PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
BALANCE SHEET
December 31, 1993 and March 31, 1993
(Unaudited)
ASSETS
December 31 March 31
Operating investment properties:
Land $ 5,008,793 $ 5,008,793
Buildings and improvements 36,453,256 36,423,906
41,462,049 41,432,699
Less accumulated depreciation (8,651,073) (7,722,461)
32,810,976 33,710,238
Cash and cash equivalents 4,405,323 4,494,420
Restricted cash 334,539 25,473
Accounts receivable 7,395 126,956
Accounts receivable - affiliates 65,305 57,805
Prepaid expenses 19,490 12,707
Investments in unconsolidated joint ventures,
at equity 66,214,599 68,054,010
Deferred rent receivable 282,335 303,326
Deferred expenses, net 450,546 597,136
$104,590,508 $107,382,071
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 231,780 $ 181,250
Tenant security deposits 72,822 68,150
Accounts payable - affiliates 38,073 49,848
Advances from consolidated ventures 361,210 558,020
Bonds payable 2,922,407 2,955,931
Notes payable and accrued interest 33,168,326 30,888,809
Minority interest in net assets of
consolidated joint ventures 331,249 331,249
Partners' capital 67,464,641 72,348,814
$104,590,508 $107,382,071
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended December 31, 1993 and 1992
(Unaudited)
General Limited
Partner Partners
Balance at March 31, 1992 $(354,844) $ 78,277,450
Cash distributions (50,432) (4,992,721)
Net income 3,613 357,737
Balance at December 31, 1992 $(401,663) $ 73,642,466
Balance at March 31, 1993 $(410,582) $ 72,759,396
Cash distributions (50,432) (4,992,720)
Net income 1,590 157,389
Balance at December 31, 1993 $(459,424) $ 67,924,065
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
For the three and nine months ended December 31, 1993 and 1992
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
1993 1992 1993 1992
Revenues:
Rental income $ 906,974 $1,081,310 $3,153,612 $3,354,067
Interest and
other income 24,082 43,544 133,180 127,689
931,056 1,124,854 3,286,792 3,481,756
Expenses:
General and
administrative 143,651 151,959 460,915 431,206
Interest expense 850,325 773,437 2,420,775 2,234,275
Depreciation
and amortization 370,185 559,659 1,117,946 1,678,979
Property operating
expenses 317,617 174,458 991,634 1,003,539
1,681,778 1,659,513 4,991,270 5,347,999
Operating loss (750,722) (534,659) (1,704,478) (1,866,243)
Investment income:
Interest income on
note receivable
from joint venture 27,273 28,178 80,123 80,395
Partnership's share of
unconsolidated
ventures' income 589,499 873,908 1,783,334 2,147,198
Net income (loss) $ (133,950) $ 367,427 $ 158,979 $ 361,350
Net income (loss)
per 1,000 Limited
Partnership Units $(0.99) $ 2.71 $ 1.17 $ 2.66
Cash distributions
per 1,000 Limited
Partnership Units $12.38 $12.38 $37.14 $37.14
The above net income (loss) and cash distributions per 1,000 Limited
Partnership Units are based upon the 134,425,741 Limited Partnership Units
outstanding during each period.
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the nine months ended December 31, 1993 and 1992
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
1993 1992
Cash flows from operating activities:
Net income $ 158,979 $ 361,350
Adjustments to reconcile net income to net cash
provided by operating activities:
Partnership's share of unconsolidated
ventures' income (1,783,334) (2,147,198)
Interest expense 2,279,517 2,069,869
Depreciation and amortization 1,117,946 1,678,979
Changes in assets and liabilities:
Restricted cash (309,066) (66,949)
Accrued interest receivable - 12,961
Accounts receivable 119,561 162,399
Accounts receivable - affiliates (7,500) (22,805)
Deferred rent receivable 20,991 (73,674)
Deferred expenses (42,744) (134,292)
Prepaid expenses (6,783) 9,325
Tenant security deposits 4,672 11,372
Accounts payable - affiliates (11,775) (79,641)
Accounts payable and accrued expenses 50,530 46,093
Advances from consolidated ventures (196,810) (846,414)
Total adjustments 1,235,205 620,025
Net cash provided by operating
activities 1,394,184 981,375
Cash flows from investing activities:
Distributions from unconsolidated
ventures 3,622,745 3,451,225
Additional investments in
unconsolidated ventures - (168,668)
Additions to operating investment properties (29,350) (13,010)
Net cash provided by investing activities 3,593,395 3,269,547
Cash flows from financing activities:
Distributions to partners (5,043,152) (5,043,153)
Payments on bond assessments (33,524) (1,236)
Net cash used for financing activities (5,076,676) (5,044,389)
Net decrease in cash and
cash equivalents (89,097) (793,467)
Cash and cash equivalents,
beginning of period 4,494,420 4,873,733
Cash and cash equivalents,
end of period $4,405,323 $4,080,266
Cash paid during the
period for interest $ 141,258 $ 164,406
See accompanying notes.
