UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-12085
PAINE WEBBER GROWTH PROPERTIES TWO LP
Delaware 04-2798594
(State of organization) (I.R.S.Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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 ___
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
October 6, 1983, as supplemented
Current Report on Form 8-K of Part IV
registrant dated March 13, 1996
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-4
Part II
Item 5 Market for the Partnership's Limited Partnership Interests
and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-5
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial
Owners and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-36
<PAGE>
PART I
Item 1. Business
Paine Webber Growth Properties Two LP (the "Partnership") is a limited
partnership formed in June 1983 under the Uniform Limited Partnership Act of the
State of Delaware for the purpose of investing in a portfolio of rental
apartment and commercial properties which had potential for near-term capital
appreciation. It is the Partnership's intention to enhance the value of the
properties through the use of capital reserves and by reinvesting cash flow from
operations. The Partnership sold $33,410,000 in Limited Partnership Units
(33,410 Units at $1,000 per Unit) from October 6, 1983 to October 5, 1984
pursuant to a Registration Statement on Form S-11 filed under the Securities Act
of 1933 (Registration No. 2-84814). Limited Partners will not be required to
make any additional capital contributions. Net proceeds of the Partnership's
offering were originally invested in four operating properties through joint
venture partnerships. Through March 31, 1996, three of these investments had
been sold, including two during fiscal 1996.
As of March 31, 1996, the Partnership owned, through a joint venture
partnership, an interest in the operating property set forth below:
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- -------------------------- ---- ----------- --------------------
Oregon Portland Associates 525 4/26/84 Fee ownership of land
Portland Center, Apartment apartment and improvements
and Office Complex units and (through joint venture)
Portland, Oregon 28,328
sq. ft.
office
space
(1)See Notes to the Financial Statements of the Partnership filed in Item
14(a)(1) of this Annual Report for a description of the long-term
mortgage indebtedness secured by the Partnership's operating property
investment and for a description of the agreement through which the
Partnership has acquired this real estate investment.
The Partnership's principal investment objectives are to invest the net
cash proceeds from the offering of limited partnership units in rental apartment
properties with the goals of obtaining:
(1) capital appreciation;
(2) tax losses during the early years of operations from deductions generated by
investments;
(3) equity build-up through principal repayments of mortgage loans on
Partnership properties; and
(4) cash distributions from rental income.
The primary investment objective of the Partnership is capital
appreciation. The Partnership may sacrifice attainment of its other objectives
to the extent required to achieve the capital appreciation objective. The
Partnership's success in meeting its capital appreciation objective will depend
upon the proceeds received from the final liquidation of the remaining
investment, the Portland Center Apartments, which comprised 41% of the
Partnership's original investment portfolio. The amount of such proceeds will
ultimately depend upon the value of the underlying investment property at the
time of such liquidation, which cannot be determined at the present time. Of the
three investments that the Partnership has sold to date, two have been sold at
sizable gains on the original investment and the third was sold at a sizable
loss. In September 1986, the joint venture which owned The Hamlet, an 864-unit
apartment property located in Montgomery Village, Maryland, sold the property to
an unrelated third party for $38 million, which consisted of $36 million in cash
and a $2 million second mortgage note. The Hamlet Apartments had been purchased
by the Partnership's joint venture investee in 1984 for $26.8 million. The
Partnership received a distribution of almost $13 million in 1986 from the cash
proceeds of the sale. Through September 1991, when the second mortgage note
receivable matured, the Partnership had received an additional $2.4 million in
principal and interest payments from the note. In September 1995, the
Partnership sold its interest in Hudson Partners, which owned the Hudson
Apartments, to the co-venture partner for $350,000. The Hudson Apartments is a
144-unit complex located in Tyler, Texas. While the proceeds received from the
sale were substantially below the amount of the Partnership's original
investment in the Hudson joint venture, which totalled $2.6 million, management
believed that the offer was reflective of the fair value of the Partnership's
interest and that it was an opportune time to dispose of this investment. In
March 1996, the joint venture which owned the Walker House Apartments sold the
operating investment property to an unrelated third party for $10.6 million. The
Walker House Apartments, a 196-unit complex located in Montgomery Village,
Maryland, had been purchased by the Partnership's joint venture investee for
$7.8 million in 1984. After repayment of the existing mortgage debt, transaction
costs, and the co-venturer's share of the proceeds, the Partnership received net
proceeds of approximately $5.3 million from the sale of Walker House.
The Partnership has generated tax losses from operations since inception.
However, the benefits of such losses to investors have been significantly
reduced by changes in federal income tax law subsequent to the organization of
the Partnership. Through March 31, 1996, the Limited Partners had received
cumulative cash distributions of approximately $16,636,000, or approximately
$498 per original $1,000 investment for the Partnership's earliest investors.
This return includes distributions totalling $445 per original $1,000 unit from
the sale of The Hamlet Apartments, including an amount of $45 per Unit
distributed in fiscal 1992 as a result of the collection of the note receivable
taken back at the time of the sale. This return also includes distributions
totalling $11 per original $1,000 investment from the sale of the Partnership's
investment in the Hudson Apartments and $12 per original $1,000 investment from
a distribution of Partnership reserves that exceeded future reserve
requirements. Subsequent to year-end, on May 15, 1996, the Partnership
distributed $5.3 million to the Limited Partners, or $159 per original $1,000
investment, representing the Walker House net sale proceeds. As noted above, the
Partnership continues to retain an ownership interest in one operating
investment property. During fiscal 1996, improved conditions in the real estate
markets for multi-family apartment properties favorably impacted the performance
of the Portland Center Apartments. The remaining apartment property in the
Partnership's portfolio is generating excess cash flow from operations after
payment of operating expenses and debt service obligations which is being used
to cover the Partnership's operating expenses and for distributions to the
partners. Subsequent to the distribution of the Walker House sale proceeds, the
Partnership expects to make regular quarterly distribution payments at a rate of
4.25% per annum on remaining invested capital of $373 per original $1,000
investment.
The Portland Center investment property is located in a real estate market
in which it faces significant competition for the revenues it generates. The
apartment complex competes with numerous projects of similar type, generally on
the basis of price, location and amenities. The property also competes with the
local single-family home market for prospective tenants. The continued
availability of low interest rates on home mortgage loans has increased the
level of this competition over the past few years. However, the impact of the
competition from the single-family home market has been offset by the lack of
significant new construction activity in the multi-family apartment market over
this period. The Portland Center property also has a small amount of leasable
commercial space. The property competes for long-term commercial tenants with a
number of other properties generally on the basis of price, location and tenant
improvement allowances.
The Partnership is engaged solely in the business of real estate
investment; therefore, a presentation of information about industry segments is
not applicable. The Partnership has no real estate investments located outside
the United States.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are
Second PW Growth Properties, Inc. and Properties Associates. Second PW Growth
Properties, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber, is the managing general partner of the Partnership. The associate
general partner is Properties Associates (the "Associate General Partner"), a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
The Partnership has acquired interests in operating properties through
joint venture partnerships. These joint venture partnerships and the related
properties are referred to under Item 1 above to which reference is made for the
name, location, and the description of each property.
Occupancy figures for each fiscal quarter during 1996, along with an
average for the year, are presented below for each property:
Percent Occupied At
-------------------------------------------------
Fiscal
1996
6/30/95 9/30/95 12/31/95 3/31/96 Average
------- ------- -------- ------- --------
Walker House Apartments 98% 98% 98% N/A (1) N/A (1)
Portland Center 91% 91% 93% 94% 92%
The Hudson Apartments 97% N/A (2) N/A (2) N/A (2) N/A (2)
(1) The Walker House Apartments property was sold on March 13, 1996.
(2) The Partnership sold its interest in The Hudson Apartments on September 12,
1995.
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Second PW Growth Properties, Inc. and Properties
Associates, which are the General Partners of the Partnership and affiliates of
PaineWebber. On May 30, 1995, the court certified class action treatment of the
claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in Paine Webber Growth Properties
Two LP, PaineWebber, Second PW Growth Properties, Inc. and Properties Associates
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purport to be suing on behalf of all persons who invested in Paine Webber Growth
Properties Two LP, also allege that following the sale of the partnership
interests, PaineWebber, Second PW Growth Properties, Inc. and Properties
Associates misrepresented financial information about the Partnership's value
and performance. The amended complaint alleges that PaineWebber, Second PW
Growth Properties, Inc. and Properties Associates violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs seek unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also seek treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in PaineWebber Growth Properties
Two LP.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentations and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $3.4 million plus punitive damages. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber affiliates could be
entitled to indemnification for expenses and liabilities in connection with
this litigation. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no provision
for any liability which could result from the eventual outcome of these matters
has been made in the accompanying financial statements of the Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1996 there were 3,157 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for Units will develop. The Managing General Partner will
not redeem or repurchase Units.
Effective for the second quarter of fiscal 1995, the Partnership began
distributions to the Limited Partners equivalent to a 3% annualized rate of
return on the remaining invested capital. The distribution rate was increased
gradually in subsequent quarters to its current stabilized rate of 4.25% per
annum for the quarter ended March 31, 1996. Reference is made to Item 6 below
for a disclosure of the amount of cash distributions per Unit made to the
Limited Partners during fiscal 1996.
Item 6. Selected Financial Data
PaineWebber Growth Properties Two LP
For the years ended March 31, 1996, 1995, 1994, 1993 and 1992
(in thousands, except for per Unit data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 259 $ 227 $ 201 $ 202 $ 223
Operating income
(loss) $ (51) $ (65) $ (15) $ 22 $ 19
Partnership's share of
ventures' losses $ (134) $ (161) $ (309) $ (867) $(1,244)
Partnership's share of
gain on sale of
operating investment
property $ 4,226 - - - -
Loss on writedown
of investment to
fair value - $ (2,019) - - -
Net income (loss) $ 4,041 $ (2,245) $ (324) $ (845) $(1,225)
Per Limited Partnership Unit:
Net income (loss) $117.36 $ (66.54) $ (9.60) $ (25.05) $(36.30)
Cash distributions:
Operations $ 21.26 $ 8.68 - - -
Sales and
other capital
proceeds $ 23.00 - - - $ 45.00
Total assets $ 6,726 $ 4,180 $ 6,671 $ 7,021 $ 7,864
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the 33,410
Limited Partnership Units outstanding during each year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered limited partnership interests to the public from
October 1983 to October 1984 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $33,410,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
approximately $26,690,000 was initially invested in three joint ventures which
owned four operating investment properties. To date, the Partnership has made
additional advances of approximately $1.7 million to the three joint ventures,
including approximately $7,000 in fiscal 1996. Through March 31, 1996, three of
the four original investments had been sold, including two during fiscal 1996,
which transactions are discussed further below. The sale of one of the original
investment properties in September of 1986 resulted in the return of $13,364,000
to the Limited Partners in November of 1986 and the return of approximately
$1,503,000 to the Limited Partners during fiscal 1992 as a result of the
maturity of a note received at the time of the sale. The Partnership does not
have any commitments for additional capital expenditures or investments but may
be called upon to advance funds to its remaining joint venture investment in
accordance with the joint venture agreement. The Partnership's primary objective
has been to achieve long-term capital appreciation of the operating investment
properties through property upgrades and subsequent rental income increases.
