UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-10977
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-2689565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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 .
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and September 30, 1994
(Unaudited)
ASSETS
March 31 September 30
Investment property held for sale, net $ 4,348,594 $ 3,910,782
Cash and cash equivalents 563,350 202,812
Restricted escrow deposits 1,074,202 1,695,420
Accounts receivable - affiliates 813 12,865
Prepaid expenses 32,077 23,353
Deferred expenses, net 224,089 228,975
$ 6,243,125 $ 6,074,207
LIABILITIES AND PARTNERS' DEFICIT
Mortgage note payable $ 9,890,770 $ 9,924,203
Accounts payable and accrued expenses 316,419 203,281
Real estate taxes payable 49,143 144,171
Tenant security deposits and other liabilities 177,199 176,060
Venture partner's subordinated deficit (1,743,081) (1,826,129)
Partners' deficit (2,447,325) (2,547,379)
$ 6,243,125 $ 6,074,207
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended March 31, 1995 and 1994
(Unaudited)
General Limited
Partners Partners
Balance at September 30, 1993 $ 6,361 $(2,496,858)
Net loss (974) (96,400)
BALANCE AT MARCH 31, 1994 $ 5,387 $(2,593,258)
Balance at September 30, 1994 $ 5,785 $(2,553,164)
Net income 1,001 99,053
BALANCE AT MARCH 31, 1995 $ 6,786 $(2,454,111)
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 1995 and 1994
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
REVENUES:
Rental revenues $588,165 $560,514 $1,163,162 $ 1,118,807
Interest and other income 29,680 22,466 92,619 53,117
617,845 582,980 1,255,781 1,171,924
EXPENSES:
Property operating expenses 260,644 245,536 566,711 555,952
Interest expense and
related financing fees 181,950 183,141 364,105 348,186
Depreciation and amortization 1,465 133,003 5,471 266,006
Real estate taxes 49,143 22,946 94,896 75,471
General and administrative 23,237 33,258 41,496 56,495
516,439 617,884 1,072,679 1,302,110
Operating income (loss) 101,406 (34,904) 183,102 (130,186)
Venture partner's share
of venture's operations (45,487) 11,765 (83,048) 32,812
NET INCOME (LOSS) $ 55,919 $(23,139) $ 100,054 $ (97,374)
Net income (loss) per Limited
Partnership Unit $ 3.58 $(1.48) $ 6.41 $ (6.24)
The above net income (loss) per Limited Partnership Unit is based upon the
15,445 Limited Partnership Units outstanding during each period.
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
1995 1994
Cash flows from operating activities:
Net income (loss) $100,054 $ (97,374)
Adjustments to reconcile net income
loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 5,471 266,006
Venture partner's share of venture's operations 83,048 (32,812)
Changes in assets and liabilities:
Restricted escrow deposits 621,218 154,680
Real estate tax escrows - (153,784)
Accounts receivable - (3,124)
Accounts receivable - affiliates 12,052 9,478
Prepaid expenses and other assets (8,724) 66,853
Deferred expenses (585) (38,298)
Accounts payable and accrued expenses 113,138 (29,315)
Real estate taxes payable (95,028) (120,693)
Tenant security deposits and other
liabilities 1,139 (35,446)
Total adjustments 731,729 83,545
Net cash provided by (used for)
operating activities 831,783 (13,829)
Cash flows from investing activities:
Additions to investment property held for sale (437,812) (23,609)
Net cash used for investing activities (437,812) (23,609)
Cash flows from financing activities:
Principal payments on mortgage note payable (33,433) (31,069)
Net cash used for financing activities (33,433) (31,069)
Net increase (decrease) in cash and cash equivalents 360,538 (68,507)
Cash and cash equivalents, beginning of period 202,812 420,261
Cash and cash equivalents, end of period $563,350 $351,754
Cash paid during the period for interest $364,206 $366,568
See accompanying notes.
1. General
The accompanying consolidated financial statements, footnotes and discussion
should be read in conjunction with the financial statements and footnotes
contained in the Partnership's Annual Report for the year ended September
30, 1994.
In the opinion of management, the accompanying consolidated financial
statements, which have not been audited, reflect all adjustments necessary
to present fairly the results for the interim period. All of the accounting
adjustments reflected in the accompanying interim financial statements are
of a normal recurring nature.
2. Real Estate Investment
At March 31, 1995, the Partnership has an ownership interest in one joint
venture, Spanish Trace Associates, which owns the Spanish Trace Apartments,
a 372-unit apartment complex located in St. Louis, Missouri. This joint
venture is consolidated in the Partnership's financial statements, and
therefore, the assets, liabilities, revenues and expenses of the venture
appear in the consolidated statements. The effects of all transactions
between the Partnership and the consolidated joint venture have been
eliminated in the consolidation.
The following is a summary of property operating expenses for the three and
six months ended March 31, 1995 and 1994.
