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
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
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(Exact name of registrant as specified in its charter)
Delaware 04-2798594
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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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, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
June 30 March 31
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Cash and cash equivalents $ 712 $ 905
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$ 712 $ 905
========= ========
LIABILITIES AND PARTNERS' CAPITAL
Equity in losses of joint venture in excess
of investment and advances $ 481 $ 618
Accounts payable and accrued expenses 17 46
Partners' capital 214 241
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$ 712 $ 905
========= =======
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT
For the three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
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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
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Balance at March 31, 1997 $ (8) $ 249
Net income 1 102
Cash distributions (1) (129)
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Balance at June 30, 1997 $ (8) $ 222
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See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF INCOME
For the three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
1997 1996
---- ----
Revenues:
Reimbursements from affiliate $ 48 $ 48
Interest and other income 12 75
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60 123
Expenses:
Management fees 13 19
General and administrative 33 59
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46 78
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Operating income 14 45
Partnership's share of venture's income 89 1
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Net income $ 103 $ 46
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Net income per Limited Partnership Unit $ 3.04 $ 1.36
====== =========
Cash distributions per Limited
Partnership Unit $ 3.85 $ 164.65
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The above net income and cash distributions per Limited Partnership Unit are
based upon the 33,410 Limited Partnership Units outstanding during each period.
See accompanying notes.
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOW
For the three months ended June 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 103 $ 46
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Reimbursements from affiliate (48) (48)
Partnership's share of venture's income (89) (1)
Changes in assets and liabilities:
Accounts payable and accrued expenses (29) (39)
Accounts receivable - 191
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Total adjustments (166) 103
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Net cash (used in) provided by
operating activities (63) 149
Cash flows from financing activities:
Distributions to partners (130) (5,503)
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Net decrease in cash and cash equivalents (193) (5,354)
Cash and cash equivalents, beginning of period 905 6,278
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Cash and cash equivalents, end of period $ 712 $ 924
========= ========
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 June 30, 1997 and March 31, 1997 and
revenues and expenses for the three-month periods ended June 30, 1997 and
1996. Actual results could differ from the estimates and assumptions used.
2. Investments in Joint Venture Partnerships
As of June 30, 1997 and 1996, the Partnership has 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 months ended March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Rental revenues and
expense recoveries $1,557 $1,460
Interest and other income 35 128
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1,592 1,588
Property operating expenses 604 610
Real estate taxes 124 111
Interest expense 429 458
Depreciation and amortization 346 408
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1,503 1,587
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Net income $ 89 $ 1
====== ======
Net income:
Partnership's share of net income $ 88 $ 1
Co-venturers' share of net income 1 -
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$ 89 $ 1
====== ======
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 $13,000 and $19,000
for the three-month periods ended June 30, 1997 and 1996, respectively.
Included in general and administrative expenses for three months ended
June 30, 1997 and 1996 is $16,000 and $17,000, 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, 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
- -------------------------------
The occupancy level at the Portland Center Apartments in Portland, Oregon,
averaged 94% for the quarter ended June 30, 1997, unchanged from the prior
quarter. The property continues to generate excellent results, including high
occupancy levels and escalating rental rates. 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. While the Partnership
continues to be optimistic about the near-term prospects for 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 and formal marketing efforts are currently underway. Management is
currently focusing on completing a potential near-term sale of this property and
the possible liquidation of the Partnership prior to March 31, 1998. There are
no assurances, however, 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 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. The occupancy level in the commercial space at Portland Center
increased to 100% as of June 30, 1997. This increase is the result of signing
four new leases totalling 2,400 square feet and converting a portion of the
formerly vacant commercial space into a new fitness and activity facility for
residents. The fitness/activity center, which opened in May, includes a kitchen,
big screen television, pool table and new exercise equipment. In addition to the
fitness/activity facility, other capital projects that were completed during the
first quarter included upgrades for 21 apartment units, renovations to the
lobbies in all three residential buildings, exterior paint and power-washing as
needed, new interiors for the elevators, and mulch for the plantings around the
property. The enhancements planned for next quarter include seal coating for the
deck of one building and sidewalk repairs throughout the property. 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 apartment units. The property's apartment units are
being upgraded on a turnover basis. 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. 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 while the sale efforts
are in process. As a result of improvement in the net cash flow of the Portland
Center joint venture, the Partnership has 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. The distribution increase will be effective
for the payment to be made on August 15, 1997 for the quarter ended June 30,
1997.
The mortgage debt obtained by the Portland Center joint venture in
December 1993 contains 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. As a result, in light of the current strength of the market conditions,
management believes that proceeding with the marketing efforts for the sale of
the property is in the Partnership's best interest. Under the terms of the
Portland Center joint venture agreement, both the Partnership and the
co-venturer have certain first refusal rights with respect to a sale of the
property. The Partnership would expect to recognize a sizable gain for financial
reporting purposes upon the sale of the Portland Center property.
At June 30, 1997, the Partnership had available cash and cash equivalents
of approximately $712,000. 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 June 30, 1997
- --------------------------------
The Partnership reported net income of $103,000 for the three months ended
June 30, 1997, as compared to net income of $46,000 for the same period in the
prior year. This increase in net income of $57,000 is the result of an increase
of $88,000 in the Partnership's share of venture's income, which was partially
offset by a decrease in the Partnership's operating income of $31,000.
The Partnership recognized net income of $89,000 from its share of the
Portland Center joint venture's operations for the current three-month period,
as compared to $1,000 for the same period in the prior year. This increase of
$88,000 in the Partnership's share of venture's income is primarily a result of
a decrease in expenses at the Portland Center joint venture. The venture's
interest expense declined by $29,000 for the current three-month period and
depreciation expense decreased by $62,000. An increase in rental revenues was
almost entirely offset by a reduction in the venture's interest and other
income.
The Partnership's operating income decreased primarily due to a decline in
interest income. Interest income decreased by $63,000 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 and a decrease in management fees. General and
administrative expenses decreased by $26,000 mainly due to a reduction in
certain required professional fees during the current three-month period.
Management fees declined by $6,000 due to a reduction in the amount of the
Partnership's operating cash flow distributions subsequent to the return of
capital from the Walker House sale.
<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: August 13, 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 June 30, 1997
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-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 712
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 712
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 712
<CURRENT-LIABILITIES> 17
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 214
<TOTAL-LIABILITY-AND-EQUITY> 712
<SALES> 0
<TOTAL-REVENUES> 149
<CGS> 0
<TOTAL-COSTS> 46
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 103
<INCOME-TAX> 0
<INCOME-CONTINUING> 103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103
<EPS-PRIMARY> 3.04
<EPS-DILUTED> 3.04
</TABLE>
