4.02 per share after all costs if the properties
were sold in the current environment. Of course, we would stress that these
valuations are merely estimates and the eventual net sales proceeds may be
higher or lower.
In the secondary market, the Fund's shares closed the year at $2.56 per
share, or some 38% lower than our estimate of appraised value. Trading volumes
have been very light, which is not surprising given the Fund's ongoing
liquidation.
LONGER-TERM PERFORMANCE
Based on our estimate of year-end appraised value of $4.14 per share, the
Fund's total return (income plus capital change) for 1995 was 19.0%, which as
shown in the chart at left, compares to an estimated total return of 7.7% for
the NCREIF Index of pension real estate portfolios (one of the few indexes
available to measure real estate performance). Due to the inherent imprecision
in estimating real estate values, we believe a longer-term view of returns is a
more meaningful comparison. Over the life of the Fund, our total return has
been modest in absolute terms, but competitive with that of the Index. We
calculate the Fund's total return since June 30, 1988, to be 2.6% annually
versus 2.9% for the Index.
To help you understand the Fund's income and distribution from net
proceeds we have provided in the chart on page 3 a chronology of the year-end
appraised value, and annual and cumulative distributions. In sum, the value of
an investment in the Fund has increased from $10.00 per share at inception on
June 30, 1988, to $11.985 per share at year-end 1995, not including the benefit
of earnings on cash distributions over the years (which would add another $1.14
per share if invested in Treasury bills, for example).
2
<PAGE> 5
VANGUARD REAL ESTATE FUND II YEAR-END APPRAISED VALUE PER SHARE,
ANNUAL AND CUMULATIVE DISTRIBUTIONS PER SHARE
[GRAPH]
<TABLE>
<CAPTION>
Per Share Amounts: Inception 1988 1989 1990 1991 1992 1993 1994 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Year Distributions: -- $ .66 $ .74 $ .66 $ .66 $ .60 $ .60 $2.45 $1.475
Year-end Appraised Value: -- $ 9.59 $ 9.75 $ 9.61 $8.96 $7.81 $7.06 $4.72 $4.14
Year-end Tax Cost Basis
for an Investor*: $10.00 $10.00 $10.00 $10.00 $9.81 $9.23 $8.63 $6.67 $5.195
</TABLE>
*Assuming shares purchased at inception of Fund and subsequently reduced by
annual nontaxable return of capital distributions, as applicable.
CONCLUSION
The Fund made progress during 1995 by selling three properties at amounts above
carrying values and by moving forward on the disposition process for our other
properties. We expect to report on further sales within the first half of the
year. We will both keep you apprised of our progress and remit net proceeds to
you expeditiously.
Sincerely,
/s/ John C. Bogle
John C. Bogle
Chairman of the Board
March 7, 1996
3
<PAGE> 6
REPORT FROM
THE INVESTMENT ADVISER
PORTFOLIO OVERVIEW
During 1995, we have been working to position each of the Fund's assets for
sale in order to execute a timely liquidation consistent with the Fund's
objectives while striving to optimize current operating performance from each
asset. We believe we have been successful in these efforts.
In June 1995, we sold the Raleigh Office Building (Chicago, Illinois) for
a contract price of $1,235,000, generating net proceeds to the Fund of
approximately $1.1 million. In December 1995, we sold the four buildings that
comprised the Penn Warner Industrials (Bucks County, Pennsylvania) portfolio
for a contract price of $4,885,000. The sale generated approximately $4.6
million in net proceeds to the Fund. On November 17, 1995, the sale of Sequoia
Commerce Center (Torrance, California) was closed at a contract price of
$12,700,000, generating net proceeds of approximately $1.1 million to the Fund
after repayment of the first mortgage. Arapahoe Village (Boulder, Colorado) was
marketed for sale during the latter half of 1995 and generated strong interest
among several potential buyers, resulting in a purchase and sale agreement for
the property in October 1995. During the course of due diligence by the
potential purchaser; however, certain environmental conditions were discovered
and the sale was delayed. Additional testing was completed in late 1995 and the
State of Colorado subsequently issued "no further action" letters in February.
We are pleased to report that the sale has now closed at an extremely
attractive price to the Fund. After paying off the mortgage loan securing the
property, the sale netted the Fund $11.1 million in net proceeds, which
represented a substantial gain over the Fund's carrying value which will be
recognized as income in 1996.
We have re-opened discussions with the General Partner at Mountain View
Place in order to negotiate a more rapid buyout of the Fund's remaining
interest. Under the agreement executed late in 1992, the buyout was to be
completed no later than 1998.
Overall, during 1995 the portfolio remained well-leased and stable. On a
combined basis, net operating income for the three assets remaining at year end
for the period January-November 1995 was 2% ahead of budget.
PROPERTY HIGHLIGHTS
As we noted in our last report to you, we exercised the Fund's option to call
its first and second mortgage loans on Bayside Business Center (San Carlos,
California), and the loans became due in full on October 18, 1995. In early
December, the borrower offered to make a discounted payoff of $7,600,000 in
full satisfaction of its obligations under the loans, and we accepted that
offer. We also agreed to give the borrower until mid-February to obtain the
necessary financing to complete the buyout. However, we simultaneously made
preparations to market the property for sale. The borrower was unable to pay
off the loan and the Fund took title to the property in late February. We have
immediately and actively begun the sales process.
The Fund made great progress in 1995 towards its liquidation, and we will
continue to proceed with the disposition process in an effective and
expeditious manner.
Sincerely,
Aldrich, Eastman & Waltch, L.P.
March 7, 1996
<TABLE>
<CAPTION>
==========================================================================================================================
PROPERTY DECEMBER 31, 1995 DECEMBER 31, 1994
PROPERTY TYPE INVESTMENT TYPE OCCUPANCY RATE OCCUPANCY RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Bayside Business Center Industrial Fixed-Rate and Shared- 100% 100%
Appreciation Mortgages
- --------------------------------------------------------------------------------------------------------------------------
2. Mountain View (Plymouth Street, L. P.) Office Leveraged Joint Venture 100% 100%
- --------------------------------------------------------------------------------------------------------------------------
3. Arapahoe Village Retail Leveraged Ownership 99% 100%
==========================================================================================================================
</TABLE>
4
<PAGE> 7
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
ASSETS ($ in 000's) ($ in 000's)*
----------------- -----------------
<S> <C> <C>
Investments in Real Estate:
Direct Ownership Investments:
Land ................................................... $ 6,000 $ 9,211
Buildings and Improvements ............................. 8,192 22,788
------- -------
14,192 31,999
Less--Accumulated Depreciation ......................... 1,255 2,820
------- -------
12,937 29,179
Mortgage Loans Receivable ................................ 8,290 8,430
Less--Allowance for possible losses .................... 800 800
------- -------
Net Investment Portfolio ............................... 20,427 36,809
Marketable Securities-REMICs ............................... 1,194 1,548
Short-Term Investments:
Vanguard Money Market Reserves-Prime Portfolio
(959,453 and 1,293,264 shares, respectively) ............. 959 1,293
Temporary Cash Investments ............................... 4,995 5,000
Other Assets ............................................... 789 1,489
------- -------
TOTAL ASSETS ............................................... $28,364 $46,139
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage Loans (including current portion of $101 and $92,
respectively) ............................................ $ 6,115 $17,258
Deferred Revenue--Mountain View ............................ 1,856 1,820
Due to Affiliates .......................................... 142 138
Other Liabilities .......................................... 506 1,136
------- -------
TOTAL LIABILITIES .......................................... 8,619 20,352
------- -------
Shares of Beneficial Interest, without par value, unlimited
shares authorized ........................................ 31,361 40,849
Accumulated Taxable Distributions in Excess of Net Income .. (11,616) (15,062)
------- -------
TOTAL SHAREHOLDERS' EQUITY ................................. 19,745 25,787
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $28,364 $46,139
======= =======
</TABLE>
*Certain prior year amounts have been reclassified to conform to current year
presentation.
The accompanying notes are an integral part of these statements.
