-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L58FeKjUWLz+0ZK656MfH1NpnB0pfatcXR/20epIxrMcadtq1WX6P1J5URaCqeOM wVDLXDBNFvi7GJFayJUQog== 0000793973-99-000003.txt : 19990215 0000793973-99-000003.hdr.sgml : 19990215 ACCESSION NUMBER: 0000793973-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINEWEBBER EQUITY PARTNERS TWO LTD PARTNERSHIP CENTRAL INDEX KEY: 0000793973 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 042918819 STATE OF INCORPORATION: VA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15705 FILM NUMBER: 99535268 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15TH FL CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398118 10-Q 1 THIS IS A 10-Q FOR EP2 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 QUARTER ENDED December 31, 1998 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 |_|. PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS December 31, 1998 and March 31, 1998 (Unaudited) (In thousands) ASSETS December 31 March 31 ----------- -------- Operating investment properties: Land $ 2,342 $ 7,351 Building and improvements 5,437 40,616 ---------- --------- 7,779 47,967 Less accumulated depreciation (2,207) (14,044) ---------- --------- 5,572 33,923 Investments in unconsolidated joint ventures, at equity 30,234 30,237 Cash and cash equivalents 12,652 6,202 Escrowed cash 76 398 Accounts receivable 299 236 Prepaid expenses 2 31 Deferred rent receivable 145 737 Deferred expenses, net 90 510 ---------- --------- $ 49,070 $ 72,274 ========== ========= LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses $ 348 $ 427 Net advances from consolidated ventures 154 115 Tenant security deposits - 111 Bonds payable - 2,171 Mortgage notes payable 9,171 19,369 Other liabilities - 331 Partners' capital 39,397 49,750 ---------- --------- $ 49,070 $ 72,274 ========== ========= See accompanying notes. PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine months ended December 31, 1998 and 1997 (Unaudited) (In thousands, except per Unit data) Three Months Ended Nine Months Ended December 31, December 31, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Rental income and expense reimbursements $ 2,102 $1,152 $ 4,725 $3,714 Interest and other income 227 104 513 304 ------- ------ ------- ------ 2,329 1,256 5,238 4,018 Expenses: Property operating expenses 633 379 1,267 1,083 Depreciation and amortization 693 506 1,744 1,556 Interest expense 1,436 507 2,392 1,455 Real estate taxes 197 129 470 400 General and administrative 194 217 452 506 ------- ------ ------- ------ 3,153 1,738 6,325 5,000 ------- ------ ------- ------ Operating loss (824) (482) (1,087) (982) Gains on sale of operating investment properties 10,456 - 10,456 - Consolidated venture partners' share of operations (331) - (331) - Partnership's share of gain on sale of unconsolidated operating investment property - - 5,848 - Partnership's share of unconsolidated ventures' income 194 176 396 398 ------- ------ ------- ------ Net income (loss) $ 9,495 $ (306) $15,282 $ (584) ======= ======= ======= ====== Net income (loss) per 1,000 Limited Partnership Unit $ 69.93 $ (2.25) $ 112.55 $(4.30) ======= ======= ======== ====== Cash distributions per 1,000 Limited Partnership Unit $147.21 $ 2.21 $ 190.63 $ 6.63 ======= ======= ======== ====== 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. PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the nine months ended December 31, 1998 and 1997 (Unaudited) (In thousands) General Limited Partners Partners -------- -------- Balance at March 31, 1997 $ (539) $ 51,752 Cash distributions (9) (891) Net loss (6) (578) -------- --------- Balance at December 31, 1997 $ (554) $ 50,283 ======== ========= Balance at March 31, 1998 $ (554) $ 50,304 Cash distributions (9) (25,626) Net income 152 15,130 -------- --------- Balance at December 31, 1998 $ (411) $ 39,808 ======== ========= See accompanying notes. PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended December 31, 1998 and 1997 (Unaudited) Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1998 1997 ---- ---- Cash flows from operating activities: Net income (loss) $ 15,282 $ (584) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gains on sale of operating investment properties (10,456) - Consolidated venture partners' share of operations 331 - Partnership's share of gain on sale of unconsolidated operating investment property (5,848) - Partnership's share of unconsolidated ventures' income (396) (398) Depreciation and amortization 1,744 1,556 Amortization of deferred financings costs - 33 Changes in assets and liabilities: Escrowed cash 322 (8) Accounts receivable (63) 36 Prepaid expenses 29 (7) Deferred rent receivable 62 75 Deferred expenses (588) (8) Accounts payable and accrued expenses (79) 261 Advances from consolidated ventures 39 (483) Tenant security deposits (111) (61) --------- --------- Total adjustments (15,014) 996 --------- --------- Net