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
Repairs and maintenance $ 70,078 $ 60,997 $ 162,626 $171,232
Utilities 37,876 31,170 75,517 71,230
Insurance 22,170 34,663 44,274 44,198
Management fees 30,674 29,180 59,428 58,477
General and
administrative 99,846 89,526 224,866 210,815
$260,644 $245,536 $ 566,711 $555,952
3. Related Party Transactions
Included in general and administrative expenses for the six months ended
March 31, 1995 and 1994 is $18,410 and $9,078, respectively, representing
reimbursements to an affiliate of the General Partner for providing certain
financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the six months
ended March 31, 1995 and 1994 is $557 and $890, respectively, representing
fees earned by Mitchell Hutchins Institutional Investors, Inc. for managing
the Partnership's cash assets.
4. Mortgage Note Payable
The mortgage note payable on the consolidated balance sheets relates to the
Spanish Trace joint venture and is secured by that venture's operating
investment property.
Mortgage note payable consists of the following at March 31, 1995 and
September 30, 1994:
March 31 September 30
7.35% nonrecourse mortgage loan secured by the
Spanish Trace Apartments, payable in monthly
installments, including principal and interest
of $66,273 through August 1, 2028. The
remaining balance of principal and interest is
due September 1, 2028 (see discussion below). $ 9,890,770 $9,924,203
On August 31,1993, the Partnership refinanced the existing debt on Spanish
Trace Apartments with a new loan insured by the U.S. Department of Housing
and Urban Development (HUD). As part of the HUD insured loan program, the
operating investment property was required to establish an escrow account
for a replacement reserve and other required repairs. The balance of these
restricted escrow deposits totalled approximately $1,074,000 and $1,695,000
as of March 31, 1995 and September 30, 1994, respectively.
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's remaining investment is a joint venture interest in the
Spanish Trace Apartments, located in St. Louis, Missouri. The Partnership has
already returned capital of approximately $3,344,000 to the Limited Partners
from the Spanish Trace investment as a result of a 1985 refinancing transaction.
As previously reported, on August 31, 1993 the Partnership completed a second
refinancing of the existing debt on the Spanish Trace Apartments with a loan
insured by the U.S. Department of Housing and Urban Development (HUD). As part
of the HUD insured loan program, the Spanish Trace joint venture was required to
establish an escrow account for a replacement reserve and other required
repairs. The balance of these restricted escrow deposits totalled approximately
$1,074,000 as of March 31, 1995. These escrows will provide the capital
necessary to address certain deferred maintenance and capital improvement items
that will significantly upgrade individual units and the property as a whole.
The capital improvement program commenced during fiscal 1994. To date, the
joint venture has incurred over $1.1 million in improvement costs. A
substantial portion of such costs have been reimbursed from the restricted
escrow deposits through the second quarter of fiscal 1995. With a major portion
of the exterior phase of the capital improvement program now completed,
management has stepped up its leasing and marketing efforts to take advantage of
the property's improved physical appearance. As of March 31, 1995, the
occupancy at Spanish Trace had reached 95%, an increase of 3% over the previous
fiscal quarter. The rest of the improvement program is expected to be completed
during fiscal 1995.
Conditions in the markets for multi-family residential properties across
the country continue to demonstrate gradual improvement. The recent increase in
market interest rate levels should help further such improvement as it reduces
the competition from the single-family home market and it makes construction of
new multi-family units more expensive to finance. The absence of significant
new construction has allowed the oversupply which existed in many markets as a
result of the overbuilding of the 1980s to be absorbed. The results of this
absorption have been stabilized occupancy levels and a gradual improvement in
rental rates, which have had a positive impact on cash flow levels and,
consequently, property values. The implementation of the capital improvement
program made possible by the 1993 refinancing of Spanish Trace is expected to
support management's ability to increase rents and add value to the property.
The capital work and rental rate increases are part of management's strategic
plan to maximize the return to the Limited Partners upon the sale of Spanish
Trace. The Managing General Partner, together with the Partnership's co-venture
partner, engaged in limited marketing efforts to sell the property during fiscal
1994. Certain parties, including the co-venture partner, have expressed
preliminary interest in engaging in sale discussions. As the capital
improvement program nears completion in fiscal 1995, management believes that
there may be a favorable opportunity to complete a sale transaction. Management
must also consider the near term appreciation potential of the property in light
of the planned rental rate increases in order to determine what would be the
most favorable timing for a sale of Spanish Trace.
