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 DECEMBER 31, 1995
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
December 31, 1995 and March 31, 1995 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
Investments in joint ventures, at equity $ 1,966 $ 2,777
Investment held for sale - 350
Cash and cash equivalents 673 1,053
------------ ---------
$ 2,639 $ 4,180
============= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 17 $ 55
Partners' capital 2,622 4,125
------------- ----------
$ 2,639 $ 4,180
============= =========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended December 31, 1995 and 1994 (Unaudited)
(In thousands)
General Limited
Partner Partners
Balance at March 31, 1994 $ (88) $ 6,751
Net loss (1) (93)
Cash Distributions (2) (139)
-------- ---------
Balance at December 31, 1994 $ (91) $ 6,519
======== =========
Balance at March 31, 1995 $ (113) $ 4,238
Net loss (2) (206)
Cash distributions (5) (1,290)
-------- --------
Balance at December 31, 1995 $ (120) $ 2,742
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1995 and 1994
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- --------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Reimbursements from affiliate $ 36 $ 59 $ 144 $ 151
Interest income 16 12 45 27
-------- -------- ------- ------
52 71 189 178
Expenses:
Management fees 18 14 52 14
General and administrative 68 49 174 166
-------- -------- ------- ------
86 63 226 180
-------- -------- ------- ------
Operating income (loss) (34) 8 (37) (2)
Partnership's share of
ventures' losses (61) (17) (171) (92)
-------- -------- ------- ------
Net loss $ (95) $ (9) $ (208) $ (94)
======== ======== ======= ======
Per Limited Partnership Unit:
Net loss $(2.82) $(0.25) $( 6.17) $(2.78)
====== ====== ======= ======
Cash distributions $28.56 $ 4.16 $ 38.61 $ 4.16
====== ====== ======== ========
The above per Limited Partnership Unit information is based upon the 33,410
Limited Partnership Units outstanding during each period.
See accompanying notes.
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1995 and 1994 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994
Cash flows from operating activities:
Net loss $ (208) $ (94)
Adjustments to reconcile net loss to
net cash used for operating activities:
Reimbursements from affiliate (144) (151)
Partnership's share of ventures' losses 171 92
Changes in assets and liabilities:
Accounts payable and accrued expenses (38) 12
------------- --------
Total adjustments (11) (47)
------------- --------
Net cash used for operating activities (219) (141)
Cash flows from investing activities:
Distributions from joint ventures 784 672
Proceeds from sale of joint venture investment 350 -
------------- ----------
Net cash provided by investing activities 1,134 672
------------ -------
Cash flows from financing activities:
Distributions to partners (1,295) (140)
Net increase (decrease) in cash and cash equivalents (380) 391
Cash and cash equivalents, beginning of period 1,053 514
----------- -------
Cash and cash equivalents, end of period $ 673 $ 905
=========== ======
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, 1995.
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 nine months ended
December 31, 1995 and 1994 is $52,000 and $51,000, 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, 1995 and 1994 is $2,000 and $1,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
As a result of the commencement of regular quarterly distributions effective
for the second quarter of fiscal 1995 the Adviser began earning 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 $52,000 and $14,000 for the nine-month periods
ended December 31, 1995 and 1994, respectively.
3. Investments in Joint Venture Partnerships
The Partnership has investments in two joint venture partnerships at
December 31, 1995 (three at December 31, 1994) which own operating
properties as more fully described in the Partnership's Annual Report. 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, these 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 of March 31, 1995,
the Partnership's investment in Hudson Partners was recorded as held for
sale and was separately classified on the accompanying balance sheet at its
estimated fair value. On September 12, 1995, the Partnership sold its joint
venture interest in the Hudson Apartments for $350,000 to its co-venture
partner. In addition, the Partnership started formally marketing the Walker
House property for sale in September 1995. Subsequent to the quarter ended
December 31, 1995, the Partnership signed an agreement to sell the Walker
House Apartments to an unrelated third party for $10,650,000. The proposed
sale is subject to the satisfactory completion of due diligence by the
buyer. Consequently, there are no assurances that this sale transaction will
be consummated. The Partnership would recognize a sizable gain for both book
and tax purposes if this transaction is completed.
Summarized operating results of the joint ventures, for the periods
indicated, are as follows. The operating results for the three and nine
months ended September 30,1995 do not include any for the Hudson partners
joint venture because the Partnership was not entitled to any share of the
venture's operations in accordance with the joint venture agreement through
the date of the sale of the Partnership's interest.
