UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number : 0-12085
PAINE WEBBER GROWTH PROPERTIES TWO LP
(Exact name of registrant as specified in its charter)
Delaware 04-2798594
(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>
PAINE WEBBER GROWTH PROPERTIES TWO LP
BALANCE SHEETS
September 30, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------- --------
Investments in joint ventures, at equity $ 165 $ 257
Cash and cash equivalents 758 6,278
Accounts receivable - 191
----------- ----------
$ 923 $ 6,726
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 22 $ 46
Partners' capital 901 6,680
------------ ----------
$ 923 $ 6,726
============ ==========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1995 $ (113) $ 4,238
Net loss (1) (85)
Cash Distributions (3) (162)
------- --------
Balance at September 30, 1995 $ (117) $ 3,991
======= ========
Balance at March 31, 1996 $ - $ 6,680
Net loss (2) (141)
Cash distributions (3) (5,633)
------- --------
Balance at September 30, 1996 $ (5) $ 906
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1996 and 1995
(Unaudited) (In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
----------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Reimbursements from affiliate $ 57 $ 57 $ 105 $ 108
Interest and other income 12 14 87 29
----- ----- ------ -------
69 71 192 137
Expenses:
Management fees 13 18 32 34
General and administrative 47 61 106 106
----- ----- ------ -------
60 79 138 140
----- ----- ------ -------
Operating income (loss) 9 (8) 54 (3)
Partnership's share of
ventures' losses (198) (30) (197) (110)
----- ----- ------ -------
Net loss $(189) $ (38) $ (143) $ (113)
===== ===== ====== ======
Net loss per Limited
Partnership Unit $(5.58) $ (1.13) $ (4.22) $ (3.35)
====== ======= ======== =======
Cash distributions per Limited
Partnership Unit $ 3.96 $ 5.19 $ 168.61 $10.05
====== ======= ======== ======
The above net loss and cash distributions per Limited Partnership Unit are
based upon the 33,410 Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (143) $ (113)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Reimbursements from affiliate (105) (108)
Partnership's share of ventures' losses 197 110
Changes in assets and liabilities:
Accounts payable and accrued expenses (24) (45)
Accounts receivable 191 -
----- -----
Total adjustments 259 (43)
----- -----
Net cash provided by (used in)
operating activities 116 (156)
----- -----
Cash flows from investing activities:
Distributions from joint ventures - 682
Proceeds from sale of investment - 350
------ ------
Net cash provided by investing activities - 1,032
------ ------
Cash flows from financing activities:
Distributions to partners (5,636) (339)
------- --------
Net increase (decrease) in cash and cash equivalents (5,520) 537
Cash and cash equivalents, beginning of period 6,278 1,053
------- ------
Cash and cash equivalents, end of period $ 758 $ 1,590
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussions 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 six months ended
September 30, 1996 and 1995 is $27,000 and $35,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for the six months
ended September 30, 1996 and 1995 is $5,000 and $2,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
The Adviser earns a management fee equal to approximately 10% of the
Distributable Cash of the Partnership, as defined, pursuant to the advisory
agreement. The Adviser earned management fees totalling $32,000 and $34,000
for the six-month periods ended September 30, 1996 and 1995, respectively.
3. Investments in Joint Venture Partnerships
The Partnership has an investment in one joint venture partnership at
September 30, 1996 which owns an operating property as more fully described
in the Partnership's Annual Report. At September 30, 1995, the Partnership
had investments in three joint ventures which owned operating properties. As
discussed further below, during fiscal 1996 two of these investments were
sold. Except as discussed below, the joint ventures are accounted for by
using the equity method because the Partnership does not have a voting
control interest in the ventures. Under the equity method, the investments
are carried at cost adjusted for the Partnership's share of the ventures'
earnings and losses and distributions. For income tax reporting purposes,
the joint ventures are required to maintain their accounting records on a
calendar year basis. As a result, the joint ventures are accounted for based
on financial information which is three months in arrears to that of the
Partnership.
