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 JUNE 30, 1996
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 .
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
Consolidated
Statement of
Net Assets
in Liquidation Consolidated
June 30, 1996 Balance Sheet
(Unaudited) September 30, 1995
------------ ------------------
(In thousands)
ASSETS
Investment property held for sale, net $ - $ 4,670
Cash and cash equivalents 92 638
Restricted escrow deposits - 774
Prepaid expenses - 33
Deferred expenses, net - 222
----------- --------
$ 92 $ 6,337
=========== ========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage note payable $ - $ 9,856
Accounts payable and accrued expenses 92 87
Real estate taxes payable - 106
Tenant security deposits - 97
Accrued interest payable - 60
Deferred revenues - 4
----------- ---------
Total liabilities 92 10,210
Venture partner's subordinated deficit - (1,713)
Partners' deficit - (2,160)
----------- --------
$ 6,337
========
Net Assets in Liquidation $ 0
===========
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended June 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at September 30, 1994 $ 6 $(2,553)
Net income 2 181
------ -------
Balance at June 30, 1995 $ 8 $(2,372)
====== =======
Balance at September 30, 1995 $ 9 $(2,169)
Cash distributions - (2,441)
Net income (loss) (9) 4,610
------ -------
Balance at June 30, 1996 $ - $ -
====== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended June 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues $ - $ 591 $ 618 $ 1,754
Interest and other income 17 41 55 134
------- ------ ----- --------
17 632 673 1,888
Expenses:
Property operating expenses - 174 226 715
Interest expense and
related financing fees - 210 189 599
Depreciation and amortization - 1 - 7
Real estate taxes - 49 32 144
General and administrative 17 47 151 89
------- ------ ----- --------
17 481 598 1,554
------- ------ ----- --------
Operating income - 151 75 334
Venture partner's share of
venture's operations - (69) (41) (151)
Gain on sale of Partnership's
joint venture interest - - 4,829 -
Disposition fee - - (262) -
------- ------ ----- --------
Net income $ - $ 82 $4,601 $ 183
======= ====== ====== ========
Net income per Limited
Partnership Unit $ - $ 5.30 $298.48 $ 11.71
======= ====== ====== ========
Cash distributions per Limited
Partnership Unit $ - $ - $158.03 $ -
======= ====== ====== =======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 15,445 Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 4,601 $ 183
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization - 7
Venture partner's share of venture's operations 41 151
Gain on sale of Partnership's joint venture
interest (4,829) -
Changes in assets and liabilities:
Restricted escrow deposits - 909
Accounts receivable - affiliates - -
Prepaid expenses - 5
Deferred expenses - (60)
Accounts payable and accrued expenses 71 166
Real estate taxes payable - (95)
Tenant security deposits and other liabilities - 1
------- -------
Total adjustments (4,717) 1,084
------- -------
Net cash provided by (used in)
operating activities (116) 1,267
------- -------
Cash flows from investing activities:
Additions to investment property held for sale - (642)
Net proceeds from sale of joint venture interest 2,300 -
-------- --------
Net cash provided by (used in)
investing activities 2,300 (642)
-------- -------
Cash flows from financing activities:
Distribution to Limited Partners (2,441) -
Cash flow distributions to co-venture partner (289) -
Principal payments on mortgage note payable - (51)
-------- -------
Net cash used in investing activities (2,730) (51)
-------- --------
Net increase (decrease) in cash and cash equivalents (546) 574
Cash and cash equivalents, beginning of period 638 203
-------- -------
Cash and cash equivalents, end of period $ 92 $ 777
========= =======
Cash paid during the period for interest $ 181 $ 583
========= =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Planned Liquidation
Paine Webber Income Properties Two Limited Partnership (the "Partnership")
is a limited partnership formed on September 5, 1979 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of existing income-producing operating properties such as
shopping centers, office buildings and apartment complexes. The Partnership
offered limited partnership interests to the public from April, 1980 to
December, 1980 pursuant to a Registration Statement filed under the Securities
Act of 1933. Gross proceeds of $15,445,000 were received by the Partnership and,
after deducting selling expenses and offering costs, approximately $12,700,000
was invested in joint venture interests in three operating investment
properties.
As of June 30, 1996, the Partnership's interest in all three
operating investment properties had been sold, with the final sale occurring on
December 29, 1995. The Partnership's remaining investment was a joint venture
interest in the Spanish Trace Apartments, located in St. Louis, Missouri.