<PAGE>
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the three and nine months ended September 30, 1995 and 1994
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Rental revenues
and expense recoveries $1,798 $1,970 $5,378 $5,814
Interest and other income 18 35 47 114
------ ------ ------ ------
1,816 2,005 5,425 5,928
Property operating expenses 768 801 2,254 2,347
Real estate taxes 149 177 442 506
Interest expense 545 651 1,650 1,947
Depreciation and amortization 416 390 1,252 1,233
-------- ------ ------- -------
1,878 2,019 5,598 6,033
------- ------ ------- -------
Net income (loss) $ (62) $ (14) $ (173) $ (105)
======= ====== ======= =======
Net income (loss):
Partnership's share of
combined income (loss) $ (61) $ (17) $ (171) $ (93)
Co-venturers' share of
combined income (loss) (1) 3 (2) (12)
------- ------- -------- -------
$ (62) $ (14) $ (173) $ (105)
======= ======= ======== ========
4. Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse
effect 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, during the first quarter of fiscal 1996
the Partnership agreed to the sale of its interest in the Hudson Apartments
located in Tyler, Texas. On September 12, 1995, the Partnership completed the
sale of its joint venture interest in the Hudson Apartments for $350,000 to its
co-venture partner. While such proceeds are substantially less than the amount
of the Partnership's original investment in the venture, of $2,600,000,
management believes that the offer is reflective of the current fair market
value of the Partnership's interest. In the mid-to-late 1980s, the Hudson joint
venture was unable to meet its contractual debt service requirements. As a
result, the venture entered into several debt modifications aimed at alleviating
the need for the Partnership to fund cash flow deficits. In October 1990, in
order to take advantage of a discounted debt pay-off offer from the existing
mortgage lender and to avoid possibly losing the property through foreclosure
proceedings, the venture admitted a new partner who contributed the $600,000
necessary to complete the proposed refinancing transaction. Although this
recapitalization saved the property from likely foreclosure, it resulted in a
50% dilution of the Partnership's interest and created a 15% preferred return on
the new partner's $600,000 investment. Based on current market factors,
management did not foresee significant appreciation in the value of the
Partnership's interest in the Hudson joint venture in the near-term.
Furthermore, since the venture's new mortgage financing was expected to have a
five-year prohibition on prepayment, and thereafter any sale of the property
would require the consent of the co-venturer, management believed that it was an
opportune time to sell the Partnership's investment. The Partnership made a
special distribution to the Limited Partners of $23 per original $1,000 Unit, or
approximately $768,000, on November 15, 1995, which represented the Hudson sale
proceeds plus an amount of cash reserves that was in excess of expected future
requirements.
The current operations of the Partnership's two remaining investment
properties, the Portland Center and Walker House apartment complexes, reflect
the generally improving conditions in the real estate markets for multi-family
residential properties across the country, as previously reported. The
implementation of capital improvements at Portland Center, which are discussed
further below, has allowed management to increase rents and add value to this
property. Accordingly, management will likely not consider the sale of the
Portland Center property in the near term, at least until the capital
improvement program is substantially completed and the effects of the
improvements are fully reflected in the asking rents for the apartment units.
With respect to the Walker House property, management decided to test the market
to determine if a favorable sale opportunity might exist in light of the current
market conditions. The Partnership started formally marketing the property for
sale in September 1995. Subsequent to the end of the third fiscal quarter, the
Partnership signed an agreement to sell the property to an unrelated third party
for $10,650,000. Net proceeds from such a transaction, after repayment of the
venture's $5 million mortgage loan and transaction closing costs would be
payable primarily to the Partnership in accordance with the joint venture
agreement. The proposed sale is subject to the satisfactory completion of due
diligence by the buyer. Consequently, there are no assurances that this sale
transaction will be consummated.
As discussed further in the Annual Report, management is currently in the
process of using the excess cash reserves from the December 1993 Portland Center
HUD loan refinancing to complete a major renovation program at the Portland
Center 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 rate increases. Approximately 35% of the property's total units have
been upgraded to date, and rental rate increases averaging greater than 10% have
been achieved on these units. During fiscal 1995, management learned that the
City of Portland is proposing the development of a light rail system that may
result in a rail line extension along the street in front of the Portland Center
Apartments. As a result, the Partnership, through the on-site management team,
has organized a coalition of interested property owners to attempt to secure a
line extension decision and to suggest design alternatives that would have the
most beneficial impact to Portland Center and the surrounding area.
Excess cash flow distributions from the Walker House and Portland Center
investment properties totalled $784,000 and $672,000 for the nine months ended
December 31, 1995 and 1994, respectively. Because of the continued improvement
in cash flow at the Partnership's two remaining properties, and the expectation
that it will continue in the future, the Partnership instituted the payment of
quarterly cash distributions during fiscal 1995. The first payment was made on
November 15, 1994 for the quarter ended September 30, 1994. The initial payment
to the Limited Partners was based upon a 3% annual return on remaining invested
capital. The annualized distribution rate has been increased by 0.25% each
quarter since September 1994 and reached 4.25% for the quarter ended December
31, 1995. Management expects to maintain the distribution rate at 4.25% on the
remaining invested capital of $532 per original $1,000 Unit for the fourth
quarter of fiscal 1996 and all of fiscal 1997, unless actual results of
operations, economic conditions or other factors differ substantially from the
assumptions used in projecting the planned distribution rate.