cash provided by operating activities 268 412 --------- --------- Cash flows from investing activities: Net proceeds from sales of operating investment properties 37,776 - Distributions from unconsolidated ventures 7,238 2,486 Additional investments in unconsolidated ventures (991) (844) Additions to operating investment properties (1,862) (181) --------- --------- Net cash provided by investing activities 42,161 1,461 --------- --------- Cash flows from financing activities: Distributions to partners (25,635) (900) Repayment of principal on bonds (146) - Repayment of principal on long term debt (10,198) (290) --------- --------- Net cash used in financing activities (35,979) (1,190) --------- --------- Net increase in cash and cash equivalents 6,450 683 Cash and cash equivalents, beginning of period 6,202 5,322 --------- --------- Cash and cash equivalents, end of period $ 12,652 $ 6,005 ========= ========= Cash paid during the period for interest $ 2,392 $ 1,422 ========= ========= Supplemental Schedule of Noncash Financing Activities: Assumption of bonds payable by buyer of operating investment property $ 2,025 $ - ========= ========= See accompanying notes. 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, 1998. 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, 1998 and March 31, 1998 and revenues and expenses for each of the three- and nine-month periods ended December 31, 1998 and 1997. 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, 1998 and 1997 is $176,000 and $172,000, 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-month periods ended December 31, 1998 and 1997 is $11,000 and $13,000, respectively, representing fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the Partnership's cash assets. 3. Investments in Unconsolidated Joint Ventures -------------------------------------------- As of December 31, 1998, the Partnership had investments in two unconsolidated joint venture partnerships (three at December 31, 1997) which own operating investment properties as described further in the Partnership's Annual Report. 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. On July 2, 1998, Richmond Gables Associates, a joint venture in which the Partnership held an interest, sold The Gables at Erin Shades Apartments to an unrelated third party for $11,500,000. After deducting closing costs and property adjustments of $320,000, The Gables joint venture received net sale proceeds of $11,180,000. These net sale proceeds were split between the Partnership and its co-venture partner in accordance with the terms of The Gables joint venture agreement. The Partnership received $10,602,000 and the non-affiliated co-venture partner received $578,000 as their share of the sale proceeds. From its share of the proceeds, the Partnership prepaid its refinanced original zero coupon loan secured by the property and the related prepayment fee, the sum of which was $5,449,000. The Partnership distributed the $5,153,000 of net proceeds from the sale of The Gables, along with an amount of cash reserves that exceeded expected future requirements, in the form of a special distribution totalling approximately $5,243,000, or $39 per original $1,000 investment, on July 20, 1998. In accordance with the Partnership's policy to recognize significant lag period transactions in the period which they occur, the Partnership accelerated the recognition of the operating results of Richmond Gables Associates during the quarter ended December 31, 1998 and recognized a gain of $5,848,000 on the sale of the Gables operating investment property. Summarized operations of the unconsolidated joint ventures, for the periods indicated, are as follows. Condensed Combined Summary of Operations For the three and nine months ended September 30, 1998 and 1997 (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Rental revenues and expense recoveries $ 2,298 $2,402 $7,518 $7,153 Interest and other income 9 117 61 356 ------- ------ ------ ------ 2,307 2,519 7,579 7,509 Expenses: Property operating expenses 765 619 2,161 2,386 Real estate taxes 561 593 1,551 1,660 Interest expense 91 198 923 594 Depreciation and amortization 672 901 2,399 2,383 ------- ------ ------ ------ 2,089 2,311 7,034 7,023 ------- ------ ------ ------ Operating income 218 208 545 486 Gain on sale of operating investment property - - 6,433 - ------- ------ ------ ------ Net income $ 218 $ 208 $6,978 $ 486 ======= ====== ====== ====== Net income: Partnership's share of combined income $ 211 $ 191 $6,289 $ 442 Co-venturers' share of combined income 7 17 689 44 ------- ------ ------ ------ $ 218 $ 208 $6,978 $ 486 ======= ====== ====== ====== Reconciliation of Partnership's Share of Operations For the three and nine months ended December 31, 1998 and 1997 (in thousands) Three Months Ended Nine Months Ended December 31, December 31, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Partnership's