As discussed in the Annual Report, on September 12, 1995 the Partnership
sold its interest in the Hudson Apartments joint venture to its co-venture
partner for $350,000. As of March 31, 1995, the Partnership's investment in
the Hudson joint venture had been reclassified to investment held for sale
and written down to its net realizable value of $350,000. Subsequent to the
writedown, the Partnership accounted for this investment on the cost method
during the period of time in fiscal 1996 which it took for the sale
transaction to be completed. As a result, the Partnership's net operating
results for fiscal 1996 do not include any operations of the Hudson joint
venture. The Partnership made a special distribution to the Limited Partners
of approximately $768,000, or $23 per original $1,000 Unit, on November
15,1995, which represented the Hudson sale proceeds plus an amount of cash
reserves that was in excess of the Partnership's expected future
requirements. On March 13, 1996, the joint venture which owned the Walker
House Apartments sold the operating investment property to an unrelated
third party for $10,650,000. The Partnership received net proceeds of $5.3
million from the sale of the Walker House Apartments after deducting closing
costs, the repayment of the outstanding first mortgage loan and the
co-venture partner's share of the proceeds. Due to the Partnership's policy
of accounting for significant lag-period transactions in the period in which
they occur, the gain on this transaction was recognized in fiscal 1996. The
Partnership's share of the net proceeds was distributed to the Limited
Partners as a special distribution on the amount of approximately
$5,312,000, or $159 per original $1,000 investment, paid concurrently with
the regular quarterly distribution on May 15, 1996.
Summarized operating results of the joint ventures, for the periods
indicated, are as follows. The operating results for the three and six
months ended June 30, 1995 include the operations of the Walker House joint
venture.
<PAGE>
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the three and six months ended June 30, 1996 and 1995
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Rental revenues and
expense recoveries $1,529 $1,810 $2,989 $3,580
Interest and other income 28 12 156 29
------ ------ ------ ------
1,557 1,822 3,145 3,609
Property operating expenses 826 745 1,436 1,486
Real estate taxes 111 146 222 293
Interest expense 432 546 890 1,105
Depreciation and amortization 388 415 796 836
------- ------- ------- -------
1,757 1,852 3,344 3,720
------- ------- ------- -------
Net loss $ (200) $ (30) $ (199) $ (111)
======= ======= ======= =======
Net loss:
Partnership's share of
combined loss $ (198) $ (30) $ (197) $ (110)
Co-venturers' share of
combined loss (2) - (2) (1)
-------- ------- --------- -------
$ (200) $ (30) $ (199) $ (111)
======== ======= ======== ======
4. 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>
PAINE WEBBER GROWTH PROPERTIES TWO LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As discussed in the Annual Report, on March 13, 1996 the joint venture
which owned the Walker House Apartments sold the operating investment property
to an unrelated third party for $10,650,000. The existing mortgage balance of
$5,011,000 was paid off in conjunction with the sale, and the venture paid
closing costs of approximately $364,000. In addition, the joint venture had
excess cash as of the date of the sale in the amount of approximately $235,000.
The net proceeds available after the sale transaction totalled approximately
$5.5 million, of which the co-venture partner was entitled to $220,000 under the
terms of the amended joint venture agreement. The Partnership received the
remainder of the net sale proceeds of approximately $5.3 million. The
Partnership's share of the net proceeds was distributed to the Limited Partners
as a special distribution in the amount of approximately $5,312,000, or $159 per
original $1,000 investment, paid concurrently with the regular quarterly
distribution on May 15, 1996.
The sale of the Walker House Apartments leaves the Partnership with one
remaining real estate investment, a majority interest in a joint venture which
owns the Portland Center Apartments. Portland Center is a 525-unit high-rise
apartment building located in Portland, Oregon, which also contains 28,000
square feet of leasable commercial space. The investment in the Portland Center
joint venture comprised 41% of the Partnership's original investment portfolio.
