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, 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
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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
December 31, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Cash and cash equivalents $ 903 $ 905
-------- ---------
$ 903 $ 905
======== =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Losses of joint venture in excess
of investment and advances $ 1,462 $ 618
Accounts payable and accrued expenses 26 46
Partners' capital (deficit) (585) 241
-------- ---------
$ 903 $ 905
======== =========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT
For the nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $ - $ 6,680
Net loss (3) (291)
Cash distributions (5) (6,115)
------- --------
Balance at December 31, 1996 $ (8) $ 274
======= ========
Balance at March 31, 1997 $ (8) $ 249
Net loss (4) (371)
Cash distributions (4) (447)
------- --------
Balance at December 31, 1997 $ (16) $ (569)
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1997 and 1996
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Reimbursements from affiliate $ 48 $ 39 $ 145 $ 145
Interest and other income 16 14 43 101
------- ------ ------- --------
64 53 188 246
Expenses:
Management fees 16 13 45 45
General and administrative 78 46 164 153
------- ------ ------- --------
94 59 209 198
------- ------ ------- --------
Operating income (loss) (30) (6) (21) 48
Partnership's share of
venture's loss (468) (145) (354) (342)
------- ------ ------- --------
Net loss $ (498) $ (151) $ (375) $ (294)
======= ====== ======= ========
Net loss per Limited
Partnership Unit $(14.76) $(4.48) $(11.11) $ (8.70)
======= ====== ======= ========
Cash distributions per Limited
Partnership Unit $ 4.76 $14.44 $ 13.37 $ 183.05
======= ====== ======= ========
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, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (375) $ (294)
Adjustments to reconcile net loss to
net cash (used in) provided by operating
activities:
Reimbursements from affiliate (145) (145)
Partnership's share of venture's loss 354 342
Changes in assets and liabilities:
Accounts payable and accrued expenses (20) (16)
Accounts receivable - 191
------- -------
Total adjustments 189 372
------- -------
Net cash (used in) provided by
operating activities (186) 78
Cash flows from investing activities:
Distributions from joint venture 635 139
Cash flows from financing activities:
Distributions to partners (451) (6,120)
------- -------
Net decrease in cash and cash equivalents (2) (5,903)
Cash and cash equivalents, beginning of period 905 6,278
------- -------
Cash and cash equivalents, end of period $ 903 $ 375
======= =======
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 December 31, 1997 and March 31, 1997 and revenues and
expenses for the three-and nine-month periods ended December 31, 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 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 $45,000 for the
nine-month periods ended December 31, 1997 and 1996, respectively.
Included in general and administrative expenses for nine months ended
December 31, 1997 and 1996 is $47,000 and $44,000, 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, 1997 and 1996 is $2,000 and $6,000, respectively,
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 December 31, 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.
Summarized operating results of the joint venture, for the periods
indicated, are as follows.
<PAGE>
CONDENSED SUMMARY OF OPERATIONS
For the three and nine months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Rental revenues and
expense recoveries $ 1,485 $ 1,565 $ 4,634 $ 4,554
Interest and other income 37 28 107 184
-------- -------- -------- --------
1,522 1,593 4,741 4,738
Property operating
expenses 1,096 786 2,402 2,222
Real estate taxes 124 110 372 332
Interest expense 428 431 1,285 1,321
Depreciation and
amortization 346 412 1,039 1,208
------- -------- -------- --------
1,994 1,739 5,098 5,083
------- -------- -------- --------
Net loss $ (472) $ (146) $ (357) $ (345)
======= ======== ======== ========
Net loss:
Partnership's share of
net loss $ (468) $ (145) $ (354) $ (342)
Co-venturers' share of
net loss (4) (1) (3) (3)
------- -------- -------- --------
$ (472) $ (146) $ (357) $ (345)
======= ======== ======== ========
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. 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. Subsequent to the
signing of this agreement, the co-venture partner had 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. The co-venturer did not
exercise its right to purchase the property during this 30-day period, and the
Partnership is proceeding with the sale to the prospective buyer at the agreed
upon sale price of approximately $58 million. 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.
