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 DECEMBER 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 : 0-15705
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Virginia 04-2918819
(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>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and March 31, 1995 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,287 40,975
---------- ----------
50,095 49,783
Less accumulated depreciation (10,022) (8,895)
---------- ----------
40,073 40,888
Investments in unconsolidated joint
ventures, at equity 25,887 39,887
Cash and cash equivalents 8,893 1,827
Escrowed cash 249 57
Accounts receivable 185 192
Accounts receivable - affiliates 85 15
Prepaid expenses 29 28
Deferred rent receivable 704 476
Deferred expenses, net 683 778
---------- ----------
$ 76,788 $ 84,148
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 617 $ 434
Net advances from consolidated ventures 194 29
Tenant security deposits 95 103
Other liabilities 349 348
Bonds payable 2,458 2,498
Notes payable 19,961 20,137
Partners' capital 53,114 60,599
---------- ---------
$ 76,788 $ 84,148
========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1995 and 1994 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 1,166 $ 925 $ 3,432 $ 2,980
Interest and other income 166 83 284 193
-------- -------- -------- --------
1,332 1,008 3,716 3,173
Expenses:
Property operating expenses 381 328 1,008 982
Depreciation and amortization 409 445 1,206 1,211
Interest expense 557 647 1,580 2,452
General and administrative 245 231 573 549
Real estate taxes 113 137 350 361
-------- -------- -------- --------
1,705 1,788 4,717 5,555
-------- -------- -------- --------
Operating loss (373) (780) (1,001) (2,382)
Investment income:
Interest income on notes
receivable from
unconsolidated ventures 27 28 80 80
Partnership's share of
unconsolidated
ventures' income 121 552 467 1,660
-------- -------- -------- --------
Net loss $ (225) $ (200) $ (454) $ (642)
========= ======== ========= ========
Net loss per 1,000 Limited
Partnership Units $(1.65) $(1.47) $(3.34) $ (4.73)
====== ====== ====== ========
Cash distributions per 1,000 Limited
Partnership Units $42.72 $4.72 $52.16 $ 29.48
====== ===== ====== =======
The above per 1,000 Limited Partnership Units information is based upon the
134,425,741 Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended December 31, 1995 and 1994 (Unaudited)
(In thousands)
General Limited
Partners Partners
Balance at March 31, 1994 $ (478) $ 66,025
Cash distributions (40) (3,963)
Net loss (7) (635)
-------- ---------
Balance at December 31, 1994 $ (525) $ 61,427
======== =========
Balance at March 31, 1995 $ (527) $ 61,126
Cash distributions (19) (7,012)
Net loss (5) (449)
-------- ---------
Balance at December 31, 1995 $ (551) $ 53,665
======== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1995 and 1994 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994
---- ----
Cash flows from operating activities:
Net loss $ (454) $ (642)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Partnership's share of unconsolidated
ventures' income (467) (1,660)
Interest expense on zero coupon loans - 1,467
Depreciation and amortization 1,206 1,370
Amortization of deferred financings costs 28 -
Changes in assets and liabilities:
Escrowed cash (192) (97)
Accounts receivable 7 31
Accounts receivable - affiliates (70) (7)
Deferred rent receivable (228) 65
Deferred expenses and other assets 53 (29)
Prepaid expenses (1) (15)
Accounts payable and accrued expenses 183 291
Advances from consolidated ventures 165 (329)
Tenant security deposits (8) (5)
Other liabilities 1 -
------- --------
Total adjustments 677 1,082
------- --------
Net cash provided by operating activities 223 440
------- --------
Cash flows from investing activities:
Distributions from unconsolidated ventures 15,868 15,207
Additional investments in unconsolidated ventures (1,401) (894)
Payment of leasing commissions (65) (299)
Additions to operating investment properties (312) (59)
------- --------
Net cash provided by investing activities 14,090 13,955
--------- ---------
Cash flows from financing activities:
Distributions to partners (7,031) (4,003)
Proceeds from issuance of loans 2,000 7,000
Payment of deferred financing costs - (260)
Repayments of principal on notes payable (2,176) (18,233)
Repayment of principal on bonds payable (40) (32)
------- --------
Net cash used for financing activities (7,247) (15,528)
------- --------
Net increase (decrease) in cash and cash equivalents 7,066 (1,133)
Cash and cash equivalents, beginning of period 1,827 4,529
------- --------
Cash and cash equivalents, end of period $ 8,893 $ 3,396
======= ========
Cash paid during the period for interest $ 1,553 $ 10,990
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
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, 1995.