On March 13, 1996, the joint venture which owned the Walker House
Apartments sold the operating investment property to an unrelated third party
for $10,650,000. The existing mortgage balance of $5,011,000 was paid off in
conjunction with the sale, and the venture paid closing costs of approximately
$364,000. In addition, the joint venture had excess cash as of the date of the
sale in the amount of approximately $235,000. The net proceeds available after
the sale transaction totalled approximately $5.5 million, of which the
co-venture partner was entitled to $220,000 under the terms of the joint
venture agreement. The Partnership received the remainder of the net sale
proceeds of approximately $5.3 million. The operations of the Walker House
apartment complex over the past several years have reflected the generally
improving conditions in the real estate markets for multi-family residential
properties across the country. Over the past year, average monthly rental rates
at Walker House had increased by approximately 2.5% to a level of $753 per
apartment unit. Management believed that with the property performing favorably
it was an appropriate time to market the property for sale. The Partnership
began formally marketing the Walker House property for sale in September 1995.
After receiving significant interest from a number of parties, the joint
venture successfully consummated the transaction described above. 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.
During the first quarter of fiscal 1996, the Partnership agreed to the
sale of its interest in the Hudson Apartments, located in Tyler, Texas, to its
co-venture partner. On September 12, 1995, the Partnership completed the sale of
its joint venture interest in the Hudson Apartments for $350,000. While such
proceeds were substantially less than the amount of the Partnership's original
investment in the venture, of $2.6 million, management believed that the offer
was reflective of the current fair market value of the Partnership's interest.
In the mid-to-late 1980s, the Hudson joint venture was unable to meet its
contractual debt service requirements. As a result, the venture entered into
several debt modifications aimed at alleviating the need for the Partnership to
fund cash flow deficits. In October 1990, in order to take advantage of a
discounted debt pay-off offer from the existing mortgage lender and to avoid
possibly losing the property through foreclosure proceedings, the venture
admitted a new partner who contributed the $600,000 necessary to complete the
proposed refinancing transaction. Although this recapitalization saved the
property from likely foreclosure, it resulted in a 50% dilution of the
Partnership's interest and created a 15% preferred return on the new partner's
$600,000 investment. Based on current market factors, management did not foresee
significant appreciation in the value of the Partnership's interest in the
Hudson joint venture in the near-term. Furthermore, since the venture's new
mortgage financing was expected to have a five-year prohibition on prepayment,
and thereafter any sale of the property would require the consent of the
co-venturer, management believed that it was an opportune time to sell the
Partnership's investment. The Partnership made a special distribution to the
Limited Partners of approximately $768,000, or $23 per original $1,000 Unit, on
November 15, 1995, which represented the Hudson sale proceeds plus an amount of
cash reserves that was in excess of expected future requirements.
<PAGE>
The Partnership's remaining investment is a majority interest in the
Portland Center Apartments, a 525-unit high-rise apartment building located in
Portland, Oregon, which also contains 28,000 square feet of leasable commercial
space. The investment in the Portland Center joint venture comprised 41% of the
Partnership's original investment portfolio. As previously reported, management
is currently in the process of using the excess cash reserves from the December
1993 Portland Center HUD loan refinancing to complete a major renovation
program at the property, which includes upgrades to the common areas and many
individual units. The property's individual apartments units are being upgraded
on a turnover basis. Management expects to be able to lease the renovated units
at substantial rental rate increases. Approximately 38% of the property's total
units have been upgraded to date, and rental rate increases averaging 10% have
been achieved on these units. The venture has over $2 million remaining in the
replacement reserve escrow to cover the costs of completing the planned
renovation program, which will continue throughout calendar year 1996. As
previously reported, during fiscal 1995 management learned that the City of
Portland is currently proposing the development of a light rail system that may
result in a rail line extension along the street in front of the Portland
Center Apartments. As a result, the Partnership, through the on-site management
team, has a representative on the coalition of interested property owners which
is seeking to secure a line extension decision and to suggest design
alternatives that would have the most beneficial impact to Portland Center and
the surrounding area.
The implementation of the planned capital improvements at Portland Center
is expected to support management's ability to increase rents and add value to
the property. Accordingly, management will likely not consider the sale of the
Portland Center property in the near term, at least until the capital
improvement program is substantially completed and the effects of the
improvements are fully reflected in the asking rents for the apartment units.
The mortgage debt obtained by the Portland Center joint venture in December
1993 contained a five-year prohibition on prepayment. Beginning in December
1998, the loan becomes prepayable 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 1% fee, subject to the lender's
approval. As noted above, management has no current plans to market the
Portland Center property for sale as a result on the ongoing renovation
program. However, if the renovation program and rental rate increases are fully
implemented prior to the end of the debt prepayment restriction period, 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. Nonetheless, the sales of the Walker House
Apartments and the Partnership's interest in the Hudson joint venture have
positioned the Partnership for a possible liquidation within the next 2 to 3
years. However, there are no assurances that the Partnership will be able to
successfully dispose of its remaining investment under favorable conditions
within this time frame. Management's hold versus sell decisions with respect to
the investment in Portland Center will be based on an assessment of the impact
on the overall returns to the Limited Partners.
The Partnership received distributions from the Portland Center joint
venture totalling approximately $973,000 during fiscal 1996. Improved cash flow
from operations is expected to be generated by the Portland Center joint venture
in fiscal 1997 as the capital improvement program continues. At March 31, 1996,
the Partnership had available cash and cash equivalents of approximately
$6,278,000. Such cash and cash equivalents include the proceeds of the Walker
House sale transaction discussed further above. As noted above, a special
distribution of these proceeds totalling $5.3 million was made to the Limited
Partners subsequent to year-end. The remainder of 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. These sources of liquidity
are expected to be sufficient to meet the Partnership's needs on a short-term
and long-term basis. Cash flow from Portland Center is expected to be sufficient
to cover the Partnership's operating expenses and permit the payment of
quarterly distributions at a rate of 4.25% per annum on the $373 remaining
portion of a Limited Partner's original $1,000 investment. 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.
Results of Operations
1996 Compared to 1995
The Partnership reported net income of $4,041,000 for the year ended March
31, 1996, compared to a net loss of $2,245,000 for the prior year. The favorable
change in the Partnership's net operating results is primarily the result of the
gain of $4,226,000 on the sale of the Walker House Apartments in fiscal 1996 and
the write down of the carrying value of the Partnership's investment in the
Hudson joint venture, of $2,019,000, which was recorded in fiscal 1995, as
discussed further above. In addition, a decrease in the Partnership's operating
loss of $14,000 and a decrease in the Partnership's share of ventures' losses of
$27,000 also contributed to the change in net operating results between fiscal
1996 and 1995. Operating loss decreased mainly due to an increase in interest
income of $18,000 and a decrease in general and administrative expenses of
$24,000. Interest income increased as a result of a higher average outstanding
cash balance during the current year due to the receipt of proceeds from the
sale of the Hudson and Walker House investments and an increase in the operating
cash flow distributions from the Portland Center joint venture. The decrease in
general and administrative expenses is primarily attributable to lower
professional fees being incurred in the current year for the completion of the
annual independent valuation of the Partnership's operating properties. The
favorable changes in operating loss were partially offset by an increase in
management fees for fiscal 1996. The Adviser began to earn management fees in
the second half of fiscal 1995 with the commencement of regular quarterly
operating cash flow distributions.
The Partnership's share of ventures' losses decreased in the current year
mainly as a result of a reduction in net losses from the Hudson joint venture
due to the sale of the Partnership's interest in September 1995, as discussed
further above. A slight increase in net loss at the Portland Center joint
venture of $15,000 was almost entirely offset by an increase in net income from
the Walker House joint venture. Net income from Walker House increased mainly
due to an additional two and one-half months of operations being recorded in
fiscal 1996 in order to eliminate the three month reporting lag through the date
of the sale in March 1996. Net loss at Portland Center increased slightly due to
additional depreciation and repairs and maintenance expenses associated with the
renovation program in progress at the property, as discussed further above. Such
incremental expenses offset a 6% increase in the venture's gross revenues.
Average occupancy at Portland Center actually decreased from 93% for calendar
1994 to 91% for calendar 1995 due to management's initiative to increase rental
rates in order to turn over the apartment units to accelerate the pace of the
interior unit renovations at the property. Management has stepped up its
marketing efforts as the unit renovation program has progressed, and occupancy
had increased to 94% for the quarter ended March 31, 1996.
1995 Compared to 1994
The Partnership reported a net loss of $2,245,000 for the year ended March
31, 1995, compared to a net loss of $324,000 for fiscal 1994. The increase in
net loss is primarily the result of a write-down of $2,019,000 which the
Partnership recorded in fiscal 1995 to adjust the carrying value of the Hudson
investment to $350,000, as discussed further above. An increase of $50,000 in
the Partnership's operating loss also contributed to the increase in net loss
for fiscal 1995. Operating loss increased due to increases in management fees
and general and administrative expenses. The Partnership incurred management
fees in the amount of $29,000 for fiscal 1995. As a result of the commencement
of regular quarterly distributions of operating cash flow in fiscal 1995, the
Adviser began to earn asset management fees in an amount equal to approximately
10% of the distributable cash of the Partnership. An increase of approximately
$34,000 in interest income on Partnership cash reserves offset the increase in
management fees. The increase in interest income can be attributed to higher
average cash balances and slightly higher interest rates during fiscal 1995.
General and administrative expenses increased by $47,000 in fiscal 1995, mainly
due to higher professional fees related to the completion of an independent
valuation of the Partnership's operating properties which began in late fiscal
1994.
A significant decline in the Partnership's share of ventures' losses, from
$309,000 in fiscal 1994 to $161,000 in fiscal 1995, partially offset the Hudson
write-down and the increase in the Partnership's operating loss. Operating
results at Portland Center for calendar 1994 showed the most improvement among
the joint ventures, with a $390,000 increase in revenues over the prior year. As
discussed further above, such increases in rental income are attributable to
rental rate increases implemented at the property in conjunction with the
ongoing renovation program. Occupancy at Portland Center actually declined
during the fourth quarter of fiscal 1995 to 89% as management implemented a
program to accelerate tenant turnover in order to complete the renovation
program more quickly. Revenues were up slightly at the Walker House and Hudson
Apartments as well during calendar 1994. Both properties maintained occupancy
levels in the high 90's throughout calendar 1994 while implementing small rental
rate increases. The favorable changes in revenues were offset, in part, by an
increase in mortgage interest expense at Portland Center of $286,000 as a result
of the increase in the mortgage loan balance as a result of the December 1993
refinancing. Despite a significant reduction in the interest rate on the
Portland Center loan, interest and related charges exceed their prior level due
to the higher principal balance and the payment of mortgage insurance premiums
required under the HUD financing agreement. Property operating expenses at
Portland Center also increased mainly due to the capital improvement program,
which included significant repairs and maintenance expenses.