At December 31, 1995, the Partnership had available cash and cash
equivalents of approximately $673,000. Such cash and cash equivalents, along
with the expected operating cash flow from the Partnership's joint venture
investments, will be utilized for the working capital needs of the Partnership
and for distributions to the partners. The source of future liquidity and
distributions to the partners is expected to be through proceeds received from
the sale or refinancing of the two remaining investment properties.
Results of Operations
Three Months Ended December 31, 1995
For the three months ended December 31, 1995, the Partnership reported a
net loss of $95,000 as compared to a net loss of $9,000 for the same period in
the prior year. The adverse change in net operating results for the third
quarter of fiscal 1996 was caused by an increase in the Partnership's share of
ventures' losses along with an increase in general and administrative expenses.
The increase in the Partnership's share of ventures' losses was mainly due to an
increase in the net losses recognized by the Portland Center joint venture. The
venture's net losses increased as a result of increases in operating expenses
and depreciation expense related to the ongoing upgrading and capital
improvement program discussed further above. A portion of the increase in
operating expenses at Portland Center was due to a significant increase in
advertising and other media expenses which have resulted from efforts to
re-lease the renovated apartment units. The increase in expenses at Portland
Center was partially offset by increased rental revenues at both Portland Center
and Walker House for the three-month period. Partnership's general and
administrative expenses increased by $19,000 primarily due to an increase in
required professional services.
Nine Months Ended December 31, 1995
For the nine months ended December 31, 1995, the Partnership reported a net
loss of $208,000 as compared to a net loss of $94,000 for the same period in the
prior year. The increase in net loss for the current nine-month period is
primarily the result of increases in the Partnership's share of ventures' losses
and management fees. The Partnership's share of the combined losses from its two
remaining investment properties increased by $91,000 for the current nine-month
period mainly as a result of increased operating expenses and depreciation
expense at Portland Center related to the ongoing upgrading and capital
improvement program discussed further above. The increase in expenses at
Portland Center was partially offset by improved rental revenues at both
Portland Center and Walker House, as well as a decline in utilities and other
operating expenses at the Walker House joint venture. In addition, the
Partnership's share of ventures' losses in fiscal 1995 included a portion of the
net loss of the Hudson joint venture. The Partnership stopped recognizing such
losses in fiscal 1996 once the agreement to sell the venture interest was
reached because the investment had been written down to the agreed upon sale
price and the partnership was not entitled to any share of the fiscal 1996 net
cash flow under the terms of the joint venture agreement through the date of the
sale transaction. Partnership management fees increased by $38,000 for the
current nine-month period as a result of the reinstatement of quarterly
distributions during the second half of fiscal 1995.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
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.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in Paine Webber Growth Properties
Two LP, PaineWebber, Second PW Growth Properties, Inc. and Properties Associates
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purport to be suing on behalf of all persons who invested in Paine Webber Growth
Properties Two LP, also allege that following the sale of the partnership
interests, PaineWebber, Second PW Growth Properties, Inc. and Properties
Associates misrepresented financial information about the Partnership's value
and performance. The amended complaint alleges that PaineWebber, Second PW
Growth Properties, Inc. and Properties Associates violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs seek unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also seek treble damages under RICO.
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 which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in Paine Webber Growth Properties
Two LP. Pursuant to provisions of the Partnership Agreement and other
contractual obligations, under certain circumstances the Partnership may be
required to indemnify Second PW Growth Properties, Inc. and Properties
Associates and their affiliates for costs and liabilities in connection with
this litigation. Management has had discussions with representatives of
PaineWebber and, based on such discussions, the Partnership does not believe
that PaineWebber intends to invoke the aforementioned indemnifications in
connection with the settlement of this litigation.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
On September 20, 1995 a Form 8-K was filed by the registrant reporting the
Partnership's sale of its interest in the Hudson Apartments property.
<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: February 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended September 30, 1995
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-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 673
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 673
<PP&E> 1,966
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,639
<CURRENT-LIABILITIES> 17
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 2,622
<TOTAL-LIABILITY-AND-EQUITY> 2,639
<SALES> 0
<TOTAL-REVENUES> 189
<CGS> 0
<TOTAL-COSTS> 226
<OTHER-EXPENSES> (171)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (208)
<EPS-PRIMARY> (6.17)
<EPS-DILUTED> (6.17)
</TABLE>
