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 SEPTEMBER 30, 1997
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, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Cash and cash equivalents $ 1,152 $ 905
--------- ---------
$ 1,152 $ 905
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Equity in losses of joint venture in excess
of investment and advances $ 1,042 $ 618
Accounts payable and accrued expenses 37 46
Partners' capital 73 241
--------- ---------
$ 1,152 $ 905
========= =========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $ - $ 6,680
Net loss (1) (112)
Cash distributions (3) (5,633)
-------- ---------
Balance at September 30, 1996 $ (4) $ 935
======== =========
Balance at March 31, 1997 $ (8) $ 249
Net income 1 122
Cash distributions (3) (288)
-------- ---------
Balance at September 30, 1997 $ (10) $ 83
======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1997 and 1996
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Reimbursements from affiliate $ 54 $ 57 $ 97 $ 105
Interest and other income 15 12 27 87
------ ------ ------ -----
69 69 124 192
Expenses:
Management fees 16 13 29 32
General and administrative 54 47 86 106
------ ------ ------ -----
70 60 115 138
------ ------ ------ -----
Operating income (loss) (1) 9 9 54
Partnership's share of venture's
income (loss) 26 (149) 114 (167)
------ ------ ------ -----
Net income (loss) $ 25 $ (140) $ 123 $(113)
====== ====== ====== =====
Net income (loss) per Limited
Partnership Unit $ 0.74 $(4.14) $ 3.64 $(3.35)
====== ====== ====== ======
Cash distributions per Limited
Partnership Unit $ 4.76 $ 3.96 $ 8.61 $168.61
====== ====== ====== =======
The above net income (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, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 123 $ (113)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Reimbursements from affiliate (97) (105)
Partnership's share of venture's income (loss) (114) 167
Changes in assets and liabilities:
Accounts payable and accrued expenses (9) (24)
Accounts receivable - 191
-------- --------
Total adjustments (220) 229
-------- --------
Net cash (used in) provided by
operating activities (97) 116
Cash flows from investing activities:
Distributions from joint venture 635 -
Cash flows from financing activities:
Distributions to partners (291) (5,636)
-------- --------
Net increase (decrease) in cash and cash
equivalents 247 (5,520)
Cash and cash equivalents, beginning of period 905 6,278
-------- --------
Cash and cash equivalents, end of period $ 1,152 $ 758
======= ========
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, 1997. 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 September 30, 1997 and March 31, 1997 and revenues and
expenses for the three-and six-month periods ended September 30, 1997 and 1996.
Actual results could differ from the estimates and assumptions used.
The Partnership has one remaining joint venture investment, the Portland
Center Apartments (see Note 2). Management of the Partnership is currently
pursuing a possible sale of this final asset and a potential liquidation of the
Partnership which could be accomplished prior to the end of fiscal 1998. There
are no assurances, however, that the disposition of the Partnership's remaining
asset and a liquidation of the Partnership will be accomplished within this time
frame.
2. Investments in Joint Venture Partnerships
-----------------------------------------
As of September 30, 1997 and 1996, the Partnership had an investment in
one joint venture partnership which owns an operating property as more fully
described in the Partnership's Annual Report. The remaining joint venture is
Oregon Portland Associates, which owns Portland Center, a 525-unit high-rise
apartment property, located in Portland, Oregon, which also contains 28,000
square feet of commercial space. The joint venture is accounted for by using the
equity method because the Partnership does not have a voting control interest in
the venture. Under the equity method, the investment is carried at cost adjusted
for the Partnership's share of the venture's earnings and losses and
distributions. For income tax reporting purposes, the joint venture is required
to maintain its accounting records on a calendar year basis. As a result, the
joint venture is accounted for based on financial information which is three
months in arrears to that of the Partnership.
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 venture, for the periods
indicated, are as follows.
