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, 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) dentification 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
ASSETS
(In thousands)
Consolidated
Statement of
Net Assets
in Liquidation Consolidated
March 31, 1996 Balance Sheet
(Unaudited) September 30, 1995
--------------- ------------------
Investment property held for sale, net $ - $ 4,670
Cash and cash equivalents 39 638
Restricted escrow deposits - 774
Accounts receivable - affiliate 48 -
Prepaid expenses - 33
Deferred expenses, net - 222
------- ----------
$ 87 $ 6,337
======= ==========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage note payable $ - $ 9,856
Accounts payable and accrued expenses 87 87
Real estate taxes payable - 106
Tenant security deposits - 97
Accrued interest payable - 60
Deferred revenues - 4
Disposition fee payable to Adviser - -
Distribution payable to limited partners - -
------- ----------
Total liabilities 87 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 six months ended March 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
Balance at September 30, 1994 $ 6 $(2,553)
Net income 1 99
------- -------
Balance at March 31, 1995 $ 7 $(2,454)
======= =======
Balance at September 30, 1995 $ 9 $(2,169)
Cash distributions - (2,441)
Net income (loss) (9) 4,610
------- -------
Balance at March 31, 1996 $ - $ -
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
Revenues:
Rental revenues $ - $ 588 $ 618 $ 1,163
Interest and other income - 30 38 93
------- ------- ------ -------
- 618 656 1,256
Expenses:
Property operating expenses - 261 226 567
Interest expense and
related financing fees- - 182 189 364
Depreciation and amortization - 2 - 5
Real estate taxes - 49 32 95
General and administrative - 23 134 42
------- ------- ------ -------
- 517 581 1,073
------- ------- ------ -------
Operating income - 101 75 183
Venture partner's share of venture's
operations - (45) (151) (83)
Gain on sale of Partnership's
remaining investment - - 4,939 -
Disposition fee - - (262) -
------- ------- ------ -------
Net income $ - $ 56 $ 4,601 $ 100
======= ======= ======= =======
Net income per Limited
Partnership Unit $ - $ 3.58 $298.48 $ 6.41
======= ======= ======= =======
Cash distributions per Limited
Partnership Unit $158.03 $ - $158.03 $ -
======= ======= ======= =======
The above net income and cash distributions per Limited Partnership Unit is
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 six months ended March 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
Cash flows from operating activities:
Net income $ 4,601 $ 100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - 5
Venture partner's share of venture's operations 151 83
Gain on sale of Partnership's remaining
investment (4,939) -
Changes in assets and liabilities:
Restricted escrow deposits 403 621
Accounts receivable - affiliates - 12
Prepaid expenses - (9)
Accounts payable and accrued expenses 66 113
Real estate taxes payable - (95)
Tenant security deposits and other liabilities - 1
------ ------
Total adjustments (4,319) 731
------ ------
Net cash provided by operating activities 282 831
------ ------
Cash flows from investing activities:
Additions to investment property held for sale - (438)
Net proceeds from sale of joint venture investment 2,300 -
Net cash provided by (used for) ------ ------
investing activities 2,300 (438)
------ ------
Cash flows from financing activities:
Distribution to Limited Partners (2,441) -
Cash flow distributions to co-venture partner (151) -
Principal payments on mortgage note payable - (33)
------ ------
Net cash used for investing activities (2,592) (33)
------ ------
Net (decrease) increase in cash and cash equivalents (10) 360
Cash and cash equivalents, beginning of period 638 203
Less: cash and cash equivalents of consolidated
joint venture, beginning of period (589) -
------ ------
Cash and cash equivalents, end of period $ 39 $ 563
========== =========
Cash paid during the period for interest $ 181 $ 364
========== =========
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 March 31, 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 June 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 state at their estimated net
realizable value and all liabilities reflect their estimated settlement amounts
at March 31, 1996. All liquidation-related expenses were accrued at March 31,
1996 and are included in general and administrative expenses on the accompanying
statement of operations for the six-month period ended March 31, 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 was due to
receive 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. As of March 31, 1996, the Partnership had received
approximately $461,000 of such distributions. Subsequent to the quarter end, the
Partnership received the remaining balance of approximately $48,000 due from the
joint venture. Such amounts will be used for the payment of Partnership
liquidation expenses.