At March 31, 1995 the Partnership and its consolidated joint venture had
cash and cash equivalents of approximately $563,000. Approximately $562,000 of
the cash and cash equivalents is held by the consolidated joint venture, Spanish
Trace Associates. The availability of this cash to the Partnership is
restricted by the terms of the joint venture agreement and the HUD financing
agreement. Under the HUD financing agreement, distributions of surplus cash to
the venture partners can only be made twice a year. In addition, certain excess
reserve funds are due to be released to the joint venture in fiscal 1995, but
must be approved by HUD before they will be available for distribution to the
Partnership. As a result, the General Partner may be called upon to provide the
Partnership with a short-term advance to cover operating expenses until the
joint venture receives HUD approval to release a distribution. The
Partnership's cash and cash equivalents will be utilized for its working capital
requirements. The source of future liquidity and distributions to the partners
is expected to be from the proceeds received from the sale of the Spanish Trace
Apartments, the Partnership's remaining operating investment property. A sale
of the remaining property would initiate a liquidation of the Partnership, which
could occur in fiscal 1995. However, there can be no assurances that a sale and
liquidation will occur in fiscal 1995. Upon the sale of the Partnership's
remaining asset, the Partnership's share of net sale proceeds, along with any
remaining cash reserves after payment of all Partnership obligations (including
liquidation-related expenses), would be distributed to the partners in
accordance with the Partnership Agreement.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995
The Partnership reported net income of approximately $56,000 for the three
months ended March 31, 1995, as compared to a net loss of approximately $23,000
for the same period in the prior year. This favorable change in net operating
results for the second quarter of fiscal 1995 is the result of a combination of
increased rental revenues and a decrease in expenses. Rental revenues increased
by approximately $28,000 for the current three-month period, primarily
reflecting increasing rental rates made possible by the capital improvement
program at Spanish Trace. The decrease in expenses of approximately $101,000
can be primarily attributed to the absence of depreciation recorded on the
operating investment property in the current period. As of September 30, 1994,
the Spanish Trace property was classified as an asset held for sale, as a result
of management's plans to market the property for sale in fiscal 1995, as
described above. The estimated market value of the Spanish Trace Apartments is
substantially higher than the net carrying value of the property on the
accompanying balance sheets. Therefore, no further depreciation will be
recorded unless the Partnership's plans for holding the asset change at some
future date.
Six Months Ended March 31, 1995
For the six-month period ended March 31, 1995, the Partnership reported net
income of approximately $100,000, as compared to a net loss of approximately
$97,000 for the same period in the prior year. This favorable change in net
operating results, of approximately $197,000, can be primarily attributed to the
absence of depreciation recorded on the operating investment property for the
six month period ended March 31, 1995, as further discussed above. Increases in
rental revenues and interest income also contributed to the favorable change in
net operating results for the first half of fiscal 1995. Rental revenues
increased by approximately $44,000 in the current six-month period, reflecting
the increases in rental rates referred to above. Interest and other income
increased by approximately $40,000 due to an increase in the interest rates
earned on the restricted escrow funds related to the debt refinancing.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Second Income Properties, Inc., an affiliate of
PaineWebber and the Managing General Partner in the Partnership.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in PaineWebber Income Properties
Two Limited Partnership, PaineWebber and Second Income Properties, Inc. (1)
failed to provide adequate disclosure of the risks involved; (2) made false and
misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purport to be suing on behalf of all persons who invested in PaineWebber Income
Properties Two Limited Partnership, also allege that following the sale of the
partnership interests, PaineWebber and Second Income Properties, Inc.
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber and Second Income
Properties, Inc. violated the Racketeer Influenced and Corrupt Organizations Act
("RICO") and the federal securities laws. The plaintiffs seek unspecified
damages, including reimbursement for all sums invested by them in the
partnerships, as well as disgorgement of all fees and other income derived by
PaineWebber from the limited partnerships. In addition, the plaintiffs also
seek treble damages under RICO. The defendants' time to move against or answer
the complaint has not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual
obligations, under certain circumstances the Partnership may be required to
indemnify Second Income Properties, Inc. and its affiliates for costs and
liabilities in connection with this litigation. The Managing General Partner
intends to vigorously contest the allegations of the action, and believes that
the action will be resolved without material adverse effect on the Partnership's
financial statements, taken as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements 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.
PAINE WEBBER INCOME PROPERTIES TWO
LIMITED PARTNERSHIP
By: SECOND INCOME PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: May 12, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's interim financial statements for the six months ended March 31,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 563,350
<SECURITIES> 0
<RECEIVABLES> 813
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,670,442
<PP&E> 4,348,594
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,243,125
<CURRENT-LIABILITIES> 542,761
<BONDS> 9,890,770
<COMMON> 0
0
0
<OTHER-SE> (4,190,406)
<TOTAL-LIABILITY-AND-EQUITY> 6,243,125
<SALES> 0
<TOTAL-REVENUES> 1,255,781
<CGS> 0
<TOTAL-COSTS> 1,072,679
<OTHER-EXPENSES> (83,048)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 100,054
<INCOME-TAX> 0
<INCOME-CONTINUING> 100,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,054
<EPS-PRIMARY> 6.41
<EPS-DILUTED> 6.41
</TABLE>
