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, 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
December 31, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Operating investment properties:
Land $ 8,808 $ 8,808
Building and improvements 41,753 41,396
--------- ---------
50,561 50,204
Less accumulated depreciation (12,230) (10,781)
--------- ---------
38,331 39,423
Investments in unconsolidated joint
ventures, at equity 31,752 32,206
Cash and cash equivalents 5,511 5,126
Escrowed cash 263 150
Accounts receivable 208 261
Accounts receivable - affiliates 15 15
Net advances to consolidated ventures - 78
Prepaid expenses 54 29
Deferred rent receivable 798 731
Deferred expenses, net 706 703
--------- ----------
$ 77,638 $ 78,722
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 521 $ 283
Net advances from consolidated ventures 251 -
Tenant security deposits 116 96
Bonds payable 2,364 2,408
Mortgage notes payable 19,683 19,907
Other liabilities 349 349
Partners' capital 54,354 55,679
----------- ----------
$ 77,638 $ 78,722
=========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 1,194 $ 1,166 $ 3,773 $3,432
Interest and other income 138 166 318 284
------- ------- ------- ------
1,332 1,332 4,091 3,716
Expenses:
Property operating expenses 372 381 1,038 1,008
Depreciation and amortization 518 409 1,531 1,206
Interest expense 494 557 1,492 1,580
General and administrative 93 245 372 573
Real estate taxes 146 113 355 350
------- ------- ------- ------
1,623 1,705 4,788 4,717
------- ------- ------- ------
Operating loss (291) (373) (697) (1,001)
Investment income:
Interest income on note
receivable from unconsolidated
venture - 27 - 80
Partnership's share of
unconsolidated
ventures' income 67 121 272 467
------- ------- ------- ------
Net loss $ (224) $ (225) $ (425) $ (454)
======= ======= ======= ======
Net loss per 1,000 Limited
Partnership Units $(1.65) $(1.65) $(3.13) $(3.34)
====== ====== ====== ======
Cash distributions per 1,000 Limited
Partnership Units $ 2.21 $42.72 $ 6.63 $52.16
======= ====== ====== ======
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 September 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
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
======== =========
Balance at March 31, 1996 $ (494) $ 56,173
Cash distributions (9) (891)
Net loss (4) (421)
-------- ---------
Balance at December 31, 1996 $ (507) $ 54,861
======== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (425) $ (454)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Partnership's share of unconsolidated
ventures' income (272) (467)
Depreciation and amortization 1,531 1,206
Amortization of deferred financings costs 24 28
Changes in assets and liabilities:
Escrowed cash (113) (192)
Accounts receivable 53 7
Accounts receivable - affiliates - (70)
Prepaid expenses (25) (1)
Deferred rent receivable (67) (228)
Deferred expenses (57) 53
Accounts payable and accrued expenses 238 183
Advances to (from) consolidated ventures 329 165
Tenant security deposits 20 (8)
Other liabilities - 1
------- -------
Total adjustments 1,661 677
------- -------
Net cash provided by operating activities 1,236 223
------- -------
Cash flows from investing activities:
Distributions from unconsolidated ventures 1,966 15,868
Additional investments in unconsolidated ventures (1,240) (1,401)
Payment of leasing commissions (52) (65)
Additions to operating investment properties (357) (312)
------- -------
Net cash provided by investing activities 317 14,090
------- -------
Cash flows from financing activities:
Distributions to partners (900) (7,031)
Proceeds from issuance of loans - 2,000
Repayment of principal on long term debt (268) (2,216)
------- -------
Net cash used in financing activities (1,168) (7,247)
------- -------
Net increase in cash and cash equivalents 385 7,066
Cash and cash equivalents, beginning of period 5,126 1,827
------- -------
Cash and cash equivalents, end of period $ 5,511 $ 8,893
======= =======
Cash paid during the period for interest $ 1,493 $ 1,553
====== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
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.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1996 and March 31,
1996 and revenues and expenses for each of the three- and nine-month
periods ended December 31, 1996 and 1995. Actual results could differ from
the estimates and assumptions used.
