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 QUARTER ENDED SEPTEMBER 30, 1998
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
- ------------------------------------------ -----
(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, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Cash and cash equivalents $ 1,360 $ 696
========== =========
LIABILITIES AND PARTNERS' DEFICIT
Losses from joint venture in excess
of investment and advances $ 1,637 $ 777
Accounts payable and accrued expenses 18 23
Partners' deficit (295) (104)
---------- ---------
$ 1,360 $ 696
========== =========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (8) $ 249
Net income 1 122
Cash distributions (3) (288)
-------- ---------
Balance at September 30, 1997 $ (10) $ 83
======= =========
Balance at March 31, 1998 $ (11) $ (93)
Net income 1 129
Cash distributions (3) (318)
------- ---------
Balance at September 30, 1998 $ (13) $ (282)
======= =========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF INCOME
For the three and six months ended September 30, 1998 and 1997
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Reimbursements from
affiliate $ 49 $ 54 $ 98 $ 97
Interest and other income 18 15 32 27
------- ------ -------- -------
67 69 130 124
Expenses:
Management fees 16 16 32 29
General and administrative 50 54 100 86
------ ------ -------- -------
66 70 132 115
------ ------ -------- -------
Operating income (loss) 1 (1) (2) 9
Partnership's share of
venture's income 105 26 132 114
------ ------ -------- -------
Net income $ 106 $ 25 $ 130 $ 123
====== ======= ======== =======
Net income per Limited
Partnership Unit $ 3.14 $ 0.74 $ 3.85 $ 3.64
====== ======= ======== =======
Cash distributions per
Limited Partnership Unit $ 4.76 $ 4.76 $ 9.52 $ 8.61
====== ======= ======== =======
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.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 130 $ 123
Adjustments to reconcile net income to
net cash used in operating activities:
Reimbursements from affiliate (98) (97)
Partnership's share of venture's income (132) (114)
Changes in assets and liabilities:
Accounts payable and accrued expenses (5) (9)
--------- ---------
Total adjustments (235) (220)
--------- ---------
Net cash used in operating activities (105) (97)
Cash flows from investing activities:
Distributions from joint venture 1,090 635
Cash flows from financing activities:
Distributions to partners (321) (291)
--------- ---------
Net increase in cash and cash equivalents 664 247
Cash and cash equivalents, beginning of period 696 905
--------- ---------
Cash and cash equivalents, end of period $ 1,360 $ 1,152
========= =========
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, 1998. 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, 1998 and March 31, 1998 and revenues and
expenses for the three- and six-month periods ended September 30, 1998 and 1997.
Actual results could differ from the estimates and assumptions used.
The Partnership has one remaining joint venture investment, the Portland
Center Apartments (see Note 3). 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 calendar 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. 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 $32,000 and $29,000 for
the six-month periods ended September 30, 1998 and 1997, respectively.
Included in general and administrative expenses for each of the six months
ended September 30, 1998 and 1997 is $31,000 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 each of the six
months ended September 30, 1998 and 1997 is $1,000 representing fees earned by
an affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the
Partnership's cash assets.
3. Investments in Joint Venture Partnerships
-----------------------------------------
As of September 30, 1998 and 1997, 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 and
six months in arrears to that of the Partnership.
Summarized operating results of the joint venture, for the periods
indicated, are as follows.