share of operations, as shown above $ 211 $ 191 $6,289 $ 442 Amortization of excess basis (17) (15) (45) (44) ------- ------- ------ ------- Partnership's share of unconsolidated ventures' net income $ 194 $ 176 $6,244 $ 398 ======= ======= ====== ======= The Partnership's share of the net income of the unconsolidated joint ventures is presented as follows in the accompanying statements of operations: Three Months Ended Nine Months Ended December 31, December 31, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Partnership's share of unconsolidated ventures' income $ 194 $ 176 $ 396 $ 398 Partnership's share of gain on sale of unconsolidated operating investment property - - 5,848 - ------- ------- -------- ------ $ 194 $ 176 $ 6,244 $ 398 ======= ======= ======== ====== 4. Operating Investment Properties ------------------------------- The Partnership's balance sheet at December 31, 1998 includes one operating investment property (three at March 31, 1998) owned by a joint venture in which the Partnership has a controlling interest; West Ashley Shoppes Associates. The Partnership's policy is to report the operations of the consolidated joint ventures on a three-month lag. The West Ashley Shoppes Shopping Center consists of approximately 135,000 square feet of leasable retail space located in Charleston, South Carolina. On November 20, 1998, Hacienda Park Associates, a joint venture in which the Partnership had a controlling interest, sold the Hacienda Business Park property to an unrelated third party for $25 million. The property consisted of four separate office/R&D buildings comprising approximately 185,000 square feet, located in Pleasanton, California. The Partnership received net proceeds of approximately $20,861,000 after deducting closing costs of approximately $278,000, net closing proration adjustments of approximately $89,000, the repayment of the existing first mortgage note of approximately $3,769,000 and accrued interest of approximately $3,000. On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which the Partnership had a controlling interest, sold the Asbury Commons to an unrelated third party for $13.345 million. The Asbury Commons Apartments is a 204-unit residential apartment complex located in Atlanta, Georgia. The Partnership received net proceeds of approximately $5,613,000 after deducting closing costs of approximately $291,000, closing proration adjustments of approximately $90,000, the repayment of the existing mortgage note of approximately $6,598,000, accrued interest of approximately $10,000 and a prepayment penalty of approximately $743,000. The Partnership's policy is to report the operations of the consolidated joint ventures on a three-month lag. However, the Partnership's policy is also to record significant lag-period transactions in the period in which they occur. Accordingly, the Partnership accelerated the recognition of the operating results of Hacienda Park Associates and Atlanta Asbury Partnership during the quarter ended December 31, 1998 and recorded gains of $9,051,000 and $1,405,000, respectively, on the sales of the operating investment properties. The following is a combined summary of property operating expenses for Saratoga Center and EG&G Plaza (through the date of sale in 1998), Asbury Commons Apartments (through the date of sale in 1998) and the West Ashley Shoppes Shopping Center for the three and nine months ended September 30, 1998 and 1997 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Property operating expenses: Repairs and maintenance $ 192 $ 128 $ 374 $ 361 Utilities 77 57 161 169 Salaries and related costs 137 48 251 127 Insurance 39 17 72 50 Management fees 59 36 134 118 Administrative and other 129 93 275 258 ------- ------- ------ ------ $ 633 $ 379 $1,267 $1,083 ======= ======= ====== ====== 5. Bonds Payable ------------ Bonds payable consisted of the Hacienda Park joint venture's share of liabilities for bonds issued by the City of Pleasanton, California for public improvements that benefited Hacienda Business Park and the operating investment property and were secured by liens on the operating investment property. The bonds for which the operating investment property was subject to assessment bore interest at rates ranging from 5% to 7.87%, with an average rate of approximately 7.2%. Principal and interest were payable in semi-annual installments and due to mature in years 2004 through 2017. As a result of the sale of the Hacienda Park property on November 20, 1998 (see Note 4), the liability for the bond assessments was transferred to the buyer of the operating investment property. 