1. Organization
The accompanying 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 March 31, 1993.
In the opinion of management, the accompanying 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. Investments in Unconsolidated Joint Ventures
The Partnership has investments in six unconsolidated joint venture
partnerships which own operating investment properties at December 31,
1993. The unconsolidated joint venture partnerships are accounted for on
the equity method in the Partnership's financial statements. The
Partnership's policy is to recognize its share of ventures' operations
three months in arrears.
Summarized operations of the unconsolidated joint ventures for the periods
indicated are as follows:
Condensed Combined Summary of Operations
For the three and nine months ended September 30, 1993 and 1992
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1992 1993 1992
Rental revenues and
expense recoveries $3,258,000 $3,445,000 $9,721,000 $10,117,000
Interest and other
income 129,000 67,000 318,000 120,000
3,387,000 3,512,000 10,039,000 10,237,000
Property operating
expenses 1,047,000 598,000 2,993,000 2,672,000
Real estate taxes 761,000 833,000 2,252,000 2,313,000
Interest expense 40,000 45,000 121,000 135,000
Depreciation and
amortization 887,000 1,003,000 2,660,000 2,575,000
2,735,000 2,479,000 8,026,000 7,695,000
Net income $ 652,000 $ 1,033,000 $2,013,000 $ 2,542,000
Net income:
Partnership's share of
combined income 613,000 $ 898,000 $1,857,000 $ 2,221,000
Co-venturers' share of
combined income 39,000 135,000 156,000 321,000
$ 652,000 $1,033,000 $2,013,000 $ 2,542,000
Reconciliation of Partnership's Share of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1992 1993 1992
Partnership's share
of operations,
as shown above $ 613,000 $ 898,000 $1,857,000 $2,221,000
Amortization of
excess basis (24,000) (24,000) (74,000) (74,000)
Partnership's
share of
unconsolidated
ventures' income $ 589,000 $ 874,000 $1,783,000 $2,147,000
3. Operating Investment Property
At December 31, 1993 and March 31, 1993, the Partnership's balance sheet
includes two operating investment properties; Saratoga Center and EG&G Plaza,
owned by Hacienda Park Associates, and the Asbury Commons Apartments, owned by
Atlanta Asbury Partnership. The Partnership obtained controlling interests in
both of these joint ventures during fiscal 1992. The Partnership's policy is
to report the operations of these consolidated joint ventures on a three-month
lag. Saratoga Center and EG&G Plaza consists of four separate office/R&D
buildings comprising approximately 185,000 square feet, located in Pleasanton,
California. Asbury Commons Apartments is a 204-unit residential apartment
complex located in Atlanta, Georgia.
The following is a combined summary of property operating expenses for the
Saratoga Center and EG&G Plaza and the Asbury Commons Apartments for the
nine months ended September 30, 1993 and 1992.
Nine Months Ended
September 30,
1993 1992
Property operating expenses:
Real estate taxes $ 272,080 $ 241,136
Repairs and maintenance 114,177 80,443
Utilities 136,523 120,163
Salaries and related costs 109,393 73,564
Insurance 23,908 28,281
Management fees 99,112 116,783
Administrative and other 236,441 343,169
$ 991,634 $1,003,539
4. Related Party Transactions
Included in general and administrative expenses for the nine months ended
December 31, 1993 and 1992 is $199,095 and $230,871, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership. Accounts payable - affiliates at December 31,
1993 and March 31, 1993 includes $20,186 and $35,024, respectively, payable
to this affiliate for providing such services.
Also included in general and administrative expenses for the nine months
ended December 31, 1993 and 1992 is $7,500 and $8,438, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
The General Partners and their affiliates are reimbursed for any direct
expenses of the Partnership incurred by the General Partners and their
affiliates on behalf of the Partnership. PWPI generally pays all of the
expenses incurred in connection with the operation of the Partnership and is
reimbursed by the Partnership on a monthly basis. Accounts payable -
affiliates at December 31, 1993 and March 31, 1993 includes reimbursements of
out-of-pocket expenses of $13,496 and $10,432, respectively, payable to PWPI.