5
<PAGE> 8
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
REAL ESTATE INCOME (000) (000) (000)
--------- --------- ---------
<S> <C> <C> <C>
Rental Income .................................. $ 4,331 $ 6,481 $ 6,104
Mortgage Interest Income ....................... 830 910 866
--------- --------- ---------
5,161 7,391 6,970
--------- --------- ---------
REAL ESTATE EXPENSES
Mortgage Interest Expense ...................... 1,020 1,370 1,397
Real Estate Taxes .............................. 593 780 928
Property Operating Expenses .................... 1,040 1,636 1,290
Depreciation and Amortization .................. 458 1,307 1,116
(Reversal of) Provision for Possible Losses .... (1,636) 8,650 1,759
--------- --------- ---------
1,475 13,743 6,490
--------- --------- ---------
INCOME (LOSS) FROM REAL ESTATE ................. 3,686 (6,352) 480
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS ................................... 424 390 357
--------- --------- ---------
4,110 (5,962) 837
--------- --------- ---------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee ........................ 194 255 136
Administrative Fee ............................. 160 243 121
Other Administrative Expenses .................. 310 294 283
--------- --------- ---------
664 792 540
--------- --------- ---------
INCOME (LOSS) BEFORE NET GAIN ON SALES
OF INVESTMENTS ................................ 3,446 (6,754) 297
Net Gain on Sales of Investments .............. -- 2,211 --
--------- --------- ---------
NET INCOME (LOSS) $ 3,446 $ (4,543) $ 6,297
========= ========= =========
Weighted Average Number of Shares Outstanding .. 6,432,626 6,432,626 6,469,723
========= ========= =========
Net Income (Loss) Per Share:
Income (Loss) Before Net Gain on Sales of
Investments .................................. $ .54 $ (1.05) $ .05
Net Gain on Sales of Investments .............. -- .34 --
--------- --------- ---------
Net Income (Loss) Per Share .................... $ .54 $ (.71) $ .05
========= ========= =========
Ordinary Income Distributions Per Share ........ $ -- $ .30 --
Long-Term Capital Gain Distributions Per
Share .......................................... -- .19 --
Return of Capital Distributions Per Share ...... .225 1.96 $ .60
Liquidating Distributions Per Share ............ 1.250 -- --
--------- --------- ---------
Total Distributions Per Share .................. $ 1.475 $ (2.45) $ .60
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 9
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
(000) (000) (000)
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Real Estate Investments:
Rental Income ............................. $ 4,490 $ 6,529 $ 5,839
Mortgage Interest Income .................. 824 791 722
Distributions from Joint Venture-
Operating ............................... 36 43 156
Mortgage Interest Payments ................ (1,009) (1,486) (1,300)
Operating Expense Payments ................ (1,633) (2,408) (2,333)
------- ------- -------
Net Cash Provided by Real Estate
Investments ........................... 2,708 3,469 3,084
Interest from Short-Term Investments ........ 424 390 357
Administrative Expenses ..................... (635) (829) (538)
------- ------- -------
Net Cash Provided by Operating
Activities ............................ 2,497 3,030 2,903
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Distributions from Joint Venture-Net Capital
Proceeds ................................... -- 931 4,612
Property Acquisition--Shadow Brook ......... -- -- (12,200)
Sales of Investments ....................... 6,904 18,190 --
Marketable Securities Acquired ............. -- (1,749) --
Investment Transaction Fees and Acquisition
Costs .................................... (70) (367) (293)
Building Improvements ...................... (444) (763) (906)
Cash Used to Obtain Title to Sequoia ....... -- -- (1,325)
Principal Repayments from
Marketable Securities--REMICs ............ 355 177 --
------- ------- -------
Net Cash Provided by (Used in)
Investing Activities ............... 6,745 16,419 (10,112)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from Mortgage Loan
Refinancing ............................... -- -- 6,190
Mortgage Principal Payments ................. (93) (92) (6,165)
Refinancing Fee--Arapahoe ................... -- (41) --
Distributions Paid .......................... (9,488) (15,759) (3,878)
Shares Repurchased .......................... -- -- (576)
------- ------- -------
Net Cash Used in Financing Activities .. (9,581) (15,892) (4,429)
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ................................ (339) 3,557 (11,638)
CASH AND CASH EQUIVALENTS--Beginning
of Year .................................... 6,293 2,736 14,374
------- ------- -------
CASH AND CASH EQUIVALENTS--End of Year ...... $ 5,954 $ 6,293 $ 2,736
======= ======= =======
</TABLE>
(continued on next page)
7
<PAGE> 10
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
(000) (000) (000)
------- -------- -------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income (Loss) .................................... $ 3,446 $(4,543) $ 297
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Property Depreciation and Amortization ............. 458 1,307 1,116
(Reversal of) Provision for Possible Losses ........ (1,636) 8,650 1,759
Net Gain on Sales of Investments ................... -- (2,211) --
Increase in Deferred Mortgage Interest
Receivable ..................................... -- (144) (144)
Distributions in Excess of Equity in Net Income
of Joint Venture ............................... 36 43 156
Unrealized (Appreciation) Depreciation
on Marketable Securities ....................... (7) 21 --
Changes in Other Assets and Liabilities ............ 200 (93) (281)
------- ------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. $ 2,497 $ 3,030 $2,903
======= ======= ======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On March 12, 1993, the Fund obtained title to its former junior mortgage loan
investment, Sequoia Commerce Center, and assumed a first mortgage loan pursuant
to a reorganization plan approved by the Bankruptcy Court (see Note E). The
excess of recorded assets over assets obtained, net of liabilities assumed and
incurred, was charged to the provision for possible losses in the year ended
December 31, 1993, as follows (amounts in 000's):
<TABLE>
<S> <C>
Recorded Assets $5,704
Assets Obtained, Net of Liabilities Assumed and Incurred 4,695
------
Charge to Provision for Possible Losses $1,009
======
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 11
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Taxable
Shares of Beneficial Interest Distributions in Excess Total Shareholders'
Amount of Net Income Equity
Number (000) (000) (000)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance: January 1, 1993 .. 6,503,726 $57,795 $(7,632) $50,163
Net Income for the Year .. 297 297
Less: Distributions
Return of Capital ........ (3,878) (3,878)
Shares Repurchased ........ (71,100) (493) (493)
--------------------------------------------------------------------------------
Balance: December 31, 1993 6,432,626 53,424 (7,335) 46,089
Net Loss for the Year .... (4,543) (4,543)
Less: Distributions
Ordinary Income (1,954) (1,954)
Long-Term Capital Gain .. (1,230) (1,230)
Return of Capital ....... (12,575) (12,575)
--------------------------------------------------------------------------------
Balance: December 31, 1994 6,432,626 40,849 (15,062) 25,787
Net Income for the Year .. 3,446 3,446
Less: Distributions
Return of Capital ...... (1,447) (1,447)
Liquidating ............ (8,041) (8,041)
--------------------------------------------------------------------------------
Balance: December 31, 1995 6,432,626 $31,361 $(11,616) $19,745
================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
A. GENERAL DESCRIPTION: Vanguard Real Estate Fund II, A Sales-Commission-Free
Income Properties Fund (the "Fund"), a Massachusetts business trust organized
in 1987, is a qualified finite-life real estate investment trust ("REIT") under
the Internal Revenue Code of 1986. The Fund's Declaration of Trust precludes
the Fund from reinvesting net proceeds from the sale or repayment of its real
estate investments in additional real estate investments after December 31,
1994, and contemplates the liquidation of all of the Fund's investments after a
period of approximately seven to twelve years following completion of its
initial public offering. On December 8, 1995, the Fund's Board of Trustees
approved a Plan of Liquidation and Termination (the "Liquidation Plan"). The
Liquidation Plan provides that the Fund will dispose of all of its assets, wind
up its affairs, pay or adequately provide for the payment of all of its
liabilities and distribute for the benefit of its shareholders all of the
Fund's assets over 24 months in complete cancellation and redemption of all
issued and outstanding shares of beneficial interest. The Liquidation Plan
provides that the Fund's assets may be sold, conveyed, transferred or otherwise
disposed of when and on such terms and conditions as are deemed by the Trustees
to be in the best interests of the Fund and the shareholders. It is
contemplated that the Fund will be completely liquidated and dissolved by
December 8, 1997. To the extent that the Fund has not disposed of all of its
assets or made provision for all of its liabilities on December 8, 1997, the
Fund intends to form a liquidating trust, the beneficiaries of which will be
the shareholders of the Fund. All assets and liabilities not disposed of and
discharged will be transferred to the liquidating trust. Shares of the Fund
would no longer be traded and the beneficial interests in the liquidating trust
would not be readily transferable.
The Fund intends to continue to qualify as a REIT under the Internal Revenue
Code during the Fund's liquidation period.
B. The following significant accounting policies are in conformity with
generally accepted accounting principles for real estate investment trusts.
Such policies are consistently followed by the Fund in the preparation of
financial statements.
1. BASIS OF PRESENTATION: The Fund's financial statements have been prepared
on the basis of a going concern using historical cost. As of June 30,
1995, the Fund considered all of its remaining investments as held for
sale and reduced the carrying value of such investments to the extent that
each investment's then-current carrying value exceeded its estimated net
realizable value, defined as estimated fair market value less selling
costs. Upon obtaining binding agreements of sale for all of its remaining
real estate investments, the Fund will account for such investments on a
liquidation basis and will recognize at that time net gains, if any, on
such investments.
2. ORGANIZATION COSTS: Costs incurred in conjunction with the organization
of the Fund were deferred and were amortized on a straight-line basis over
a 60-month period from the date the Fund commenced operations.
3. INVESTMENTS IN REAL ESTATE: Real estate directly owned by the Fund is
carried at cost less accumulated provisions for depreciation and estimated
losses. Major renovations are capitalized, and routine maintenance and
repairs are charged to expense as incurred.
Mortgage loan receivables deemed impaired are carried at the
estimated fair value of the loan's collateral less estimated selling
costs.
10
<PAGE> 13
The Fund's investment in a real estate joint venture ("Plymouth
Street, L.P.") is accounted for under the equity method of accounting.
Under this method, the Fund's initial investment was recorded at cost and
is subsequently adjusted for the Fund's allocated share of the joint
venture's net income and cash distributions (see Note K).
4. REVENUE RECOGNITION: Rental income is accrued as rents are due. For those
operating leases that provide for rental concessions or fixed escalation
increases, rental income is recognized on a straight-line basis over the
term of the lease. For those operating leases that provide for
reimbursement of expenses for real estate taxes, common area maintenance,
utilities and insurance, income is recognized in the period in which the
expenses are incurred. Mortgage interest income is recorded based on the
annual effective yield of the respective loans.
5. PROVISION FOR POSSIBLE LOSSES: A provision for possible losses is
provided for estimated losses based upon management's regular evaluation
of the recoverability of each investment in the portfolio. Except for
investments considered to be held for sale, management's evaluation
included consideration of each investment's estimated remaining holding
period. Provisions for possible losses are recorded as direct write downs
of the carrying value of direct ownership and through an allowance account
for mortgage loans receivable deemed to be impaired. For impaired loans,
changes in the estimated fair value of the loan's collateral less
estimated selling costs are recognized through the provision for possible
losses. In the event net sales proceeds exceed the carrying value upon the
ultimate disposition of investments for which an estimated provision for
losses was previously recorded, a reversal of the provision is recognized
to the extent of such previously recorded provisions for possible losses.
The Fund's management believes that the provision recorded to write
down the carrying values of its remaining real estate investments is
adequate at December 31, 1995; however, the provision is based on
estimates and actual results may vary from current estimates.