6. Mortgage Notes Payable ---------------------- Mortgage notes payable on the consolidated balance sheets of the Partnership at December 31, 1998 and March 31, 1998 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 $83 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, 1998 and March 31, 1998. $ 9,171 $ 9,282 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 required monthly principal and interest payments of $55 through maturity on October 15, 2001. The fair value of the mortgage note approximated its carrying value at March 31, 1998. The loan was repaid in full during fiscal 1999 from the proceeds of the sale of the operating investment property (see Note 4). - 6,707 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 required 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, 1998. The loan was repaid in full during fiscal 1999 from the proceeds of the sale of the operating investment property (see Note 4). - 3,380 ------- ------- $ 9,171 $19,369 ======= ======= 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 bore interest at 8.72% and was scheduled to mature in 7 years. As discussed further in Note 3, The Gables Apartments was sold on July 2, 1998 and this mortgage loan was repaid in full. On February 10, 1995, the Partnership repaid an outstanding zero coupon loan secured by Gateway Plaza (formerly Loehmann's Plaza), 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 Gateway 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 loan secured by the Gateway Plaza property rests with the related unconsolidated joint venture. Accordingly the mortgage loan liability is recorded on the books of the unconsolidated joint venture. The Partnership has indemnified Daniel/Metcalf Associates Partnership and the related co-venture partner against all liabilities, claims and expenses associated with this borrowing. PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information Relating to Forward-Looking Statements - -------------------------------------------------- The following discussion of financial condition includes forward-looking statements which reflect management's current views with respect to future events and financial performance of the Partnership. These forward-looking statements are subject to certain risks and uncertainties, including those identified in Item 7 of the Partnership's Annual Report on Form 10-K for the year ended March 31, 1998 under the heading "Certain Factors Affecting Future Operating Results", which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which were made based on facts and conditions as they existed as of the date of this report. The Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Liquidity and Capital Resources - ------------------------------- In light of the continued strength in the national real estate market with respect to multi-family apartment properties and the recent improvements in the office/R&D property markets, management believes that this may be an opportune time to sell the Partnership's remaining operating investment properties. As a result, management is currently focusing on potential disposition strategies for the remaining investments in the Partnership's portfolio. As part of that plan, as discussed further below, The Gables Apartments was marketed for sale during the quarter ended June 30, 1998 and sold during the quarter ended September 30, 1998. In addition, during the first quarter the Partnership began the process of marketing the Hacienda Business Park property for sale. As discussed further below, this sale transaction closed during the third quarter. Also, the Partnership began marketing the Asbury Commons Apartments in the second quarter of fiscal 1999 and completed a sale of the property at the end of the third quarter. With regard to the three remaining commercial office and retail properties, the Partnership is working with each property's leasing and management team to develop and implement programs that will protect and enhance value and maximize cash flow at each property while at the same time exploring potential sale opportunities. These programs include pursuing a new leasing opportunity at 625 North Michigan Avenue, which is noted below, and completing leasing programs currently underway at Gateway Plaza and West Ashley Shoppes. Although there are no assurances, it is currently contemplated that sales of the Partnership's remaining assets could be completed prior to the end of calendar 1999. On July 2, 1998, Richmond Gables Associates, a joint venture in which the Partnership held an interest, sold The Gables at Erin Shades Apartments to an unrelated third party for $11,500,000. After deducting closing costs and property adjustments of $320,000, The Gables joint venture received net sale proceeds of $11,180,000. These net sale proceeds were split between the Partnership and its co-venture partner in accordance with the terms of The Gables joint venture agreement. The Partnership received $10,602,000 and the non-affiliated co-venture partner received $578,000 as their share of the sale proceeds. From its share of the proceeds, the Partnership prepaid its refinanced original zero coupon loan secured by the