<PAGE>
CONDENSED SUMMARY OF OPERATIONS
For the three and six months ended June 30, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Rental revenues and
expense recoveries $ 1,618 $ 1,592 $ 2,981 $ 3,149
Interest and other
income 2 35 16 70
-------- -------- ------- -------
1,620 1,627 2,997 3,219
Property operating
expenses 643 702 1,111 1,306
Real estate taxes 126 124 252 248
Interest expense 397 428 813 857
Depreciation and
amortization 348 347 688 693
-------- -------- ------- -------
1,514 1,601 2,864 3,104
-------- -------- ------- -------
Net income $ 106 $ 26 $ 133 $ 115
======== ======== ======= =======
Net income:
Partnership's share
of net income $ 105 $ 26 $ 132 $ 114
Co-venturer's share
of net income 1 - 1 1
-------- -------- ------- -------
$ 106 $ 26 $ 133 $ 115
======== ======== ======= =======
As discussed further in the Partnership's Annual Report, the Partnership
has been focusing on a near-term sale of the Portland Center property and a
liquidation of the Partnership since the first quarter of fiscal 1998. The
property has been marketed extensively and sale packages were distributed to
international, national, regional and local prospective purchasers. As a result
of these efforts, the Partnership received 13 offers, most of which were
substantially in excess of the property's most recent independent appraised
value. The prospective purchasers were then asked to submit best and final
offers, of which seven were received. After completing an evaluation of the best
and final offers, the Partnership selected an offer and, on November 25, 1997,
signed an agreement to sell the Portland Center Apartments to a prospective
buyer. During the fourth quarter of fiscal 1998, the prospective buyer decided
to terminate the purchase and sale agreement and discontinued its efforts to
acquire the property. The Partnership subsequently re-opened discussions with
the other prospective purchasers who had previously submitted best and final
offers. Following negotiations, the Partnership selected an offer from one of
these prospective buyers and signed a purchase and sale agreement. Because the
Partnership's joint venture agreement gives the co-venture partner a right of
first refusal to purchase the property, this purchase and sale agreement was
then submitted to the partner for its review. Under the terms of the agreement,
the partner must decide whether to agree to buy the property at the price and on
the terms offered by the prospective purchaser, or to waive its first refusal
right and agree to a sale to this prospective purchaser. On June 12, 1998, the
co-venture partner notified the Partnership that it would be exercising its
right to buy the property. Under the terms of the joint venture agreement, the
co-venturer had an additional 90 days to close the transaction. Because the
buyer will assume the existing HUD-insured mortgage loan secured by the
property, the sale transaction must be approved by HUD. The buyer is currently
awaiting receipt of the preliminary approval from HUD for the loan assumption,
and the 90-day closing period has been extended to accommodate the receipt of
this HUD consent. While there can be no assurances that this sale transaction
will be completed, management continues to make every effort to close the sale
and complete a liquidation of the Partnership in calendar year 1998. However,
given the delays experienced to date in the HUD approval process, it is possible
that the sale and liquidation could be delayed until the first quarter of
calendar 1999. Following the completion of a sale of the Portland Center
Apartments, the net sale proceeds along with the Partnership's remaining cash
reserves after paying liquidation-related expenses will be distributed to the
Limited Partners.
<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, 1998 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 was extensively marketed during the first and second quarters of fiscal
1998 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.
The Partnership then completed an evaluation of the seven final offers, as well
as the relative strength of the prospective purchasers, and selected one of the
offers. On November 25, 1997, the Partnership executed a purchase and sale
agreement with this prospective buyer. During the fourth quarter of fiscal 1998,
the prospective buyer decided to terminate the purchase and sale agreement and
discontinued its efforts to acquire the property. The Partnership subsequently
re-opened discussions with the other prospective purchasers who had previously
submitted best and final offers. Following negotiations, the Partnership
selected an offer from one of these prospective buyers and signed a purchase and
sale agreement. Because the Partnership's joint venture agreement gives the
co-venture partner a right of first refusal to purchase the property, this
purchase and sale agreement was then submitted to the partner for its review.
Under the terms of the agreement, the partner must decide whether to agree to
buy the property at the price and on the terms offered by the prospective
purchaser, or to waive its first refusal right and agree to a sale to this
prospective purchaser. On June 12, 1998, the co-venture partner notified the
Partnership that it would be exercising its right to buy the property. Under the
terms of the joint venture agreement, the co-venturer had an additional 90 days
to close the transaction. Because the buyer will assume the existing HUD-insured
mortgage loan secured by the property, the sale transaction must be approved by
HUD. The buyer is currently awaiting receipt of the preliminary approval from
HUD for the loan assumption, and the 90-day closing period has been extended to
accommodate the receipt of this HUD consent. While there can be no assurances
that this sale transaction will be completed, management continues to make every
effort to close the sale and complete a liquidation of the Partnership in
calendar year 1998. However, given the delays experienced to date in the HUD
approval process, it is possible that the sale and liquidation could be delayed
until the first quarter of calendar 1999. Following the completion of a sale of
the Portland Center Apartments, the net sale proceeds along with the
Partnership's remaining cash reserves after paying liquidation-related expenses
will be distributed to the Limited Partners.