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. Related Party Transactions
Included in general and administrative expenses for the nine months ended
December 31, 1995 and 1994 is $195,000 and $199,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for the nine months
ended December 31, 1995 and 1994 is $4,000 and $8,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
Accounts receivable - affiliates at December 31, 1995 and March 31, 1995
consist of investor servicing fees of $70,000 and $63,000, respectively,
due from the TCR Walnut Creek Limited Partnership and $15,000 at both dates
due from certain unconsolidated joint ventures for expenses paid by the
Partnership on behalf of the joint ventures.
3. Investments in Unconsolidated Joint Ventures
As of December 31,1995, the Partnership has investments in three
unconsolidated joint venture partnerships (five at December 31,1994) which
own operating investment properties as described further in the
Partnership's Annual Report. On November 1, 1995, the joint venture which
owned the Richmond Park and Richland Terrace Apartments sold the properties
to a third party for $11 million. The Partnership received net proceeds of
approximately $8 million after deducting closing costs, the co-venturer's
share of the proceeds and repayment of the $2 million borrowing described in
Note 5. The Partnership distributed approximately $5.1 million of these net
proceeds to the Limited Partners in a Special Distribution made on December
27, 1995. The remaining sale proceeds were retained by the Partnership for
the capital needs of the Partnership's commercial properties. In addition,
on December 29, 1995 the joint venture which owned the Treat Commons II
Apartments sold the property to a third party for approximately $12.1
million. The Partnership received net proceeds of approximately $4.1 million
after deducting closing costs and the repayment of the existing mortgage
note of approximately $7.3 million. Management plans to distribute
approximately $3.1 million of these net sale proceeds to the Limited
Partners in a Special Distribution to be made on February 15, 1996. The
remaining sale proceeds of approximately $1 million will be retained by the
Partnership for potential reinvestment in the Loehmann's Plaza property,
where a significant renovation and re-leasing program is currently underway.
The unconsolidated joint venture partnerships are accounted for on the
equity method in the Partnership's financial statements because the
Partnership does not have a voting control interest in these joint ventures.
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.
<PAGE>
Condensed Combined Summary of Operations
For the three and nine months ended September 30, 1995 and 1994 (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Rental revenues and
expense recoveries $3,200 $3,200 $9,362 $9,209
Interest and other income 36 102 218 287
------- ------ ------ ------
3,236 3,302 9,580 9,496
Property operating expenses 1,044 1,008 2,918 2,803
Real estate taxes 706 770 2,094 2,289
Interest expense 383 43 1,108 124
Depreciation and amortization 959 832 2,897 2,386
-------- ------ ------- ------
3,092 2,653 9,017 7,602
-------- ------- ------- ------
Net income $ 144 $ 649 $ 563 $1,894
======== ======= ======= ======
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Net income:
Partnership's share of
combined income $ 141 $ 572 $ 527 $ 1,720
Co-venturers' share of
combined income 3 77 36 174
--------- --------- -------- --------
$ 144 $ 649 $ 563 $ 1,894
========= ========= ======== ========
Reconciliation of Partnership's Share of Operations
For the three and nine months ended September 30, 1995 and 1994
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Partnership's share of
operations,
as shown above $ 141 $ 572 $ 527 $ 1,720
Amortization of excess basis (20) (20) (60) (60)
------- ------- -------- --------
Partnership's share of
unconsolidated
ventures' income $ 121 $ 552 $ 467 $ 1,660
======= ======= ======= ========
4. Operating Investment Properties
At December 31, 1995, the Partnership's balance sheet includes three
operating investment properties; Saratoga Center and EG&G Plaza, owned by
Hacienda Park Associates, the Asbury Commons Apartments, owned by Atlanta
Asbury Partnership, and the West Ashley Shoppes Shopping Center, owned by
West Ashley Shoppes Associates. 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 West Ashley Shoppes
Shopping Center consists of approximately 135,000 square feet of leasable
retail space located in Charleston, South Carolina.