2. Related Party Transactions
Included in general and administrative expenses for the nine months
ended December 31, 1996 and 1995 is $164,000 and $195,000, 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, 1996 and 1995 is $13,000 and $4,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
Accounts receivable - affiliates at December 31, 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 December 31, 1996, the Partnership had investments in three
unconsolidated joint venture partnerships which own operating investment
properties as described further in the Partnership's Annual Report. As of
March 31, 1995, the Partnership had investments in five unconsolidated
joint venture partnerships. 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 for potential reinvestment in the Partnership's
commercial properties.
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.
<PAGE>
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows (the three- and nine-month periods in the
prior year include the results of operations of the Richmond/Richland and
Treat Commons joint ventures).
Condensed Combined Summary of Operations
For the three and nine months ended September 30, 1996 and 1995
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $2,368 $3,200 $7,228 $9,362
Interest and other income 20 36 68 218
------ ------ ------ ------
2,388 3,236 7,296 9,580
Expenses:
Property operating expenses 675 1,044 2,135 2,918
Real estate taxes 545 706 1,658 2,094
Interest expense 200 383 602 1,108
Depreciation and amortization 812 959 2,423 2,897
------ ------ ------ ------
2,232 3,092 6,818 9,017
------ ------ ------ ------
Net income $ 156 $ 144 $ 478 $ 563
====== ====== ====== ======
Net income:
Partnership's share of
combined income $ 82 $ 141 $ 316 $ 527
Co-venturers' share of
combined income 74 3 162 36
------- ------- ------- ------
$ 156 $ 144 $ 478 $ 563
======= ======= ====== ======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended September 30, 1996 and 1995
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Partnership's share of operations,
as shown above $ 82 $ 141 $ 316 $ 527
Amortization of excess basis (15) (20) (44) (60)
------ ------ ------- ------
Partnership's share of
unconsolidated
ventures' income $ 67 $ 121 $ 272 $ 467
====== ====== ======= ======
<PAGE>
4. Operating Investment Properties
The Partnership's balance sheets include 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.
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 nine months ended
September 30, 1996 and 1995 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 128 $ 158 $ 355 $ 385
Utilities 59 52 149 150
Salaries and related costs 51 48 133 128
Insurance 17 17 50 48
Management fees 44 38 123 111
Administrative and other 73 68 228 186
------ ------ ------- -------
$ 372 $ 381 $ 1,038 $ 1,008
====== ====== ======= =======
5. 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.
<PAGE>
6. Mortgage Notes Payable
Mortgage notes payable on the consolidated balance sheets of the
Partnership at December 31, 1996 and March 31, 1996 consist of the following
(in thousands):
December 31 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
December 31, 1996 and March 31, 1996. $ 9,448 $ 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
September 30, 1996 and December 31,
1995. 6,798 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
September 30, 1996 and December 31,
1995. 3,437 3,468
-------- --------
$ 19,683 $ 19,907
======== ========
On November 7, 1994, the Partnership repaid certain outstanding 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 10, 1995, the Partnership repaid an outstanding 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.
7. Contingencies
As discussed in more detail in the 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 an overall improvement in operations at the Partnership's
investment properties, the Partnership expects to increase its annual
distribution rate from 1% to 2.5% on the $882 remaining portion of an original
$1,000 investment. This potential adjustment would be effective for the
distribution to be paid on May 15, 1997 for the quarter ending March 31, 1997.
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 fiscal 1997, management has evaluated the expected future
capital needs of the Partnership's remaining investment properties and believes
that current cash reserve levels are sufficient for such purposes. The status of
these potential future capital requirements are discussed further below.
Loehmann's Plaza was 84% leased as of December 31, 1996, an increase from
79% as of the end of the second quarter. During the third quarter of fiscal
1997, a lease was signed with a new 8,526 square foot tenant. This tenant will
take 5,525 square feet of vacant space and 3,001 square feet of an existing
tenant's 7,290 square foot space. During the second quarter of fiscal 1997, a
renewal and expansion agreement was signed with an existing tenant that
increased its 7,058 square foot store to a total of 13,160 square feet, or 9% of
the Center's rentable area. As previously reported, a major capital enhancement
program was completed at Loehmann's Plaza between the spring of 1995 and the
fall of 1996. 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 terminated the lease of 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. 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. Once this anchor space is
fully leased, the property would be in a position to be sold.
