UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number : 0-15705
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
June 30, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
June 30 March 31
------- --------
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,508 41,396
-------- --------
50,316 50,204
Less accumulated depreciation (11,135) (10,781)
-------- --------
39,181 39,423
Investments in unconsolidated joint ventures,
at equity 32,194 32,206
Cash and cash equivalents 5,334 5,126
Escrowed cash 207 150
Accounts receivable 112 261
Accounts receivable - affiliates 15 15
Net advances to consolidated ventures - 78
Prepaid expenses 11 29
Deferred rent receivable 795 731
Deferred expenses, net 628 703
-------- --------
$ 78,477 $ 78,722
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 377 $ 283
Net advances from consolidated ventures 268 -
Tenant security deposits 114 96
Bonds payable 2,414 2,408
Mortgage notes payable 19,827 19,907
Other liabilities 349 349
Partners' capital 55,128 55,679
-------- --------
$ 78,477 $ 78,722
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
1996 1995
---- ----
Revenues:
Rental income and expense
reimbursements $ 1,197 $ 1,099
Interest and other income 76 51
-------- --------
1,273 1,150
Expenses:
Property operating expenses 348 322
Depreciation and amortization 481 389
Interest expense 515 506
General and administrative 138 132
Real estate taxes 116 99
-------- --------
1,598 1,448
Operating loss (325) (298)
Investment income:
Interest income on note receivable
from unconsolidated venture - 25
Partnership's share of unconsolidated
ventures' income 76 230
-------- --------
Net loss $ (249) $ (43)
========== =======
Net loss per 1,000 Limited
Partnership Units $ (1.86) $ (0.32)
========= ========
Cash distributions per 1,000 Limited
Partnership Units $ 2.21 $ 4.72
======= ======
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 three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1995 $ (527) $ 61,126
Cash distributions (7) (634)
Net loss (1) (42)
-------- ---------
Balance at June 30, 1995 $ (535) $ 60,450
======== =========
Balance at March 31, 1996 $ (494) $ 56,173
Cash distributions (3) (299)
Net loss (2) (247)
-------- ---------
Balance at June 30, 1996 $ (499) $ 55,627
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (249) $ (43)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Partnership's share of unconsolidated
ventures' income (76) (230)
Depreciation and amortization 481 389
Amortization of deferred financings costs 16 5
Changes in assets and liabilities:
Escrowed cash (57) (67)
Accounts receivable 149 (43)
Accounts receivable - affiliates - (2)
Prepaid expenses 18 (4)
Deferred rent receivable (64) (48)
Deferred expenses (68) 41
Accounts payable and accrued expenses 94 (51)
Advances to (from) consolidated ventures 346 (29)
Tenant security deposits 18 (2)
Other liabilities - 1
---- ----
Total adjustments 857 (40)
---- ----
Net cash provided by (used in)
operating activities 608 (83)
---- ----
Cash flows from investing activities:
Distributions from unconsolidated ventures 600 629
Additional investments in unconsolidated ventures (512) (247)
Payment of leasing commissions - -
Additions to operating investment properties (112) (45)
---- ----
Net cash provided by (used in)
investing activities (24) 337
---- ----
Cash flows from financing activities:
Distributions to partners (302) (641)
Repayment of principal on long term debt (74) (67)
---- ----
Net cash used in financing activities (376) (708)
---- ----
Net increase (decrease) in cash and cash equivalents 208 (454)
Cash and cash equivalents, beginning of period 5,126 1,827
---- -----
Cash and cash equivalents, end of period $5,334 $ 1,373
====== =======
Cash paid during the period for interest $ 476 $ 549
======= =======
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 three months ended
June 30, 1996 and 1995 is $65,000 and $70,000, 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 three months
ended June 30, 1996 and 1995 is $7,000 and $1,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
Accounts receivable - affiliates at June 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 June 30, 1996, the Partnership had investments in three
unconsolidated joint venture partnerships (five at June 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
collaterilized 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 months ended March 31, 1996 and 1995 (in thousands)
1996 1995
---- ----
Revenues:
Rental revenues and expense recoveries $ 2,319 $3,021
Interest and other income 160 207
2,479 3,228
Expenses:
Property operating expenses 778 942
Real estate taxes 542 693
Interest expense 221 389
Depreciation and amortization 806 911
-------- -------
2,347 2,935
-------- -------
Net income $ 132 $ 293
======== ========
Net income:
Partnership's share of
combined income $ 90 $ 251
Co-venturers' share of
combined income 42 42
-------- -------
$ 132 $ 293
======= ========
Reconciliation of Partnership's Share of Operations
For the three months ended June 30, 1996 and 1995
(in thousands)
1996 1995
---- ----
Partnership's share of operations,
as shown above $ 90 $ 251
Amortization of excess basis (14) (21)
-------- -------
Partnership's share of unconsolidated
ventures' income $ 76 $ 230
======= =======
4. Operating Investment Properties