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. 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>
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 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. Subsequent to the signing of this
agreement, the co-venture partner had 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. The co-venturer did not exercise its
right to purchase the property during this 30-day period, and the Partnership is
proceeding with the sale to the prospective buyer at the agreed upon sale price
of approximately $58 million. 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 third quarter of fiscal 1998 was 94%, unchanged
from the three prior quarters. 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 was
reflected in the sale offers received in connection with the marketing process.
The demand for rental units in Portland's downtown market has remained steady
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. The commercial space at
Portland Center continues to be well leased with an occupancy level of 98% as of
December 31, 1997. As previously reported, the ongoing renovation work at the
Portland Center Apartments has been the primary strategy for generating higher
rental rates, maintaining occupancy levels 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. As of the
third quarter end, 63% of the apartment units had been fully renovated and all
of the remaining units had been partially renovated. To date, management has
been able to lease the fully renovated units at substantial rental rate
increases, averaging approximately 10% above the rental rate prior to the
renovations.
At December 31, 1997, the Partnership had available cash and cash
equivalents of approximately $903,000. 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 December 31, 1997
- ------------------------------------
The Partnership reported a net loss of $498,000 for the three months ended
December 31, 1997, as compared to a net loss of $151,000 for the same period in
the prior year. This increase in the Partnership's net loss is mainly
attributable to a $323,000 increase in the Partnership's share of venture's
loss.
The Partnership recognized a loss of $468,000 from its share of the
Portland Center joint venture's operations for the current three-month period,
as compared to a net loss of $145,000 for the same period in the prior year.
This unfavorable change in the Partnership's share of venture's loss is mainly
due to a $310,000 increase in property operating expenses for the current
three-month period. Property operating expenses increased primarily as a result
of an increase in repairs and maintenance expenses. Repairs and maintenance
expenses increased due to the ongoing renovation program discussed further above
and due to additional expenses incurred in connection with preparing the
property for a potential sale.
An increase in the Partnership's operating loss for the three months ended
December 31, 1997, which is attributable to an increase in general and
administrative expenses, also contributed to the increase in net loss. General
and administrative expenses increased by $32,000 mainly due to an increase in
certain required professional fees. In addition, 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.
Nine Months Ended December 31, 1997
- -----------------------------------
The Partnership reported a net loss of $375,000 for the nine months ended
December 31, 1997, as compared to a net loss of $294,000 for the same period in
the prior year. This increase in the Partnership's net loss is attributable to
an unfavorable change in the Partnership's operating income (loss) of $69,000
and a $12,000 increase in the Partnership's share of venture's loss.
The Partnership's operating income (loss) changed primarily due to a
decrease in interest and other income. Interest and other income decreased by
$58,000 for the current nine-month period 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. In addition,
general and administrative expenses increased by $12,000 for the current
nine-month period mainly due to an increase in certain required professional
fees.
The Partnership recognized a loss of $354,000 from its share of the
Portland Center joint venture's operations for the current nine-month period, as
compared to a net loss of $342,000 for the same period in the prior year. This
unfavorable change in the Partnership's share of venture's loss is primarily due
to a $180,000 increase in property operating expenses. Property operating
expenses increased for the current nine-month period due to an increase in
repairs and maintenance expenses. Repairs and maintenance expenses increased due
to the ongoing renovation program discussed further above and due to additional
expenses incurred in connection with preparing the property for a potential
sale. The increase in property operating expenses at Portland Center was
partially offset by higher rental revenues and reductions in interest expense
and depreciation and amortization charges.
<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: February 12, 1998
<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,
1997 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-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 903
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 903
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 903
<CURRENT-LIABILITIES> 26
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (585)
<TOTAL-LIABILITY-AND-EQUITY> 903
<SALES> 0
<TOTAL-REVENUES> 188
<CGS> 0
<TOTAL-COSTS> 209
<OTHER-EXPENSES> 354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (375)
<EPS-PRIMARY> (11.11)
<EPS-DILUTED> (11.11)
</TABLE>