1994 Compared to 1993
The Partnership's net loss decreased by approximately $521,000 in fiscal
1994, when compared to fiscal 1993, mainly due to a decrease in the Partnerships
share of ventures' losses. The Partnership's share of ventures' losses decreased
significantly from the prior year mainly as a result of improved operations at
the Portland Center joint venture. During fiscal 1994, management of the joint
venture was able to increase rental rates at Portland Center while maintaining a
high occupancy level. The result was an increase in rental revenues of
approximately $163,000. In addition, the joint venture experienced a substantial
decrease in interest expense during fiscal 1994 as a result of certain loan
extension fees paid in the prior year and the full amortization of a debt
discount on the venture's original mortgage loan which occurred in early fiscal
1994. Also, real estate tax expense for the Portland Center property declined in
fiscal 1994. The venture's real estate tax expense was lower by approximately
$182,000 as a result of the full 12-month effect of an abatement received during
the latter part of fiscal 1993.
The favorable change in the Partnership's share of ventures' losses was
partially offset by an increase in Partnership general and administrative
expenses of approximately $36,000. General and administrative expenses increased
mainly due to certain costs incurred in connection with an independent valuation
of the Partnership's operating properties which was commissioned in support of
management's ongoing portfolio management responsibilities.
Inflation
The Partnership completed its twelfth full year of operations in fiscal
1996. The effects of inflation and changes in prices on the Partnership's
operating results to date have not been significant.
Inflation in future periods may increase revenues as well as operating
expenses at the Partnership's operating investment property. Tenants at the
Partnership's apartment complex have short-term leases, generally of six months
to one year in duration. Rental rates at the property can be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases are
renewed or turned-over. Such increases in rental income would be expected to at
least partially offset the corresponding increases in Partnership and property
operating expenses.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Second PW Growth
Properties, Inc. a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
Lawrence A. Cohen President and Chief
Executive Officer 42 5/15/91
Albert Pratt Director 85 6/1/83 *
J. Richard Sipes Director 49 6/9/94
Walter V. Arnold Senior Vice President and
Chief Financial Officer 48 10/29/85
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 43 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 53 6/1/83 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 33 12/1/91
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and officers have been elected to serve until the annual
meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated serves as the Adviser.
The business experience of each of the directors and principal executive
officers of the Managing General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of the Adviser which
he joined in January 1989. He is also a member of the Board of Directors and the
Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty Partners where he was responsible for origination and
structuring of real estate investment programs and for managing national
broker-dealer relationships. He is a member of the New York Bar and is a
Certified Public Accountant.
Albert Pratt is a Director of the Managing General Partner and a
Consultant of PWI. Mr. Pratt joined PWI as Counsel in 1946 and since that time
has held a number of positions including Director of both the Investment Banking
Division and the International Division, Senior Vice President and Vice Chairman
of PWI and Chairman of PaineWebber International, Inc.
<PAGE>
J. Richard Sipes is a Director of the Managing General Partner and a
Director of the Adviser. Mr. Sipes is an Executive Vice President at
PaineWebber. He joined the firm in 1978 and has served in various capacities
within the Retail Sales and Marketing Division. Before assuming his current
position as Director of Retail Underwriting and Trading in 1990, he was a
Branch Manager, Regional Manager, Branch System and Marketing Manager for a
PaineWebber subsidiary, Manager of Branch Administration and Director of
Retail Products and Trading. Mr. Sipes holds a B.S. in Psychology from
Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President and Member of the Investment Committee of the
Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation where he served as
the Vice President of Asset Sales prior to re-joining PWPI. From February 1989
to October 1990, he was President of Kan Am Investors, Inc., a real estate
investment company. During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General
Partner and a Senior Vice President of the Adviser which he joined in June 1988.
Mr. Watts has had over 17 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and Vice President and Treasurer of the Adviser which he joined
in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of
the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner
and a Vice President and Manager of Financial Reporting of the Adviser which
he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended March 31, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed renumeration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the
General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described in
Item 13.
The Partnership began paying cash distributions to the Unitholders on a
quarterly basis at a rate of 3% per annum on the remaining invested capital
effective for the second quarter of fiscal 1995. The annual rate has been
increased gradually in subsequent quarters to the current stabilized level of
4.25% per annum for the quarter ended March 31, 1996. However, the Partnership's
Limited Partnership Units are not actively traded on any organized exchange, and
no efficient secondary market exists. Accordingly, no accurate price information
is available for these Units. Therefore, a presentation of historical unitholder
total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
Managing General Partner, Second PW Growth Properties, Inc., is owned by
PaineWebber. Properties Associates, the Associate General Partner, is a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner. Properties Associates
is also the Initial Limited Partner of the Partnership and owns one Unit of
Limited Partnership Interest. No limited partner is known by the Partnership to
own beneficially more than 5% of the outstanding interests of the Partnership.
(b) Neither the officers and directors of the Managing General Partner nor
the general partners of the Associate General Partner, individually, own any
Units of limited partnership interest of the Partnership. No officer or director
of the Managing General Partner, nor any general partner of the Associate
General Partner, possesses a right to acquire beneficial ownership of Units of
limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Second PW Growth Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber") and Properties Associates (the "Associate General
Partner"), a Massachusetts general partnership, certain general partners of
which are also officers of PaineWebber Properties Incorporated (the "Adviser")
and the Managing General Partner. Subject to the Managing General Partner's
overall authority, the business of the Partnership is managed by the Adviser
pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of
PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The
General Partners, the Adviser and PWI receive fees and compensation, determined
on an agreed upon basis, in consideration of various services performed in
connection with the sale of the Units, the management of the Partnership and the
acquisition, management, financing and disposition of Partnership investments.
In addition, the General Partners and their affiliates are reimbursed for their
direct expenses relating to the offering of units, the administration of the
Partnership and the operations of the Partnership's real property investments.
All distributable cash, as defined, for each fiscal year will be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income and tax
losses of the Partnership from both current operations and capital transactions
generally will be allocated 99% to the Limited Partners and 1% to the General
Partners, except that the General Partners shall be allocated an amount of
taxable income from a capital transaction at least sufficient to eliminate their
deficit capital account balance. Allocations of the Partnership's operations
between the General Partners and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser is due to be paid an annual management fee of up to
1% of the gross offering proceeds outstanding. However, during the quarter ended
June 30, 1991 the Partnership reached a limitation on the cumulative amount of
management fees that can be earned by the Adviser under the terms of the
original Prospectus. Future management fees will only be earned in an amount
equal to 10% of the Distributable Cash, as defined, generated by the
Partnership. During the second half of fiscal 1995, the Partnership instituted
the payment of quarterly distributions and, as a result, the Adviser was paid
management fees of $71,000 and $29,000 for fiscal 1996 and fiscal 1995,
respectively.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended March 31, 1996 is $69,000 representing reimbursements to this
affiliate of the Managing General Partner for providing such services to the
Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $3,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended March 31, 1996. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of the Adviser.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this Report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this Report.
(b) A Current Report on Form 8-K dated March 13, 1996 was filed during
the last quarter of fiscal 1996 to report the sale of the
Partnership's Walker House investment property and is hereby
incorporated by reference.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this Report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership 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/ Lawrence A. Cohen
Lawrence A. Cohen
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Albert Pratt Date: June 28, 1996
---------------- -------------
Albert Pratt
Director
By: /s/ J. Richard Sipes Date: June 28, 1996
-------------------- -------------
J. Richard Sipes
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER GROWTH PROPERTIES TWO LP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ------------------------ -------------------------
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated October 6, 1983, as pursuant to Rule 424(c)
supplemented, with particular and incorporated
reference to the Restated herein by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with all Act of 1934 and
such contracts filed as exhibits of incorported herein
previously filed Forms 8-K and by reference.
Forms 10-K are hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the
fiscal year 1996 has been
sent to the Limited
Partners. An Annual Report
will be sent to the
Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of
Part I of this Report
Page I-1, to which
reference is hereby made.
(27) Financial Data Schedule Filed as the last page
of EDGAR submission
following the Financial
Statements and Financial
Statement Schedule required
by Item 14.
