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 SEPTEMBER 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 : 0-15705
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
September 30, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,605 41,396
----------- ------------
50,413 50,204
Less accumulated depreciation (11,639) (10,781)
----------- -----------
38,774 39,423
Investments in unconsolidated joint
ventures, at equity 31,800 32,206
Cash and cash equivalents 5,419 5,126
Escrowed cash 287 150
Accounts receivable 334 261
Accounts receivable - affiliates 15 15
Net advances to consolidated ventures - 78
Prepaid expenses 3 29
Deferred rent receivable 816 731
Deferred expenses, net 631 703
---------- ----------
$ 78,079 $ 78,722
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 450 $ 283
Net advances from consolidated ventures 167 -
Tenant security deposits 121 96
Bonds payable 2,364 2,408
Mortgage notes payable 19,750 19,907
Other liabilities 349 349
Partners' capital 54,878 55,679
---------- ---------
$ 78,079 $ 78,722
========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 1,382 $1,167 $2,579 $2,266
Interest and other income 104 67 180 118
------- ------ ------ ------
1,486 1,234 2,759 2,384
Expenses:
Property operating expenses 318 305 666 627
Depreciation and amortization 532 408 1,013 797
Interest expense 483 517 998 1,023
General and administrative 141 196 279 328
Real estate taxes 93 138 209 237
------- ------- ------- -------
1,567 1,564 3,165 3,012
------- ------- ------- -------
Operating loss (81) (330) (406) (628)
Investment income:
Interest income on note receivable
from unconsolidated venture - 28 - 53
Partnership's share of
unconsolidated ventures' income 129 86 205 346
-------- -------- -------- ------
Net income (loss) $ 48 $ (216) $ (201) $ (229)
======== ======= ======== ======
Net income (loss) per 1,000 Limited
Partnership Units $ 0.35 $(1.59) $(1.48) $(1.69)
====== ====== ======= ======
Cash distributions per 1,000 Limited
Partnership Units $ 2.21 $ 4.72 $ 4.42 $ 9.44
====== ====== ====== ======
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 six months ended September 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1995 $ (527) $ 61,126
Cash distributions (13) (1,269)
Net loss (3) (226)
-------- ---------
Balance at September 30, 1995 $ (543) $ 59,631
======== =========
Balance at March 31, 1996 $ (494) $ 56,173
Cash distributions (6) (594)
Net loss (2) (199)
--------- ----------
Balance at September 30, 1996 $ (502) $ 55,380
========= ==========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(201) $ (229)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Partnership's share of unconsolidated
ventures' income (205) (346)
Depreciation and amortization 1,013 797
Amortization of deferred financings costs 25 19
Changes in assets and liabilities:
Escrowed cash (137) (113)
Accounts receivable (73) (37)
Accounts receivable - affiliates - (68)
Prepaid expenses 26 28
Deferred rent receivable (85) (89)
Deferred expenses (56) (26)
Accounts payable and accrued expenses 167 39
Advances to (from) consolidated ventures 245 64
Tenant security deposits 25 (5)
------ ------
Total adjustments 945 263
------ ------
Net cash provided by operating activities 744 34
------ ------
Cash flows from investing activities:
Distributions from unconsolidated ventures 1,358 1,271
Additional investments in unconsolidated ventures (747) (487)
Payment of leasing commissions (52) -
Additions to operating investment properties (209) (254)
------ -------
Net cash provided by investing activities 350 530
------ -------
Cash flows from financing activities:
Distributions to partners (600) (1,282)
Proceeds from issuance of loans - 2,000
Repayment of principal on long term debt (201) (157)
------- -------
Net cash provided by (used in)
financing activities (801) 561
------- -------
Net increase in cash and cash equivalents 293 1,125
Cash and cash equivalents, beginning of period 5,126 1,827
------- -------
Cash and cash equivalents, end of period $ 5,419 $ 2,952
======= =======
Cash paid during the period for interest $ 946 $ 1,029
======= =======
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, 1996.