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 remaining 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. 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 prior reports. 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.
Overall occupancy at West Ashley Shoppes stood at 70% as of December 31, 1996,
up from 68% as of the end of the second quarter. During the third quarter, the
leasing team finalized a 4,000 square foot lease with a national tenant which
will occupy a space vacated during the prior quarter.
The 625 North Michigan Office Building was 86% leased at December 31, 1996,
down 3% from the prior quarter. A tenant occupying 15,639 square feet moved out
of the building during the current quarter upon the expiration of its lease
obligation. However, the loss of this tenant was partially offset by certain
positive leasing developments during the quarter. Two tenants expanded their
spaces for a total of 2,358 square feet, two leases were signed with new tenants
occupying 4,724 square feet, and one tenant renewed its lease for 2,109 square
feet. The modernization of the building's elevator controls is currently
underway, and this work is expected to continue for approximately one year at an
estimated total cost of approximately $700,000.
Occupancy at the Hacienda Business Park remained at 100% as of December 31,
1996. Market conditions in Pleasanton, California, where Hacienda Park is
located, have improved significantly over the past year. During the quarter
ended September 30, 1996, four build-to-suit office developments, totalling
542,000 square feet, commenced construction. In calendar 1997, three speculative
office projects, totalling 560,000 square feet, are scheduled to begin
construction. 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. During the third quarter, however, a major tenant at Hacienda Business
Park announced that it will vacate the property and relocate to one of the
proposed new buildings. This tenant occupies 51,683 square feet, or 28% of the
property's leasable area, and will remain responsible for paying rent and its
share of operating expenses on its six leases at Hacienda Park which expire
between February 1998 and January 2001. The property's leasing team will focus
its efforts on securing replacement tenants for this space. When new leases for
a substantial portion of this tenant's space have been signed, management will
review the potential for selling the Hacienda Business Park property.
The average occupancy level at Asbury Commons Apartments in Atlanta,
Georgia, was 89% for the third quarter of fiscal 1997, compared to 93% for the
previous quarter. Despite the 4% decline, average occupancy at Asbury Commons
continues to compare favorably to other similar quality apartment properties in
the market. The decrease in occupancy at Asbury Commons resulted from several
factors including the development of a substantial number of apartment units in
the local market, as well as a seasonal decline in the number of prospective
tenants looking to rent apartments. In addition, there has been a market-wide
decline in average occupancy levels as a result of the thousands of temporary
employees that moved out of Atlanta after the Olympics. As the newly constructed
apartments are leased over the next year, rental rates and occupancy levels are
projected to remain flat. After this absorption period, however, the Atlanta
apartment market should benefit from the continuation of strong regional
population and job growth.
During the third quarter, an analysis of the exterior wood trim and wood
framing at the Asbury Commons Apartments revealed extensive deterioration of the
wood trim and evidence of potential structural problems affecting the exterior
breezeways, the decks of certain apartment unit types and the stairway towers.
Management is in the process of assembling a design and construction team to
further evaluate the potential problems, make cost-effective remediation
recommendations and implement the repair program. Based on the preliminary
assessments, the magnitude of the repair work could be substantial. Management
is also evaluating potential claims to be made against various parties
responsible for the construction of the apartment complex. The eventual outcome
of any such claims cannot be determined at the present time.
At The Gables Apartments in Richmond, Virginia, the average occupancy level
was 90%, compared to 95% the previous quarter. The drop in average occupancy
resulted from a decline in the number of prospective tenants looking to rent
apartments during the holiday season as well as the continued attraction of the
local single-family home market. However, with demand for apartments in the
Richmond market generally remaining strong and only moderate new construction
activity underway, management anticipates that average occupancy levels will
rebound during the next quarter. In order to ensure that The Gables continues to
show well to prospective tenants, a signage and entrance improvement program was
completed during the third quarter.