The following is a combined summary of property operating expenses for
Saratoga Center and EG&G Plaza, Asbury Commons Apartments and West Ashley
Shoppes Shopping Center for the three and nine months ended September 30,
1995 and 1994 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 158 $ 102 $ 385 $ 325
Utilities 52 69 150 171
Salaries and related costs 48 46 128 136
Insurance 17 16 48 45
Management fees 38 35 111 106
Administrative and other 68 60 186 199
------- ------- ------ ------
$ 381 $ 328 $1,008 $ 982
======= ======= ====== ======
5. Notes Payable
Notes payable on the consolidated balance sheet of the Partnership at
December 31, 1995 and March 31, 1995 consist of the following (in
thousands):
December 31 March 31
9.125% mortgage note payable to an
insurance company secured by the 625 North
Michigan Avenue operating investment
property. The loan requires monthly
principal and interest payments of $55
through maturity on May 1, 1999. The
terms of the note were modified effective
May 31, 1994 (see discussion below). $9,572 $9,657
8.75% mortgage note payable to an
insurance company secured by the Asbury
Commons operating investment property.
The loan requires monthly principal
and interest payments of $58 through
maturity on October 15, 2001
(see discussion below). 6,911 6,980
9.04% mortgage note payable to an
insurance company secured by the Saratoga
Center and EG&G Plaza operating
investment property. The loan requires
monthly principal and interest
payments of $36 through maturity on January
20, 2002 (see discussion below). 3,478 3,500
-------- --------
$19,961 $20,137
======= =======
On April 29, 1988, the Partnership borrowed $6,000,000 in the form of
a zero coupon loan which had a scheduled maturity date in May of 1995. The
note bore interest at an effective compounded annual rate of 9.8% and was
secured by the 625 North Michigan Avenue Office Building. Payment of all
interest was deferred until maturity, at which time principal and interest
totalling approximately $11,556,000 was to be due and payable. On May 31,
1994 the Partnership executed a modification and extension agreement with
the 625 North Michigan lender. The terms of the agreement called for the
Partnership to make a principal paydown of $801,000. The maturity date of
the loan, which now requires principal and interest payments on a monthly
basis as set forth above, was extended to May 31, 1999. The terms of the
loan agreement also required the establishment of an escrow account for
real estate taxes, as well as a capital improvement escrow which is to be
funded with monthly deposits from the Partnership aggregating approximately
$1 million through the scheduled maturity date.
On June 20, 1988, the Partnership borrowed $17,000,000 in the form of
zero coupon loans due in June of 1995. These notes bore interest at a rate
of 10%, compounded annually. During fiscal 1991, the Partnership had 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.
During fiscal 1995, the remaining balances of the zero coupon loans were
repaid from the proceeds of five new conventional mortgage loans issued to
the Partnership's joint venture investees, together with funds contributed
by the Partnership, as set forth below.
On September 27, 1994, the Partnership refinanced the portion of the
zero coupon loan secured by the Treat Commons Phase II apartment complex, of
approximately $3,353,000, with the proceeds of a new $7.4 million loan
obtained by TCR Walnut Creek Limited Partnership. The $7.4 million loan is
secured by the Treat Commons apartment complex, carries an annual interest
rate of 8.54% and matures in 7 years. The loan requires monthly principal
and interest payments of $59,786. On September 28, 1994, the Partnership
repaid the portion of the zero coupon loan secured by the Asbury Commons
apartment complex, of approximately $3,836,000, with the proceeds of a new
$7 million loan obtained by the consolidated Asbury Commons joint venture.
The $7 million loan is secured by the Asbury Commons apartment complex,
carries an annual interest rate of 8.75% and matures in 7 years. The loan
requires monthly principal and interest payments of $57,575. On October 22,
1994, the Partnership applied a portion of the excess proceeds from the
refinancings of the Treat Commons and Asbury Commons properties described
above and repaid the portion of the zero coupon loan which had been secured
by West Ashley Shoppes of approximately $2,703,000 and made a partial
prepayment toward the portion of the zero coupon loan secured by Hacienda
Business Park of $3,000,000. On November 7, 1994, the Partnership repaid the
portion of the zero coupon loans secured by The Gables Apartments and the
Richland Terrace and Richmond Park apartment complexes of approximately
$2,353,000 and $2,106,000, respectively, with the proceeds of a new $5.2
million loan secured by The Gables Apartments. The new $5.2 million loan was
issued to the Gables joint venture, bears interest at 8.72% and matures in 7
years. The loan requires monthly principal and interest payments of $42,646.