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 six months ended
September 30, 1996 and 1995 is $106,000 and $132,000, 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 six months
ended September 30, 1996 and 1995 is $7,000 and $5,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
Accounts receivable affiliates at September 30, 1996 and March 31, 1996
consist of $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 September 30, 1996, the Partnership had investments in three
unconsolidated joint venture partnerships (five at September 30, 1995) which
own operating investment properties as described further in the
Partnership's Annual Report. On November 2, 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 a $2 million short-term loan
collateralized by the Partnership's share of the sale proceeds. 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 $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 $7.3 million. The Partnership
distributed approximately $3.1 million of these net sale proceeds to the
Limited Partners in a Special Distribution made on February 15, 1996. The
remaining sale proceeds of approximately $1 million were 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 six months ended June 30, 1996 and 1995
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $2,419 $3,096 $4,860 $6,162
Interest and other income 10 54 48 182
------ ------ ------ ------
2,429 3,150 4,908 6,344
Expenses:
Property operating expenses 682 989 1,460 1,874
Real estate taxes 571 694 1,113 1,388
Interest expense 181 349 402 725
Depreciation and amortization 805 1,026 1,611 1,938
------- ------- ------- -------
2,239 3,058 4,586 5,925
------- ------- ------- -------
Net income $ 190 $ 92 $ 322 $ 419
======= ======= ======= =======
Net income:
Partnership's share of
combined income $ 144 $ 106 $ 234 $ 386
Co-venturers' share of
combined income (losses) 46 (14) 88 33
-------- ------- ------ -------
$ 190 $ 92 $ 322 $ 419
======= ======= ====== =======
Reconciliation of Partnership's Share of Operations
For the three and six months ended June 30, 1996 and 1995
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Partnership's share of operations,
as shown above $ 144 $ 106 $ 234 $ 386
Amortization of excess basis (15) (20) (29) (40)
------ ------ ------ ------
Partnership's share of
unconsolidated ventures'
income $ 129 $ 86 $ 205 $ 346
====== ====== ====== ======
4. Operating Investment Properties
At September 30, 1996, the Partnership's balance sheet includes three
operating investment properties owned by joint ventures in which the
Partnership has a controlling interest; 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.
<PAGE>
The following is a combined summary of property operating expenses for
Saratoga Center and EG&G Plaza, Asbury Commons Apartments and the West
Ashley Shoppes shopping center for the three and six months ended June 30,
1996 and 1995 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 131 $ 89 $ 227 $ 227
Utilities 43 47 90 98
Salaries and related costs 40 47 82 80
Insurance 16 15 33 31
Management fees 40 36 79 73
Administrative and other 48 71 155 118
------ ------ ------ -----
$ 318 $ 305 $ 666 $ 627
====== ====== ====== =====
5. Notes Payable
Notes payable on the consolidated balance sheet of the Partnership at
September 30, 1996 and March 31, 1996 consist of the following (in
thousands):
September 30 March 31
------------ --------
9.125% mortgage note payable by
the Partnership to an insurance
company secured by the 625 North
Michigan Avenue operating investment
property. The terms of the note were
modified effective May 31, 1994. The
loan requires monthly principal and
interest payments of $55 through
maturity on May 1, 1999. In addition,
the loan requires monthly deposits to
a capital improvement escrow. The
fair value of the mortgage note
approximated its carrying value at
September 30, 1996 and March 31,
1996. $ 9,482 $ 9,542
8.75% mortgage note payable by
the consolidated Atlanta Asbury
Partnership to an insurance company
secured by the Asbury Commons
operating investment property. The
loan requires monthly principal and
interest payments of $88 through
maturity on October 15, 2001. The
fair value of the mortgage note
approximated its carrying value at
June 30, 1996 and December 31, 1995. 6,820 6,897
9.04% mortgage note payable by
the consolidated Hacienda Park
Associates 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. The fair value of the mortgage
note approximated its carrying value
at June 30, 1996 and December 31,
1995. 3,448 3,468
------- --------
$19,750 $ 19,907
======= ========
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 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 the TCR Walnut Creek Limited Partnership joint venture. The $7.4
million loan was secured by the Treat Commons Phase II apartment complex,
carried an annual interest rate of 8.54% and was scheduled to mature in 7
years. As discussed in Note 5, the Treat Commons property was sold and this
loan obligation was repaid in full on December 29, 1995. 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 terms of which are set forth above. 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 obtained by Richmond Gables Associates and secured by The
Gables Apartments. The new $5.2 million loan bears interest at 8.72% and
matures in 7 years. The loan requires monthly principal and interest
payments of $43,000. On February 9, 1995, the Partnership repaid the 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 Associates, the terms of which
are set forth above, along with additional funds contributed by the
Partnership. 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 $34,000. Legal liability for the repayment of the new
mortgage loans secured by the Gables and Loehmann's Plaza properties rests
with the respective unconsolidated joint ventures. Accordingly the mortgage
loan liabilities are recorded on the books of these unconsolidated joint
ventures. The Partnership has indemnified Richmond Gables Associates and
Daniel/Metcalf Associates Partnership and the related co-venture partners,
against all liabilities, claims and expenses associated with these
borrowings.