6. DEPRECIATION AND ACQUISITION COSTS: Prior to June 30, 1995, depreciation
on real estate owned was computed using the straight-line method over 40
years for buildings and costs incurred in conjunction with the acquisition
of real estate investments were deferred and amortized on a straight-line
basis over the life of the loan for mortgage loan investments and the life
of the property for equity investments. After June 30, 1995, no
depreciation or amortization expense related to the Fund's owned real
estate and acquisition costs is recognized since the Fund's real estate
investments are considered to be held-for-sale assets.
7. SHORT-TERM AND MARKETABLE SECURITIES INVESTMENTS: Investments in
marketable securities, including Vanguard Money Market Reserves-Prime
Portfolio, are carried at fair, or market, value. Unrealized
appreciation/depreciation resulting from adjustments to carry such
securities at market value is reflected in mortgage interest income.
Temporary cash investments are carried at amortized cost, which
approximates market value. The Fund's temporary cash investments consisted
of commercial paper at December 31, 1995.
8. CASH EQUIVALENTS: For purposes of the Statements of Cash Flows, the Fund
considers all liquid short-term investments with original maturities of
three months or less to be cash equivalents.
9. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify
as a real estate investment trust and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements. Differences between net income determined in
accordance with generally
11
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
(continued)
accepted accounting principles and taxable income before dividend
distributions result primarily from timing differences relating to the
accounting for the provision for possible losses, depreciation on tenant
improvements, and certain rental income.
10. PER SHARE AMOUNTS: The calculation of the Fund's net income per share is
based upon the weighted average number of shares outstanding during the
year. Income, capital gain, liquidating and return of capital
distributions per share represent actual distributions made during the
year.
C. Under the terms of an agreement expiring December 31, 1996, as amended, the
Fund pays Aldrich, Eastman and Waltch, L.P. (the "Adviser") an annual
investment advisory fee equal to .5% of the average fair market value of the
Fund's real estate investments. The Adviser agreed to waive payment of advisory
fees in the amount of $33,000 for 1994, and to waive payment of 50% of such
advisory fees for 1993, which would have otherwise been payable under the terms
of its agreement with the Fund. The Fund also pays investment transaction fees
generally equal to an amount ranging from 1.5% to 2% of the proceeds realized
from its real estate investments and to .65% of the proceeds realized from
refinancing mortgage loans outstanding. Pursuant to an amendment to the
agreement dated September 2, 1994, investment transaction fees will be equal to
1.5% of the proceeds realized from real estate investments unless such proceeds
exceed an agreed-upon target amount above the investment's March 31, 1994
appraised value, in which case investment transaction fees will be equal to 2%
of such proceeds. At December 31, 1995, the associated investment transaction
fee percentage for all of the Fund's remaining real estate investments, if sold
at their current appraised value, would be 1.5%. The Fund incurred investment
transaction fees to its Adviser of $87,000, $367,000, and $315,000,
respectively, for the years ended December 31, 1995, 1994, and 1993.
D. Under the terms of an agreement expiring December 31, 1996, the Fund pays
The Vanguard Group, Inc. (the "Sponsor") an administrative fee calculated at an
annual percentage rate of the average fair market value of the Fund's real
estate investments and temporary investments (excluding investments in Vanguard
Money Market Reserves-Prime Portfolio). The Sponsor agreed to waive payment of
50% of the administrative fees for 1993, which would otherwise be required
under the terms of its agreement with the Fund. For the years ended December
31, 1995, 1994, and 1993, the administrative fee represents an effective annual
rate of .45%, .45%, and .22% of the average fair market value of such
investments, respectively.
12
<PAGE> 15
E. The Fund's wholly-owned direct real estate investments consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
(In thousands) (In thousands)
-------------------------------- --------------------------------
Accumulated Accumulated
Description Cost Depreciation Net Cost Depreciation Net
- ----------- ------- ------------ ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PARKS(1)(3)
Land -- -- -- $ 2,984 -- $ 2,984
Buildings and
Improvements -- -- -- 13,942 $(1,608) 12,334
------- ------- ------- ------- ------- -------
-- -- -- 16,926 (1,608) 15,318
------- ------- ------- ------- ------- -------
SHOPPING CENTER
Land $ 6,000 -- $ 6,000 6,000 -- 6,000
Building and
Improvements 8,192 $(1,255) 6,937 8,091 (1,110) 6,981
------- ------- ------- ------- ------- -------
14,192 (1,255) 12,937 14,091 (1,110) 12,981
------- ------- ------- ------- ------- -------
OFFICE BUILDING(2)
Land -- -- -- 227 -- 227
Building and
Improvements -- -- -- 755 (102) 653
------- ------- ------- ------- ------- -------
-- -- -- 982 (102) 880
------- ------- ------- ------- ------- -------
TOTAL $14,192 $(1,255) $12,937 $31,999 $(2,820) $29,179
======= ======= ======= ======= ======= =======
</TABLE>
(1) During January 1992, the borrower under the Fund's former junior
mortgage loan investment in the Sequoia Commerce Center ("Sequoia")
discontinued making its monthly interest payment to the Fund and subsequently
filed for protection under Chapter 11 of the Bankruptcy Code. On March 12,
1993, the Fund obtained title to Sequoia and assumed a first mortgage loan,
secured by the Sequoia property, pursuant to a reorganization plan approved by
the Bankruptcy Court. At that time, this investment was written down to its
then-estimated fair value and reclassified as a direct ownership investment.
The first mortgage lender appealed the Bankruptcy Court's decision confirming
the bankruptcy plan. The assumed mortgage loan aggregated $11,845,000,
including penalties and accrued but unpaid interest, at March 12, 1993. Under
terms of the approved bankruptcy plan, the Fund was required to reduce the
outstanding balance of the loan to $11,050,000 by making a payment to the first
mortgage lender. Such payment was made in December 1993. During 1994, in
consideration of several factors resulting from difficult conditions in the
market in which Sequoia is located, including (i) a decline in the property's
estimated appraised value to an amount that approximated the non-recourse loan
balance and (ii) the uncertainty about whether future cash flows will be
sufficient to cover prospective debt service, the Fund's management further
wrote down the carrying value of this investment to its estimated net
realizable value. On August 17, 1995, the Fund reached an agreement with the
mortgage lender to sell Sequoia for a contract price of $12,700,000 effective
as of that date. Pursuant to the terms of the sales agreement, the mortgage
lender and the Fund jointly proposed an amended reorganization plan to the
Bankruptcy Court which contemplated the sale of Sequoia from the Fund to the
mortgage lender and dismissal of the bankruptcy case, including the mortgage
lender's appeal. Effective October 31, 1995, the Bankruptcy Court confirmed the
amended reorganization plan and the sale was completed on November 17, 1995. In
connection with the sale, the Fund received net proceeds of $1,062,000, after
satisfaction of the outstanding mortgage loan and expenses associated with the
sale, which included investment advisory fees of approximately $53,000
paid to a third party. No investment transaction fees were paid to the Adviser
in connection with the sale. Since this investment had previously been written
down to an amount approximating the non-recourse mortgage loan balance, the
excess of net proceeds received were recognized as a reversal of amounts
previously recorded as a provision for possible losses.
(2) On June 5, 1992, the Fund obtained a deed in lieu of foreclosure on
the Raleigh Building, which had secured its former mortgage loan investment. At
that time, this investment was written down to its then-estimated net
realizable value and reclassified to a
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
(continued)
direct ownership investment. During 1993, the Fund's management wrote down the
carrying value of this investment to its then-estimated net realizable value to
reflect a shorter estimated remaining holding period for the property. During
1994, the Fund's management further wrote down Raleigh's carrying value,
primarily as a result of a decline in its appraised value, to its
then-estimated net realizable value. On June 16, 1995, the Fund sold Raleigh
for a contract price of $1,235,000 resulting in net proceeds to the Fund of
$1,136,000. The excess of such net proceeds over the investment's carrying
value were recognized as a reversal of amounts previously recorded as a
provision for possible losses.
(3) During 1992, the Fund's management wrote down the carrying value of
its Penn Warner Industrials investment to its then-estimated net realizable
value to reflect a decline in its appraised value. During 1994, the Fund's
management further wrote down Penn Warner's carrying value, primarily to
reflect shorter estimated remaining holding periods for the six buildings
comprising this investment, to its estimated net realizable value. Two of the
six buildings were subsequently sold, in separate transactions, in the fourth
quarter of 1994 for an aggregate sale price of $2,900,000. Since the carrying
value of the two buildings had been previously written down to their estimated
net realizable value, no additional loss was realized at the time of the
buildings' sales. On December 22, 1995, the Fund sold the remaining four
buildings for a contract price of $4,885,000 resulting in net proceeds to the
Fund of $4,619,000. The excess of such net proceeds over the investment's
carrying value were recognized as a reversal of amounts previously recorded as
a provision for possible losses.
F. The Fund's mortgage loans receivable consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------------
Maturity Call Effective Pay December 31,
Description Date Date Rate Rate 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bayside:
fixed-rate senior
mortgage loan 1996 1994 10.5% 10.5% $4,000 $4,000
shared-appreciation
junior mortgage loan 1996 1994 12.4% 7.35%-8.4% 3,600 3,600
shared-appreciation
deferred interest receivable 690 830
------ ------
TOTAL $8,290 $8,430
====== ======
</TABLE>
Upon repayment of the Bayside junior loan, the Fund is entitled to receive
an amount equal to the greater of (i) an amount sufficient to generate a 12.4%
internal rate of return (as defined in the loan documents) on the junior loan
or (ii) 50% of Bayside's fair market value in excess of $9 million. In
anticipation of the Fund exercising its call option in early 1995, at December
31, 1994, fund management, based on: (i) an evaluation of the borrower's
remaining equity in the Bayside property securing the mortgage loan and; (ii)
the economic prospects of the borrower and Bayside property over its expected
remaining holding period, reduced the loan's carrying value (remaining loan
balance plus the deferred interest receivable pursuant to the
shared-appreciation feature of the mortgage) to the estimated fair value of the
collateral less estimated selling costs. On April 13, 1995, the Fund exercised
its call right on the loan and the entire balance of the loan became due and
payable on October 18, 1995.