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINE WEBBER GROWTH PROPERTIES TWO LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Growth Properties Two LP:
Reports of independent auditors F-3
Balance sheets as of March 31, 1996 and 1995 F-5
Statements of operations for the years ended March 31, 1996,
1995 and 1994 F-6
Statements of changes in partners' capital (deficit) for the years
ended March 31, 1996, 1995 and 1994 F-7
Statements of cash flows for the years ended March 31, 1996,
1995 and 1994 F-8
Notes to financial statements F-9
Schedule III-Real Estate and Accumulated Depreciation F-19
Oregon Portland Associates:
Report of independent auditors F-20
Balance sheets as of December 31, 1995 and 1994 F-21
Statements of operations for the years ended December 31, 1995,
1994 and 1993 F-22
Statements of changes in venturers' capital (deficit) for the
years ended December 31, 1995, 1994 and 1993 F-23
Statements of cash flows for the years ended December 31, 1995,
1994 and 1993 F-24
Notes to financial statements F-25
Montgomery Village HWH Associates:
Independent Auditors' Report F-29
Balance sheets as of December 31, 1995 and 1994 F-30
Statements of operations for the years ended December 31, 1995,
1994 and 1993 F-31
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINE WEBBER GROWTH PROPERTIES TWO LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(continued)
Reference
Statements of changes in partners' equity for the years
ended December 31, 1995, 1994 and 1993 F-32
Statements of cash flows for the years ended December 31, 1995,
1994 and 1993 F-33
Notes to financial statements F-34
Other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Paine Webber Growth Properties Two LP:
We have audited the accompanying balance sheets of PaineWebber Growth
Properties Two LP as of March 31, 1996 and 1995, and the related statements of
operations, changes in partners' capital (deficit), and cash flows for each of
the three years in the period ended March 31, 1996. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Montgomery Village HWH Associates, which statements reflect 0% and 24% of the
Partnership's total assets as of March 31, 1996 and 1995, respectively, and 36%,
27% and 14% of the Partnership's share of ventures' losses for the years ended
March 31, 1996, 1995 and 1994, respectively. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Montgomery Village HWH Associates as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of PaineWebber Growth Properties Two LP at March 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the report of other auditors, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 19, 1996
<PAGE>
Reznick Fedder & Silverman
Certified Public Accountants
217 East Redwood Street, Suite 1900
Baltimore, MD 21202
INDEPENDENT AUDITORS' REPORT
The Partners
Montgomery Village HWH Associates:
We have audited the accompanying balance sheets of Montgomery Village HWH
Associates as of December 31, 1995 and 1994 and the related statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of partnership's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Montgomery Village HWH
Associates as of December 31, 1995 and 1994 and the results of its operations,
the changes in partners' equity and its cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/Reznick Fedder & Silverman
Reznick Fedder & Silverman
Baltimore, Maryland
January 5, 1996, except for Note E,
as to which the date is
March 13, 1996
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
BALANCE SHEETS
March 31, 1996 and 1995
(In thousands, except for per Unit data)
ASSETS
1996 1995
---- ----
Investments in joint ventures, at equity $ 257 $ 2,777
Investment held for sale - 350
Cash and cash equivalents 6,278 1,053
Accounts receivable 191 -
---------- ---------
$ 6,726 $ 4,180
========== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 46 $ 55
---------- ----------
Total liabilities 46 55
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income (losses) 9 (111)
Cash distributions (10) (3)
Limited Partners ($1,000 per Unit,
33,410 Units outstanding):
Capital contributions, net of offering costs 29,778 29,778
Cumulative net losses (6,462) (10,383)
Cumulative cash distributions (16,636) (15,157)
---------- -----------
Total partners' capital 6,680 4,125
---------- -----------
$ 6,726 $ 4,180
========== ===========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the years ended March 31, 1996, 1995 and 1994
(In thousands, except for per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Interest income $ 68 $ 50 $ 16
Reimbursements from affiliate 191 177 185
--------- --------- -------
259 227 201
Expenses:
Management fees 71 29 -
General and administrative 239 263 216
--------- --------- --------
310 292 216
--------- --------- --------
Operating loss (51) (65) (15)
Partnership's share of ventures' losses (134) (161) (309)
Partnership's share of gain on sale of
operating investment property 4,226 - -
Loss on write-down of investment
to fair value - (2,019) -
--------- --------- ---------
Net income (loss) $ 4,041 $(2,245) $ (324)
========= ======= =========
Per Limited Partnership Unit:
Net income (loss) $ 117.36 $(66.54) $ (9.60)
======== ======= ========
Cash distributions $ 44.26 $ 8.68 $ -
======== ======= =======
The above per Limited Partnership Unit information is based upon the 33,410
Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended March 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
Balance at March 31, 1993 $ (85) $ 7,072 $ 6,987
Net loss (3) (321) (324)
------- -------- --------
Balance at March 31, 1994 (88) 6,751 6,663
Net loss (22) (2,223) (2,245)
Cash distributions (3) (290) (293)
------- -------- --------
Balance at March 31, 1995 (113) 4,238 4,125
Net income 120 3,921 4,041
Cash distributions (7) (1,479) (1,486)
------- -------- --------
Balance at March 31, 1996 $ - $ 6,680 $ 6,680
======= ======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOWS
For the years ended March 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 4,041 $ (2,245) $ (324)
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Partnership's share of gain on sale of
operating investment property (4,226) - -
Reimbursements from affiliate (191) (177) (185)
Partnership's share of ventures' losses 134 161 309
Loss on write-down of investment to
fair value - 2,019 -
Changes in assets and liabilities:
Accounts payable - affiliates - - (10)
Accounts payable and accrued expenses (9) 47 (17)
------- -------- ------
Total adjustments (4,292) 2,050 97
------ -------- ------
Net cash used in operating activities (251) (195) (227)
Cash flows from investing activities:
Distributions from joint ventures 6,629 1,034 347
Additional investments in joint ventures (17) (7) (117)
Proceeds from sale of investment 350 - -
------ -------- ------
Net cash provided by investing
activities 6,962 1,027 230
Cash flows from financing activities:
Distributions to partners (1,486) (293) -
------ -------- ------
Net increase in cash and cash equivalents 5,225 539 3
Cash and cash equivalents, beginning of year 1,053 514 511
------ -------- ------
Cash and cash equivalents, end of year $ 6,278 $ 1,053 $ 514
======== ========= =======
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
NOTES TO FINANCIAL STATEMENTS
1. General
Paine Webber Growth Properties Two LP (the "Partnership") is a limited
partnership organized pursuant to the laws of the State of Delaware in June 1983
for the purpose of investing in a portfolio of rental apartment and commercial
properties which have potential for near-term capital appreciation. The
Partnership authorized the issuance of Units (at $1,000 per Unit) of which
33,410, representing capital contributions of $33,410,000, were subscribed and
issued between October 1983 and October 1984. The net proceeds of the
Partnership's offering were originally invested in four operating investment
properties. Through March 31, 1996, three of these investments had been sold.
See Note 4 for a further discussion of the Partnership's investments.
2. Summary of Significant Accounting Policies
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 March 31, 1996 and 1995 and revenues and expenses for each
of the three years in the period ended March 31, 1996. Actual results could
differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in three joint venture partnerships which own or owned operating
properties. The Partnership accounts for its investments in joint venture
partnerships using the equity method because the Partnership does not have
majority voting control. Under the equity method the investment in a joint
venture is carried at cost adjusted for the Partnership's share of the venture's
earnings and losses and distributions. All of the joint venture partnerships are
required to maintain their accounting records on a calendar basis for income tax
reporting purposes. As a result, the Partnership recognizes its share of the
income or loss from the joint ventures based on financial information which is
three months in arrears to that of the Partnership. See Note 4 for a description
of the joint venture partnerships.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of" ("Statement 121"), which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Statement 121 is effective for financial statements for years beginning
after December 15, 1995. The Partnership will adopt Statement 121 in fiscal 1997
and, based on current circumstances, does not believe the adoption will have a
material effect on results of operations or financial position.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
No provision for income taxes is made in the accompanying financial
statements as the liability for such taxes is that of the partners rather than
the Partnership.
The cash and cash equivalents, accounts receivable and accounts payable
and accrued expenses appearing on the accompanying balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The
carrying amount of these assets and liabilities approximates their fair value
due to the short-term maturities of these instruments.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Second PW Growth Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber") and Properties Associates (the "Associate General
Partner"), a Massachusetts general partnership, certain general partners of
which are also officers of PaineWebber Properties Incorporated (the "Adviser")
and the Managing General Partner. Subject to the Managing General Partner's
overall authority, the business of the Partnership is managed by the Adviser
pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of
PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The
General Partners, the Adviser and PWI receive fees and compensation, determined
on an agreed upon basis, in consideration of various services performed in
connection with the sale of the Units, the management of the Partnership and the
acquisition, management, financing and disposition of Partnership investments.
In addition, the General Partners and their affiliates are reimbursed for their
direct expenses relating to the offering of units, the administration of the
Partnership and the operations of the Partnership's real property investments.
All distributable cash, as defined, for each fiscal year will be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income and tax
losses of the Partnership from both current operations and capital transactions
generally will be allocated 99% to the Limited Partners and 1% to the General
Partners, except that the General Partners shall be allocated an amount of
taxable income from a capital transaction at least sufficient to eliminate their
deficit capital account balance. Allocations of the Partnership's operations
between the General Partners and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser is due to be paid an annual management fee of up to
1% of the gross offering proceeds outstanding. However, during the quarter ended
June 30, 1991 the Partnership reached a limitation on the cumulative amount of
management fees that can be earned by the Adviser under the terms of the
original Prospectus. Future management fees are limited further to 10% of the
Distributable Cash, as defined, of the Partnership. For the years ended March
31, 1996 and 1995, the Adviser earned $71,000 and $29,000, respectively, in
management fees as a result of the commencement of regular quarterly
distributions effective for the second quarter of fiscal 1995.
In connection with investing Partnership capital, the Adviser earned
acquisition fees of up to 9% of the gross proceeds of the offering. A portion of
these acquisition fees ($718,000) were deferred at the time the joint venture
interests were acquired and were payable from distributable net cash flow, as
defined, generated by the operating investment properties. As of March 31, 1992,
all deferred acquisition fees had been paid in full.
In connection with the sale of the properties, the Adviser may receive
real estate brokerage commissions in an amount of up to 2% of the selling prices
of properties sold upon the disposition of Partnership investments. Payments of
such amounts is subordinated to the payment of certain amounts to the Limited
Partners. To date the Adviser has not received any real estate brokerage
commissions.
Included in general and administrative expenses for the years ended March
31, 1996, 1995 and 1994 are $69,000, $72,000 and $67,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $3,000, $2,000, and $1,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during the years ended March 31,
1996, 1995 and 1994, respectively.
4. Investments in Joint Venture Partnerships
As of March 31, 1996, the Partnership has an investment in one joint
venture (three at March 31, 1995). Except as noted below, the joint ventures are
accounted for on the equity method in the Partnership's financial statements.
For income tax reporting purposes, the joint ventures are required to maintain
their accounting records on a calendar year basis. As a result, the Partnership
accounts for its joint venture investments based on financial information which
is three months in arrears to that of the Partnership. On September 12, 1995,
the Partnership sold its interest in the Hudson Apartments joint venture to its
co-venture partner for $350,000. As of March 31, 1995, the Partnership's
investment in the Hudson joint venture was reclassified to investment held for
sale and written down to its net realizable value of $350,000. Subsequent to the
writedown, the Partnership accounted for this investment on the cost method
during the period of time in fiscal 1996 which it took for the sale transaction
to be completed. On March 13, 1996, the joint venture which owned the Walker
House Apartments sold the operating investment property to an unrelated third
party. 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. Accordingly, in addition to the operations for the
twelve months ended December 31, 1995, the Partnership's share of ventures'
losses in fiscal 1996 also reflects the Partnership's share of Walker House
operations for the period January 1, 1996 through the date of sale. Such
operations in calendar 1996 reflected total revenues of $360,000 and total
expenses of $414,000 for a net loss of $54,000, of which the Partnership's share
was $53,000.
Condensed combined financial statements of these joint ventures, for the
periods indicated, are as follows. As a result of the transactions described
above, the condensed balance sheet as of December 31, 1995 includes only the
accounts of the Portland Center joint venture. The condensed combined statement
of operations for the year ended December 31, 1995 includes the results of the
Portland Center joint venture for calendar 1995 and the results of the Walker
House joint venture for the fourteen and one-half months from January 1, 1995
through the date of the sale on March 13, 1996.