Accounts receivable - affiliates at December 31, 1993 consists of investor
services fees of $50,000 due from the TCR Walnut Creek Limited Partnership
and $15,305 due from certain unconsolidated joint ventures for expenses paid
by the Partnership on behalf of the joint ventures. Accounts receivable -
affiliates at March 31,1993 consists of investor services fees of $42,500 due
from the TCR Walnut Creek Limited Partnership and $15,305 due from certain
unconsolidated joint ventures for expenses paid by the Partnership on behalf
of the joint ventures.
5. Notes Payable
On April 29, 1988, the Partnership borrowed $6,000,000 in the form of a zero
coupon loan due in May of 1995. The note bears interest at an effective
compounded annual rate of 9.8% and is secured by the 625 North Michigan
Avenue Office Building. Payment of all interest is deferred until maturity,
at which time principal and interest totalling approximately $11,556,000 is
due and payable. The carrying value on the Partnership's balance sheet at
December 31, 1993 of the loan plus accrued interest aggregated approximately
$10,163,000.
On June 20, 1988, the Partnership borrowed $17,000,000 in the form of zero
coupon loans due in June of 1995. These notes bear interest at an annual
rate of 10% compounded annually and are secured by Saratoga Center and EG&G
Plaza, Loehmann's Plaza Shopping Center, Richland Terrace and Richmond Park
Apartments, West Ashley Shoppes, The Gables Apartments, Treat Commons Phase
II Apartments and Asbury Commons Apartments. Payment of all interest is
deferred until maturity. During fiscal 1991, the Partnership repaid the
portion of the zero coupon loans which had been secured by the Highland
Village Apartments, which was sold in May of 1990. The aggregate amount of
principal and accrued interest repaid on May 31, 1990 amounted to
approximately $1,660,000. Additionally, a paydown of principal and accrued
interest, totalling approximately $2,590,000, was made on August 20, 1990.
This paydown represented a mandatory repayment of the full amount of the
principal and accrued interest which had been secured by the Ballston Place
property, which was sold in fiscal 1990, and an optional partial prepayment
of the principal and accrued interest secured by The Gables Apartments. The
remaining balances of these loans and the related accrued interest,
aggregating approximately $23,005,000, are reflected on the balance sheet of
the Partnership as of December 31, 1993. Based on the current loan balances,
principal and interest aggregating approximately $26,419,000 will be due and
payable at maturity, in June of 1995.
6. Bonds Payable
Bonds payable consist of the Hacienda Park joint venture's share of
liabilities for bonds issued by the City of Pleasanton, California for public
improvements that benefit Hacienda Business Park and the operating investment
property and are secured by liens on the operating investment property. The
bonds for which the operating investment property is subject to assessment
bear interest at rates ranging from 5% to 7.87%, with an average rate of
approximately 7.2%. Principal and interest are payable in semi-annual
installments. In the event the operating investment property is sold,
Hacienda Park Associates will no longer be liable for the bond assessments.
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As discussed further in the Annual Report, the Partnership's focus for the
current fiscal year is on efforts to restructure the zero coupon loans secured
by all of the Partnership's operating investment properties prior to their
scheduled maturities in May and June of 1995. As previously reported, the
Partnership originally borrowed $23,000,000 to finance its offering costs and
related acquisition expenses in order to invest a greater portion of the
initial offering proceeds in real estate assets. During fiscal 1991, principal
and interest aggregating approximately $4,250,000 was repaid on these
borrowings in connection with the sale of the Ballston Place and Highland
Village investments. At the time of such borrowings, it was believed that this
investment structure would have a positive impact on the overall returns to the
Limited Partners. In light of the fact that the Partnership's properties have
not appreciated as they were originally expected to, the accumulation of
accrued interest on these obligations has had, and will likely continue to
have, an adverse effect on the overall returns to the Limited Partners. For
this reason, in addition to the current favorable interest rate environment,
management believes it would be prudent to seek to prevent the further
accumulation of accrued interest at the present time rather than waiting until
the scheduled maturity dates. Such a strategy could involve a refinancing of
the outstanding obligations with conventional current-pay loans, a sale of
assets to repay the obligations, or the current payment of interest at the
stated rates of the current loan agreements. The availability of financing
sources and the willingness of the current lenders to negotiate prepayment or
restructuring terms will play major roles in determining which course of action
would be most advantageous. Certain of the Partnership's options for
preventing the further accumulation of accrued interest on its zero coupon
loans could involve a reduction in current cash flows which might affect future
distributions to the Limited Partners.