CONDENSED SUMMARY OF OPERATIONS
For the three and six months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Rental revenues and
expense recoveries $1,592 $1,529 $3,149 $2,989
Interest and other income 35 28 70 67
------ ------ ------ ------
1,627 1,557 3,219 3,056
Property operating expenses 702 826 1,306 1,436
Real estate taxes 124 111 248 222
Interest expense 428 432 857 890
Depreciation and amortization 347 339 693 677
------ ------ ------ ------
1,601 1,708 3,104 3,225
------ ------ ------ ------
Net income (loss) $ 26 $ (151) $ 115 $ (169)
====== ====== ====== ======
Net income (loss):
Partnership's share of
net income (loss) $ 26 $ (149) $ 114 $ (167)
Co-venturers' share of
net income (loss) - (2) 1 (2)
------ ------ ------ ------
$ 26 $ (151) $ 115 $ (169)
====== ====== ====== ======
The Partnership has been focusing on a near-term sale of the Portland
Center Apartments, the Partnership's only remaining real estate asset, and the
liquidation of the Partnership. The property has been extensively marketed over
the past six months resulting in 13 offers to purchase the property, most of
which were at a sale price substantially in excess of the property's most recent
independent appraised value. The prospective purchasers were then asked to
submit their best and final offers which resulted in final offers from seven
prospective buyers. Subsequent to September 30, 1997, the Partnership completed
an evaluation of the seven final offers, as well as the relative strength of the
prospective purchasers, and selected one of the offers. The Partnership is
currently negotiating a purchase and sale agreement with this prospective buyer.
Because the Portland Center joint venture agreement entitles the co-venturer to
a right of first refusal with respect to a sale of the property, the Partnership
will submit the purchase and sale agreement to its co-venture partner for their
review. The co-venture partner has 30 days to exercise their right of first
refusal and purchase the property at the same price and terms offered by
selected prospective purchaser, or to waive their first refusal right and agree
to a sale to this prospective purchaser. If the co-venturer exercises its right
of first refusal, it will have an additional 90 days to close the transaction.
Consequently, the Partnership expects to close the sale and complete a
liquidation of the Partnership in calendar year 1998. However, since the sale
remains subject to certain due diligence and financing contingencies, there are
no assurances that both a sale of the remaining investment property and the
liquidation of the Partnership will be completed within this time frame. If
completed, the Partnership's share of the net proceeds from the sale of Portland
Center, along with the remaining Partnership cash reserves after the payment of
all liquidation-related expenses, would be distributed to the Limited Partners
prior to the liquidation of the Partnership.
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 $29,000 and $32,000 for
the six-month periods ended September 30, 1997 and 1996, respectively.
Included in general and administrative expenses for six months ended
September 30, 1997 and 1996 is $31,000 and $27,000, 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, 1997 and 1996 is $1,000 and $5,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended March 31, 1997 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
As previously reported, the Partnership has been focusing on a near-term
sale of the Portland Center Apartments, the Partnership's only remaining real
estate asset, which would be followed by the liquidation of the Partnership. The
property has been extensively marketed over the past six months resulting in 13
offers to purchase the property, most of which were at a sale price
substantially in excess of the property's most recent independent appraised
value. The prospective purchasers were then asked to submit their best and final
offers which resulted in final offers from seven prospective buyers. Subsequent
to September 30, 1997, the Partnership completed an evaluation of the seven
final offers, as well as the relative strength of the prospective purchasers,
and selected one of the offers. The Partnership is currently negotiating a
purchase and sale agreement with this prospective buyer. Because the Portland
Center joint venture agreement entitles the co-venturer to a right of first
refusal with respect to a sale of the property, the Partnership will submit the
purchase and sale agreement to its co-venture partner for their review. The
co-venture partner has 30 days to exercise their right of first refusal and
purchase the property at the same price and terms offered by selected
prospective purchaser, or to waive their first refusal right and agree to a sale
to this prospective purchaser. If the co-venturer exercises its right of first
refusal, it will have an additional 90 days to close the transaction.
Consequently, the Partnership expects to close the sale and complete a
liquidation of the Partnership in calendar year 1998. However, since the sale
remains subject to certain due diligence and financing contingencies, there are
no assurances that both a sale of the remaining investment property and the
liquidation of the Partnership will be completed within this time frame. If
completed, the Partnership's share of the net proceeds from the sale of Portland
Center, along with the remaining Partnership cash reserves after the payment of
all liquidation-related expenses, would be distributed to the Limited Partners
prior to the liquidation of the Partnership.
The Portland Center Apartments continues to maintain consistently high
occupancy levels, while implementing significant increases in rental rates. The
average occupancy level for the second quarter was 94%, as it was for the two
prior quarters, and the average monthly rental rate per apartment unit has risen
by 9% over the past 12 months. These healthy occupancy levels and increasing
rental rates, in combination with the property's positive attributes and strong
local economy, have resulted in a materially higher property value which is
reflected in the sale offers received to date. The demand for rental units in
Portland's downtown market is high and is being fueled by solid economic growth,
as well as physical and political constraints that have limited the construction
of new apartments in the downtown area. As a result of these constraints, there
are no new apartment properties in the immediate vicinity of Portland Center
currently under development or being added to the market.
