UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number : 0-12085
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, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Investment in joint venture, at equity $ - $ 257
Cash and cash equivalents 375 6,278
Accounts receivable - 191
----------- ----------
$ 375 $ 6,726
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 30 $ 46
Equity in losses of joint venture in
excess of investments and advances 79 -
Partners' capital 266 6,680
----------- ----------
$ 375 $ 6,726
=========== ==========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
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
======= ========
Balance at March 31, 1996 $ - $ 6,680
Net loss (3) (291)
Cash distributions (5) (6,115)
------- --------
Balance at December 31, 1996 $ (8) $ 274
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Reimbursements from affiliate $ 39 $ 36 $ 145 $ 144
Interest and other income 14 16 101 45
----- ------ ------ ------
53 52 246 189
Expenses:
Management fees 13 18 45 52
General and administrative 46 68 153 174
----- ------ ------ ------
59 86 198 226
----- ------ ------ ------
Operating income (loss) (6) (34) 48 (37)
Partnership's share of
ventures' losses (145) (61) (342) (171)
----- ------ ------ -------
Net loss $(151) $ (95) $ (294) $ (208)
===== ====== ====== ======
Net loss per Limited
Partnership Unit $(4.48) $ (2.82) $(8.70) $(6.17)
====== ======= ====== =======
Cash distributions per Limited
Partnership Unit $14.44 $28.55 $183.05 $38.61
====== ====== ======= ======
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 nine months ended December 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (294) $ (208)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Reimbursements from affiliate (145) (144)
Partnership's share of ventures' losses 342 171
Changes in assets and liabilities:
Accounts payable and accrued expenses (16) (38)
Accounts receivable 191 -
------- --------
Total adjustments 372 (11)
------- --------
Net cash provided by (used in)
operating activities 78 (219)
------- --------
Cash flows from investing activities:
Distributions from joint ventures 139 784
Proceeds from sale of investment - 350
------- --------
Net cash provided by investing activities 139 1,134
------- --------
Cash flows from financing activities:
Distributions to partners (6,120) (1,295)
------- ---------
Net decrease in cash and cash equivalents (5,903) (380)
Cash and cash equivalents, beginning of period 6,278 1,053
------- --------
Cash and cash equivalents, end of period $ 375 $ 673
======= ========
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.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1996 and March 31, 1996
and revenues and expenses for the three- and nine-month periods ended
December 31, 1996 and 1995. Actual results could differ from the estimates
and assumptions used.
2. Investments in Joint Venture Partnerships
The Partnership has an investment in one joint venture partnership at
December 31, 1996 which owns an operating property as more fully described
in the Partnership's Annual Report. At March 31, 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 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. An additional special
distribution of approximately $350,000, or $10.48 per original $1,000
investment was made on December 13, 1996 in connection with the Walker House
transaction. Because the sale of the Walker House Apartments was a taxable
transaction in the state of Maryland, the Partnership withheld Maryland
state income tax equal to the amount of this special distribution on behalf
of most Limited Partners, as required by state law.
<PAGE>
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 include the operations of the Walker House
joint venture.
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the three and nine months ended September 30, 1996 and 1995
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
Rental revenues and
expense recoveries $1,565 $1,798 $4,554 $5,378
Interest and other income 28 18 184 47
------ ------ ------ ------
1,593 1,816 4,738 5,425
Property operating expenses 786 768 2,222 2,254
Real estate taxes 110 149 332 442
Interest expense 431 545 1,321 1,650
Depreciation and amortization 412 416 1,208 1,252
------ ------ ------ ------
1,739 1,878 5,083 5,598
------ ------ ------ ------
Net loss $ (146) $ (62) $ (345) $ (173)
====== ====== ====== ======
Net loss:
Partnership's share of
combined loss $ (145) $ (61) $ (342) $ (171)
Co-venturers' share
of combined loss (1) (1) (3) (2)
------ ------ ------ ------
$ (146) $ (62) $ (345) $ (173)
====== ====== ====== ======
3. Related Party Transactions
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 $45,000 and $52,000
for the nine-month periods ended December 31, 1996 and 1995, respectively.
Included in general and administrative expenses for nine months ended
December 31, 1996 and 1995 is $44,000 and $52,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for the nine months
ended December 31, 1996 and 1995 is $6,000 and $2,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
4. Contingencies
As discussed in more detail in the Annual Report for the year ended
March 31, 1996, the Partnership is involved in certain legal actions. At the
present time, the Managing General Partner is unable to determine what
impact, if any, the resolution of these matters may have on the
Partnership's financial statements, taken as a whole.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The sales of the Walker House Apartments and the Partnership's interest in
the Hudson Apartments during fiscal 1996 leave the Partnership with one
remaining real estate investment, a majority interest in the joint venture which
owns the Portland Center Apartments. While management continues to be optimistic
about the near-term prospects of Portland Center and the downtown Portland
apartment market, management believes that it may be the appropriate time to
sell the property. There appears to be growing interest from institutional and
local buyers for well-located, quality apartment properties like Portland
Center. As a result, management has decided to market the property for sale with
formal marketing efforts expected to begin in the fourth quarter of fiscal 1997.