As previously reported, management continues to be in the process of using the
excess cash reserves from the December 1993 Portland Center loan refinancing to
complete a major renovation program at the property, which includes upgrades to
the common areas and many individual units. The property's individual apartment
units are being upgraded on a turnover basis. Management expects to be able to
lease the renovated units at substantial rental rate increases. Upgrades to the
apartment interiors have been accelerated in recent months and continue to
produce rental rates that are generally 10% above the rents generated by these
units prior to their renovation.
The implementation of the planned capital improvements at Portland Center,
which will continue throughout the remainder of calendar 1996 and calendar 1997,
is expected to support management's ability to increase rents and add value to
the property. Accordingly, to date management has deferred any active marketing
efforts for a sale of the Portland Center property. In addition, the mortgage
debt obtained by the Portland Center joint venture in December 1993 contained a
five-year prohibition on prepayment. Beginning in December 1998, the loan
becomes prepayable with a prepayment penalty which begins at 5% of the
outstanding principal balance and declines by 1% annually over the next five
years. While the loan cannot be prepaid prior to December 1998, it could be
assumed by a buyer of the property for a fee, subject to approval by the lender
and the U.S. Department of Housing and Urban Development, which insured the
mortgage loan The requirement that a buyer would have to assume the outstanding
mortgage obligation could limit management's ability to effectively market the
property for sale prior to December 1998. Nonetheless, subsequent to the quarter
ended September 30, 1996, management completed an analysis of market conditions
to assess whether it might be in the best interests of the Limited Partners to
seek a sale of the Portland Center property in the near term. Market conditions
for residential apartment properties in the Pacific Northwest in general and in
the downtown Portland market in particular are very strong at the present time
as a result of, among other factors, healthy employment gains, local
restrictions on new construction, a limited amount of buildable land sites and
several projects that have converted rental units into condominiums. Such
conditions may result in the Partnership having a favorable opportunity to sell
the Portland Center property even prior to the completion of the ongoing
improvement program and prior to the expiration of the loan prepayment
restrictions. Consequently, management has decided to market the Portland Center
property for sale and these efforts are expected to begin in early calendar year
1997.
The sales of the Walker House Apartments and the Partnership's interest in
the Hudson joint venture during fiscal 1996, together with the planned marketing
efforts for the Portland Center property, have positioned the Partnership for a
possible liquidation within the next 2- to- 3 years. However, there are no
assurances that the Partnership will be able to successfully sell its remaining
investment under favorable conditions within this time frame. Management's hold
versus sell decisions with respect to the investment in Portland Center will be
based on an assessment of the impact on the overall returns to the Limited
Partners.
The Partnership received distributions from the Portland Center joint
venture totalling approximately $973,000 during fiscal 1996. Improved cash flow
from operations is expected to be generated by the Portland Center joint venture
in fiscal 1997 as the capital improvement program continues. At September 30,
1996, the Partnership had available cash and cash equivalents of approximately
$758,000. Such cash and cash equivalents, along with the expected operating cash
flow from the Portland Center property, will be utilized for the working capital
needs of the Partnership and for distributions to the partners. These sources of
liquidity are expected to be sufficient to meet the Partnership's needs on a
short-term and long-term basis. The source of future liquidity and distributions
to the partners is expected to be through proceeds received from the sale or
refinancing of the remaining investment property.