property and the related prepayment fee, the sum of which was $5,449,000. Despite incurring a sizable prepayment penalty on the repayment of the outstanding first mortgage loan, management believed that a current sale of The Gables property was in the best interests of the Limited Partners due to the exceptionally strong market conditions that exist at the present time and which resulted in the achievement of a very favorable selling price. In addition, management was concerned that the rate of job and population growth in the Richmond, Virginia area could lead to an increase in new development activity in the near future. The Partnership distributed the $5,153,000 of net proceeds from the sale of The Gables, along with an amount of cash reserves that exceeded expected future requirements, in the form of a special distribution totalling approximately $5,243,000, or $39 per original $1,000 investment, which was paid on July 20, 1998. On November 20, 1998, Hacienda Park Associates, a joint venture in the Partnership had an interest, sold the Hacienda Business Park property located in Pleasanton, California, to an unrelated third party for $25 million. The Hacienda Park property consisted of one building known as Saratoga Center and two attached buildings known as Gibraltar Center. The Partnership received net proceeds of approximately $20,862,000 after deducting closing costs of approximately $278,000, net closing proration adjustments of approximately $88,000, the repayment of the existing first mortgage note of approximately $3,769,000 and accrued interest of approximately $3,000. As a result of the sale of the Hacienda Park property, the Partnership made a special distribution totalling approximately $19,492,000, or $145 per original $1,000 investment, on December 4, 1998. Approximately $1,370,000 of the total net proceeds from the sale of the Hacienda Park property has been added to the Partnership's cash reserves for potential investment in 625 North Michigan Avenue because of the recently approved retail development rights for this property. Given the current strength of the local Pleasanton market conditions, during the quarter ended June 30, 1998 management interviewed potential real estate brokers and selected a national real estate firm that is a leading seller of R&D/office properties to market Hacienda Park for sale. A marketing package was subsequently finalized, and comprehensive sales efforts began in June. As a result of those efforts, several offers were received. After completing an evaluation of these offers and the relative strength of the prospective purchasers, the Partnership selected an offer. A purchase and sale agreement was signed on September 21, 1998 with an unrelated third-party prospective buyer and a non-refundable deposit of $1,500,000 was made on October 21, 1998. The prospective buyer completed its due diligence work in early November and closed on this transaction on November 20, 1998, as described above. In accordance with the Partnership's policy of recording significant lag-period transactions in the period in which they occur, the Partnership accelerated the recognition of the operating results of Hacienda Park Associates during the quarter ended December 31, 1998 and recorded a gain of $9,051,000 on the sale of the operating investment property. On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which the Partnership had an interest, sold the property known as the Asbury Commons Apartments located in Atlanta, Georgia, to an unrelated third party for $13.345 million. The Partnership received net proceeds of approximately $5,613,000 after deducting closing costs of approximately $291,000, closing proration adjustments of approximately $90,000, the repayment of the existing mortgage note of approximately $6,598,000, accrued interest of approximately $10,000 and a prepayment penalty of approximately $743,000. Despite incurring a sizable prepayment penalty on the repayment of the outstanding first mortgage loan, management believed that a current sale of the Asbury Commons property was in the best interests of the Limited Partners due to the exceptionally strong market conditions that exist at the present time and which resulted in a very favorable sale price. As previously reported, the Partnership had selected a regional real estate firm with a strong background in selling apartment properties to market the Asbury Commons property for sale. Sales materials were finalized and an extensive marketing campaign began in September 1998. As a result of these sale efforts, seven offers were received. After completing an evaluation of these offers and the relative strength of the prospective purchasers, the Partnership and its co-venture partner selected an offer and negotiated a purchase and sale agreement. A purchase and sale agreement was signed on November 9, 1998, and the buyer made a deposit of $250,000. After the