On February 9, 1995, the Partnership repaid the remaining portion of the
zero coupon loan secured by the Hacienda Business Park, of approximately
$3,583,000, with the proceeds of a new $3.5 million loan obtained by the
consolidated Hacienda Park joint venture along with additional funds
contributed by the Partnership. The $3.5 million loan is secured by the
Hacienda Business Park, carries an annual interest rate of 9.04% and matures
in 7 years. The loan requires monthly principal and interest payments of
$35,620. On February 10, 1995, the Partnership repaid the portion of the
zero coupon loan secured by the Loehmann's Plaza shopping center, of
approximately $4,093,000, with the proceeds of a new $4 million loan
obtained by Daniel/Metcalf Associates Partnership along with additional
funds contributed by the Partnership. The $4 million loan is secured by the
Loehmann's Plaza shopping center, carries an annual interest rate of 9.04%
and matures on February 15, 2003. The loan requires monthly principal and
interest payments of $33,700. Legal liability for the repayment of the new
mortgage loans secured by the Treat Commons, Gables and Loehmann's Plaza
properties rests with the respective unconsolidated joint ventures.
Accordingly, these mortgage loan liabilities are recorded on the books of
the unconsolidated joint ventures. The Partnership has indemnified TCR
Walnut Creek Limited Partnership, Richmond Gables Associates and
Daniel/Metcalf Associates Partnership and the related co-venture partners,
against all liabilities, claims and expenses associated with these
borrowings. The net proceeds of these loans were recorded as distributions
to the Partnership by the unconsolidated joint ventures.
In August 1995, in order to have sufficient funds to proceed with a
renovation program at one of its joint venture properties, the Partnership
secured a one year loan in the amount of $2 million, collateralized by the
Partnership's share of the proceeds from a future sale or refinancing of
the Richmond Park/Richland Terrace Apartments. The note required monthly
interest-only payments at a variable rate of the lender's prime plus 1%
through the scheduled maturity date of August 2, 1996. On November 1, 1995,
the Partnership repaid the note with the proceeds from the sale of Richmond
Park/Richland Terrace (see Note 3).
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.
7. Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse
effect on the Partnership's financial statements, taken as a whole.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As previously reported, in light of the current strength of the national
real estate market with respect to multi-family apartment properties, management
had examined the Partnership's four apartment properties to identify whether a
current sale of one or more of these properties might be in the Partnership's
best interests. Based on such analysis, the Richmond Park/Richland Terrace and
Treat Commons II properties were determined to be the best candidates for a
current sale. In the case of Richmond Park and Richland Terrace, the economic
growth in the Portland, Oregon area has been among the best in the country for
some time. Such results may lead to increased levels of development activity
which could limit the current favorable trends in the market for existing
apartment properties. Accordingly, management believed that the market value of
Richmond Park and Richland Terrace was at or near its peak for the current
market cycle and began to actively market the property for sale in fiscal 1995.
On November 1, 1995, the Partnership sold the Richmond Park and Richland Terrace
properties to a third party for $11 million. The Partnership received net sale
proceeds of approximately $8 million after deducting closing costs, the
co-venture partner's share of the proceeds and repayment of the $2 million
short-term note discussed further below. The Partnership distributed
approximately $5.1 million of this amount, or $38 per original $1,000
investment, to the Limited Partners in a Special Distribution made on December
27, 1995. The remaining sale proceeds were retained by the Partnership to be
used for the capital needs of its commercial properties.
In the case of Treat Commons, the Partnership owned Phase II of a 2-phase
development. During fiscal 1995, management learned that the owner of Phase I
had decided to market the property for sale. Management believed there were
advantages to a joint marketing effort of both phases which could maximize the
sale proceeds to the Partnership and began working with the Phase I owner to
actively market the property for sale during fiscal 1996. On December 29, 1995,
the Partnership sold the Treat Commons II Apartments to a third party for
approximately $12.1 million. The Partnership received net sale proceeds of
approximately $4.1 million after deducting closing costs and the repayment of
the existing mortgage note on the property of approximately $7.3 million.
Management plans to distribute approximately $3.1 million of this amount, or $23
per original $1,000 investment, to the Limited Partners in a Special
Distribution to be made on February 15, 1996. The remaining sale proceeds of
approximately $1 million will be retained by the Partnership for potential
reinvestment in the Loehamann's Plaza property, where a significant renovation
and re-leasing program is currently underway, as discussed further below. If
these funds are not needed for use at Loehmann's Plaza, management will likely
distribute them to the Limited Partners sometime during fiscal 1997.