The Fund and the borrower reached agreement to satisfy in full the
obligations due under the loan balance by means of a discounted payoff of
$7,600,000. The Fund also agreed to provide the borrower 120 days to obtain
financing to make the payoff in exchange for a commitment to transfer title to
the Fund in lieu of foreclosure if the borrower could not make the discounted
payoff. The borrower was unable to secure the
14
<PAGE> 17
necessary financing and, accordingly, the Fund took title to Bayside in late
February 1996. The former borrower remained current on all interest payments
due on the loan. In addition, during 1995 the borrower also paid the Fund
approximately $140,000 related to the shared-appreciation deferred interest
receivable. Since both the net proceeds expected to be received from the
possible discounted payoff of the loan and the estimated net realizable value
of the collateral approximated the investment's carrying value, no provision
for possible losses was required related to Bayside during 1995.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, (SFAS 114), "Accounting by Creditors
for the Impairment of a Loan." Adoption of SFAS 114 was required for the year
beginning January 1, 1995. It requires that loans, such as the Fund's mortgage
loan receivable, if impaired, be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the fair
value of the collateral. Because the Fund already recognized such reductions of
value through its provision for possible losses, adoption of SFAS 114 did not
have a significant effect on the Fund's financial position or results of
operations.
G. Write downs in the carrying value of direct ownership and mortgage
investments, recorded through the provision for possible losses, are as
follows:
<TABLE>
<CAPTION>
(In thousands)
-------------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------------------------------
<S> <C> <C> <C>
Direct Ownership
Investments--see Note E -- $7,850 $ 750
Mortgage Loan
Receivable--see Notes E and F -- 800 1,009
------ ------ ------
Provision for Possible Losses -- $8,650 $1,759
====== ====== ======
</TABLE>
In addition, in the year ended December 31, 1995, $1,636,000 was recorded
as a reversal of amounts previously recorded to the provision for possible
losses (see Note E).
15
<PAGE> 18
H. The Fund's mortgage loans payable consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
DECEMBER 31, DECEMBER 31,
DESCRIPTION 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ARAPAHOE:
senior mortgage loan, secured by the shopping center, principal
and interest payable over term
6.8%, matures November 1998 $6,115 $ 6,208
SEQUOIA(1):
senior mortgage loan, secured by the industrial park, non-amortizing,
and interest payable over term
8.5%, matures December 2003 -- 11,050
------ -------
TOTAL $6,115 $17,258
====== =======
</TABLE>
(1) Mortgage loan assumed in connection with obtaining title to Sequoia
pursuant to a reorganization plan approved by the Bankruptcy Court. Such loan
was paid off in connection with the subsequent sale of Sequoia--see Note E.
Scheduled principal payments for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending December 31 (In thousands)
--------------
<S> <C>
1996 $ 101
1997 109
1998 5,905
1999 --
2000 --
Thereafter --
------
TOTAL PRINCIPAL PAYMENTS $6,115
======
</TABLE>
I. For the Fund's wholly-owned direct real estate investment, annual minimum
future rentals to be received under operating leases in effect at December 31,
1995, are as follows:
<TABLE>
Year Ending December 31 (In thousands)
--------------
<S> <C>
1996 $1,332
1997 985
1998 934
1999 773
2000 599
Thereafter 902
------
TOTAL MINIMUM FUTURE RENTALS $5,525
======
</TABLE>
Total minimum future rentals do not include contingent participating
rentals under certain leases based upon lessees' sales volumes. Contingent
rentals aggregating $113,000, $113,000, and $108,000 were received during 1995,
1994, and 1993, respectively. Certain leases also require lessees to pay all
or a portion of real estate taxes and operating costs.
16
<PAGE> 19
J. The following is a summary of the net assets and liabilities and results of
operations of the Bayside Business Center, the property which underlies the
Bayside investment in which the Fund has invested greater than 10% of its net
offering proceeds:
BAYSIDE BUSINESS CENTER
<TABLE>
<CAPTION>
(In thousands)
BALANCE SHEETS OCTOBER 31, 1995 OCTOBER 31, 1994
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property and Equipment, Net $ 3,855 $ 3,976
Other Assets 60 273
------- -------
3,915 4,249
------- -------
LIABILITIES
Mortgage Payable 7,600 7,600
Other Liabilities 607 777
------- -------
8,207 8,377
------- -------
NET LIABILITIES $(4,292) $(4,128)
======= =======
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
FISCAL YEAR ENDED
STATEMENTS OF OPERATIONS OCTOBER 31, 1995 OCTOBER 31, 1994
- ------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Rental Income $1,040 $1,112
------ ------
EXPENSES
Mortgage Interest 866 866
Operating 241 220
Depreciation 224 212
------ ------
1,331 1,298
------ ------
NET LOSS $ (291) $ (186)
====== ======
</TABLE>
Property and equipment is carried at cost at the date of acquisition by
the mortgagor, net of accumulated depreciation. In addition, mortgage interest
expense is determined based on the effective interest rate of the mortgage loan
which exceeded the currently scheduled cash payments by $144,000 for both 1995
and 1994, respectively.
K. The Fund holds a Limited Partnership interest in Plymouth Street, L.P. (the
"Partnership"), which investment is accounted for under the equity method. The
Partnership owns an office property located in Mountain View, California
("Mountain View"). In 1992, the Partnership entered into a Loan Agreement and
Option and Put Agreement with an unrelated party. The Loan Agreement provides
for scheduled advances totaling $17.5 million over five years, such advances
secured by a non-recourse mortgage on the property bearing interest at 10% per
annum. The net proceeds of such advances are to be immediately distributed to
the
17
<PAGE> 20
Partners under the terms of the Partnership Agreement. Prior to these
agreements, there was no debt outstanding on the property. The Fund received
net cash proceeds of $8,756,000 and $4,612,000 from scheduled advances in 1992
and 1993, respectively, which in the aggregate exceeded the carrying value of
the investment. The Fund also received a distribution of net cash proceeds of
$931,000 in 1994, and expects to receive an additional distribution of $75,000
from the advance scheduled for July 1, 1997. A deferred credit representing the
excess of distributions received over the Fund's carrying value is reflected in
the balance sheets as Deferred Revenue--Mountain View. The remaining proceeds
are to be distributed to the general partner in accordance with the scheduled
advances under the Loan Agreement and terms of the Partnership Agreement.
Under the terms of the Option and Put Agreement, the Partnership has the
right to require the lender to purchase the property during the period December
7, 1997 to February 28, 1998, and the lender has the exclusive right to
purchase the property during the period March 1, 1998 to May 30, 1998, for
$19,000,000. Upon exercise of the option or put, the Fund will receive 50% of
the proceeds in excess of the aggregate advances yet to be received under the
Loan Agreement. The Partnership also has the right to repurchase the lender's
purchase option for an amount of at least $3,000,000 between July 1, 1996, and
December 31, 1996.
As a result of the Loan Agreement executed during the fourth quarter of
1992 described above, and the resultant interest thereon, the Partnership
generated net losses during 1993, 1994, and 1995. In each of 1993, 1994, and
1995, such losses were allocated entirely to the general partner in accordance
with the terms of the Partnership Agreement. Since the Fund has received
distributions in excess of the carrying value of its investment in the
Partnership, if any future losses are allocated to the Fund, such allocated
losses will be recognized only to the extent of previously allocated net
income.
L. During the fourth quarter of 1990, the Fund's Board of Trustees authorized
the Fund to repurchase in the open market from time to time up to 300,000 of
the Fund's outstanding shares. As of December 31, 1995, 233,200 shares have
been repurchased at an aggregate cost of $1,586,000. No shares have been
repurchased since October 1993, and the Fund's management, in consideration of
the Liquidation Plan, does not expect the Fund to repurchase any further
shares.
M. The Fund's investment in marketable securities consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
--------------------------
DESCRIPTION STANDARD & POOR'S RATING DECEMBER 31, DECEMBER 31,
(COST IN THOUSANDS) (UNAUDITED) 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Resolution Trust Corporation (RTC) AA $1,194 $1,548
Series 1992-C7, Class A2 REMIC
7.2%, cost $1,208
</TABLE>
Unrealized appreciation (depreciation) recorded to adjust the carrying
value of the security to its market value was $7,000 and ($21,000),
respectively, at December 31, 1995 and 1994.
18
<PAGE> 21
N. On March 7, 1996, the Fund sold its Arapahoe Village investment ("Arapahoe")
in Boulder, Colorado for a gross contract price of $17,550,000. The Fund
reported in November 1995 that it had then been recently advised by AEW that
soil and groundwater samples extracted from the Arapahoe site revealed the
presence of constituents of gasoline and dry-cleaning fluid in the soil and
groundwater. The samples were taken as part of an environmental assessment
undertaken at the request of a contract purchaser in connection with a
contemplated sale of the property. AEW subsequently engaged on the Fund's
behalf attorneys and environmental consultants in an effort to further assess
the scope and magnitude of the possible contamination. Pursuant to the terms of
an amended sale agreement, the Fund completed the sale of Arapahoe to the same
contract purchaser. The sale of Arapahoe generated a net gain to the Fund of
approximately $4,100,000 over the investment's carrying cost, after payment by
the Fund of applicable transaction costs, including a disposition fee payable
to AEW in the amount of $250,000. Such gain will be recognized in the first
quarter of 1996.