Condensed Combined Balance Sheets
December 31, 1995 and 1994
(in thousands)
Assets
1995 1994
Current assets $ 1,814 $ 4,892
Operating investment property, net 19,126 31,147
Other assets 3,079 842
--------- ---------
$ 24,019 $ 36,881
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Liabilities and Venturers' Capital
Current liabilities $ 859 $ 3,734
Other liabilities 913 2,096
Long-term mortgage debt, less current portion 22,540 27,656
Partnership's share of combined capital (deficit) (183) 3,870
Co-venturers' share of combined capital (deficit) (110) (475)
--------- ---------
$ 24,019 $ 36,881
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Reconciliation of Partnership's Investment
March 31, 1996 and 1995
(in thousands)
1996 1995
Partnership's share of combined capital (deficit)
at December 31, as shown above $ (183) $ 3,870
Less: Partnership's share of capital from
investment held for sale (1) - (2,204)
Reimbursement of management fees and expenses
receivable from joint venture (2) 913 1,415
Timing difference due to contributions (distributions)
made subsequent to December 31 (see Note 2) (473) (304)
-------- ---------
Investments in joint ventures, at equity
at March 31 $ 257 $ 2,777
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(1)As noted above, as of March 31, 1995 the Partnership's investment in Hudson
Partners was recorded as held for sale and was separately classified on the
accompanying 1995 balance sheet at its estimated fair value.
(2)In accordance with the Portland Center joint venture agreement, the
Partnership recorded reimbursement revenues for the years ended March 31,
1996, 1995 and 1994 of $191,000, $177,000 and $185,000, respectively, for the
reimbursement of certain Partnership expenses. The Portland Center joint
venture records a comparable reimbursement expense in its statement of
operations which is reflected in the Partnership's share of ventures' losses.
Accordingly, the accounting for these reimbursements has no material effect
on the Partnership's net capital or its results of operations. The
reimbursements due the Partnership are payable only out of net cash flow of
the operating property and are cumulative to the extent not paid. A
cumulative total of $913,000 and $1,415,000 remained unpaid as of March 31,
1996 and 1995, respectively, which is recorded in the joint venture
investment balance on the accompanying balance sheet.
Condensed Combined Summary of Operations
For the years ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 7,549 $ 7,757 $ 7,341
Interest and other income 337 233 194
------- --------- -------
7,886 7,990 7,535
Expenses:
Property operating expenses 3,945 3,874 3,767
Interest expense 2,373 2,684 2,400
Depreciation and amortization 1,703 1,621 1,719
-------- -------- -------
8,021 8,179 7,886
-------- -------- -------
Operating loss (135) (189) (351)
Gain on sale of operating investment
property 4,580 - -
--------- -------- --------
Net income (loss) $ 4,445 $ (189) $ (351)
========= ========= ========
Net income (loss):
Partnership's share of
combined net income (loss) $ 4,092 $ (161) $ (309)
Co-venturers' share of combined
net income (loss) 353 (28) (42)
--------- --------- --------
$ 4,445 $ (189) $ (351)
========= ========= ========
The Partnership's share of the combined net income (loss) of the joint
ventures is presented as follows on the accompanying statements of operations
(in thousands):
1995 1994 1993
---- ---- ----
Partnership's share of ventures' losses $ (134) $ (161) $ (309)
Partnership's share of gain on sale of
operating investment property 4,226 - -
-------- ------- ---------
$ 4,092 $ (161) $ (309)
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Investments in joint ventures, at equity is the Partnership's net
investment in the joint venture partnerships. These joint ventures are subject
to partnership agreements which determine the distribution of available funds,
the disposition of the ventures' assets and the rights of the partners,
regardless of the Partnership's percentage ownership interest in the ventures.
As a result, substantially all of the Partnership's investments in these joint
ventures are restricted as to distributions.
Investments in joint ventures, at equity on the balance sheet at March 31,
is comprised of the following investment carrying values (in thousands):
1996 1995
---- ----
Montgomery Village HWH Associates $ - $ 1,483
Oregon Portland Associates 257 1,294
Hudson Partners - - (1)
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$ 257 $ 2,777
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(1)As noted above, the Partnership's investment in Hudson Partners was held for
sale as of March 31, 1995 (see further discussion below).
The cash distributions received from the Partnership's joint venture
investments during fiscal 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994
---- ---- ----
Montgomery Village HWH Associates $ 5,656 $ 445 $ 347
Oregon Portland Associates 973 586 -
Hudson Partners - 3 -
------- ------- -------
$ 6,629 $ 1,034 $ 347
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A description of the ventures' properties and the terms of the joint
venture agreements are summarized below:
(a) Montgomery Village HWH Associates
On December 29, 1983 the Partnership acquired an interest in Montgomery
Village HWH Associates, a Maryland general partnership organized to purchase and
operate The Hamlet and Walker House, two apartment complexes located in
Montgomery Village, Maryland with a total of 1,060 units. The Partnership is a
general partner in the joint venture. The Partnership's co-venture partner is an
affiliate of General American Real Estate and Development, Inc. The properties
were purchased on March 9, 1984.
The aggregate cash investment by the Partnership for its interest was
approximately $12,982,000 (including an acquisition fee of $1,100,000 paid to
the Adviser and fees aggregating $150,000 paid to an affiliate of the
co-venturer). In addition, acquisition fees aggregating $350,000 were deferred
at the time of purchase and were paid to the Adviser from distributable net cash
flow and net sale proceeds of the joint venture. The apartment complexes were
acquired subject to nonrecourse mortgages totalling approximately $24,639,000 at
the time of closing. On November 29, 1989 the joint venture refinanced the
mortgage debt secured by the Walker House Apartments, replacing its original $4
million, 9.75% loan with a $5.1 million, 9.5% nonrecourse loan due in December
of 1996.
On September 30, 1986, The Hamlet Apartments was sold. The sales price was
$38,000,000, with $36,000,000 paid in cash and the remainder paid in the form of
a second mortgage note of $2,000,000. The Partnership received a distribution of
$12,973,283 and was allocated a gain of $9,320,750 from the sale in 1986. The
note bore interest at 9% with principal and interest payable on September 30,
1991. The joint venture received $500,000 during calendar 1988 as partial
prepayment of the note and, on August 23, 1988, the partners entered into an
agreement for the distribution of this amount. The co-venturer received $427,000
of the $500,000 consisting of $100,000 for deferred consulting fees, $177,000 as
compensation owed for negotiating the sale of The Hamlet, and $150,000 for
capital proceeds distributions deferred at the time of the sale. The remaining
$73,000 was paid to the Adviser as deferred acquisition fees. The joint venture
received $2,357,295 from the maturity of the note and interest receivable
related to the sale of The Hamlet in September of 1991. The Partnership received
the entire amount of the proceeds. The proceeds from the note were used to make
a special distribution of approximately $1.5 million to the Limited Partners and
to pay previously deferred management fees owed to the Adviser totalling
approximately $731,000. The remainder of the $2.4 million was added to the
Partnership's cash reserves.
On March 13, 1996, the Walker House Apartments property was sold to an
unrelated third party for $10,650,000. The existing mortgage balance of
$5,011,000 was paid off in conjunction with the sale, and the venture paid
closing costs of approximately $364,000. In addition, the joint venture had
excess cash as of the date of the sale in the amount of approximately $235,000.
The net proceeds from this sale totalled approximately $5.5 million, of which
the co-venture partner was entitled to $220,000 under the terms of the joint
venture agreement. The Partnership received the remainder of the net sale
proceeds of approximately $5.3 million. Subsequent to year-end, the
Partnership's share of the net sale proceeds was distributed to the Limited
Partners as a special distribution in the amount of $159 per original $1,000
investment paid concurrently with the regular quarterly distribution on May 15,
1996.
The joint venture agreement provided that distributable net cash flow, to
the extent that it exceeded minimums, as defined, would be allocated 99% to the
Partnership and 1% to the co-venturer, as a distribution to the partners.
Taxable income and tax loss from operations in each year were allocated
99% to the Partnership and 1% to the co-venturer. Allocations of the joint
venture operations between the partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
Upon sale or refinancing, the Partnership was entitled to an amount equal
to its investment in the properties plus a 7% simple, cumulative return per
annum on its investment as a first priority, after payment of mortgage debt and
any deferred fees then payable. Next, any accrued subordinated management fees
were to be paid. Proceeds were then to be applied to the payment of accrued
interest and then principal on any outstanding operating notes. The co-venturer
was then to receive an amount equal to its remaining investment. Remaining
proceeds were to be split between the Partnership and the co-venturer in varying
proportions in accordance with the joint venture agreement.
Taxable income and tax loss resulting from a sale of the properties was
allocated between the Partnership and the co-venturer generally as sales
proceeds were distributed.
<PAGE>
(b) Oregon Portland Associates
On October 28, 1983, the Partnership acquired an interest in Oregon
Portland Associates, a newly formed Oregon general partnership organized to
purchase and operate Portland Center, a residential apartment and office complex
located in Portland, Oregon with a total of 525 apartment units and 28,328
square feet of office space. The Partnership is a general partner in the joint
venture. The Partnership's co-venture partner is an affiliate of Golub &
Company. The property was purchased on April 26, 1984.
The aggregate cash investment by the Partnership for its interest was
approximately $11,097,000 (including acquisition fees of $800,000 paid to the
Adviser and $280,000 paid to an affiliate of the co-venturer). In addition,
acquisition fees aggregating $280,000 were deferred at the time of purchase and
were paid to the Adviser out of net cash flow of the joint venture. The
apartment complex was acquired subject to nonrecourse mortgage balances
totalling approximately $18,493,000 at the time of the closing. During fiscal
1994, the joint venture refinanced its outstanding debt obligation with a new
nonrecourse loan in the amount of approximately $23 million issued in
conjunction with an insured loan program of the Department of Housing and Urban
Development (HUD). The loan, which is fully assumable, has a 35-year maturity
and bears interest at a fixed rate of 7.125% per annum. As part of the HUD
insured loan program, the joint venture was required to establish escrow
accounts for replacement reserves and other required repairs. The balance of
these restricted escrow deposits totalled approximately $2.3 million and $3.3
million as of December 31, 1995 and 1994, respectively. The excess loan
proceeds, after repayment of the outstanding indebtedness, were used to pay
transaction costs and to fund the required escrow accounts.
Pursuant to the agreement, the Partnership is to be reimbursed each year
by the joint venture for the joint venture's share of the management fee and
expenses (a "deferred fee") allocable to or incurred by the Partnership in
connection with the management of the property. These fees are payable only out
of net cash flow, as defined, and are cumulative to the extent not paid.
The joint venture agreement provides that net cash flow, as defined, will
be allocated first to the payment of any deferred fees then payable, then to the
payment of interest and principal on any loans made by the partners to the joint
venture, and any remaining amounts 99% to the Partnership and 1% to the
co-venturer as a distribution to the partners. Such distributions are subject to
the terms of the first mortgage and a regulatory agreement.