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, the
ongoing renovation work at the Portland Center Apartments has been the primary
strategy for increasing occupancy levels, generating higher rental rates and
enhancing the property's overall competitive position in the marketplace. The
renovation program began in fiscal year 1995 and focuses on the interiors of the
525 apartment units. During the second quarter, an additional 11 units were
fully renovated and 25 more were partially renovated. As of the September 30,
1997 quarter-end, 62% of the units have been fully renovated and all of the
remaining units have been partially renovated. The cost of the ongoing
renovation program has been funded by the excess cash reserves from the December
1993 Portland Center loan refinancing. To date, management has been able to
lease the renovated units at substantial rental rate increases, averaging
approximately 10% above the rental rate prior to the renovations. As a result of
improvement in the net cash flow of the Portland Center joint venture, the
Partnership increased its quarterly distribution rate from 4.25% to 5% per annum
on a Limited Partner's remaining capital account of $362.52 per original $1,000
Unit effective for the payment made on August 15, 1997 for the quarter ended
June 30, 1997.
At September 30, 1997, the Partnership had available cash and cash
equivalents of approximately $1,152,000. 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 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 September 30, 1997
- -------------------------------------
The Partnership reported net income of $25,000 for the three months ended
September 30, 1997, as compared to a net loss of $140,000 for the same period in
the prior year. This favorable change in net operating results of $165,000 is
the result of a favorable change in the Partnership's share of venture's income
(loss) of $175,000 which was partially offset by an unfavorable change in the
Partnership's operating income (loss) of $10,000.
The Partnership recognized income of $26,000 from its share of the
Portland Center joint venture's operations for the current three-month period,
as compared to a net loss of $149,000 for the same period in the prior year.
This favorable change in the Partnership's share of venture's income (loss) is
primarily a result of a $124,000 decrease in property operating expenses and a
$63,000 increase in rental revenues. Property operating expenses decreased
mainly due to a reduction in repairs and maintenance expense during the current
three-month period. Rental revenues increased as a result of an increase in
rental rates, as discussed further above.
The unfavorable change in the Partnership's operating income (loss)
resulted from an increase in Partnership operating expenses for the current
three-month period. General and administrative expenses increased by $7,000
mainly due to an increase in certain required professional fees. Management
fees, which are based on the amount of the Partnership's operating cash flow
distributions, increased by $3,000 due to an increase in the quarterly
distribution rate, as discussed further above.
Six Months Ended September 30, 1997
- -----------------------------------
The Partnership reported net income of $123,000 for the six months ended
September 30, 1997, as compared to a net loss of $113,000 for the same period in
the prior year. This favorable change in net operating results of $236,000 is
the result of a $281,000 favorable change in the Partnership's share of
venture's income (loss) which was partially offset by a $45,000 decrease in the
Partnership's operating income.
The Partnership recognized income of $114,000 from its share of the
Portland Center joint venture's operations for the current six-month period, as
compared to a net loss of $167,000 for the same period in the prior year. This
favorable change in the Partnership's share of venture's income (loss) is
primarily a result of a $160,000 increase in rental income and a $130,000
decrease in property operating expenses. Rental income increased as a result of
an increase in rental rates, as discussed further above. Property operating
expenses decreased due to a decline in repairs and maintenance expense.
The Partnership's operating income decreased primarily due to a decrease
in interest income. Interest income decreased by $60,000 primarily due to lower
outstanding cash reserve balances. The prior period results reflect the
temporary investment of the Walker House sale proceeds prior to the May 1996
distribution to the Limited Partners, as discussed further in the Annual Report.
This decrease in interest income was partially offset by a reduction in general
and administrative expenses. General and administrative expenses decreased by
$20,000 mainly due to a reduction in certain required professional fees.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
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 10, 1997
<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, 1997 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-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,152
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,152
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,152
<CURRENT-LIABILITIES> 37
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 73
<TOTAL-LIABILITY-AND-EQUITY> 1,152
<SALES> 0
<TOTAL-REVENUES> 238
<CGS> 0
<TOTAL-COSTS> 115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 123
<INCOME-TAX> 0
<INCOME-CONTINUING> 123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 3.64
</TABLE>