O. The unaudited quarterly results of operations for the years ended December
31, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
(Amounts In Thousands, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
Except Per Share Data) 1995 1995 1995 1995 1994 1994 1994 1994
- ---------------------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate and Short-
Term Investment
Income $1,601 $1,604 $1,446 $ 934 $2,081 $2,016 $1,892 $ 1,792
====== ====== ====== ====== ====== ====== ====== =======
Net Income (Loss) $ 434 $ 588 $ 502 $ 922(1) $ 583 $ 472 $1,349 $(6,947)(2)
====== ====== ====== ====== ====== ====== ====== =======
Per Share
Net Income (Loss) $00.07 $00.09 $00.08 $00.30 $00.09 $00.07 $00.21 $ (1.08)
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
(1) Net income for the quarter ended December 31, 1995 includes a reversal of
amounts previously recorded as a provision for possible losses in the amount of
$1,394,000 related to the sales of the Fund's Sequoia Commerce Center and Penn
Warner Industrials investments as described in Note E.
(2) Net loss for the quarter ended December 31, 1994 includes a provision for
possible losses in the amount of $7,400,000 to write down the carrying value of
the Fund's Sequoia Commerce Center, Penn Warner Industrials, Raleigh Building,
and Bayside Business Center investments as described in Notes E and F,
respectively.
19
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Real Estate Fund II
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in shareholders' equity, and cash flows present fairly, in
all material respects, the financial position of Vanguard Real Estate Fund II
(the "Fund") at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Fund's management; our
responsibility is to express an opinion on these statements based on our
audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As explained in Note A to the financial statements, on December 8, 1995, the
Fund's Board of Trustees approved a Plan of Liquidation and Termination which
will result in the sale or disposition of all of the assets of the Fund, the
payment or provision for all liabilities of the Fund, and the distribution to
shareholders of the remaining proceeds in a complete liquidation and
dissolution of the Fund. The Fund's management currently anticipates that such
liquidation and dissolution of the Fund will occur on or before December 8,
1997.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 15, 1996
20
<PAGE> 23
<LR,HL><EL>
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data)
The following table sets forth selected financial data for the Fund and should
be read in conjunction with the financial statements included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Real estate and short-term
investment income ............. $ 5,585 $ 7,781 $ 7,327 $ 5,516 $ 6,497
Income (loss) from real estate..... 3,686 (6,352) 480 (5,071) 2,067
Funds from operations(a) .......... 2,304 3,246 3,328 3,207 4,670
Net income(loss) .................. 3,446 (4,543) 297 (5,383) 1,717
PER SHARE(b):
Net income (loss) ................. $ .54 $ (.71) $ .05 $ (.82) $ .26
Income distributions .............. -- .30 -- .02 .47
Long-term capital gain distribution -- .19 -- -- --
Return of capital distributions.... .225 1.96 .60 .58 .19
Liquidating distributions ......... 1.250 -- -- -- --
Total distributions ............... 1.475 2.45 .60 .60 .66
FINANCIAL POSITION:
Real estate investments(c) ........ $20,544 $36,942 $60,620 $40,617 $57,750
Total assets ...................... 28,364 46,139 66,085 57,737 67,025
Long-term obligations ............. 6,014 17,166 17,266 -- 6,165
Total liabilities ................. 8,619 20,352 19,996 7,574 6,970
Total shareholders' equity ........ 19,745 25,787 46,089 50,163 60,055
</TABLE>
(a) Funds from operations is calculated by adding back depreciation and
amortization, including the Fund's proportionate share of depreciation and
amortization recognized by its former joint venture investment, and the Fund's
provision for possible losses to net income before net gain on sales of
investments, plus net operating cash flow from its limited partnership
interest. Funds from operations should not be considered as an alternative to
net income as an indicator of the Fund's operating performance or to cash flows
as a measure of liquidity.
(b) Net income per share is calculated based upon the weighted average number
of shares outstanding during the year. Income, capital gain, liquidating, and
return of capital distributions per share designations are made based on their
treatment for Federal income tax purposes and represent actual distributions
made during the year.
(c) Net of accumulated depreciation and reductions in carrying value recorded
via the provision for possible losses.
21
<PAGE> 24
MARKET AND DISTRIBUTION INFORMATION
The Fund's Shares of Beneficial Interest ("Shares") are traded on the American
Stock Exchange under the symbol "VRT." As of December 31, 1995, there were
approximately 8,951 shareholders of record of the Fund's Shares.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
------------------------------------------------
Stock Prices Distributions Declared
------------------------ ----------------------
High Low Per Share
------------------------ ----------------------
<S> <C> <C> <C>
For the Quarter Ended:
March 31, 1995 ...... $4-5/8 $3-5/8 $ .075
June 30, 1995 ....... 3-13/16 3-1/4 .075
September 30, 1995 .. 3-7/8 3-1/8 .075
December 31, 1995 ... 3-7/8 2-1/2 1.250
======================== ======================
</TABLE>
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Vanguard Real Estate Fund II, a Sales-Commission-Free Income Properties
Fund (the "Fund"), a Massachusetts business trust established in 1987, is a
qualified finite-life real estate investment trust ("REIT") under the Internal
Revenue Code of 1986. The Fund's current real estate investments include a
direct ownership and shared-appreciation mortgage property (comprised of one
industrial park and one shopping center). Geographically, the Fund's
investments are located in each of the Midwest and West regions. The Fund also
holds a limited partnership interest in a limited partnership that owns an
income-producing property located in the West. The Fund's Declaration of Trust
precludes the Fund from reinvesting net proceeds from the sale or repayment of
its real estate investments in additional real estate investments after
December 31, 1994 and contemplates the liquidation of all of the Fund's
investments after a period of approximately seven to twelve years following
completion of its initial public offering, or between 1995 and 2000.
On December 8, 1995, the Fund's Board of Trustees approved a Plan of
Liquidation and Termination (the "Liquidation Plan"). The Trustee's decision to
adopt the Liquidation Plan at this point in the Fund's initially contemplated
liquidation period was driven by several factors, including real estate market
conditions affecting each investment in the Fund's portfolio and tax
considerations affecting real estate investment trusts. The Liquidation Plan
provides that the Fund will dispose of all of its assets, wind up its affairs,
pay or adequately provide for the payment of all of its liabilities, and
distribute for the benefit of its shareholders all of the Fund's assets over 24
months, in complete cancellation and redemption of all issued and outstanding
shares of beneficial interest. Under the Liquidation Plan, the Fund's Adviser,
Aldrich, Eastman and Waltch, L.P. ("AEW"), Trustees and officers are authorized
and directed to take any and all actions as may be necessary or convenient to
market the assets of the Fund and convert them into a form that may be
distributed to shareholders. The Liquidation Plan provides that the Fund's
assets may be sold, conveyed, transferred or otherwise disposed of when and on
such terms and conditions as are deemed by the Trustees to be in the best
interests of the Fund and the shareholders.
The Fund is currently in the process of liquidating its real estate
investments with the intention of distributing the net proceeds to its
shareholders in accordance with the Liquidation Plan. It is contemplated that
the Fund will be completely liquidated and dissolved by December 8, 1997. To
the extent that the Fund has not disposed of all of its assets or made
provision for all of its liabilities on December 8, 1997, the Fund intends to
form a liquidating trust, the beneficiaries of which will be the shareholders
of the Fund. All assets and liabilities of the Fund not previously disposed of
and discharged will be transferred to the liquidating trust. Shares of the Fund
would no longer be traded and the beneficial interests in the liquidating trust
would not be readily transferable. See "Distributions" and "Liquidity and
Capital Resources."
The Fund reported in November 1995 that it had been advised by its Adviser
that soil samples recently extracted from the site of the Fund's Arapahoe
Village (Boulder, Colorado) investment had revealed the presence of
constituents of gasoline and dry-cleaning fluid in the soil and groundwater.
The soil samples were taken as part of an environmental assessment undertaken
at the request of a contract purchaser in connection with a contemplated sale
of the Arapahoe Village investment. AEW subsequently engaged attorneys and
environmental consultants, on behalf of the Fund, to further assess the issue
and conduct additional testing at the site, and appropriate State of Colorado
environmental officials were notified of the contamination as required by law.
In December 1995, the tests were completed and subsequently the State of
Colorado issued "no further action" letters. Pursuant to the terms of an
amended sales agreement with the same contract purchaser, the Fund completed
the sale of Arapahoe on March 7, 1996 for net proceeds of approximately
$11,100,000 (after satisfaction of a $6.1 million mortgage loan secured by the
property), representing a gain of approximately $4.1 million over the
investment's carrying value. See Note N to the accompanying financial
statements.
The Fund intends to continue to qualify as a REIT under the Internal
Revenue Code during the Fund's liquidation period.
23
<PAGE> 26
RESULTS OF OPERATIONS
1995 as compared to 1994
Net Income
The Fund had net income of $3,446,000, or $.54 per share, for the year
ended December 31, 1995, as compared to a net loss of ($4,543,000), or ($.71)
per share, for the year ended December 31, 1994. Net loss for the year ended
December 31, 1994 included a net gain on sales of investments of $2,211,000,
resulting from the sale of the Fund's Shadow Brook Apartments investment. On
June 16, 1995, the Fund sold the Raleigh Office Building ("Raleigh") for a
contract price of $1,235,000. The Fund received net proceeds of $1,136,000
after expenses associated with the sale. On December 22, 1995, the Fund sold
the remaining four buildings comprising its Penn Warner Industrials ("Penn
Warner") investment in Bucks County, Pennsylvania for an aggregate sales price
of $4,885,000. The Fund, after expenses associated with the sale, received net
proceeds of $4,619,000. On November 17, 1995, the Fund completed its sale of
the Sequoia Commerce Center ("Sequoia") investment to the property's mortgage
lender for a contract price of $12,700,000. The Fund received net proceeds of
$1,062,000 after expenses associated with the sale. For each of the 1995
property sales, the net proceeds received were in excess of the property's
carrying value. Such excess was recorded as a reversal of amounts previously
charged to the provision for possible losses as more fully described below. See
Note E to the accompanying financial statements for a further discussion of
1995 property sales.