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 and mature in years 2004 through 2017. In the
event the operating investment property is sold, Hacienda Park Associates
will no longer be liable for the bond assessments.
7. Contingencies
As discussed in detail in the Partnership's Annual Report for the year
ended March 31, 1996, 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>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As a result of the overall improvement in operations at the Partnership's
investment properties, the Partnership expects to increase the annual
distribution rate. This potential adjustment would be effective for the
distribution to be paid on May 15, 1997. Management is finalizing its review of
the 1997 operating budgets and determining the capital needs of the
Partnership's properties. Once this review is complete, management will
determine the amount of the proposed increased distribution. As discussed in the
Annual Report, the Partnership reduced its distribution rate to a level of 1% on
remaining invested capital effective for the payment made on February 15, 1996
for the quarter ended December 31, 1995 as a result of the reduction in
Partnership cash flow resulting from the sale of the Richmond Park, Richland
Terrace and Treat Commons II properties during the third quarter of fiscal 1996.
During the quarter ended September 30,1996, management completed a major
capital enhancement program at Loehmann's Plaza. The improvement program cost
approximately $2 million and was necessary in order for the property to remain
competitive in its market. As part of a planned 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 rental rate. On November 7, 1995, management completed the negotiation of
an agreement whereby Loehmann's consented to terminate its lease, vacate the
property and relinquish control of its space to the Partnership's joint venture
in return for a payment of $75,000. Loehmann's Plaza was 79% leased as of
September 30, 1996, an increase from 74% as of the end of the first quarter.
Management is currently in discussions with a number of potential replacement
anchor tenants for the vacant Loehmann's space. A lease with a national or
strong regional 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. A portion of the funds required
to pay for the capital improvement work at Loehmann's Plaza was expected to come
from a $550,000 Renovation and Occupancy Escrow withheld by the lender from the
proceeds of a $4 million loan secured by the property which was obtained in
February 1995. Funds were to 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 satisfied certain requirements, which included specified
occupancy and rental income thresholds. If such requirements were not met within
18 months from the date of the loan closing, the lender would have the right to
apply the balance of the escrow account to the payment of loan principal. In
addition, the lender required that the Partnership unconditionally guarantee up
to $1,400,000 of the loan obligation. This guaranty was to be released in the
event that the venture satisfied the requirement for the release of the
Renovation and Occupancy Escrow funds. The Partnership did not satisfy the
requirements for the release of these escrow funds by the required date in
August 1996. As a result, these funds are expected to be applied against the
mortgage loan payable obligation during fiscal 1997, and the $1.4 million
recourse obligation will likely remain in place until the property is sold or
refinanced. The funds required to pay for the expected re-leasing costs at
Loehmann's Plaza will be provided by the proceeds retained by the Partnership
from the sales of the Richmond Park, Richland Terrace and Treat Commons II
properties in fiscal 1996.
A significant amount of funds may also be needed to pay for tenant
improvement costs to re-lease the vacant 36,000 square foot 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. West Ashley's other major anchor
tenant, Phar-Mor, emerged from the protection of Chapter 11 of the U.S.
Bankruptcy Code during fiscal 1996. While Phar-Mor closed a number of its stores
nationwide as part of its bankruptcy reorganization, the company remains
obligated under a lease at West Ashley which runs through August 2002. On
September 9, 1996, Phar-Mor announced plans to merge with ShopKo, another major
pharmacy store chain. Prior to the merger, Phar-Mor's strategy since emerging
from bankruptcy was to "rightsize" its stores down to 40,000 square feet. Since
the announced plans to merge with Shopko, Phar-Mor has announced that its stores
will be approximately 55,000 square feet, which is in line with the size of the
existing Phar-Mor store at West Ashley Shoppes. With these new developments, it
does not appear that Phar-Mor will continue to pursue the relocation scenario to
the former Children's Palace space as discussed in the first quarter report. The
property's leasing team is currently refocusing its efforts on finding another
national credit tenant or tenants to fill the vacant anchor space at West Ashley
Shoppes.
The 625 North Michigan Office Building remained 89% occupied as of
September 30, 1996, unchanged from the prior quarter. Within the next twelve
months, leases with seven tenants at 625 North Michigan, totalling 27,353 square
feet, will expire. One of these tenants occupies 15,639 square feet under a
lease that expires in December 1996. Efforts are currently underway by the
property's leasing team to retain this tenant. However, management is aware that
this tenant is considering other locations and may not renew its lease at 625
North Michigan. 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, capital improvement and leasing costs at the 625 North
Michigan are expected to continue to be significant for the foreseeable future.