The following is a summary of property operating expenses for the
period October 1, 1995 to December 29, 1995 and the six-month period ended March
31, 1995 (in thousands):
December 29, March 31,
1995 1995
Repairs and maintenance $ 34 $ 163
Utilities 56 76
Insurance 10 44
Management fees 33 59
Administrative and other 93 225
------- -------
$ 226 $ 567
======= =======
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 each of the six-month
periods ended March 31, 1996 and 1995 is $8,000 representing reimbursements
to an affiliate of the Managing General Partner for providing certain financial,
accounting and investor communication services to the Partnership. An additional
$16,000 is also included in general and administrative expenses for services to
be rendered through the liquidation of the Partnership.
Also included in general and administrative expenses for the six-month
period ended March 31, 1995 is $600 representing fees earned by Mitchell
Hutchins Institutional Investors, Inc. for managing the Partnership's cash
assets.
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 remain-
ing 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 cannot estimate the impact, if any, of these
matters 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 June 30, 1996.
As previously reported, on December 29, 1995, the Partnership sold
it's remaining investment in the Spanish race 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. The agreed upon fair market value, of $13.3 million, 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 was due to
receive 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. As of March 31, 1996, the Partnership
had received approximately $461,000 of such distributions. Subsequent to the
quarter end, the Partnership received the remaining balance of approximately
$48,000 due from the joint venture. Such amounts will be used for the payment of
Partnership liquidation expenses.
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 equity 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 March 31, 1996, the Partnership had cash and cash equivalents of
approximately $39,000. In addition, as discussed further above, approximately
$48,000, which was due from the Spanish Trace joint venture for the
Partnership's share of the venture's distributable cash flow through the date of
sale, was received subsequent to March 31, 1996. 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
Six Months Ended March 31, 1996
The Partnership reported net income of $4,601,000 for the six-month period
ended March 31, 1996, as compared to net income of $100,000 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 $4,939,000 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 $108,000 for the six-month
period ended March 31, 1996 compared to the same period in the prior year. This
decrease in operating income was mainly the result of an increase in Partnership
general and administrative expenses. 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. At March 31,
1996, $87,000 of expenses representing estimated costs for services to be
rendered through the Partnership's final liquidation date were accrued as a
result of management's announced liquidation plan. These costs include, among
other items, legal, accounting, tax preparation, securities law compliance,
investor communications, printing and audit expenses. Due to the sale of the
Partnership's interest in Spanish Trace, the results of operations for the
current six-month period include the operations of Spanish Trace through
December 29, 1995 and are not directly comparable to the full six months of
operations in the prior six-month period.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, Second Income Properties, Inc., the Managing
General Partner of the Partnership, was a defendant in a class action lawsuit
against PaineWebber Incorporated ("PaineWebber") and a number of its affiliates
relating to PaineWebber's sale of 70 direct investment offerings, including the
offering of interests in the Partnership. In January 1996, PaineWebber signed a
memorandum of understanding with the plaintiffs in the class action 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 a plan of allocation which
the parties expect to submit to the court for its consideration and approval
within the next several months. Until a definitive settlement and plan of
allocation is approved by the court, there can be no assurance what, if any,
payment or non-monetary benefits will be made available to unitholders in
PaineWebber Income Properties Two Limited Partnership. 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 this litigation. At the present
time, the Managing General Partner cannot estimate the impact, if any, of this
matter 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:
On January 16, 1996 a Current Report on Form 8-K was filed by the registrant
reporting the sale of Partnership interest in the Spanish Trace Apartments on
December 29, 1995.
<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: May 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended March 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 39
<SECURITIES> 0
<RECEIVABLES> 48
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 87
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 87
<CURRENT-LIABILITIES> 87
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 87
<SALES> 0
<TOTAL-REVENUES> 5595
<CGS> 0
<TOTAL-COSTS> 392
<OTHER-EXPENSES> 413
<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>