The Fund's income before net gain on sales of investments for the year
ended December 31, 1995, was $3,446,000, or $.54 per share, as compared to a
loss before net gain on sales of investments for the year ended December 31,
1994 of ($6,754,000), or ($1.05) per share, representing an increase of
$10,200,000. This increase, as more fully described below, was primarily
attributable to the Fund's (reversal of) provision for possible losses of
($1,636,000) recorded in 1995, as compared to $8,650,000 recorded in 1994, and,
to a lesser extent, decreases in depreciation and amortization expense,
administrative expenses, and mortgage interest expense, and was partially
offset by a decrease in net rental income, in each case as compared to such
items in 1994.
Provision for Possible Losses
The Fund's 1995 provision for possible losses in the amount of
($1,636,000) represented reversals of amounts previously charged to the
provision relating to the Fund's Raleigh, Sequoia, and Penn Warner investments;
each of which were sold in 1995. With respect to the sale of such investments,
the amount of net sales proceeds received by the Fund exceeded the current
carrying value of each of the respective investments. Since, in each case, the
amount by which net proceeds exceeded the investment's carrying value was less
than the cumulative amount of provision for possible losses previously charged
to reduce each investment to its then-estimated net realizable value, the
aggregate amount of the net proceeds received in excess of carrying values, or
$1,636,000, was recorded as a reversal of amounts previously charged to the
provision for possible losses. The provision for possible losses in 1994 was
recorded to further write down the carrying values of the Fund's direct
ownership investments in Sequoia, Penn Warner, and Raleigh to their estimated
net realizable values. The 1994 provision for losses also included a write down
of the carrying value of the Fund's Bayside Business Center mortgage loan
investment ("Bayside").
The provision for possible losses is based upon management's regular
evaluation of the recoverability of each investment. Prior to June 30, 1995,
management's evaluation of recoverability was based upon (i) the Adviser's
analysis of current property values (adjusted for selling costs), (ii)
independent appraisals, and (iii) management's estimate of cash flows during
each investment's holding period. At June 30, 1995, the Fund's Adviser and
management were continuing to evaluate various alternatives with respect to the
remaining holding period for each of the Fund's then held investments. However,
the Adviser was either marketing for sale or preparing to market for sale such
investments at that time and, accordingly, as of June 30, 1995 the Fund's
management considered all of the Fund's remaining real estate
24
<PAGE> 27
investments to be held for sale, rather than for the production of income.
Accordingly, for purposes of assessing their recoverability, such investments
are considered to have no remaining holding period. No provision for losses to
reduce the carrying value of the Fund's direct ownership investments was
required for the year ended December 31, 1995.
With respect to Bayside, at December 31, 1994, in anticipation of the Fund
exercising its call option in early 1995, the Fund reduced the loan's carrying
value (remaining loan balance plus the deferred interest receivable pursuant to
the shared-appreciation feature of the mortgage) to the estimated fair value of
the collateral less estimated selling costs. The Fund made this assessment
based on an evaluation of the borrower's remaining equity in the Bayside
property securing the mortgage loan and the economic prospects of the borrower
and Bayside property over its expected remaining holding period. On April 13,
1995, the Fund exercised its call right on the loan and the entire balance of
the loan became due and payable on October 18, 1995. The Fund and the borrower
reached agreement to satisfy in full the obligations due under the loan balance
by means of a discounted payoff of $7,600,000. The Fund also agreed to provide
the borrower 120 days to obtain financing to fund the payoff in exchange for a
commitment to transfer title to the Fund in lieu of foreclosure if the borrower
could not obtain financing. The borrower was unable to secure the necessary
financing and, accordingly, the Fund took title to Bayside in late February
1996. The former borrower remained current on all interest payments due on the
loan. In addition, during 1995 the borrower also paid the Fund approximately
$140,000 related to the shared appreciation deferred interest receivable. Since
both the net proceeds expected to be received from the possible discounted
payoff of the loan and the estimated net realizable value of the collateral
approximated the investment's carrying value, no provision for possible losses
related to Bayside was required during 1995.
The Fund's management believes that the provisions recorded to write down
the carrying value of its remaining real estate investments are adequate at
December 31, 1995; however, the provisions are based on estimates and actual
results may vary from current estimates.
Depreciation and Amortization
Depreciation and amortization expense decreased by $849,000, or 65%, from
$1,307,000 in 1994 to $458,000 in 1995. This decrease resulted primarily from
management's decision to consider all of the Fund's remaining investments to be
held for sale as of June 30, 1995. After June 30, 1995, no depreciation or
amortization expense related to the Fund's owned real estate and acquisition
costs is recognized. Prior to considering its assets as "held for sale,"
depreciation on real estate owned was computed using the straight-line method
over 40 years for buildings and costs incurred in conjunction with the
acquisition of real estate investments were deferred and amortized on a
straight-line basis over the life of the loan for mortgage loan investments and
the life of the property for equity investments.
Administrative Expenses
Administrative expenses decreased $128,000, or 16%, from $792,000 in 1994,
to $664,000 in 1995. This decrease was primarily due to lower advisory and
administrative fees payable in the 1995 period, which fees are based on average
invested real estate assets. Such fees decreased during 1995 due to: (i) the
sale of the Shadow Brook investment and subsequent distribution of the proceeds
to shareholders in 1994; (ii) the sale of two buildings of the Penn Warner
investment in 1994; and (iii) the sale of the Sequoia, Raleigh and remaining
Penn Warner investments in 1995.
Mortgage Interest Expense
Mortgage interest expense decreased by $350,000, or 26%, from $1,370,000
in 1994, to $1,020,000 in 1995. This decrease was primarily due to the August
17, 1995 agreement reached with the lender holding the mortgage loan secured by
Sequoia, as more fully described in Note E to the accompanying financial
statements.
25
<PAGE> 28
Net Rental Income
Net rental income (rental income less real estate taxes and property
operating expenses) decreased by $1,367,000, or 34%, from $4,065,000 in 1994 to
$2,698,000 in 1995. This decrease was primarily due to: (i) the sale of Shadow
Brook Apartments on August 16, 1994, which provided the Fund with net rental
income during the 1994 period of $732,000, (ii) the sale of Raleigh on June 16,
1995, which provided the Fund with net rental income during the 1994 period of
$138,000 as compared to $4,000 for the period the Fund held Raleigh in 1995,
and (iii) a decrease in net rental income provided by the Sequoia investment by
$550,000, from $1,133,000 in 1994 to $583,000 for the period in 1995 prior to
its sale on November 17, 1995.
At December 31, 1995 and December 31, 1994, the overall occupancy rate of
the Fund's remaining two direct real estate investments was 99% and 100%,
respectively. The occupancy rate of the property underlying the Fund's Bayside
Business Center investment was 100% at December 31, 1995, and 1994,
respectively. Leases for 25% of the rentable space of the Fund's directly owned
real estate are scheduled to expire during 1996. None of the rentable space at
the property underlying the Fund's Bayside mortgage investment are scheduled to
expire in 1996. The Fund's Adviser is currently working to renew leases and to
identify new tenants for space covered by leases that have expired or are
expiring. However, there is no assurance that the Fund will be able to maintain
its current occupancy and level of income.
The Fund holds a limited partnership interest in Plymouth Street, L.P.
("Plymouth"), a Delaware limited partnership that owns an office property
located in Mountain View, California ("Mountain View"). As a result of the
financing transaction completed during the fourth quarter of 1992 described in
Note K to the accompanying financial statements, and the associated interest
expense incurred by Plymouth for the years ended December 31, 1995, 1994, and
1993, Plymouth recognized net losses of ($685,000), ($568,000), and ($582,000)
in 1995, 1994, and 1993, respectively. Under the terms of the partnership
agreement, the general partner was allocated the entire amount of such losses,
and accordingly, no loss was recorded by the Fund related to this investment
for the years ended December 31, 1995, 1994 and 1993. Since the Fund has
received distributions in excess of the carrying value of its investment in
Plymouth, if any future losses are allocated to the Fund, such allocated losses
will be recognized only to the extent of previously allocated net income.
On December 30, 1992, January 5, 1993, and January 5, 1994, the Fund
received $8,756,000, $4,612,000 and $931,000, respectively, of scheduled cash
advances from Plymouth pursuant to the financing transaction and the provisions
of the Partnership Agreement. Under the terms of the loan agreement and the
Plymouth partnership agreement, an additional cash distribution of $75,000 is
scheduled to be received by the Fund on July 1, 1997. In addition, under the
terms of the option and agreement, the Fund could receive up to an additional
$750,000 if the lender exercises its purchase option or Plymouth exercises its
put option. Plymouth's put option can be exercised during the period December
7, 1997 to February 28, 1998 and the lender's purchase option can be exercised
during the period March 1, 1998 to May 30, 1998. During the six-month period
ending December 31, 1996, the Fund also has the right to repurchase the
lender's purchase option at an amount not less than $3,000,000.
In addition to the payment of the scheduled advances, the Fund also
received $35,000, $43,000, and $156,000 in net operating cash flow from
Plymouth for the years ended 1995, 1994, and 1993, respectively. However, as a
result of additional advances received or to be received by Plymouth, and the
corresponding increase in its mortgage loan payable and interest due thereon,
the Fund expects that further operating cash flow from Plymouth, if any, will
be in a minimal amount.