completion of the buyer's due diligence, the transaction closed as described above on December 21, 1998. In accordance with the Partnership's policy of recording significant lag-period transactions in the period in which they occur, the Partnership accelerated the recognition of the operating results of Atlanta Asbury Partnership during the quarter ended December 31, 1998 and recorded a gain of $1,405,000 on the sale of the operating investment property. The Partnership plans to distribute the net proceeds from the sale of the Asbury Commons property in the form of a special capital distribution of approximately $6,453,000, or $48 per original $1,000 investment, to be paid on February 12, 1999, along with the regular quarterly distribution for the quarter ended December 31, 1998. With the sale of Hacienda Business Park, the Asbury Commons Apartments and The Gables Apartments, the near-term planned sales of West Ashley Shoppes and Gateway Plaza Shopping Center, and the resulting reduction in distributable cash flow to be received by the Partnership, the payment of a regular quarterly distribution will be discontinued beginning with the quarter ending March 31, 1999. A final regular quarterly distribution of $2.21 per original $1,000 investment will be made on February 12, 1999 for the quarter ended December 31, 1998. The 625 North Michigan Office Building in Chicago, Illinois, was 96% leased and 95% occupied at December 31, 1998. During the third quarter, a new tenant signed a lease and took occupancy of 2,602 square feet of space. In addition, one tenant occupying 2,115 square feet renewed its lease. During the second quarter, a lease was signed with an existing tenant that occupies approximately 8,000 square feet. This tenant will relocate and expand into a total of 10,200 square feet. The space is still being renovated in preparation for the tenant's occupancy which is now expected to occur by the end of March 1999. The downtown Chicago real estate market continues to display an improving trend. A competitive office property within the local market has recently obtained approvals to convert its lower floors into a hotel. This should result in the removal of 290,000 square feet of office space from the market. In addition, an office tenant at that property has recently completed a 62,000 square foot expansion, which brings the occupancy level in the building's office portion to 100%. In this local market, where there is no current or planned new construction of office space, this reduction in vacant office space has resulted in a reduction in the market vacancy level and places more upward pressure on rental rates. The higher effective rents currently being achieved at 625 North Michigan are expected to increase cash flow and value as new tenants sign leases and existing tenants sign lease renewals in calendar year 1999. Retail and hotel development in the local market continues, as evidenced by plans for a Nordstrom's-anchored 95,000 square foot retail development which recently received preliminary approval from the City. This proposed development, which will be located two blocks from 625 North Michigan, is part of a master plan that includes several new hotels, entertainment and parking facilities encompassing five city blocks. Management continues to analyze a potential project for the property which includes an upgrade to the building lobby and the addition of a major retail component to the building's North Michigan Avenue frontage. Rental rates paid by high-end retailers on North Michigan Avenue are substantially greater than those paid by office tenants. While the costs of such a project would be substantial, it could have a significant positive effect on the market value of the 625 North Michigan property. During the quarter ended June 30, 1998, preliminary approval was received from the City to enclose the arcade sections of the first floor of the 625 North Michigan building, which opens the way for this potential retail development. Formal approval was received at the September meeting of the City Council. Now that this approval has been obtained, the Partnership is exploring potential sale opportunities for this property. Gateway Plaza Shopping Center (formerly Loehmann's Plaza Shopping Center) in Overland Park, Kansas was 95% leased and occupied as of December 31, 1998. The property's management team reports that the increased customer traffic levels in the Center have been maintained since the opening of the 13,410 square foot Gateway 2000 Country Store. During the third quarter, two new tenants signed leases and took occupancy of 3,943 square feet. Over the next twelve months, five leases representing a total of 27,486 square feet will expire. Three tenants, which occupy 6,487 square feet, are expected to renew their leases, while the other two tenants which occupy 20,999 square feet will not renew their leases. One of these tenants