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 of potential impairment 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
future 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 December 31, 1996, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $5,511,000. 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 December 31, 1996
- ------------------------------------
The Partnership reported a net loss of $224,000 for the three months ended
December 31, 1996, as compared to a net loss of $225,000 for the same period in
the prior year. This $1,000 decrease in the Partnership's net loss is
attributable to a decrease in the Partnership's operating loss of $82,000 which
was partially offset by a decrease in the Partnership's share of unconsolidated
ventures' income of $54,000 and a decrease in interest income on notes
receivable from unconsolidated ventures of $27,000. The Partnership's operating
loss decreased primarily due to declines in general and administrative expenses
and interest expense which were partially offset by an increase in depreciation
expense. General and administrative expenses decreased by $152,000 mainly as a
result of additional legal costs incurred in the prior three-month period
associated with certain refinancing and sale transactions, as well as a
reduction in other professional fees. Interest expense decreased by $63,000 as a
result of scheduled monthly principal payments as well as interest attributable
to a $2 million short-term loan which was outstanding in the prior year.
Depreciation and amortization expense increased by $109,000 for the current
three-month period primarily due to the accelerated depreciation on the Hacienda
Business Park property, as discussed further above.
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. The decrease in
the Partnership's share of unconsolidated ventures' income resulting from the
asset sales was partially offset by improved operating results at all three
remaining unconsolidated ventures for the current three-month period. The major
reason for the improvement at the 625 North Michigan joint venture was a lower
real estate tax expense. The venture's real estate taxes decreased due to a
reassessment that lowered the real estate tax bill for the current three-month
period. The improved operating results at The Gables and Loehmann's Plaza joint
ventures were primarily the result of higher rental income.
Nine Months Ended December 31, 1996
- -----------------------------------
The Partnership reported a net loss of $425,000 for the nine months ended
December 31, 1996, as compared to a net loss of $454,000 for the same period in
the prior year. This decrease in the Partnership's net loss resulted from a
$304,000 decrease in the Partnership's operating loss which was partially offset
by a $195,000 decrease in the Partnership's share of unconsolidated ventures'
income and an $80,000 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 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 nine-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 program 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 exterior facade incurred in the current
nine-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 unfavorable changes in the current nine-month period. Rental income
from The Gables Apartments increased by approximately 7% over the same period in
the prior year due to increases in rental rates implemented over the past year
as a result of the strengthening Richmond apartment market. At 625 North
Michigan, a property tax reassessment resulted in a reduction in taxes for the
current nine-month period.
The Partnership's operating loss decreased for the nine months ended
December 31, 1996, when compared to the same period in the prior year, due to a
$375,000 increase in total revenues, which was partially offset by a $71,000
increase in total expenses. Total revenues increased 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 along with higher average rental rates at the Asbury Commons
Apartments and Hacienda Business Park during the current nine-month period.
Interest income increased due to an increase in 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 nine-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 and general and
administrative expenses partially offset the higher depreciation and
amortization charges. Interest expense decreased by $88,000 primarily due to
scheduled principal amortization as well as interest attributable to a $2
million short-term loan which was outstanding in the prior year. General and
administrative expenses declined mainly as a result of a reduction in certain
professional fees.
<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 was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
With regard to the Abbate and Bandrowski actions 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 applicable
securities arbitration regulations. Mediation with respect to both actions was
held in December 1996. As a result of such mediation, a tentative settlement
between PaineWebber and the plaintiffs was reached which would provide for
complete resolution of such actions. PaineWebber anticipates that releases and
dismissals with regard to these actions will be received by February 1997.
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 indemnification 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: February 12, 1997
<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, 1996 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-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 5,511
<SECURITIES> 0
<RECEIVABLES> 223
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,051
<PP&E> 82,313
<DEPRECIATION> 12,230
<TOTAL-ASSETS> 77,638
<CURRENT-LIABILITIES> 888
<BONDS> 22,047
0
0
<COMMON> 0
<OTHER-SE> 54,354
<TOTAL-LIABILITY-AND-EQUITY> 77,638
<SALES> 0
<TOTAL-REVENUES> 4,363
<CGS> 0
<TOTAL-COSTS> 3,296
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,492
<INCOME-PRETAX> (425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (425)
<EPS-PRIMARY> (3.13)
<EPS-DILUTED> (3.13)
</TABLE>