Net proceeds (after repayment of third-party indebtedness and the
establishment of any necessary reserves) from a sale or refinancing will be
distributed first to the payment of all deferred fees then payable, then to the
payment of principal and interest on certain loans made by the partners to the
joint venture. The Partnership will then receive an amount equal to its
investment in the property plus a 6% noncompounded cumulative return on its
investment. Interest and principal on any remaining loans made by the partners
to the joint venture will then be paid. Next, the co-venturer will be paid an
amount equal to its remaining investment. Any remaining proceeds will be split
between the Partnership and the co-venturer in varying proportions which
increase in the co-venturer's favor from 5% to 40% in accordance with the joint
venture agreement. Such payments to the partners, except for the payment of
interest and principal on any remaining loans as described above, will not be
made if a partner's account in the joint venture equals zero, until sufficient
distributions have been made to the other partner in order to bring that
partner's capital account to zero.
Taxable income and tax loss from operations in each year are allocated 99%
to the Partnership and 1% to the co-venturer. Allocations of the joint venture
operations between the partners for financial accounting purposes have been made
in conformity with the allocations of taxable income or tax loss. Taxable income
and tax loss resulting from a sale of the property will be allocated between the
Partnership and the co-venturer generally as sales proceeds are distributed.
The joint venture originally entered into a property management agreement
with an affiliate of the co-venturer, cancellable at the Partnership's option
upon the occurrence of certain events, that provided for management and leasing
commission fees to be paid to the property manager. The management fee was 5% of
gross rents, as defined. In September of 1989 the Partnership exercised its
right to terminate the contract and hired an unaffiliated party to manage the
property. The joint venture continues to pay a joint venture management fee to
the original property manager. This fee is equal to 1% of gross rents, as
defined.
In the event the joint venture requires additional funds, such funds are
to be provided 90% by the Partnership and 10% by the co-venturer as capital
contributions or interim borrowings in accordance with the terms of the joint
venture agreement. During fiscal 1994, the Partnership advanced 100% of the
funds required by the venture to close the debt refinancing transaction
described above. Such advances, which totalled approximately $117,000, were
repaid in full during fiscal 1995, including accrued interest. All such amounts
are reflected as distributions received in the Partnership's financial
statements.
(c) Hudson Partners
On November 20, 1984 the Partnership acquired an interest in Hudson
Partners, a Texas general partnership organized to purchase and operate the
Hudson Apartments, a residential apartment complex located in Tyler, Texas with
a total of 144 apartment units. The Partnership was a general partner in the
joint venture. The Partnership's original co-venture partner was an affiliate of
the Trammel Crow organization. The property was purchased on November 20, 1984.
On October 31, 1989, the co-venturer assigned its entire ownership
interest in Hudson Partners to Second PW Growth Properties, Inc., ("Growth II")
the Managing General Partner of the Partnership. The assignment included all
prior interests, obligations and responsibilities of the original co-venture
partner. On October 30, 1990, an amended and restated joint venture agreement
was entered into, whereby: the Partnership assigned its entire partnership
interest to PaineWebber Hudson Partners, Ltd. ("PW Hudson"), Growth II withdrew
from the joint venture, and Hudson Associates Ltd. (Associates) was admitted
into the joint venture in exchange for a $600,000 cash capital contribution. PW
Hudson was a Texas limited partnership between the Partnership as general
partner and Growth II as a limited partner. Associates is an affiliate of
Horn-Barlow Companies. During fiscal 1995, the co-venture partner approached the
Partnership about the possibility of purchasing the Partnership's interest in
the Hudson joint venture in conjunction with the refinancing transaction
discussed below. In the first quarter of fiscal 1996, the Partnership agreed to
sell its interest in Hudson Partners for $350,000. While such proceeds were
substantially below the amount of the Partnership's original investment,
management believed that the offer was reflective of the current fair value of
the Partnership's interest and that it was an opportune time to dispose of this
investment. The completion of this transaction remained contingent upon a
potential new mortgage lender advancing sufficient funds to the co-venture
partner for the purpose of purchasing the Partnership's interest. Nonetheless,
since it was the Partnership's intention to sell its interest, the investment in
Hudson Partners was separately classified as an investment held for sale as of
March 31, 1995 and its net carrying value was written down to $350,000. The
write-down resulted in the recognition of a loss of $2,019,000 in fiscal 1995.
On September 12, 1995, the co-venturer closed on the refinancing transaction
which provided funds for the consummation of the sale of the Partnership's
interest at the agreed upon price of $350,000.
The aggregate cash investment by the Partnership for its interest was
approximately $2,611,000 (including acquisition fees of $183,000 to the Adviser
and $66,000 to an affiliate of the co-venturer). In addition, acquisition fees
aggregating $88,000 were deferred and paid to the Adviser from distributable net
cash flow of the joint venture, as defined. The apartment complex was acquired
subject to a nonrecourse mortgage balance of $4,500,000 at the time of the
closing. In October 1990, the Partnership paid $3,149,939 on the old mortgage
and the remaining principal balance of $1,995,318, plus the accrued and deferred
interest balance of $216,566, were forgiven by the lender. A substantial portion
of the $3,149,939 payment was funded by a new $2,666,000 nonrecourse mortgage
note payable entered into on October 30, 1990, which bore interest at 10% per
annum and matured in November 1995.
The net profits and losses of the joint venture were allocated 99% to the
Partnership and 1% to the co-venturer through October 30, 1990. Thereafter, in
accordance with the terms of the restated joint venture agreement, income or
gain were to be allocated, first, to Associates until such time as it had been
allocated cumulative income or gain equal to the cumulative amount, if any, of
its Preferred Return, as defined, and LC Preferred Return, if any, as defined,
distributed to it during the year, and, second to PW Hudson and Associates until
such time as they had been allocated cumulative income or gain equal to, or in
proportion to, if there was insufficient income or gain, the respective
cumulative distributions to them during the year relative to proceeds from
Capital Transactions, as defined. Losses were to be allocated equally between PW
Hudson and Associates. Allocations of the joint venture's operations among the
partners for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
The income and losses of PW Hudson in each fiscal year were to be
allocated 99.99% to the Partnership and .01% to Growth II. Available cash was
first be used to repay interest and principal on Optional Loans, and then
distributed 99.99% to the Partnership and .01% to Growth II.
The joint venture had initially entered into a property management
agreement with an affiliate of the original co-venturer. In August of 1990, the
Partnership terminated that contract and entered into a property management
contract with an affiliate of Associates that provided for a management fee to
be paid at the rate of 5% of monthly gross rents, as defined in the agreement.
5. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Second PW Growth Properties, Inc. and Properties
Associates ("PA"), which are the General Partners of the Partnership and
affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in Paine Webber Growth Properties
Two LP, PaineWebber, Second PW Growth Properties, Inc. and PA (1) failed to
provide adequate disclosure of the risks involved; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs, who purport to be suing on
behalf of all persons who invested in Paine Webber Growth Properties LP, also
allege that following the sale of the partnership interests, PaineWebber, Second
PW Growth Properties, Inc. and PA misrepresented financial information about the
Partnership's value and performance. The amended complaint alleges that
PaineWebber, Second PW Growth Properties, Inc. and PA violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs seek unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also seek treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in Paine Webber Growth Properties
Two LP.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentations and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $3.4 million plus punitive damages. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber affiliates could be
entitled to indemnification for expenses and liabilities in connection with
this litigation. At the present time, the Managing General Partner cannot
estimate the impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no provision
for any liability which could result from the eventual outcome of these matters
has been made in the accompanying financial statements.
6. Subsequent Event
On May 15, 1996, the Partnership distributed $189,000 to the Limited
Partners and $2,000 to the General Partners for the quarter ended March 31,
1996. The Partnership also made a special distribution of $5,312,000 to the
Limited Partners, representing the available proceeds from the sale of the
Walker House Apartments, as discussed further in Note 4.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER GROWTH PROPERTIES TWO LP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
(Removed) Depreciation
Initial Cost to Subsequent to Gross Amount at Which Carried at in Latest
Partnership Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Complex
Portland,
Oregon $22,716 $4,700 $19,453 $6,925 $4,700 $26,378 $31,078 $11,952 4/26/84 7-25 yrs.
Apartment Complex
Montgomery
Village, MD 4,953 1,211 7,254 944 1,211 8,198 9,409 3,500 3/9/84 5-30 yrs.
------- ------ ------- ------ ----- ------- ----- -------
$27,669 $5,911 $26,707 $7,869 $5,911 $34,576 $40,487 $15,452
======== ====== ======= ====== ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal income tax purposes is approximately $45,096
(B) See Note 4 to the financial statements for a description of the agreements through which the Partnership owns interests in the
above properties and for a discussion of the debt encumbering the operating investment properties.