As a result of the reduction in Partnership cash flow resulting from the
fiscal 1996 sale transactions described above, management determined that it
would be necessary to reduce the Partnership's distribution rate from its level
of 2% on remaining invested capital to 1% effective for the payment to be made
on February 15, 1996 for the quarter ended December 31, 1995. Distributions are
expected to remain at this level until the leasing status of the commercial
properties has been stabilized.
During fiscal 1995, the Partnership secured a new tenant, under a
seven-year lease, for the vacant 31,000 square foot building at Hacienda Park.
The Partnership agreed to pay for the tenant improvement costs to modify this
space to the needs of the new tenant. Tenant improvements and leasing
commissions related to this lease totalled approximately $630,000. During the
first quarter of fiscal 1996, the Partnership leased an additional 10,808 square
foot space to this same tenant. During the current quarter, the Partnership
leased the remaining 10,027 square feet of available space at Hacienda Park to
an existing tenant. In addition, a 31,000 square foot tenant executed a 5-year
renewal of its lease obligation, which was due to expire in March 1996. As a
result of these developments, the Hacienda Park investment property, which was
89% leased as of March 31, 1995, was fully leased as of December 31, 1995. At
Loehmann's Plaza, management is in the process of completing a major capital
enhancement and repositioning program which is scheduled for completion in the
spring of 1996. The improvement program, which is expected to cost a total of $2
million, is necessary in order for the property to remain competitive in its
market. As part of the repositioning program, management believed it would
significantly enhance the value of the shopping center to replace the property's
anchor tenant, Loehmann's, which occupied 15,000 square feet, or approximately
10%, of the property's net leasable area. Loehmann's, which is no longer a
prominent retailer in the Kansas City area, was not serving as a major draw for
the center and was paying a substantially below market lease rate. On November
7, 1995, the Partnership completed the negotiation of an agreement whereby
Loehamann's consented to terminate its lease, vacate the property and relinquish
control of its space to the Partnership in return for a payment of $75,000.
Subsequent to the termination of the Loehamann's lease, the property was 76%
leased. Management is currently in discussions with a number of potential
replacement national credit anchor tenants for the entire Loehamann's space. A
lease with a national credit anchor tenant would greatly enhance the position of
the property in its marketplace, resulting in increased cash flow and an
improved ability to lease vacant shop space. Tenant improvement costs to lease
the Loehmann's space are likely to be significant and would be in addition to
the $2 million referred to above. A portion of the funds required to pay for the
capital improvement work at Loehmann's Plaza is expected to come from a $550,000
Renovation and Occupancy Escrow withheld by the lender from the proceeds of the
$4 million loan secured by the property which was obtained in February 1995.
Funds may be released from the Renovation and Occupancy Escrow to reimburse the
venture for the costs of the planned renovations in the event that the venture
satisfies certain requirements which include specified occupancy and rental
income thresholds. If such requirements have not been met within 18 months from
the date of the loan closing, the lender may apply the balance of the escrow
account to the payment of loan principal. In addition, the lender required that
the Partnership unconditionally guaranty up to $1,400,000 of the loan
obligation. This guaranty will be released in the event that the venture
satisfies the requirement for the release of the Renovation and Occupancy Escrow
funds or upon the repayment, in full, of the entire outstanding mortgage loan
liability. In order to have sufficient funds to proceed with the Loehmann's
Plaza renovation program prior to the sale of the Richmond Park and Richland
Terrace properties, management had secured a short term loan in the amount of $2
million. The note which was obtained in August 1995 had an August 2, 1996
maturity date and required monthly interest-only payments at a variable interest
rate of the lender's prime plus one percent. On November 1, 1995, the
Partnership repaid this note with the proceeds from the sale transaction
discussed above. The remainder of the funds required to pay for the improvement
program and re-leasing costs at Loehmann's Plaza will be provided by the
proceeds retained by the Partnership from the sale of the Richmond Park,
Richland Terrace and Treat Commons II properties.