With the renovation to the building's facade now competed, the modernization of
the elevator control systems is now set to begin with work scheduled to continue
for approximately one year at an estimated total cost of $700,000. Other
significant capital improvements planned at 625 North Michigan over the next two
years include common area enhancements, and a possible lobby area retail space
expansion and renovation.
As previously reported, during fiscal 1995 the Partnership secured a new
tenant, under a seven-year lease, for a vacant 31,000 square foot building at
Hacienda Park. During the first quarter of fiscal 1996, the Partnership leased
an additional 10,808 square foot space at Hacienda Park to this same tenant.
During the third quarter of fiscal 1996, the Partnership leased the remaining
10,027 square feet of available space at Hacienda Park to another existing
tenant. In addition, during fiscal 1996 a 31,500 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 has
been fully leased since the third quarter of fiscal 1996 with no leases due to
expire until February 1998.
The average occupancy level at Asbury Commons Apartments in Atlanta,
Georgia, was unchanged at 93% for the quarter and is comparable to other similar
quality apartment communities in the market. During the quarter, the Summer
Olympic Games were held in Atlanta and Asbury Commons benefited from the premium
rental rates paid by short-term tenants during this period. Even though
thousands of temporary employees moved out of Atlanta after the Olympics, the
overall economy remains strong. However, the positive impact of the strong
regional and local economy on multi-family properties is being offset by the
development of a substantial number of apartments in the market. As a
consequence of the new building construction, rental rates and occupancy levels
are projected to remain flat for the next 18 months as the new apartments are
leased. During the quarter, an analysis of the buildings' exterior wood-framing
sills and trim for evidence of deterioration was begun. After the exterior wood
trim and wood-framing replacement programs are completed, the exteriors of the
buildings will be painted.
The Partnership elected early application of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) in fiscal 1996.
In accordance with SFAS 121, an impairment loss with respect to an operating
investment property is recognized when the sum of the expected future net cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds its fair value, where fair value is defined
as the amount at which the asset could be bought or sold in a current
transaction between willing parties, that is other than a forced or liquidation
sale. Based on management's analysis in the fourth quarter of fiscal 1996, the
estimated fair values of the Hacienda Park, 625 North Michigan, Loehmann's Plaza
and West Ashley Shoppes properties were below their net carrying amounts as of
December 31, 1995. Management's estimates of undiscounted cash flows for all
four properties indicated that such carrying amounts were expected to be
recovered, but, in the case of 625 North Michigan and Hacienda Park, the
reversion values could be less than the carrying amounts at the time of
disposition. As a result of such assessment, the 625 North Michigan joint
venture commenced recording an additional annual depreciation charge of $350,000
and the Hacienda Park joint venture commenced recording an additional annual
depreciation charge of $250,000 in calendar 1995. Both adjustments were
reflected in the Partnership's consolidated financial statements effective for
the fourth quarter of fiscal 1996. Such annual charges will continue to be
recorded in future periods. Based on management's analysis, no changes to the
depreciation on Loehmann's Plaza or West Ashley Shoppes were required.
At September 30, 1996, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,419,000. Such cash
and cash equivalent 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 September 30, 1996
The Partnership reported net income of $48,000 for the three months ended
September 30, 1996, as compared to a net loss of $216,000 for the same period in
the prior year. This favorable change in the Partnership's net operating results
is primarily attributable to a decrease in the Partnership's operating loss of
$249,000 and an increase in the Partnership's share of unconsolidated ventures'
income of $43,000. The Partnership's operating loss decreased primarily due to
an increase in rental income and expense reimbursements attributable mainly to
an increase in average occupancy at the Hacienda Business Park for the current
three-month period. The increase in depreciation expense caused by the
accelerated depreciation on the Hacienda Business Park, as discussed further
above, was offset by decreases in the general and administrative, real estate
tax and interest expense categories. Interest expense decreased as a result of
the commencement of scheduled monthly principal payments as well as interest
attributable to the $2 million short term loan which was outstanding in the
prior year. Real estate taxes decreased due to a reassessment that lowered the
expense of the Hacienda Park joint venture for the current three-month period.
General and administrative expenses decreased mainly as a result of additional
legal costs in the prior three-month period associated with certain refinancing
transactions as well as a reduction in other professional fees.
The Partnership's share of unconsolidated ventures' income increased due to the
improved operating results at all three remaining unconsolidated ventures. The
major portion of the increase in the Partnership's share of unconsolidated
ventures' income is attributable to lower real estate tax expense incurred at
the 625 North Michigan joint venture during the current three-month period. The
venture's real estate taxes decreased due to a reassessment that lowered the
real estate tax bill for the current three-month period. Small increases in
total revenues at Loehmann's Plaza and The Gables also contributed to the
favorable change in the Partnership's share of unconsolidated ventures' income.