(C) Reconciliation of real estate owned:
1995 1994 1993
---- ---- ----
Balance at beginning of period $39,649 $37,738 $36,930
Increase due to acquisition and improvements 839 1,911 808
Decrease due to disposals (1) - -
------- ------- -------
Balance at end of period $40,487 $39,649 $37,738
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $13,832 $12,474 $ 10,989
Depreciation expense 1,621 1,358 1,485
Write-offs due to disposals (1) - -
------- ------- --------
Balance at end of period $15,452 $13,832 $ 12,474
======= ======= ========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Oregon Portland Associates:
We have audited the accompanying balance sheets of the Oregon Portland
Associates (an Oregon General Partnership) as of December 31, 1995 and 1994,
and the related statements of operations and changes in partners' capital, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Oregon Portland
Associates at December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
January 30, 1996
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
Assets
1995 1994
Current assets:
Cash and cash equivalents $ 939 $ 152
Tenant receivables 9 9
Repair escrow deposits 32 1,042
Mortgage escrow deposits - restricted 359 320
Tenant security deposits - held in trust 216 244
Prepaid real estate taxes 222 250
Prepaid insurance 29 37
Other assets 8 68
--------- ---------
Total current assets 1,814 2,122
HUD reserve for replacements 2,299 2,255
Operating investment property, at cost:
Land 4,700 4,700
Buildings and improvements 22,874 22,351
Equipment 3,504 3,219
---------- ---------
31,078 30,270
Less accumulated depreciation (11,952) (10,634)
---------- ---------
Net operating investment property 19,126 19,636
Deferred financing costs and deferred leasing
commissions, net of accumulated
amortization of $98 ($67 in 1994) 780 793
---------- ---------
$ 24,019 $ 24,806
========== =========
Liabilities and Venturers' Deficit
Current liabilities:
Current portion of long-term debt $ 176 $ 177
Accounts payable and accrued expenses 372 297
Prepaid rental and other deferred income 113 40
Tenant security deposits 188 200
Payable to property manager and affiliates 10 9
---------- ----------
Total current liabilities 859 723
Long-term debt 22,540 22,703
Management fee and expense reimbursement due
to majority partner 913 1,415
Venturers' deficit (293) (35)
----------- ----------
$ 24,019 $ 24,806
=========== ==========
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
For the years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Revenues:
Rental income $ 5,456 $ 5,295 $ 4,948
Interest income 217 74 36
Other income 76 73 68
------- ------- -------
5,749 5,442 5,052
Expenses:
Interest and amortization of
related financing fees 1,808 1,943 1,677
Depreciation 1,319 1,059 1,204
Repairs and maintenance 675 504 406
Utilities 298 296 284
Real estate taxes, net of refunds of $15
and $66 in 1994 and 1993, respectively 455 468 448
Professional fees 34 30 29
General and administrative 279 243 292
Salaries and related costs 465 446 469
Management and related fees 504 521 443
Insurance 93 106 82
Security 77 68 54
------- ------- -------
Total expenses 6,007 5,684 5,388
------- ------- -------
Net loss $ (258) $ (242) $ (336)
======= ======= =======
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
(In thousands)
Majority Minority
Partner Partner Total
Balance at December 31, 1992 $ 645 $ (102) $ 543
Net loss (333) (3) (336)
--------- -------- --------
Balance at December 31, 1993 312 (105) 207
Net loss (240) (2) (242)
--------- -------- --------
Balance at December 31, 1994 72 (107) (35)
Net loss (255) (3) (258)
--------- -------- --------
Balance at December 31, 1995 $ (183) $ (110) $ (293)
========= ======== =======
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net loss $ (258) $ (242) $ (336)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation 1,319 1,059 1,204
Amortization of deferred financing costs 27 57 17
Amortization of deferred leasing commissions 4 9 2
Interest added to HUD reserve for
replacements (195) - -
Amortization of long-term debt discount - - 35
Net changes in operating assets and
liabilities:
Tenant receivables - 2 2
Mortgage escrow deposits (39) (130) 221
Prepaid real estate taxes 28 16 65
Prepaid insurance 8 (11) (1)
Other assets 12 164 (263)
Accounts payable and accrued expenses 75 125 (136)
Prepaid rental and other deferred income 73 8 16
Tenant security deposits 16 (24) 23
Payable to property manager and affiliates 1 (41) 29
Management fee and expense reimbursement
due to majority partner (502) (62) 193
----- ------ -----
Net cash provided by operating
activities 569 930 1,071
Cash flows from investing activities:
Additions to operating investment
property, net (809) (1,866) (779)
Repair escrow withdrawals (deposits) 1,010 363 (1,373)
HUD reserve for replacements - deposits (79) (77) (2,581)
HUD reserve for replacements - withdrawals 278 441 -
Increase in deferred leasing commissions (18) - -
------ ------- -------
Net cash provided by (used in)
investing activities 382 (1,139) (4,733)
Cash flows from financing activities:
Debt payments (164) (141) -
Loan from majority partner - - 117
Repayment of loan from majority partner - (117) -
Retirement of promissory note - - (18,493)
Proceeds from mortgage note - - 23,021
Deferred financing costs - - (812)
------ ------- -------
Net cash provided by (used in)
financing activities (164) (258) 3,833
------ ------- -------
Net increase (decrease) in cash and
cash equivalents 787 (467) 171
Cash and cash equivalents, beginning of year 152 619 448
------ ------- ------
Cash and cash equivalents, end of year $ 939 $ 152 $ 619
====== ======= ======
Cash paid during the year for interest $1,624 $ 1,510 $1,580
====== ======= ======
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Organization
Oregon Portland Associates, an Oregon General Partnership (the
"Partnership"), was organized on October 28, 1983 in accordance with an
agreement between PaineWebber Growth Properties Two LP ("majority partner") and
Libra Portland Partners ("minority partner"). The Partnership was organized to
purchase and operate the residential portion (and a limited amount of commercial
office space) (the "property") of the Portland Center (the "Project") from
Portland Center Associates ("PCA" or "seller"). Portland Center is located in
Portland, Oregon and was purchased on April 26, 1984 by the Partnership.
At the date of purchase, the Project was encumbered under a first mortgage
and was subject to a regulatory agreement with the Department of Housing and
Urban Development ("HUD"). PCA received a wraparound mortgage note from the
Partnership for a portion of the purchase price, and PCA continues to own and
operate a portion of the Project. While the first mortgage was still
outstanding, the Partnership was required to sign a regulatory agreement with
HUD containing restrictive covenants which, among other things, limit annual
distributions of net operating receipts to "surplus cash" (as defined in the
regulatory agreement). The regulatory agreement also requires that a reserve
fund for replacements for the property be funded monthly and that no
distributions (as defined in the regulatory agreement) be made from the
property's operations, except upon satisfaction of certain conditions in the
regulatory agreement.
The Partnership refinanced the wraparound mortgage during 1993. This
mortgage is also subject to a regulatory agreement with HUD. The new regulatory
agreement contains the same restrictive covenants as described above.
2. Use of Estimates
The preparation of financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates and
assumptions used.
Credit Risk
Financial instruments which potentially subject the Partnership to
concentrations of credit risk include cash and cash equivalents and restricted
cash accounts. The Partnership places its cash deposits with credit worthy, high
quality financial institutions. The concentration of such cash deposits is not
deemed to create a significant risk to the Partnership.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Operating Investment Property
The operating investment property was initially recorded at purchase price
plus costs incurred related to the acquisition. The acquisition of assets
involved the issuance of a wraparound mortgage which had been discounted;
accordingly, these assets were reduced by an amount equal to the original
discount.
Maintenance and repair expenses are charged to operations when incurred,
while major renewals and betterments are capitalized.
Depreciation of buildings and improvements is provided on the
straight-line method over an estimated useful life of 15 to 25 years. Equipment
is depreciated on the straight-line method over estimated useful lives ranging
from 5 to 10 years.
The apartment units are leased for terms of one year or less and the
commercial property for terms of five years.
Deferred Financing Costs and Deferred Leasing Commissions
Deferred financing costs consist principally of fees and costs incurred in
conjunction with securing refinancing for the mortgage payable. These fees are
being amortized (and are included in interest expense) over the term of the loan
utilizing a method that approximates the level-yield method. Deferred leasing
commissions are amortized over the term of the related lease.
Income Taxes
The Partnership is not a taxable entity, and the results of its operations
are includable in the tax returns of the partners. Accordingly, no income tax
provision or benefit is reflected in the accompanying financial statements.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, tenant receivables,
deposits and current liabilities approximates their fair value due to the
short-term maturities of these instruments. The fair value of the Partnership's
long-term debt is estimated using a discounted cash flow analysis, based on the
current market rate for similar types of borrowing arrangements.
New Accounting Standard
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership will adopt Statement 121 in 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
Reclassifications
Certain amounts in the financial statements presented have been
reclassified to conform prior years' data to the current year presentation.
3. Partnership Agreement
The Partnership Agreement (the "Agreement") provides that net cash flow
(as defined in the Agreement) be distributed as follows, subject to the
provisions of the HUD regulatory agreement (discussed in Note 1): first, for
payment of any deferred fees currently payable; second, for payment of interest,
then principal on any loans made by the partners to the Partnership' and third,
99% to the majority partner and 1% to the minority partner.
Per the Agreement, net income or loss is allocated 99% to the majority
partner and 1% to the minority partner.
Net capital proceeds (after repayment of third-party indebtedness and
establishing any necessary reserves) from a sale or refinancing (after payment
of any deferred fees and any principal and interest on certain loans made by the
partners to the Partnership) will be distributed as follows: first, to the
majority partner until it has received a return of its investment plus a 6%
simple, cumulative return on such investment; second, for payment of interest
then principal of the minority partner's remaining investment; and thereafter,
to the majority partner and minority partner in varying percentages which
increase in the minority partner's favor (5% to 40%) as the cumulative return on
the majority partner's investment increases.
The above payments, except the payment of interest then principal on any
remaining loans made by the partners to the Partnership, will not be made to a
partner if its capital account in the Partnership equals zero, until sufficient
distributions are made to the other partner to bring that partner's capital
account to zero.
Additional cash, after initial capital requirements, required by the
Partnership, is to be provided, either in the form of a capital contribution or
a loan to the Partnership, 90% by the majority partner and 10% by the minority
partner, unless otherwise agreed to by the partners.
4. Related Party Transactions
Pursuant to the Agreement, the majority partner is to be reimbursed each
year by the Partnership for the Partnership's share of the management fee and
expenses (a "deferred fee") allocable to or incurred by the majority partner in
connection with the management of the property. Management fees and expenses
incurred totalled $191,000, $217,000 and $193,000 in 1995, 1994 and 1993,
respectively. At December 31,1995 and 1994, $913,000 and $1,415,000,
respectively, of the amounts previously accrued have not been paid. These fees
are payable out of net cash flow or net capital proceeds from a sale or
refinancing, as defined, and are cumulative to the extent not paid. During 1995
and 1994, $693,000 and $279,000 of fees and expenses were paid to the majority
partner.
In 1994, loans outstanding from the majority partner aggregating $117,000
were paid in full. The borrowing accrued interest at 12%, and interest of
$10,000 was incurred and paid during 1994.
The Partnership had a property management contract with an affiliate of
the minority partner that provided for management and leasing commission fees to
be paid to the property manager. the management fee was 5% of "gross rents," as
defined. As of September 1, 1989, the Partnership changed property managers, the
new property manager being a third party. The new management fee is based on 4%
of "gross rents", as defined, and was $221,000, $215,000 and $200,000 for 1995,
1994 and 1993, respectively. The Partnership continues to pay a Partnership
management fee to the original property manager. This fee is equal to 1% of
"gross rents", as defined, and was $55,000, $54,000 and $50,000 in 1995, 1994
and 1993, respectively.
The Partnership has an agreement with the new property manager whereby the
property manager arranges and supervises construction improvement projects, and
in turn receives a fee equal to 2.5% of the gross contract amount on
non-HUD-related construction. There were no such fees paid during 1995, 1994 or
1993. On HUD-related construction, commencing January 1, 1994, the property
manager receives a fee of $3,000 per month, not to exceed $75,000. Fees of
$36,000, $36,000 and $5,000 were paid in 1995, 1994 and 1993, respectively.
<PAGE>
5. Long-term debt
Long-term debt aggregated $22,716,000 (fair value approximates the
carrying value at December 31, 1995) and $22,881,000 at December 31, 1995 and
1994, respectively. The borrowing is secured by the operating investment
property and bears interest at 7.125% with principal and interest of $149,000
due monthly through January 1, 2029. This loan is subject to the terms of a HUD
regulatory agreement as disclosed in Note 1.