Spanish Trace Apartments is a 372-unit, twenty-four year old, garden-style
rental property. On December 29, 1995, the Partnership sold its interest in the
joint venture for $2,300,000 as further described in Note 3. On February 15,
1996, the Partnership paid a final distribution of $158.03 per Unit to the
limited partners representing a capital distribution of $148.92 from the sale of
the Partnership's interest in the Spanish Trace Apartments and a liquidation
distribution of $9.11. The Partnership is in the process of winding up its
affairs, and management expects to complete a formal liquidation of the
Partnership by September 30, 1996.
2. Basis of Presentation
As a result of the sale of the Partnership's interest in the Spanish Trace
joint venture on December 29, 1995 and management's plans to terminate the
Partnership, as discussed in Note 1, the Partnership changed its basis of
accounting from going concern basis to the liquidation basis as of December 31,
1995. Accordingly, all non-liquid assets are stated at their estimated net
realizable value and all liabilities reflect their estimated settlement amounts
at June 30, 1996. All liquidation-related expenses were accrued at June 30, 1996
and are included in general and administrative expenses on the accompanying
statement of operations for the nine-month period ended June 30, 1996.
3. Real Estate Investment
At September 30, 1995, the Partnership had 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. The
Partnership sold its interest in the joint venture which owns the Spanish Trace
Apartments on December 29, 1995 as described below. Prior to the date of the
sale of the Partnership's interest, this joint venture was consolidated in the
Partnership's financial statements, and therefore, the assets, liabilities,
revenues and expenses of the venture appeared in the consolidated statements.
The effects of all transactions between the Partnership and the consolidated
joint venture were eliminated in consolidation. For fiscal 1996, revenues and
expenses of the venture appear in the consolidated statement of operations for
the period October 1, 1995 through December 29, 1995.
On December 29, 1995, the Partnership sold its interest in the
Spanish Trace Apartments to an affiliate of the co-venture partner for a net
price of approximately $2.3 million. The net sales price for the Partnership's
equity interest was based upon an agreed upon fair market value of the property
of $13.3 million. The agreed upon fair market value, of $13.3 million, was
supported by management's most recent independent appraisal of Spanish Trace
Apartments and by the marketing efforts to third-parties which were conducted
prior to consummation of the sale transaction. Under the terms of the Spanish
Trace joint venture agreement, the co-venture partner had the right to match any
third-party offer to purchase the property. Accordingly, a negotiated sale to
the co-venturer or its affiliate at the appropriate market price represented the
most expeditious and advantageous way for the Partnership to sell its remaining
investment. In addition to the net sale proceeds, the Partnership received
distributions totalling $509,000 from the Spanish Trace joint venture,
representing the Partnership's share of the venture's undistributed net cash
flow through the date of the sale in accordance with the joint venture agreement
and the sale contract.
The following is a summary of property operating expenses for the
period October 1, 1995 to December 29, 1995 and the nine-month period ended June
30, 1995 (in thousands):
<PAGE>
December 29, June 30,
1995 1995
----------- -------
Repairs and maintenance $ 34 $ 234
Utilities 56 99
Insurance 10 29
Management fees 33 91
Administrative and other 93 262
------- -------
$ 226 $ 715
======= =======
4. The Partnership Agreement and Related Party Transactions
The Managing General Partner of the Partnership is Second Income
Properties, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. ("PaineWebber"). Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by
PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory
contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated
("PWI"), a wholly-owned subsidiary of PaineWebber.