closed its store at the end of January 1999. This tenant operated the 13,000 square foot Alpine Hut store which has experienced operational difficulties and will be closing its business. The property's leasing team is actively working to lease this space and has held discussions with two prospective tenants to lease 4,289 square feet of the 13,000 square feet. As previously reported, a tenant occupying 6,875 square feet is also experiencing operational difficulties; however, this tenant is in compliance with the payment schedule that allows the tenant to fully pay its current rent while repaying all of the past due amounts by the end of May 1999. Because of the consistent improvement in occupancy levels over the past year and the strong performance of the center's new anchor tenant, the Partnership believes it is the appropriate time to market the property for sale. During the third quarter, the Partnership selected a national real estate firm that is a leading seller of this property type to market Gateway Plaza for sale. As previously reported, in the second quarter of fiscal 1998 the leasing team at the West Ashley Shoppes Shopping Center signed a lease for the previously vacant 36,416 square foot former Children's Palace space. Children's Palace closed its retail store at the center in May 1991 and subsequently filed for bankruptcy protection from creditors. This anchor space at West Ashley Shoppes had been vacant for a period of six and a half years. The new tenant, Waccamaw, a national home goods retailer, opened its new store in March 1998 which brought the occupancy level at the property up to 95%, where it remains as of December 31, 1998. As Waccamaw has generated significant additional customer traffic into the Center, the leasing team has received stronger interest from prospective tenants for the remaining available 7,650 square feet of shop space. Subsequent to the quarter end, the leasing team signed a lease for nearly half of the vacant space with one of these prospects. The tenant, which will occupy 3,150 square feet, will take occupancy next quarter. In addition, the leasing term is actively negotiating with a tenant which would occupy 1,050 square feet in one of the two remaining vacant shops. During the third quarter, a two-year lease renewal was signed with an existing tenant. Over the next 12 months, only two leases representing a total of 3,500 square feet will expire. One of these tenants which occupied 1,050 square feet moved from the Center at the end of January 1999. As previously reported, with an occupancy level of 95% and a stable base of tenants, the Partnership believes it is an opportune time to sell West Ashley Shoppes. As part of a plan to market the property for sale, the Partnership selected a national real estate firm that is a leading seller of this type of property. Preliminary sales materials were prepared and initial marketing efforts were undertaken. A marketing package was then finalized and comprehensive sale efforts began in November 1998. At December 31, 1998, the Partnership and its consolidated joint ventures had available cash and cash equivalents of approximately $12,652,000. Such cash and cash equivalents include the net proceeds from the sale of Asbury Commons which will be distributed to the Limited Partners on February 12, 1999, as discussed further above. The remainder of such cash and cash equivalent amounts will be utilized for the working capital requirements of the Partnership, the capital needs of the Partnership's three remaining commercial properties (as discussed further above), 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. As noted above, the Partnership expects to be liquidated prior to the end of calendar 1999. Notwithstanding this, the Partnership believes that it has made all necessary modifications to its existing systems to make them year 2000 compliant and does not expect that additional costs associated with year 2000 compliance, if any, will be material to the Partnership's results of operations or financial position. Results of Operations Three Months Ended December 31, 1998 - ------------------------------------ The Partnership had net income of $9,495,000 for the three months ended December 31, 1998 as compared to a net loss of $306,000 for the same period in the prior year. The favorable change in net income (loss) was primarily a result of the gains realized from the sale of two consolidated operating investment properties during the current period. As discussed further above, the Partnership sold the consolidated Hacienda Business Park on November 20, 1998 and realized a gain of $9,051,000. The Partnership also sold the consolidated Asbury Commons Apartments on December 21, 1998 and realized a gain of $1,405,000. The Partnership's share of unconsolidated ventures' income increased by $18,000 for the three months ended December 31, 1998, when compared to the