The zero coupon loan secured by the 625 North Michigan Office Building is
scheduled to mature in May of 1995. As discussed further in the Annual Report,
management has entered into preliminary discussions with the mortgage loan
holder concerning a restructuring of this obligation. Such discussions
continued to progress during the quarter ended December 31, 1993. Preliminary
indications support management's belief that a restructuring can be
accomplished. However, such restructuring will, in all likelihood, require a
partial paydown of the outstanding principal and interest obligation.
Management believes that the Partnership has sufficient liquid capital
resources to be able to contribute its share of any required equity infusion.
In addition to addressing the zero coupon loan obligations, management
continues to focus on the capital needs of its joint venture investment
properties. The Managing General Partner expects that additional leasing costs
may need to be funded at certain of its office and retail properties as efforts
to lease vacant space at these properties continue. The Hacienda Park
investment property, which was 77% leased as of December 31, 1993, consists of
four separate office/R&D buildings comprising approximately 185,000 square
feet. As previously reported, two of these buildings had been leased to a
single tenant, lease payments from which represented approximately 71% of the
total rental income from the property for fiscal 1993. The tenant's lease on
one of the buildings expired in June of 1993, while its lease on the second
building was scheduled to run through March of 1994 and contained a one-year
renewal option. Due to corporate reorganization and downsizing measures, this
tenant did not renew the lease which expired in June. However, during the
current quarter, management successfully negotiated the renewal of this
tenant's other lease for five years. In addition, management is aggressively
searching for replacement tenants for the vacated building in what is an
extremely overbuilt office market.
Additionally, a significant amount of funds may be needed to pay for tenant
improvement costs to re-lease the vacant anchor tenant space at West Ashley
Shoppes. As previously reported, Children's Palace closed its retail store at
the center in May 1991 and subsequently filed bankruptcy for protection from
creditors. Management does not expect to receive any significant proceeds from
the bankruptcy liquidation proceedings. Accordingly, funds for tenant
improvements required to re-lease this space will have to come from property
operations, Partnership advances and/or short-term borrowings. In addition,
Phar-Mor, West Ashley's other major anchor tenant is currently operating under
the protection of Chapter 11 of the U. S. Bankruptcy Code. While Phar-Mor has
closed a number of its locations nationwide as part of its bankruptcy
reorganization, the Phar-Mor drugstore at West Ashley Shoppes is one of their
top performing locations in the southeast. As a result, management is
optimistic that its continued operation is likely, assuming Phar-Mor
successfully emerges from its current Chapter 11 status. Phar-Mor has
approached management seeking concessions on the terms of its lease agreement,
and discussions concerning this situation are ongoing.
At December 31, 1993, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $4,405,000. Such
amounts will be utilized for the working capital requirements of the
Partnership, as well as for reinvestment in certain of the Partnership's
properties, principal payments and refinancing expenses related to the
Partnership's zero coupon loans and for distributions to the partners. The
source of future liquidity and distributions to the partners is expected to be
through cash generated from operations of the Partnership's income-producing
investment properties and proceeds received from the sale or refinancing of
such properties.
Results of Operations
The Partnership reported net income of approximately $159,000 for the nine-
month period ended December 31, 1993, as compared to a net income of
approximately $361,000 for the same period in the prior year. This unfavorable
change in net operating results can be primarily attributed to a decrease in
the Partnership's share of unconsolidated ventures' income of approximately
$364,000. The decline in the Partnership's share of unconsolidated ventures'
income was primarily due to the combined effects of a decrease in rental income
and an increase in property operating expenses at 625 North Michigan Avenue
coupled with a decline in rental income at West Ashley Shoppes. The decline in
the operating results at 625 North Michigan reflects the effects of the
extremely competitive market conditions for downtown Chicago office space. The
reduction in revenues from West Ashley Shoppes reflects the anchor tenant
vacancy discussed further above. A decline in operating loss of approximately
$162,000 partially offset the decrease in the Partnership's share of
unconsolidated ventures' income in the current period. The decline in
operating loss is mainly due to a decline in depreciation and amortization
associated with the consolidated Hacienda Park joint venture. The decrease in
depreciation and amortization expense was due to the write-off of fully
depreciated tenant improvements at the Hacienda Park investment property in the
prior period. This favorable change was partially offset by a decrease in
rental revenue at Hacienda Park as a result of the major tenant's lease
expiration discussed further above. An increase in interest expense on the
Partnership's zero coupon loans of approximately $187,000 and an increase in
general and administrative expenses of approximately $30,000 partially offset
the favorable change in depreciation and amortization expense.