At June 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 West Ashley
Shoppes shopping center for the three months ended March 31, 1996 and 1995
(in thousands):
1996 1995
---- -----
Property operating expenses:
Repairs and maintenance $ 96 $ 106
Utilities 47 47
Salaries and related costs 42 47
Insurance 17 15
Management fees 39 36
Administrative and other 107 71
------- -------
$ 348 $ 322
======= =======
5. Notes Payable
Notes payable on the consolidated balance sheet of the Partnership at
June 30, 1996 and March 31, 1996 consist of the following (in thousands):
June 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 (see
discussion below). 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. The fair value
of the mortgage note approximated its
carrying value at June 30, 1996 and
March 31, 1996. $ 9,512 $ 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 (see discussion below). 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 March 31, 1996 and
December 31, 1995. 6,843 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 (see discussion
below). 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 March
31, 1996 and December 31, 1995. 3,472 3,468
-------- --------
$ 19,827 $ 19,907
========= ========
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 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 $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 $88,000. 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 along with additional funds contributed by the Partnership. The $3.5
million loan is secured by the Hacienda Business Park property, carries an
annual interest rate of 9.04% and matures in 7 years. The loan requires monthly
principal and interest payments of $36,000. 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. The net
proceeds of these loans were recorded as distributions to the Partnership by the
joint ventures in fiscal 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 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 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. Distributions are expected to remain at this level until the
leasing status of the Partnership's commercial properties has been stabilized.
Management is in the process of completing a major capital enhancement and
repositioning program at Loehmann's Plaza. The improvement program, which was
substantially completed as of the end of the first fiscal quarter, is expected
to cost approximately $2 million and 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 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 74% leased as of June
30, 1996. 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 and would be in addition
to the $2 million for the capital enhancement and repositioning program referred
to above. 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 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 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. It
appears unlikely that the Partnership will 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 remaining portion of the improvement program and 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. During
fiscal 1996, management of Phar-Mor inquired about the possibility of downsizing
their store at West Ashley by vacating their current 52,000 square foot space
and relocating into the former Children's Palace space. During the current
quarter, management signed a letter of intent with a national credit tenant
which would lease the current Phar-Mor space if the downsizing and relocation of
the Phar-Mor store at West Ashley can be accomplished. Management believes that
securing this new tenant in conjunction with a relocation of the Phar-Mor store
into the smaller vacant anchor space would significantly enhance the value of
the shopping center. However, there are no assurances that Phar-Mor will agree
to move to the Children's Palace space and restructure its lease on terms that
are acceptable to the Partnership.
Capital improvement and leasing costs at the 625 North Michigan Office
Building 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. Significant capital improvements are planned at 625 North Michigan over
the next two years, including the completion of facade repairs, common area
enhancements, elevator control system upgrading and a possible lobby area retail
space expansion and renovation. The 625 North Michigan Office Building was 89%
occupied as of June 30, 1996.
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 was
fully leased as of June 30, 1996. No leases are due to expire at this property
until February 1998.
While market values for commercial office buildings have generally
stabilized over the past two years, such values continue to be depressed due to
the residual effects of the overbuilding which occurred in the late 1980's and
the trend toward corporate downsizing and restructurings which occurred in the
wake of the last national recession. In addition, at the present time real
estate values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. As a result of these market conditions,
the current estimated market values of the Partnership's four commercial
properties are significantly below their acquisition prices. In light of such
circumstances, in fiscal 1996 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 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.