A significant amount of funds may also be needed to pay for tenant
improvement costs to re-lease the vacant anchor tenant space at West Ashley
Shoppes in the near term. As previously reported, Children's Palace closed its
retail store at the center in May 1991 and subsequently filed for bankruptcy
protection from creditors. Although the negotiations with a strong national
retailer to occupy approximately one-half of the old Children's Palace space did
not materialize, management is encouraged by the improving economic conditions
in the Charleston market and is optimistic that a national credit tenant will be
identified to lease the vacant anchor tenant space at West Ashley Shoppes. West
Ashley's other major anchor tenant, Phar-Mor, has recently emerged from the
protection of Chapter 11 of the U.S. Bankruptcy Code. While Phar-Mor has closed
a number of its stores nationwide as part of its bankruptcy reorganization, the
Phar-Mor drugstore at West Ashley Shoppes will remain in operation as expected.
Capital improvement and leasing costs at 625 North Michigan are expected to
continue to be significant for the foreseeable future due to the size and age of
the building, the large number of leases and the competitive conditions which
exist in the market for downtown Chicago office space. The renovation of the
building's facade is expected to be completed during calendar 1996.
At December 31, 1995, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $8,893,000. Such cash
and cash equivalents includes the $41. million net proceeds from the sale of
Treat Commons in December 1995. As discussed further above, $3.1 million of such
proceeds will be distributed to the Limited Partners in February 1996, and the
balance will be retained initially for potential use as part of the Loehmann's
Plaza renovation program. The balance of such cash and cash equivalents amounts
will be utilized for the working capital requirements of the Partnership, for
reinvestment in certain of the Partnership's properties (as required) 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. Such sources of liquidity are
expected to be sufficient to meet the Partnership's needs on both a short-term
and long-term basis.
Results of Operations
Three Months Ended December 31, 1995
The Partnership reported a net loss of $225,000 for the three months ended
December 31, 1995, as compared to a net loss of $200,000 for the same period in
the prior year. This increase in net loss was the result of a decrease in the
Partnership's share of unconsolidated ventures' income of $431,000 which was
almost entirely offset by a decrease in the Partnership's operating loss of
$407,000. These offsetting changes in unconsolidated ventures' results and the
Partnership's operating loss reflect a change in the entity reporting the
interest expense associated with the borrowings secured by the Partnership's
operating investment properties. As more fully discussed in the Partnership's
Annual Report, the Partnership refinanced the majority of the zero coupon loans,
which had been issued directly to the Partnership, with the proceeds of new
loans obtained by the respective joint ventures. This caused a change in the
entity reporting the interest expense from the Partnership to the joint
ventures. As a result, the interest expense component of operating loss on the
Partnership's consolidated statements of operations declined by $90,000 in the
current three-month period despite the additional interest expense incurred
during the current quarter on the $2,000,000 temporary borrowing described
above. However, this decrease was offset by a reduction in the Partnership's
share of income from its unconsolidated joint ventures in the current period due
to the recognition of interest expense by the unconsolidated ventures on the new
borrowings. Overall, interest costs on the outstanding mortgage loans have
declined slightly as a result of the refinancings because the new loans were
obtained with lower interest rates than the prior zero coupon loans. The
Partnership's operating loss, prior to the effect of the change in interest
expense, decreased by $317,000 primarily due to increases in rental revenues at
the consolidated Asbury Commons and Hacienda Park joint ventures for the current
three-month period and as well as increases in interest income. Rental revenues
at Asbury Commons increased by $71,000 over the same period in the prior year
primarily due to increases in rental rates at the property over the past year
made possible by the strong Atlanta market. Rental income at Hacienda Park
increased by $193,000 for the current three-month period mainly due to the
leasing activity referred to above. Interest income increased due to the higher
average cash balances resulting from the receipt of the Richmond/Richland sale
proceeds.
The Partnership's share of unconsolidated ventures' income, prior to the
effect of the change in interest expense described above, decreased by $91,000
for the nine months ended December 31, 1995 primarily due to an increase in
combined depreciation and amortization expense. Depreciation and amortization
expense increased by $127,000 mainly due to an acceleration of the depreciation
rate at 625 North Michigan and additional capital improvements made to the
Loehmann's Plaza property during the past year.