Principal maturities on the mortgage for years ending December 31 are as
follows (in thousands):
Year Amount
1996 $ 176
1997 189
1998 203
1999 218
2000 234
Thereafter 21,696
--------
$22,716
=======
In conjunction with the mortgage, the Partnership was required to deposit
portions of the proceeds into various escrow accounts. The repair escrow
deposits are to be expended on specific nonrecurring landscape and site
improvements to the property. From this account, $1,010,000 and $363,000 were
expended during 1995 and 1994, respectively, and no funds were expended during
1993. The HUD reserve for replacements is an amount stipulated by HUD as
required by the regulatory agreement to fund ongoing interior betterments and
replacements to the property.
<PAGE>
Reznick Fedder & Silverman
217 East Redwood Street, Suite 1900
Baltimore, MD 21202-3316
INDEPENDENT AUDITORS' REPORT
To the Partners
Montgomery Village HWH Associates
We have audited the accompanying balance sheets of Montgomery Village HWH
Associates as of December 31, 1995 and 1994, and the related statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Montgomery Village HWH
Associates at December 31, 1995 and 1994, and the results of its operations, the
changes in partners' equity, and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Reznick Fedder & Silverman
Reznick Fedder & Silverman
Baltimore, Maryland
January 5, 1996, except for Note E,
as to which the date is
March 13, 1996
<PAGE>
Montgomery Village HWH Associates
BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
ASSETS
1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 123 $ 107
Escrow deposits 191 205
Accounts receivable 24 49
Prepaid expenses 68 63
Other current assets 16 -
------- -------
Total current assets 422 424
------- ------
RENTAL PROPERTY
Land 1,211 1,211
Buildings, improvements and furniture
and fixtures 8,198 8,168
------- -------
9,409 9,379
Less accumulated depreciation 3,500 3,198
------- -------
5,909 6,181
DEFERRED EXPENSES, net of accumulated
amortization of $104 and $87 16 33
------- -------
$6,347 $6,638
====== ======
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $4,953 $ 31
Accounts payable and accrued expenses 22 55
Accrued interest payable 39 39
Tenant security deposits payable 67 63
Rents received in advance 7 13
Other current liabilities 4 8
------- -------
Total current liabilities 5,092 209
LONG-TERM DEBT, net of current maturities - 4,952
PARTNERS' EQUITY 1,255 1,477
------- -------
$6,347 $6,638
====== ======
See notes to financial statements
<PAGE>
Montgomery Village HWH Associates
STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Revenue
Rents $1,740 $1,683 $1,637
Interest income 6 10 8
Other revenue 31 23 47
------ ------ ------
Total revenue 1,777 1,716 1,692
------ ------ ------
Expenses
Mortgage interest 472 475 477
Depreciation and amortization 320 316 316
Repairs and maintenance 124 134 154
Utilities 267 267 273
Real estate taxes and licenses 129 128 130
Salaries and related costs 140 145 135
General and administrative 59 56 55
Management fees 62 60 58
Insurance 25 24 24
Bad debts 2 5 7
------- ------- --------
Total expenses 1,600 1,610 1,629
------- ------- -------
EXCESS OF REVENUE OVER EXPENSES $ 177 $ 106 $ 63
======= ======= ========
See notes to financial statements
<PAGE>
Montgomery Village HWH Associates
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
Years ended December 31, 1995, 1994 and
1993
(In thousands)
Growth II MVLP Total
--------- ---- -----
Partners' equity (deficit),
December 31, 1992 $2,106 $ (103) $2,003
Distributions (200) - (200)
Excess of revenue over expenses 63 - 63
-------- ------- --------
Partners' equity (deficit),
December 31, 1993 1,969 (103) 1,866
Distributions (481) (15) (496)
Excess of revenue over expenses 106 1 107
------- --------- -------
Partners' equity (deficit),
December 31, 1994 1,594 (117) 1,477
Distributions (395) (4) (399)
Excess of revenue over expenses 175 2 177
-------- --------- --------
Partners' equity (deficit),
December 31, 1995 $1,374 $ (189) $1,255
====== ====== ======
See notes to financial statements
<PAGE>
Montgomery Village HWH Associates
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Excess of revenue over expenses $ 177 $ 106 $ 63
Adjustments to reconcile excess of revenue
over expenses to net cash provided by
operating activities:
Depreciation and amortization 320 316 316
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 25 8 (32)
Decrease (increase) in escrow deposits 14 25 (22)
(Increase) decrease in prepaid expenses (5) 3 (2)
(Increase) decrease in other current assets (16) 51 (51)
(Decrease) increase in accounts payable
and accrued expenses (33) 32 (22)
Increase in tenant security deposits 4 6 3
(Decrease) increase in rents received
in advance (6) 11 -
(Decrease) increase in other
current liabilities (3) 3 -
------- ------ ------
Net cash provided by operating
activities 477 561 253
------- ------ ------
Cash flows from investing activities:
Additions to rental property (30) (45) (29)
------ ------- ------
Net cash used in investing activities (30) (45) (29)
------ ------- ------
Cash flows from financial activities:
Distributions to partners (400) (491) (200)
Principal payments on long-term debt (31) (28) (25)
------- ------- -------
Net cash used in financial activities (431) (519) (225)
------ ------ ------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16 (3) (1)
Cash and cash equivalents, beginning of year 107 110 111
------- ------- -------
Cash and cash equivalents, end of year $ 123 $ 107 $ 110
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 472 $ 475 $ 477
====== ====== ======
See note to financial statements
<PAGE>
Montgomery Village HWH Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Montgomery Village HWH Associates (the Partnership) was organized on
December 29, 1983, in accordance with a partnership agreement between
PaineWebber Growth Properties Two LP (Growth II) and General American Real
Estate and Development, Inc. (GARE). In 1985, GARE transferred its interest
in the Partnership to Montgomery Village Limited Partnership (MVLP) effective
June 15, 1984.
The Partnership was organized to purchase and operate two residential
apartment complexes (Walker House and The Hamlet) in Montgomery Village,
Montgomery County, Maryland. On September 30, 1986, The Hamlet was sold.
All leases between the Partnership and tenants of the property are
operating leases.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purpose of reporting cash flows, the Partnership treats all highly
liquid investments with original maturities at date of purchase of 90 days or
less as cash equivalents.
Rental Property
Rental property is carried at cost. Depreciation is computed on a
straight-line basis over estimated useful lives of 5 to 30 years.
Deferred Expenses
Deferred expenses consist of permanent mortgage fees and other expenses
incurred in connection with the Partnership's mortgage which are being
amortized, using the straight-line method, over the seven-year term of the
mortgage.
Rental Income
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RELATED PARTY TRANSACTIONS
Under an agreement dated August 30, 1988, the Partnership received
$500,000 as a partial prepayment of the note and interest receivable related
to the sale of The Hamlet. MVLP received $427,000 of the $500,000 prepayment,
consisting of $100,000 of deferred consulting fees, $177,000 for a
disposition fee (compensation for negotiating the sale of The Hamlet), and
$150,000 for capital proceeds distributions deferred at the time of the sale
of The Hamlet. The partners agreed that these payments represented full and
complete compensation to MVLP and their affiliates for all rights or claims
MVLP or their affiliates had, or may have with respect to capital proceeds
from the sale of The Hamlet. Accordingly, the partners agreed that MVLP and
its affiliates will not be entitled to any further distributions of capital
proceeds until Growth II has received at least the amount set forth in the
agreement, consisting of the Growth II Investment and other stipulated
returns. On September 30, 1991, the Partnership received payment of the
remaining principal balance of the note and accrued interest receivable
related to the sale of The Hamlet, totalling approximately $2,357,000. As
discussed above, and in accordance with the terms of the agreement, the
entire amount of these proceeds was distributed to Growth II.
Any net proceeds arising from the refinancing, sale, exchange or other
disposition of the property or any part thereof, and after payment of any
debt other than loans made by the partners to the Partnership, the
establishment of any reasonable reserves for taxes and the payment of other
costs and expenses, will be distributed in the following order of priority:
1) to Growth II, an amount equal to the Growth II Investment, as defined, 2)
to Growth II, until Growth II has received a cumulative, noncompounded return
at the rate of 7% per annum on the Growth II Investment, 3) payment of
accrued interest and then unpaid principal balance of any outstanding Default
Notes and then Operating Notes, as defined, 4) to MVLP an amount equal to the
MVLP Investment, as defined, and 5) any remaining proceeds distributed to
Growth II and MVLP in varying percentages, until Growth II has received
certain cumulative, noncompounded returns on the Growth II Investment, as set
forth in the Partnership agreement.
NOTE C - ESCROW DEPOSITS
The Partnership and debt agreements provide that cash escrow accounts be
maintained for real estate taxes, insurance premiums and tenant security
deposits, as well as a reserve for capital expenditures, property enhancement
and other improvement expenditures. These escrow accounts are under the
control of the mortgage lender and may only be used for the purposes
specified in the agreement. The loan agreement requires that real estate tax
and insurance premium liabilities be fully funded on a current basis and that
the Partnership add an amount of $3,267 per month to the capital reserve
account. Such reserves were fully funded at December 31, 1995 and 1994.
At December 31, 1995 and 1994, cash was on deposit in escrow for the
following purposes (in thousands)
1995 1994
Real estate taxes $ 34 $ 49
Insurance premium 12 7
Tenant security deposits 65 64
Capital reserve 80 85
------ ------
$191 $205
<PAGE>
NOTE D - LONG-TERM DEBT
Long-term debt outstanding at December 31, 1995 and 1994 consists of the
following (in thousands):
1995 1994
9.5% mortgage, payable in monthly
installments of principal and
interest in the amount of $42 with
a final balloon payment of $4,919
due December 1, 1996 $4,953 $4,983
Less current maturities 4,953 31
------- ------
$ - $4,952
======= ======
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Management believes the fair value of the Partnership's long-term debt
approximates its carrying value.
NOTE E - SUBSEQUENT EVENT
On March 13, 1996, the Partnership sold the project for $10,650,000. The
existing mortgage balance of approximately $5,000,000 was paid off and the
Partnership paid closing costs of approximately $235,000. The net proceeds
from the sale of approximately $5,400,000 was distributed to the partners in
accordance with the joint venture agreement.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended March 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6278
<SECURITIES> 0
<RECEIVABLES> 191
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6469
<PP&E> 257
<DEPRECIATION> 0
<TOTAL-ASSETS> 6726
<CURRENT-LIABILITIES> 46
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 6680
<TOTAL-LIABILITY-AND-EQUITY> 6726
<SALES> 0
<TOTAL-REVENUES> 4485
<CGS> 0
<TOTAL-COSTS> 310
<OTHER-EXPENSES> 134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4041
<INCOME-TAX> 0
<INCOME-CONTINUING> 4041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4041
<EPS-PRIMARY> 117.36
<EPS-DILUTED> 117.36
</TABLE>
