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 JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number : 0-12085
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
June 30, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
June 30 March 31
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Investments in joint ventures, at equity $ 306 $ 257
Cash and cash equivalents 924 6,278
Accounts receivable - 191
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$ 1,230 $ 6,726
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LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 7 $ 46
Partners' capital 1,223 6,680
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$ 1,230 $ 6,726
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
------- --------
Balance at March 31, 1995 $ (113) $ 4,238
Net loss (1) (85)
Cash Distributions (2) (162)
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Balance at June 30, 1995 $ (116) $ 3,991
======= ========
Balance at March 31, 1996 $ - $ 6,680
Net income 1 45
Cash distributions (2) (5,501)
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Balance at June 30, 1996 $ (1) $ 1,224
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the three months ended June 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
1996 1995
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Revenues:
Reimbursements from affiliate $ 48 $ 51
Interest income 75 15
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123 66
Expenses:
Management fees 19 16
General and administrative 59 45
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78 61
Operating income 45 5
Loss from operations of investment
property held for sale - (11)
Partnership's share of ventures'
income (losses) 1 (80)
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Net income (loss) $ 46 $ (86)
======== =======
Per Limited Partnership Unit:
Net income (loss) $ 1.36 $ (2.58)
====== =======
Cash distributions $164.65 $ 4.86
======= =======
The above per Limited Partnership Unit information is 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 three months ended June 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ 46 $ (86)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Reimbursements from affiliate (48) (51)
Loss from operations of investment properties
held for sale, net - 11
Partnership's share of ventures' income (losses) (1) 80
Changes in assets and liabilities:
Accounts payable and accrued expenses (39) (49)
Accounts receivable 191 -
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Total adjustments 103 (9)
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Net cash provided by (used in)
operating activities 149 (95)
Cash flows from investing activities:
Distributions from joint ventures - 96
Cash flows from financing activities:
Distributions to partners (5,503) (164)
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Net decrease in cash and cash equivalents (5,354) (163)
Cash and cash equivalents, beginning of period 6,278 1,053
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Cash and cash equivalents, end of period $ 924 $ 890
======= ======
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 three months ended
June 30, 1996 and 1995 is $17,000 and $18,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the three months
ended June 30, 1996 is $5,000 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 $19,000 and $16,000 for the three-month
periods ended June 30, 1996 and 1995, respectively.
3. Investments in Joint Venture Partnerships
The Partnership has an investment in one joint venture partnership at June
30, 1996 which owns an operating property as more fully described in the
Partnership's Annual Report. At June 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. 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. Also, 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.
Accordingly, in addition to the operations for the twelve months ended
December 31, 1995, the Partnership's share of ventures' losses in fiscal
1996 also reflected the Partnership's share of Walker House operations for
the period January 1, 1996 through the date of sale. Such operations in
calendar 1996 reflected total revenues of $360,000 and total expenses of
$414,000 for a net loss of $54,000, of which the Partnership's share was
$53,000.
<PAGE>
Summarized operating results of the joint ventures, for the periods
indicated, are as follows. The operating results for the three months ended
March 31, 1995 include the operations of the Walker House joint venture.
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the three months ended March 31, 1996 and 1995
(in thousands)
1996 1995
---- ----
Rental revenues and expense recoveries $1,460 $1,770
Interest and other income 128 17
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1,588 1,787
Property operating expenses 610 741
Real estate taxes 111 147
Interest expense 458 559
Depreciation and amortization 408 421
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1,587 1,868
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Net income (loss) $ 1 $ (81)
====== ======
Net income (loss):
Partnership's share of combined income (loss) $ 1 $ (80)
Co-venturers' share of combined income (loss) - (1)
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$ 1 $ (81)
====== ======
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. Also as discussed further 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, to its
co-venture partner. On September 12, 1995, the Partnership completed the sale of
its joint venture interest in the Hudson Apartments for $350,000. 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.
The sales of the Walker House Apartments and the Hudson joint venture
interest leave the Partnership with one remaining real estate investment, a
majority interest in 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
HUD 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. Fewer than half of the property's total units have been upgraded
to date, and rental rate increases averaging 10% have been achieved on these
units. The venture has over $2 million remaining in the replacement reserve
escrow to cover the costs of completing the planned renovation program, which
will continue throughout calendar 1996.
The implementation of the planned capital improvements at Portland Center
is expected to support management's ability to increase rents and add value to
the 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.
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 1% fee, subject to the lender's
approval. As noted above, management has no current plans to market the Portland
Center property for sale as a result of the ongoing renovation program. However,
if the renovation program is completed and the rental rate increases are fully
implemented prior to the end of the debt prepayment restriction period, 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, the sales of the Walker House
Apartments and the Partnership's interest in the Hudson joint venture 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 June 30, 1996,
the Partnership had available cash and cash equivalents of approximately
$924,000. 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. Cash flow from Portland Center is expected to be
sufficient to cover the Partnership's operating expenses and permit the payment
of quarterly distributions at a rate of 4.25% per annum on the $373 remaining
portion of a Limited Partner's original $1,000 investment. 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 June 30, 1996
For the three months ended June 30, 1996, the Partnership reported net
income of $46,000, as compared to a net loss of $86,000 for the same period in
the prior year. The primary reason for this favorable change in the
Partnership's net operating results for the current three-month period is an
improvement of $81,000 in the Partnership's share of the net operating results
of the joint ventures. In addition, the Partnership's operating income increased
by $40,000 over the same period in the prior year.
The Partnership recognized net income of $1,000 from its share of
ventures' operations for the three months ended June 30,1996, as compared to a
net loss of $80,000 for the same period in the prior year. This favorable change
is mainly due to an increase in net income from the Portland Center joint
venture as a result of an increase in rental income. 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. The increase in rental income was
partially offset by an increase in depreciation and amortization as a result of
the venture's ongoing capital improvement program, as discussed further above.
In addition, the effect of the increase in net income at Portland Center was
partially offset by the inclusion of $68,000 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 Partnership's operating income improved in the first quarter of fiscal
1997, when compared to the same period in the prior year, mainly due to an
increase in interest income. Interest income increased by $60,000 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. The increase in interest income was partially offset by a
$14,000 increase in general and administrative expenses for the three months
ended June 30, 1996.
<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 has been scheduled for October 25, 1996.
The status of the other litigation involving the Partnership and its
General Partners remains unchanged from the description provided in the
Partnership's Annual Report on Form 10-K for the year ended March 31, 1996.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
discussed above. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no provision
for any liability which could result from the eventual outcome of these matters
has been made in the accompanying financial statements of the Partnership.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the period covered by this
report.
<PAGE>
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: August 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the three months ended June 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 924
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<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 924
<PP&E> 306
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0
0
<COMMON> 0
<OTHER-SE> 1223
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</TABLE>