While there are no assurances that a sale transaction will be completed, a
successful sale of the property would be followed by a liquidation of the
Partnership.
The investment in the Portland Center joint venture comprised 41% of the
Partnership's original investment portfolio. 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. 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. 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 calendar 1997, is expected to support
management's ability to increase rents and add value to the property.
The mortgage debt obtained by the Portland Center joint venture in
December 1993 contained a five-year prohibition on prepayment. The loan becomes
prepayable beginning in December 1998 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 because of the reserve and
reporting requirements associated with a HUD loan. However, the loan does have a
favorable interest rate of 7.125% per annum and does not mature until January 1,
2029. In addition, management's analysis of market conditions completed during
the current quarter 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
revealed favorable results. 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 favorable conditions may result
in the Partnership receiving a greater return on the current sale of this
investment property even prior to the completion of the ongoing improvement
program and prior to the expiration of the loan prepayment restrictions.
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 1 to 2 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.
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. An additional special distribution of
approximately $350,000, or $10.48 per original $1,000 investment, was made on
December 13, 1996 in connection with the Walker House transaction. Because the
sale of the Walker House Apartments was a taxable transaction in the state of
Maryland, the Partnership withheld Maryland state income tax equal to the amount
of this special distribution on behalf of most Limited Partners, as required by
state law.
At December 31, 1996, the Partnership had available cash and cash
equivalents of approximately $375,000. 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. 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. These sources of liquidity are
expected to be sufficient to meet the Partnership's needs on both a short-term
and long-term basis.
Results of Operations
Three Months Ended December 31, 1996
- ------------------------------------
For the three months ended December 31, 1996, the Partnership reported a
net loss of $151,000, as compared to a net loss of $95,000 for the same period
in the prior year. This increase in the Partnership's net loss is attributable
to an $84,000 increase in the Partnership's share of ventures' losses which was
partially offset by a $28,000 decrease in the Partnership's operating loss.
The Partnership recognized a net loss of $145,000 from its share of
ventures' operations for the three months ended December 31, 1996, as compared
to a net loss of $61,000 for the same period in the prior year. This increase in
the Partnership's share of ventures' losses is partly due to the inclusion of
$49,000 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 capital
expenditures incurred over the past year as part of the venture's ongoing
improvement program. The increases in property operating expenses and
depreciation charges at Portland Center were partially offset by an increase in
the venture's rental revenues. Rental income increased mainly due to an increase
in rental rates when compared to the same period in the prior year.
The decrease in the Partnership's operating loss for the three months ended
December 31, 1996 is primarily attributable to a decrease in general and
administrative expenses. General and administrative expenses decreased by
$22,000 for the current three-month period primarily due to a reduction in
certain required professional services.
Nine Months Ended December 31, 1996
- -----------------------------------
For the nine months ended December 31, 1996, the Partnership reported a net
loss of $294,000, as compared to a net loss of $208,000 for the same period in
the prior year. This increase in the Partnership's net loss is attributable to a
$171,000 increase in the Partnership's share of ventures' losses which was
partially offset by an $85,000 favorable change in the Partnership's operating
income (loss).
The Partnership recognized a net loss of $342,000 from its share of
ventures' operations for the nine months ended December 31, 1996, as compared to
a net loss of $171,000 for the same period in the prior year. This increase in
the Partnership's share of ventures' losses is primarily attributable to the
inclusion of $177,000 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 slightly 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 from Portland Center increased by approximately 12%
for the current nine-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.
The favorable change in the Partnership's operating income (loss) is
primarily attributable to the combined effect of a $56,000 increase in interest
income and a $28,000 decrease in the Partnership's operating expenses. Interest
income increased due to higher outstanding cash reserve balances for the current
nine-month period as a result of the temporary investment of the Walker House
sale proceeds prior to the May 15, 1996 special distribution. The Partnership's
operating expenses decreased primarily due to a $21,000 decrease in general and
administrative expenses stemming from a reduction in certain required
professional services. In addition, management fees declined by $7,000 due to
the return of capital associated with the Walker House and Hudson transactions
and the related reduction in the amount of the ongoing Partnership distributions
upon which management fees are based.
<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 was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber affiliates could be
entitled to indemnification for expenses and liabilities in connection with the
litigation discussed above. However, PaineWebber has agreed not to seek
indemnification for any amounts it is required to pay in connection with the
settlement of the New York Limited Partnership Actions. At the present time, the
General Partners cannot estimate the impact, if any, of the potential
indemnification claims on the Partnership's financial statements, taken as a
whole. Accordingly, no provision for any liability which could result from the
eventual outcome of these matters has been made in the accompanying financial
statements of the Partnership.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the period covered by this
report.
<PAGE>
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 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 375
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 375
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 375
<CURRENT-LIABILITIES> 30
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 266
<TOTAL-LIABILITY-AND-EQUITY> 375
<SALES> 0
<TOTAL-REVENUES> 246
<CGS> 0
<TOTAL-COSTS> 198
<OTHER-EXPENSES> 342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (294)
<EPS-PRIMARY> (8.70)
<EPS-DILUTED> (8.70)
</TABLE>