The Partnership has no current plans to market any of its remaining
operating investment properties for sale. As discussed further above, the market
for office properties in general has just begun to stabilize after several years
of decline and the market for retail properties is considered weak at the
present time. For these reasons, the Partnership's strategy, at present, would
be to hold the office and retail properties until the respective markets recover
sufficiently to provide favorable sales opportunities. Notwithstanding this, it
is unlikely that the values of the Partnership's office and retail properties
will fully recover to their levels of the mid-to-late 1980's within the
Partnership's remaining holding period. With respect to the Partnership's two
apartment properties, while the market for sales of multi-family properties in
most markets has been strong over the past two years, the Gables and Asbury
Commons properties, which represent a combined 18% of the original investment
portfolio, generate a stable cash flow which contributes to the payment of the
Partnership's operating costs and operating cash flow distributions. As a
result, the Partnership will most likely delay any active sales efforts for
these two apartment properties until conditions become more favorable for
potential dispositions of the four commercial properties. Management's hold
versus sell decisions will continue to be based on an assessment of the best
expected overall returns to the Limited Partners.
At June 30, 1996, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $5,334,000. 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 June 30, 1996
The Partnership reported a net loss of $249,000 for the three months ended
June 30, 1996, as compared to a net loss of $43,000 for the same period in the
prior year. This increase in the Partnership's net loss for the first quarter of
fiscal 1997 resulted from a decrease in the Partnership's share of
unconsolidated ventures' income of $154,000, an increase in the Partnership's
operating loss of $27,000 and a decrease in interest income on notes receivable
from unconsolidated ventures of $25,000. 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. An increase in property operating expenses at Loehmann's Plaza
and the 625 North Michigan Office Building also contributed to the decrease in
the Partnership's share of unconsolidated ventures' income for the current
three-month period. Property operating expenses at Loehmann's Plaza increased
mainly due to additional repair and maintenance and depreciation charges
associated with the capital improvement program currently in progress, as
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 which is currently in
progress. 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
increased expenses in the current three-month period. Rental income from The
Gables Apartments increased by approximately 11% over the same period in the
prior year due to increases in rental rates over the past year attributable to
the strong Richmond apartment market.
The Partnership's operating loss increased for the three months ended June
30, 1996, when compared to the same period in the prior year, due to an increase
in total expenses of $150,000, which was partially offset by an increase in
total revenues of $123,000. The increase in total expenses is mainly
attributable to higher depreciation and amortization charges related to the
consolidated joint ventures in the current three-month period. Depreciation and
amortization expense increased mainly due to the accelerated depreciation on the
Hacienda Business Park, as discussed further above and in the Partnership's
Annual Report. The improvement in revenues was mainly the result of an increase
in rental income and expense reimbursements from the consolidated joint
ventures. Rental income increased primarily due to an increase in average
occupancy at the Hacienda Business Park and higher average rental rates at the
Asbury Commons Apartments for the current three-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 has been scheduled for October 25, 1996.
The status of the other litigation involving the Partnership and its
General Partners remains unchanged from the description provided in the
Partnership's 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. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no provision
for any liability which could result from the eventual outcome of these matters
has been made in the accompanying financial statements of the Partnership.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
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: August 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the three months ended June 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 5334
<SECURITIES> 0
<RECEIVABLES> 127
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5679
<PP&E> 82510
<DEPRECIATION> 11135
<TOTAL-ASSETS> 78477
<CURRENT-LIABILITIES> 759
<BONDS> 22241
0
0
<COMMON> 0
<OTHER-SE> 55128
<TOTAL-LIABILITY-AND-EQUITY> 78477
<SALES> 0
<TOTAL-REVENUES> 1349
<CGS> 0
<TOTAL-COSTS> 1083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515
<INCOME-PRETAX> (249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (249)
<EPS-PRIMARY> (1.86)
<EPS-DILUTED> (1.86)
</TABLE>