same period in the prior year, primarily due to the sale of The Gables at Erin Shades Apartments on July 2, 1998. The Gables joint venture had an operating loss of $62,000 during the third quarter of the prior year. In addition, net income increased at Gateway Plaza during the current quarter by $46,000 due to an increase in rental income. Rental income increased due to an increase in occupancy. The increase in net income at Gateway Plaza and decrease in net loss at The Gables were partially offset by a decrease in net income at 625 North Michigan which was primarily due to an increase in real estate taxes. The gains realized from the sales of the Hacienda Business Park and Asbury Commons Apartments and the increase in the Partnership's share of unconsolidated ventures' income were partially offset by an increase in the Partnership's operating loss of $342,000 for the current three-month period. The increase in the Partnership's operating loss was primarily a result of an increase in interest expense due to the prepayment penalty of $743,000 incurred on the payoff of the debt secured by the Asbury Commons Apartments, as discussed further above. The impact of the prepayment penalty on the Partnership's operating loss was partially offset by the additional operating results of the Hacienda Business Park and Asbury Commons joint ventures included in the current period due to the acceleration of the lag-period recognized upon the sale of the properties, as discussed further above. Nine Months Ended December 31, 1998 - ----------------------------------- The Partnership had net income of $15,282,000 for the nine months ended December 31, 1998 as compared to a net loss of $584,000 for the same period in the prior year. The favorable change in net income (loss) was primarily a result of the gains realized from the sale of three operating investment properties during the current period. As discussed further above, the Partnership sold the consolidated Hacienda Business Park on November 20, 1998 and realized a gain of $9,051,000. In addition, the Partnership sold the consolidated Asbury Commons Apartments on December 21, 1998 and realized a gain of $1,405,000. The Partnership also realized a gain from the sale of the unconsolidated Gables Apartments, which was sold on July 2, 1998, in the amount of $5,848,000. The gains realized from the sales of the consolidated Hacienda Business Park and Asbury Commons Apartments and the unconsolidated Gables Apartments were partially offset by an increase in the Partnership's operating loss of $105,000 for the current nine-month period. The increase in the Partnership's operating loss was primarily a result of an increase in interest expense due to the prepayment penalty of $743,000 incurred on the payoff of the debt secured by the Asbury Commons Apartments, as discussed further above. The impact of the prepayment penalty on the Partnership's operating loss was partially offset by the additional operating results of the Hacienda Park and Asbury Commons joint ventures included in the current period due to the acceleration of the lag-period recognized upon the sale of the properties, as discussed further above. The Partnership's share of unconsolidated ventures' income decreased by $2,000 for the nine months ended December 31, 1998 when compared to the same period in the prior year. This decrease is primarily a result of the $472,000 prepayment penalty incurred on the pay-off of the Gables debt and various write-offs of unamortized deferred expenses associated with the sale of The Gables at Erin Shades Apartments. The increase in operating loss at The Gables was offset by increases in net income at both the 625 North Michigan and Gateway Plaza joint ventures due to increases in rental income at both of the related operating investment properties. PART II Other Information Item 1. Legal Proceedings NONE Item 2. through 5. NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: NONE (b) Reports on Form 8-K: A Current Report on Form 8-K dated November 20, 1998 was filed during the current quarter to report the sale of the Hacienda Business Park property and is hereby incorporated herein by reference. In addition, a Current Report on Form 8-K dated December 21, 1998 was filed subsequent to the quarter end to report the sale of the Asbury Commons Apartments and is hereby incorporated herein by reference 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 10, 1999 EX-27 2 ARTICLE 5 FDS FOR THE NINE MONTHS ENDED 12/31/98
5 This schedule contains summary financial information extracted from the Partnership's unaudited financial statements for the quarter ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS Mar-31-1999 Dec-31-1998 12,652 0 444 0 0 13,029 38,013 2,207 49,070 502 9,171 0 0 0 39,397 49,070 0 21,938 0 3,933 331 0 2,392 15,282 0 15,282 0 0 0 15,282 112.55 112.55
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