Nine Months Ended December 31, 1995
The Partnership reported a net loss of $454,000 for the nine months ended
December 31, 1995, as compared to a net loss of $642,000 for the same period in
the prior year. This decrease in net loss for the current nine-month period
resulted from a decrease in operating loss of $1,381,000, which was partially
offset by a decrease in the Partnership's share of unconsolidated ventures'
income of $1,193,000. As discussed above in the results for the three months
ended December 31, 1995, the major reasons for these offsetting changes are the
change in the entity reporting the interest expense associated with the
borrowings secured by the Partnership's operating investment properties and
improvement in rental revenues at the consolidated Asbury Commons and Hacienda
Park joint ventures. The Partnership's operating loss, prior to the effect of
the change in interest expense, decreased by $509,000 for the nine months ended
December 31, 1995 primarily due to increases in rental revenues at Asbury
Commons and Hacienda Park. Revenues at the Asbury Commons Apartments increased
by $211,000 over the prior period primarily due to increases in rental rates at
the property over the past year made possible by the strong Atlanta market.
Rental income at Hacienda Park increased by $263,000 for the current nine-month
period mainly due to the leasing activity referred to above. In addition to the
increase in rental revenues from the consolidated properties, interest income
increased by $91,000 in the current period mainly due to an increase in the
average outstanding balance of the Partnership's cash reserves.
The Partnership's share of unconsolidated ventures' income, prior to the
effect of the change in interest expense described above, decreased by $209,000
for the nine months ended December 31, 1995 primarily due to increases in
combined depreciation and amortization and property operating expenses, which
were partially offset by increases in combined rental income and a decrease in
real estate tax expense. Depreciation and amortization expense increased by
$511,000 mainly due to an acceleration of the depreciation rate at 625 North
Michigan and additional capital improvements made to the Loehmann's Plaza
property during the past year. Property operating expenses increased by $115,000
for the current nine-month period due in part to additional repairs and
maintenance costs incurred at the 625 North Michigan property to seal and repair
a portion of the building's facade. Property operating expenses also increased
due to additional expenses incurred at Richland Terrace, Richmond Park and Treat
Commons II to prepare the properties for sale in the current year. Rental income
increased by $153,000 over the prior period mainly due to increased occupancy at
625 North Michigan and Treat Commons II as well as increased rental rates at
Richmond Gables.
<PAGE>
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 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 Equity Partners, Inc. and Properties
Associates 1986, L.P. ("PA1986"), which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in PaineWebber Equity Partners
Two Limited Partnership, PaineWebber, Second Equity Partners, Inc. and PA1986
(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 Equity
Partners Two Limited Partnership, also allege that following the sale of the
partnership interests, PaineWebber, Second Equity Partners, Inc. and PA1986
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Second Equity
Partners, Inc. and PA1986 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.
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 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 investors in PaineWebber Equity Partners Two
Limited Partnership. Pursuant to provisions of the Partnership Agreement and
other contractual obligations, under certain circumstances the Partnership may
be required to indemnify Second Equity Partners, Inc., PA1986 and their
affiliates for costs and liabilities in connection with this litigation.
Management has had discussions with representatives of PaineWebber and, based on
such discussions, the Partnership does not believe that PaineWebber intends to
invoke the aforementioned indemnifications in connection with the settlement of
this litigation.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
On November 16, 1995 a Current Report on Form 8-K was filed by the
registrant reporting the November 1, 1995 sale of the joint venture which owned
the Richmond Park and Richland Terrace Apartments.
On January 16, 1996 a Current Report on Form 8-K was filed by the
registrant reporting the December 29, 1995 sale of the joint venture which owned
the Treat Commons Phase II Apartments
<PAGE>
PAINEWEBBER EQUITY PARTNERS 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.
PAINEWEBBER EQUITY PARTNERS TWO
LIMITED PARTNERSHIP
By: Second Equity Partners, Inc.
Managing General Partner
By: /s/Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: February 13, 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 December 31, 1995
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> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 8,893
<SECURITIES> 0
<RECEIVABLES> 270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,441
<PP&E> 75,982
<DEPRECIATION> 10,022
<TOTAL-ASSETS> 76,788
<CURRENT-LIABILITIES> 906
<BONDS> 22,419
<COMMON> 0
0
0
<OTHER-SE> 53,114
<TOTAL-LIABILITY-AND-EQUITY> 76,788
<SALES> 0
<TOTAL-REVENUES> 4,263
<CGS> 0
<TOTAL-COSTS> 3,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,580
<INCOME-PRETAX> (454)
<INCOME-TAX> 0
<INCOME-CONTINUING> (454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (454)
<EPS-PRIMARY> (3.34)
<EPS-DILUTED> (3.34)
</TABLE>