In accordance with the Partnership Agreement, sale or refinancing proceeds
are to be distributed first, 100% to the Limited Partners until the Limited
Partners have received their original capital contributions and a cumulative
annual return of 7% based upon a Limited Partner's adjusted capital
contributions, as defined in the Partnership Agreement. Next, any remaining
sale or refinancing proceeds are payable to the Adviser as a disposition fee up
to an amount equal to 3/4% of the aggregate selling prices of the Partnership's
properties. Any remaining sale or refinancing proceeds are to be distributed
85% to the Limited Partners and 15% to the General Partners. As discussed
further in Note 3, the Partnership completed the sale of its final remaining
investment on December 29, 1995. With the $158.03 per Unit distribution paid on
February 15, 1996, the Limited Partners received cumulative distributions in an
amount equal to a return of the Limited Partners' original capital
contributions plus a cumulative 7% annual return. Based on the aggregate prices
of the Partnership's properties, the Adviser would have been entitled to
receive a disposition fee of up to approximately $433,000. Residual cash
proceeds, after estimated final liquidation expenses, limited the amount of the
disposition fee paid to the Adviser to approximately $262,000.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss from the operations of the Partnership is allocated 99% to the Limited
Partners and 1% to the General Partners. Taxable income or tax loss arising
from a sale or refinancing of investment properties will be allocated to the
Limited Partners and the General Partners in proportion to the amounts of sale
or refinancing proceeds to which they are entitled, provided that the General
Partners shall be allocated at least 1% of taxable income arising from a sale
or refinancing. If there are no sale or refinancing proceeds, taxable income or
tax loss from a sale or refinancing will be allocated 99% to the Limited
Partners and 1% to the General Partners. Allocations of the Partnership's
operations between the General Partners and the Limited Partners for financial
accounting purposes have been made in conformity with the allocations of
taxable income or tax loss.
Included in general and administrative expenses for the nine-month periods
ended June 30, 1996 and 1995 is $33,000 and $27,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership. The expense for the nine-month period ended June 30, 1996 includes
an estimate of future expenses for services to be rendered by this affiliate of
the Managing General Partner through the Partnership's final liquidation.
Also included in general and administrative expenses for the nine-month
period ended June 30, 1995 is $1,000 representing fees earned by Mitchell
Hutchins Institutional Investors, Inc. for managing the Partnership's cash
assets.
<PAGE>
5. Mortgage Note Payable
The mortgage note payable on the consolidated balance sheet as of September
30, 1995 relates to the Spanish Trace joint venture and is secured by that
venture's operating investment property. As described in Note 3, the
Partnership sold its interest in the joint venture which owns the Spanish Trace
Apartments on December 29, 1995. Mortgage note payable consisted of the
following at September 30, 1995 (in thousands):
September 30
------------
7.35% nonrecourse mortgage loan
secured by the Spanish Trace Apartments,
payable in monthly installments,
including principal and interest of $66
through August 1, 2028. The remaining
balance of principal and interest is
due September 1, 2028 (see discussion
below). $ 9,856
=======
On August 31, 1993, the joint venture 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 $774,000 as of September 30,
1995.
6. Contingencies
The Partnership is involved in certain legal actions. At the present time,
the Managing General Partner is unable to determine what impact, if any, the
resolution of these matters may have on the Partnership's financial statements,
taken as a whole.
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
On February 15, 1996, the Limited Partners received a final distribution of
$158.03 per original $1,000 unit, representing a capital distribution of
$148.92 from the sale of the Partnership's interest in the Spanish Trace
Apartments and a liquidation distribution of $9.11. The Partnership is in the
process of winding up its affairs, and management expects to complete a formal
liquidation of the Partnership by September 30, 1996.
As previously reported, on December 29, 1995, the Partnership sold it's
remaining investment in the Spanish Trace Apartments, located in St. Louis,
Missouri. Spanish Trace Apartments is a 372-unit, twenty-four year old,
garden-style rental property. The Partnership sold its interest in the Spanish
Trace Apartments to an affiliate of the co-venture partner for a net price of
approximately $2.3 million. The net sales price for the Partnership's equity
interest was based upon an agreed upon fair market value of the property of
$13.3 million. This agreed upon fair market value was supported by management's
most recent independent appraisal of Spanish Trace and by the marketing efforts
to third-parties which were conducted prior to the consummation of the sales
transaction. Under the terms of the Spanish Trace joint venture agreement, the
co-venture partner had the right to match any third-party offer to purchase the
property. Accordingly, a negotiated sale to the co-venturer or its affiliate at
the appropriate market price represented the most expeditious and advantageous
way for the Partnership to sell its remaining investment. In addition to the
net sale proceeds, the Partnership received distributions totalling
approximately $509,000 from the Spanish Trace joint venture, representing the
Partnership's share of the venture's undistributed net cash flow through the
date of the sale in accordance with the joint venture agreement and sale
contract.