Results of Operations
Three Months Ended September 30, 1996
For the three months ended September 30, 1996, the Partnership reported a
net loss of $189,000, as compared to a net loss of $38,000 for the same period
in the prior year. The primary reason for this unfavorable change in the
Partnership's net operating results for the current three-month period is a
decrease of $168,000 in the Partnership's share of ventures' losses
The Partnership recognized a net loss of $198,000 from its share of
ventures' operations for the three months ended September 30,1996, as compared
to a net loss of $30,000 for the same period in the prior year. This unfavorable
change is partly due to the inclusion of $67,000 in net income attributable to
the Walker House joint venture in the prior year's results. As discussed further
above, the Walker House joint venture sold its operating property during the
fourth quarter of fiscal 1996, and, as a result, the Partnership no longer
records operating results from this investment. In addition, an increase in
property operating expenses and depreciation charges at the Portland Center
joint venture contributed to the increase in the Partnership's share of
ventures' losses for the current three-month period. Property operating expenses
at Portland Center were higher for the current three-month period because of an
increase in repairs and maintenance expenses incurred in connection with the
ongoing enhancement program referred to above. Depreciation expense increased as
a result of the ventures' ongoing capital improvement program, as discussed
further above. The increases in property operating expenses and depreciation
charges at Portland Center were partially offset by an increase in the ventures'
rental revenues. Rental income increased due to both an increase in rental rates
and an increase in average occupancy when compared to the same period in the
prior year.
A decrease in the Partnership's general and administrative expenses of
$14,000 for the three months ended September 30, 1996 partially offset the
increase in net loss resulting from the unfavorable change in the Partnership's
share of ventures' losses. The decrease in general and administrative expenses
is primarily due to a decrease in certain required professional services from
the prior year.
Six Months Ended September 30, 1996
For the six months ended September 30, 1996, the Partnership reported a
net loss of $143,000, as compared to a net loss of $113,000 for the same period
in the prior year. The primary reason for this unfavorable change in the
Partnership's net operating results for the current six-month period is a
decrease of $87,000 in the Partnership's share of ventures' losses.
The Partnership recognized a net loss of $197,000 from its share of
ventures' operations for the six months ended September 30, 1996, as compared to
a net loss of $110,000 for the same period in the prior year. This unfavorable
change is mainly due to the inclusion of $128,000 in net income attributable to
the Walker House joint venture in the prior year's results. As discussed further
above, the Walker House joint venture sold its operating property during the
fourth quarter of fiscal 1996, and, as a result, the Partnership no longer
records operating results from this investment. The impact of the Walker House
sale on the Partnership's share of ventures' losses was partially offset by a
decrease in the net loss from the Portland Center joint venture as a result of
an increase in rental income. Rental income increased by approximately 10% for
the current six-month period due to both an increase in rental rates and an
increase in average occupancy when compared to the same period in the prior
year. The increase in the venture's rental income was partially offset by an
increase in repairs and maintenance expense and depreciation charges as a result
of the venture's ongoing overall enhancement and capital improvement program, as
discussed further above.
An increase in the Partnership's interest income for the six months ended
September 30, 1996 partially offset the increase in the Partnership's share of
ventures' losses. Interest income increased by $57,000 due to higher outstanding
cash reserve balances in the current period as a result of the temporary
investment of the Walker House sale proceeds prior to the May 15, 1996 special
distribution.
<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 PW Growth Properties, Inc. and Properties Associates, which are
the General Partners of the Partnership and affiliates of PaineWebber. On May
30, 1995, the court certified class action treatment of the claims asserted in
the litigation.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement is scheduled to continue in November 1996.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
discussed above. However, PaineWebber has agreed not to seek indemnificaiton for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the 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>
PAINE WEBBER GROWTH PROPERTIES TWO LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER GROWTH PROPERTIES TWO LP
By: SECOND PW GROWTH PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Date: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the six months ended September
30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 758
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 758
<PP&E> 165
<DEPRECIATION> 0
<TOTAL-ASSETS> 923
<CURRENT-LIABILITIES> 22
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 901
<TOTAL-LIABILITY-AND-EQUITY> 923
<SALES> 0
<TOTAL-REVENUES> 192
<CGS> 0
<TOTAL-COSTS> 138
<OTHER-EXPENSES> 197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143)
<EPS-PRIMARY> (4.22)
<EPS-DILUTED> (4.22)
</TABLE>