At September 30, 1998, the Partnership had available cash and cash
equivalents of approximately $1,360,000. 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.
As noted above, the Partnership expects to be liquidated either in late
calendar year 1998 or early calendar year 1999. Notwithstanding this, the
Partnership believes that it has made all necessary modifications to its
existing systems to make them year 2000 compliant and does not expect that
additional costs associated with year 2000 compliance, if any, will be material
to the Partnership's results of operations or financial position.
<PAGE>
Results of Operations
Three Months Ended September 30, 1998
- -------------------------------------
The Partnership reported net income of $106,000 for the three months ended
September 30, 1998, as compared to net income of $25,000 for the same period in
the prior year. This increase of $81,000 in the Partnership's net income is
mainly attributable to a $79,000 increase in the Partnership's share of
venture's income.
The Partnership recognized income of $105,000 from its share of the
Portland Center joint venture's operations for the current three-month period,
as compared to net income of $26,000 for the same period in the prior year. This
favorable change in the Partnership's share of venture's income is mainly due to
an increase in rental revenues of $26,000 at the Portland Center joint venture
and a decrease of $87,000 in the venture's expenses for the current three-month
period. Rental revenues increased primarily due to an increase in market rents
when compared to the same period in the prior year. Expenses decreased primarily
due to a reduction in property operating expenses of $59,000. Property operating
expenses decreased primarily due to lower management fees, mortgage insurance
expense and apartment turnover costs. The increase in rental revenues and
decline in operating expenses at Portland Center were partially offset by a
decrease of $33,000 in the venture's interest and other income for the current
three-month period.
The Partnership reported operating income of $1,000 for the three months
ended September 30, 1998, as compared to an operating loss of $1,000 for the
same period in the prior year. The favorable change in operating income (loss)
is primarily attributable to a decrease in general and administrative expenses.
General and administrative expenses decreased by $4,000 mainly due to a
reduction in printing and mailing costs related to the Partnership's quarterly
financial reports.
Six Months Ended September 30, 1998
- -----------------------------------
The Partnership reported net income of $130,000 for the six months ended
September 30, 1998, as compared to net income of $123,000 for the same period in
the prior year. This favorable change in net operating results of $7,000 is the
result of an $18,000 increase in the Partnership's share of venture's income
which was partially offset by an $11,000 unfavorable change in the Partnership's
operating income (loss).
The Partnership recognized income of $132,000 from its share of the
Portland Center joint venture's operations for the current six-month period, as
compared to net income of $114,000 for the same period in the prior year. This
favorable change in the Partnership's share of venture's income is primarily a
result of a $195,000 decrease in property operating expenses. Property operating
expenses declined mainly due to a reduction in management fees, mortgage
insurance expense and advertising costs. In addition, interest expense decreased
by $44,000 due to principal payments on the venture's mortgage debt. The
declines in interest and property operating expenses were partially offset by a
decrease in rental revenues and expense recoveries of $168,000 for the current
six-month period. Rental revenues and expense recoveries decreased mainly due to
a decrease in average occupancy compared to the same period in the prior year.
In addition, the venture's interest and other income declined by $54,000 for the
current six-month period.
The Partnership recognized an operating loss of $2,000 for the six months
ended September 30, 1998, compared to operating income of $9,000 for the same
period in the prior year. This unfavorable change was primarily due to an
increase in general and administrative expenses. General and administrative
expenses increased by $14,000 for the current six-month period mainly due to an
increase in certain required professional fees related to the pending sale of
the Portland Center property. This increase in general and administrative
expenses was partially offset by an increase interest income. Interest income
increased by $5,000 primarily due to higher average outstanding cash reserve
balances during the current six-month period.
<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 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended September 30,
1998 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-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 1,360
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,360
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,360
<CURRENT-LIABILITIES> 18
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (295)
<TOTAL-LIABILITY-AND-EQUITY> 1,360
<SALES> 0
<TOTAL-REVENUES> 262
<CGS> 0
<TOTAL-COSTS> 132
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 130
<INCOME-TAX> 0
<INCOME-CONTINUING> 130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130
<EPS-PRIMARY> 3.85
<EPS-DILUTED> 3.85
</TABLE>