In accordance with the Partnership Agreement, sale or refinancing proceeds
are to be distributed first, 100% to the Limited Partners until the Limited
Partners have received their original capital contributions and a cumulative
annual return of 7% based upon a Limited Partner's adjusted capital
contributions, as defined in the Partnership Agreement. Next, any remaining
sale or refinancing proceeds are payable to the Adviser as a disposition fee up
to an amount equal to 3/4% of the aggregate selling prices of the Partnership's
properties. Any remaining sale or refinancing proceeds are to be distributed
85% to the Limited Partners and 15% to the General Partners. With the $158.03
per Unit distribution paid on February 15, 1996, the Limited Partners received
cumulative distributions in an amount equal to a return of the Limited
Partners' original capital contributions plus a cumulative 7% annual return.
Based on the aggregate prices of the Partnership's properties, the Adviser
would have been entitled to receive a disposition fee of up to approximately
$433,000. Residual cash proceeds, after estimated final liquidation expenses,
limited the amount of the disposition fee paid to the Adviser to approximately
$262,000.
At June 30, 1996, the Partnership had cash and cash equivalents of
approximately $92,000. The Partnership's remaining cash assets will be used for
expenses associated with winding up the Partnership's business and completing a
formal liquidation.
Results of Operations
Three Months Ended June 30, 1996
The Partnership reported net income of $0 for the three-month period ended
June 30, 1996 as compared to net income of $82,000 to the same period in the
prior year. Due to the sale of the Partnership's interest in the Spanish Trace
joint venture on December, 29, 1995 and management's planned liquidation of the
Partnership, all estimable liquidation related expenses were accrued for and
expensed as of December 31, 1995. As a result, the Partnership's operating
results for the current three-month period are not directly comparable to the
full three months of operations for the third quarter of fiscal 1995. The
Partnership's operations in the current three-month period includes only
interest income on cash reserves of $17,000 which was offset by additional
professional fees accrued for during the current quarter for services to be
rendered through the Partnership's final liquidation.
Nine Months Ended June 30, 1996
The Partnership reported net income of $4,601,000 for the nine-month period
ended June 30, 1996, as compared to net income of $183,000 for the same period
in the prior year. The increase in net income resulted from the sale of the
Partnership's interest in the Spanish Trace Apartments on December 29, 1995.
The Partnership recognized a gain of $4,829,000 in connection with the sale of
its venture interest due to prior year non-cash depreciation charges which
reduced the net book value of the operating investment property below its fair
market value at the time of the sale. The gain on the sale of the interest in
Spanish Trace was partly offset by the disposition fee paid to the Adviser, as
discussed further above, and by a decrease in the Partnership's operating
income.
The Partnership's operating income decreased by $259,000 for the nine-month
period ended June 30, 1996 compared to the same period in the prior year. This
decrease in operating income was the result of the sale of the Partnership's
interest in Spanish Trace, a decrease in interest income and an increase in
Partnership general and administrative expenses. Due to the sale of the
Partnership's interest in Spanish Trace, the results of operations for the
current nine-month period include the operations of Spanish Trace through
December 29, 1995 and are not directly comparable to the full nine months of
operations in the prior nine-month period. Interest income declined due to the
final distribution payment to the Limited Partners made in February 1996, which
resulted in a reduction in the Partnership's average outstanding cash balances.
General and administrative expenses increased as a result of the accrual of
expenses associated with the planned liquidation of the Partnership, as more
fully described above. These costs include, among other items, legal,
accounting, tax preparation, securities law compliance, investor
communications, printing and audit expenses.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As discussed in the prior quarterly and annual reports, 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 70 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 Fund, Inc.. which is the Managing General
Partner of the Partnership and affiliates of PaineWebber. On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement has been scheduled for October 25, 1996.
The status of the other litigation involving the Partnership and its
General Partners remains unchanged from the description provided in the
Partnership's Quarterly Report on Form 10-Q for the period ended March 31, 1996.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
discussed above. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no provision
for any liability which could result from the eventual outcome of these matters
has been made in the accompanying financial statements of the Partnership.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES TWO
LIMITED PARTNERSHIP
By: SECOND INCOME PROPERTIES INC.
Managing General Partner
By: s/s Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: August 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the nine months ended June 30,
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 92
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 92
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 92
<CURRENT-LIABILITIES> 92
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 92
<SALES> 0
<TOTAL-REVENUES> 5502
<CGS> 0
<TOTAL-COSTS> 409
<OTHER-EXPENSES> 303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> 4601
<INCOME-TAX> 0
<INCOME-CONTINUING> 4601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4601
<EPS-PRIMARY> 298.48
<EPS-DILUTED> 298.48
</TABLE>