RESULTS OF OPERATIONS
1994 as compared to 1993
The Fund had a net loss of ($4,543,000), or ($.71) per share, for the year
ended December 31, 1994, as compared to net income of $297,000, or $.05 per
share, for the year ended December 31, 1993. The net loss for the year
26
<PAGE> 29
ended December 31, 1994 included a net gain on sales of investments of
$2,211,000, or $.34 per share, resulting from the sale of the Fund's Shadow
Brook Apartments investment. Shadow Brook was sold on August 16, 1994 for
$15,551,000. During the fourth quarter of 1994, the Fund also sold, in separate
transactions, two of the six buildings comprising its Penn Warner Industrials
investment in Bucks County, Pennsylvania for an aggregate sales price of
$2,900,000. The two buildings were acquired in 1989 for an aggregate initial
purchase cost of $3,550,000. However, since the carrying value of the two
buildings had been previously written down to their estimated net realizable
values through charges to the provision for possible losses in both 1992 and
1994, no additional losses were realized at the time of the buildings' sales.
Total charges to the provision for possible losses relating to the two
buildings was $1,014,000.
The Fund's loss before net gain on sales of investments for the year ended
December 31, 1994, was ($6,754,000), or ($1.05) per share, as compared to
income before net gain on sales of investments for the year ended December 31,
1993, of $297,000, or $.05 per share, representing a decrease of $7,051,000.
This decrease, as more fully described below, was primarily attributable to the
Fund's provision for possible losses of $8,650,000, as compared to $1,759,000
recorded in 1993, and, to a lesser extent, increases in depreciation and
amortization expense and administrative expenses, and was partially offset by
an increase in net rental income, in each case as compared to such items in
1993.
The Fund's 1994 provision for possible losses of $8,650,000 was recorded
to further write down the carrying value of the Fund's investments in Sequoia,
Penn Warner, and Raleigh to their estimated net realizable values. Also
included in the 1994 provision for losses was an $800,000 write down of the
carrying value of the Bayside Business Center mortgage loan investment,
classified as an in-substance foreclosed asset at December 31, 1994, to the
estimated fair value of the collateral securing the mortgage loan less selling
costs.
Regarding the 1994 write downs in the carrying value of the Fund's three
remaining direct ownership investments, the Fund recorded provisions for
possible losses in the amount of $1,250,000 and $6,600,000, respectively, in
the third and fourth quarters of 1994 as a result of the following: (i)
declines, based on independent appraisals, in the appraised values of the
Sequoia and Raleigh properties; (ii) a shortening of the estimated remaining
holding period for Sequoia and the Penn Warner portfolio, and (iii) the
recovery, via the receipt of net operating income, of a portion of the carrying
value of the Raleigh and Penn Warner investments, resulting in a corresponding
charge to the provision for possible losses. Each is more fully described
below.
The decline in the appraised value of Sequoia reflected continuing
difficult conditions--principally slow demand for industrial space, declining
market rents, keen competition for tenants and declining occupancy levels--in
the market where this investment is located. Raleigh's decline in appraised
value reflects the difficult leasing conditions--declining occupancy, downward
pressure on rental rates and business difficulties experienced by certain of
the existing and former tenants--faced by this investment.
As for the shortening in the estimated remaining holding periods of
certain investments, in the case of Sequoia, the appraised value of the
property had declined to an amount that approximated the non-recourse loan
balance secured by the property. In addition, the market factors described
above created uncertainty about whether future cash flows would be sufficient
to cover prospective debt service. As a consequence, the Fund's management and
the Adviser were evaluating whether to continue to hold Sequoia or to
relinquish title in satisfaction of the debt. Accordingly, for purposes of
determining its recoverability, Sequoia was considered to have no remaining
holding period. In the case of Penn Warner, Fund management, based on
information provided by the Fund's Adviser, during the third quarter of 1994,
shortened the estimated remaining holding period for the two Penn Warner
buildings subsequently sold in the fourth quarter of 1994 and, during the
fourth quarter of 1994, shortened the estimated remaining holding period for
the remaining buildings in the portfolio.
With respect to the recovery of a portion of the carrying value of the
Raleigh and Penn Warner investments, the carrying value of each was written
down to its estimated net realizable value, based on management's assessment of
the
27
<PAGE> 30
recoverability of the investments, during the third quarter of 1994. In each
case, the recoverability of a portion of each investment's carrying value
included an estimate of net operating cash flows to be received from the
property over its estimated remaining holding period. Accordingly, as such cash
flows are received (and carrying value is recovered), a charge to the provision
for possible losses is recorded to correspondingly write down the investment's
carrying value.
With respect to the write down in the carrying value of the Fund's Bayside
investment, the Fund, based on discussions with its Adviser, expected to
exercise its call option in early 1995. Accordingly, at December 31, 1994, the
Fund reduced its carrying value (remaining loan balance plus a deferred
interest receivable pursuant to a shared-appreciation feature of the mortgage
loan) to the estimated fair value of the collateral less estimated selling
costs. This reduction was based on an evaluation of the borrower's remaining
equity in the Bayside property securing the mortgage loan and the economic
prospects of the borrower and Bayside property over its expected remaining
holding period,
Depreciation and amortization expense increased by $191,000, or 17%, from
$1,116,000 in 1993 to $1,307,000 in 1994. This increase was primarily due to:
(i) a $233,000 increase related to Sequoia (principally resulting from the Fund
obtaining title to Sequoia in March 1993 and amortization of capital and tenant
improvements made in 1994) and (ii) an increase of $103,000 related to Arapahoe
(resulting from capital and tenant improvements made in 1994). These increases
were principally offset by a decrease in depreciation expense associated with
the Fund's Penn Warner investment due to a write down of its carrying value in
December 1993.
Administrative expenses increased $252,000, or 47%, from $540,000 in 1993
to $792,000 in 1994. This increase was primarily due to the lapse as of January
1, 1994 of partial advisory and administrative fee waivers which had been in
effect during 1993. Under the terms of its advisory and administrative
agreements expiring December 31, 1995, the Fund pays Aldrich, Eastman and
Waltch, L.P. (the "Adviser") an annual advisory fee and The Vanguard Group,
Inc. (the "Sponsor") an annual administrative fee, both based on the average
fair market value of the Fund's real estate investments. The Adviser and the
Sponsor agreed to waive payment of 50% of such fees for 1993 and 1992, which
fees would otherwise have been payable under the terms of the agreements with
the Fund.
Net rental income (rental income less real estate taxes and property
operating expenses) increased by $179,000, or 5%, from $3,886,000 for the year
ended December 31, 1993 to $4,065,000 for the year ended December 31, 1994.
This increase was primarily due to: (i) acquisition of Shadow Brook Apartments
on June 30, 1993, which provided the Fund with net rental income during the
1994 period (through its disposition on August 16, 1994), of $732,000, as
compared to $590,000 for 1993, and (ii) additional net rental income in 1994 of
$63,000 provided by Sequoia Commerce Center.
DISTRIBUTIONS
Prior to the adoption of the Liquidation Plan on December 8, 1995, the
Fund's policy was to distribute, at minimum, all of its taxable income to its
shareholders. Subsequent to adoption of the Liquidation Plan, the Fund's
Trustees will also seek to distribute net proceeds from the liquidation of the
Fund's investments at such time and, in such amounts, which is, in the opinion
of the Trustees, in the best interest of the Fund's shareholders. In
establishing distribution rates, the Fund's Trustees consider the operating
performance of the Fund, the Fund's cash position and aggregate future cash
requirements. Total distributions declared by the Fund in 1995 aggregated
$9,488,000, or $1.475 per share, compared to distributions in the amount of
$15,759,000, or $2.45 per share, and $3,878,000, or $.60 per share, made in
1994 and 1993, respectively. Distributions to shareholders in 1995 included
three quarterly distributions at $.075 per share, and a $8,041,000, or $1.25
per share, liquidating distribution made at year end pursuant to the
Liquidation Plan. This liquidating distribution resulted primarily from the
Fund's sale of (i) the Raleigh investment in June 1995, and (ii) the Sequoia
investment in November 1995. Since the Fund had formally commenced its
liquidation period, the Trustees believed it was in the best interests of
shareholders to return the majority of its cash to shareholders with the
year-end distribution. In determining the amount of such distribution, the Fund
estimated its aggregate future cash requirements
28
<PAGE> 31
necessary to: (i) fund its capital and tenant improvement and leasing programs
necessary to maintain the value of its property investments, (ii) maintain its
minimum working capital reserve requirement and (iii) make its principal
payments on mortgage loan debt outstanding during the estimated remaining
holding period for all of the Fund's investments. The Fund's sale of Penn
Warner occured after the declaration of the year-end distribution; the Fund
expects to distribute the majority of net proceeds received from its sale with
its first quarter 1996 distribution.
All, or a significant portion, of the past three years' distributions
(excluding the year-end 1995 liquidating distribution of $1.25 per share)
represented a non-taxable return of shareholders' capital. Return of capital
and liquidating distributions are nontaxable to a shareholder to the extent
that the shareholder has remaining tax cost basis in the Fund's shares. Return
of capital distributions aggregated $1,447,000, or $.225 per share,
$12,575,000, or $1.96 per share, and $3,878,000, or $.60 per share, for 1995,
1994, and 1993, respectively.
During the Fund's liquidation period, its ability to make quarterly
distributions will be dependent upon its financial condition, earnings and cash
flow, and cash position and future working capital requirements. As a result of
the 1995 property sales, and the subsequent year-end liquidating distribution
of the proceeds from such sales, the book value of the Fund's shares has been
reduced. The amount of future income the Fund may be expected to generate has
also been reduced. Further, the Fund's remaining investments are being held for
sale, rather than the production of income, and, accordingly, income from
operations can be expected to decline throughout the Fund's liquidation period.
In addition, the cumulative amount of the Fund's three quarterly distributions
paid to shareholders prior to the adoption of the Liquidation Plan in the
amount of $1,447,000 was exceeded by funds from operations (defined as net
income, plus depreciation and the provision for possible losses) for that same
period by $857,000. In the opinion of the Trustees, the Fund had adequate
working capital reserves to make such distributions and thus to maintain the
Fund's quarterly distribution rate of $.075 during the nine-month period ended
September 30, 1995.