Six Months Ended September 30, 1996
The Partnership reported a net loss of $201,000 for the six months ended
September 30, 1996, as compared to a net loss of $229,000 for the same period in
the prior year. This decrease in the Partnership's net loss resulted from a
$222,000 decrease in the Partnership's operating loss which was partially offset
by a $141,000 decrease in the Partnership's share of unconsolidated ventures'
income and a $53,000 decrease in interest income on notes receivable from
unconsolidated ventures. A major portion of the decrease in the Partnership's
share of unconsolidated ventures' income, as well as the decrease in interest
income on notes receivable from unconsolidated ventures, resulted from income
attributable to the Richmond Park/Richland Terrace and Treat Commons II joint
ventures which sold their operating properties during the third quarter of
fiscal 1996. Increases in property operating expenses at the Loehmann's Plaza
and 625 North Michigan joint ventures during the current six-month period also
contributed to the decrease in the Partnership's share of unconsolidated
ventures' income. Property operating expenses at Loehmann's Plaza increased
mainly due to additional repairs and maintenance expenses and depreciation
charges associated with the recently completed enhancement programs discussed
further above. Property operating expenses at 625 North Michigan increased
mainly due to additional repairs and maintenance expenditures associated with
the renovation of the building's facade incurred in the current six month
period. An increase in rental income from The Gables Apartments and a decrease
in real estate taxes at 625 North Michigan partially offset the impact of these
negative changes in the current six-month period. Rental income from The Gables
Apartments increased by approximately 6% over the same period in the prior year
due to increases in rental rates over the past year attributable to the
strengthening Richmond apartment market.
The Partnership's operating loss decreased for the six months ended
September 30, 1996, when compared to the same period in the prior year, due to a
$375,000 increase total revenues, which was partially offset by a $153,000
increase in total expenses. Total revenues increased primarily due to an
increase in rental income and expense reimbursements from the consolidated joint
ventures as well as an increase in interest income. Rental income and expense
reimbursements increased mainly due to an increase in average occupancy at the
Hacienda Business Park and higher average rental rates at the Asbury Commons
Apartments during the current six-month period. Interest income increased due to
an increase in the average outstanding cash reserve balances resulting from the
retention of a portion of the sales proceeds from the Richmond Park/Richland
Terrace and Treat Commons II properties. Total expenses increased mainly due to
higher depreciation and amortization charges related to the consolidated joint
ventures in the current six-month period. The increase in depreciation and
amortization expense is primarily attributable to the accelerated depreciation
on the Hacienda Business Park property, as discussed further above. Decreases in
interest expense, general and administrative expenses and real estate taxes
partially offset the higher depreciation and amortization charges. Interest
expense decreased by $25,000 primarily due to scheduled principal amortization.
General and administrative expenses declined mainly as a result of a reduction
in certain professional fees. Real estate taxes decreased due to a reassessment
that lowered the expense of the Hacienda Park joint venture for the current
six-month period.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As discussed in 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 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.
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 is scheduled to continue in November 1996.
With regard to the Abbate action described in the Annual Report on Form
10-K for the year ended March 31, 1996, in September 1996 the court dismissed
many of the plaintiffs' claims as barred by the applicable statutes of
limitations. The eventual outcome of this litigation and the potential impact,
if any, on the Partnership's unitholders remains undeterminable at the present
time.
The status of the other litigation involving the Partnership and its
General Partners remains unchanged from the description provided in the
Partnership's Annual Report on Form 10-K for the year 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. However, PaineWebber has agreed not to seek indemnificaiton for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
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:
No Current Reports on Form 8-K were filed during the period covered by this
report.
<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: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the six months ended September
30, 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> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 5,419
<SECURITIES> 0
<RECEIVABLES> 349
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,058
<PP&E> 82,213
<DEPRECIATION> 11,639
<TOTAL-ASSETS> 78,079
<CURRENT-LIABILITIES> 738
<BONDS> 22,114
0
0
<COMMON> 0
<OTHER-SE> 54,878
<TOTAL-LIABILITY-AND-EQUITY> 78,079
<SALES> 0
<TOTAL-REVENUES> 2,964
<CGS> 0
<TOTAL-COSTS> 2,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 998
<INCOME-PRETAX> (201)
<INCOME-TAX> 0
<INCOME-CONTINUING> (201)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (201)
<EPS-PRIMARY> (1.48)
<EPS-DILUTED> (1.48)
</TABLE>