As a result of the factors cited in the preceding paragraph, future
quarterly distributions to shareholders, excluding any amounts distributed from
net proceeds from property sales, will be largely dependent upon the amount of
funds from operations generated by the Fund during its liquidation period.
Funds from operations are generated from the operations of the Fund's direct
real estate investments and interest income on short-term investments and
mortgage loans. Accordingly, unfavorable economic conditions, vacancies,
environmental requirements, reductions in prevailing short-term interest rates
or increases in major expenses such as energy, insurance, and real estate taxes
could have an adverse impact upon the Fund's future funds from operations and
distributions to shareholders. The exact amount of quarterly distributions to
shareholders will be determined by the Trustees based on the Fund's actual
results of operations and cash position. The timing and amount of distributions
of net proceeds from property sales to shareholders will be determined by the
Trustees as such amounts are realized and based on relevant considerations such
as the Fund's then-current results of operations, cash position, and future
working capital requirements.
Under the Liquidation Plan, the Fund intends to sell or otherwise dispose
of its real estate investments. In disposing of real estate investments, the
Fund is in competition with other domestic institutional investors, including
commercial banks and other financial institutions, insurance companies,
pensions and other retirement funds, mortgage bankers, other real estate
investment trusts, real estate brokers, developers and various types of foreign
investors who may be seeking to dispose of similar real estate investments. The
principal factors of competition for the disposition of the mortgage loan
receivable include the base interest rate, contingent interest rate and the
amount of loan relative to the value of the underlying property. In the case of
leased properties which the Fund owns or which secure Fund investments, the
marketability of the investments is also affected by how rental rates, lease
terms, free rent concessions and tenant improvements allowances compare with
those in local markets.
If the Fund's remaining real estate investments are sold or disposed of
prior to December 8, 1997, it is the Fund's intention to make a final
liquidating distribution, or distributions, prior to that date. Any assets
which have not been distributed as of December 8, 1997, will be contributed to
a liquidating trust, of which the shareholders will be the
29
<PAGE> 32
beneficiaries. The shares of the Fund would no longer be traded and the
beneficial interests in the liquidating trust would not be readily
transferable.
At present, of the Fund's three remaining real estate investments at
December 31,1995, one has been sold (Arapahoe) and the Fund, through its
Adviser, is actively marketing for sale or negotiating the disposition of the
other two. Based on information provided by the Adviser, it is possible that
both investments could be sold by September 30, 1996. However, there can be no
assurance that such sales can be completed by September 30, 1996. Upon sale of
these two remaining properties, the Fund's Trustees and management intend to
complete the Fund's Liquidation Plan as soon as practicable thereafter. In
addition to liquidating the Fund's assets, settling all of the Fund's
liabilities, making a final distribution(s) to shareholders and dissolving the
Fund, such activities are expected to include, but not necessarily be limited
to, (i) delisting the Fund's shares from trading on the American Stock
Exchange, (ii) deregistering the Fund's shares under the Securities Exchange
Act of 1934, (iii) making provision for contingent liabilities of the Fund, if
any, and (iv) obtaining any necessary insurance coverages.
<TABLE>
<CAPTION>
PRO FORMA
AMOUNT
PER SHARE
(UNAUDITED)
-----------
<S> <C>
Estimated gross proceeds on sales of properties ..................... $3.98
Less: Estimated selling commissions, expenses, and state and
local taxes ....................................................... (.14)
-----
Estimated net proceeds on sale of properties ........................ 3.84
Repayment of mortgage loan payable at December 31, 1995 ............. (.95)
Settlement of receivables and payables at December 31, 1995 related
to operations:
Receipt of accounts receivable .................................. .09
Payment of liabilities .......................................... (.10)
Cash and short-term investments ..................................... .93
Liquidation of marketable securities--REMICs ........................ .19
Estimated net cash flow from operations through September 30, 1996 .. .02
-----
Estimated resulting cash available for distribution to shareholders
(based on 6,432,626 shares outstanding at December 31, 1995) ...... $4.02
=====
</TABLE>
The schedule above sets forth the pro forma cash available for
distribution (per share) to Fund shareholders as if the Fund were liquidated on
or about September 30, 1996 in accordance with the foregoing discussion.
However, there can be no assurance that such liquidation can be completed by
September 30, 1996. Gross proceeds on sale of properties assumes that the
Fund's properties are sold either for their appraised values at December 31,
1995, or, if a property has been sold, for the contract price. Since appraised
values are based on estimates, no assurance can be given that sales could have
been transacted at their appraised values at December 31, 1995, and actual
gross sales amounts may vary from appraised amounts. Gross proceeds on sales of
properties are reduced by an estimated provision for selling commissions,
expenses and state and local taxes to arrive at net sales proceeds. An estimate
has been made for cash flow from operations from the Fund's investments during
their estimated remaining holding periods prior to their sale or disposition
less: (i) an estimate for all normal, recurring administrative expenses of the
Fund and (ii) a provision for estimated expenditures necessary to liquidate and
dissolve the Fund pursuant to the Liquidation Plan. All other amounts shown are
based on their respective historical carrying values at December 31, 1995. With
respect to the Fund's interest in the partnership that owns the Mountain View
office property, no estimate of the net present value of the amount to be
30
<PAGE> 33
received by the Fund pursuant to the purchase or put feature, if exercised, of
the financing agreement described in Note K to the accompanying financial
statements has been included in the schedule.
The calculation of the pro forma cash available for distribution (per
share) set forth above assumes that the Fund will continue to qualify as a real
estate investment trust during the entire liquidation period and, therefore, no
provision has been made for Federal income taxes. The above calculation also
assumes that all of the Fund's assets are sold or distributed prior to December
8, 1997, and does not reflect any incremental costs or expenses associated with
establishing and operating a liquidating trust. It is possible that the sale of
the remaining assets cannot be completed by December 8, 1997, in which case the
assumptions regarding the timing and costs required to complete the liquidation
would need to be revised.
Caution should be used in relying on the above pro forma estimate, which
assumes the continuation of reasonably stable economic conditions during the
remaining liquidation period and depends, among other factors, on the level of
capital available for investment in real estate, interest rates, and the demand
for real estate and mortgage investments. While the Fund's management, Trustees
and Adviser believe the assumptions and projections used in arriving at this
estimate of pro forma cash available for distribution (per share) are
reasonable, there can be no assurance that such assumptions will in fact prove
to be correct. Accordingly, there can be no assurance that actual sales or
dispositions of particular assets will not be at prices which may vary
materially from management's current estimates of net liquidation values.
LIQUIDITY AND CAPITAL RESOURCES
As a matter of policy, the Fund seeks to maintain working capital reserves
in an amount not less than $1,340,000, which amount constitutes 2% of the gross
proceeds of the Fund's initial offering. Working capital reserves are defined
as cash and cash equivalents, including the Fund's investment in marketable
securities, and other working assets expected to be realized over the next
year, less liabilities expected to be paid over the next year. Working capital
reserves at December 31, 1995, after the payment of $1.25 per share liquidating
distribution, aggregated approximately $14.5 million, representing 21.8% of the
initial public offering proceeds, compared to working capital reserves of $8.6
million at December 31, 1994, which represented 12.9% of the Fund's initial
offering proceeds.
During the fourth quarter of 1990, the Fund instituted a share repurchase
program. Under the program, the Fund is authorized to repurchase in the open
market from time to time up to 300,000 of the Fund's outstanding shares. As of
December 31, 1995, an aggregate of 233,200 shares have been repurchased at an
aggregate cost of $1,586,000. No shares have been repurchased since October
1993 and the Fund's management, in consideration of the Liquidation Plan, does
not expect the Fund to repurchase any further shares.
The Fund intends to continue to qualify as a real estate investment trust
under the Internal Revenue Code and distribute all of its taxable income. The
Fund's management considers the Fund's liquidity, as well as its ability to
generate cash, as adequate to meet its foreseeable operating and shareholder
distribution requirements and to fund its capital improvements.
31
<PAGE> 34
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
J. MAHLON BUCK, JR.
Chairman and President of TDH Capital Corporation; Director, Alco Standard
Corporation.
WILLIAM S. CASHEL, JR.
Private Investor; formerly Vice Chairman, American Telephone & Telegraph, Inc.
DAVID C. MELNICOFF
Adjunct Professor of Finance, Temple University; Director, Seamens' Capital
Corporation; Director, Cortland Trust; President, Samuel F. Fels Fund; formerly
Executive Vice President of Meritor Financial Group.
J. LAWRENCE WILSON
Director of The Vanguard Group, Inc., and of each of the investment companies
in The Vanguard Group; Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University.
OTHER OFFICERS
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
RALPH K. PACKARD, Vice President and Controller
Senior Vice President and Chief Financial Officer of The Vanguard Group, Inc.
RAYMOND J. KLAPINSKY, Secretary
Senior Vice President and Secretary of The Vanguard Group, Inc., and Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer
Treasurer of The Vanguard Group, Inc., and of each of the investment companies
in The Vanguard Group.
32
<PAGE> 35
[VANGUARD LOGO]
Vanguard Real Estate Fund II - Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447
Real Estate Shareholder Account Services: 1-(800) 662-2739
On our cover: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
A copy of the Fund's Annual Report on Form 10-K filed with the Securities and
Exchange Commission may be obtained by shareholders without charge by calling
1-800-662-7447 or by writing the Fund's Investor Relations office at P.O. Box
2600, V35, Valley Forge, PA 19482.
Q130 12/95
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's December 31, 1995 financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000823488
<NAME> VANGUARD REAL ESTATE FUND II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,954
<SECURITIES> 1,194
<RECEIVABLES> 380
<ALLOWANCES> 7
<INVENTORY> 0
<CURRENT-ASSETS> 15,226
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0
0
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