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, 1997
OR
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from_____ to _____ .
Commission File Number: 0-12085
PAINE WEBBER GROWTH PROPERTIES TWO LP
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
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
1997 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-7
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
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>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-5 of
this Form 10-K.
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, 1997, three of these investments had
been sold, including two during fiscal 1996.
As of March 31, 1997, the Partnership owned, through a joint venture
partnership, an interest in the operating property set forth below:
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- -------------------------------------- ------- ----------- -------------
<S> <C> <C> <C>
Oregon Portland Associates 525 4/26/84 Fee ownership of land and
Portland Center, Apartment apartment improvements (through
and Office Complex units and joint venture)
Portland, Oregon 28,328
sq. ft.
office
space
</TABLE>
(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, 1997, the Limited Partners
had received cumulative cash distributions of approximately $22,884,000, or
approximately $685 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, $11 per original $1,000 investment from the
sale of the Partnership's investment in the Hudson Apartments, $169.48 per
original $1,000 investment from the sale of the Walker House Apartments and $12
per original $1,000 investment from a distribution of Partnership reserves that
exceeded future reserve requirements.
As noted above, the Partnership continues to retain an ownership
interest in one operating investment property. 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 generally been offset by the lack of significant new construction
activity in the multi-family apartment market over most of this period. In the
past 12 months, development actively for multi-family properties in many markets
has escalated significantly. 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. Conditions in the real estate
markets for multi-family apartment properties have improved over the past two
years and have had a positive impact on the performance of the Portland Center
Apartments. As a result, growing interest from institutional and local buyers
for well-located, quality apartment properties like Portland Center has emerged
in recent months. Given the current buyer interest in the Portland apartment
rental market, management believes that this may be the appropriate time to sell
the property. Management is currently focusing on a potential near-term sale of
this property and the possible completion of a Partnership liquidation by the
end of calendar year 1997. However, no assurances can be given that both a sale
of the property and a liquidation of the Partnership will be completed within
this time frame.
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
As of March 31, 1997, the Partnership owns, through a joint venture
partnership, an interest in the property referred to under Item 1 above to which
reference is made for the name, location, and the description of the property.
Occupancy figures for each fiscal quarter during 1997, along with an
average for the year, are presented below for the remaining property:
Percent Occupied At
-----------------------------------------------
Fiscal
1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ------- -------
Portland Center 94% 94% 95% 94% 94%
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
alleged 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
purported to be suing on behalf of all persons who invested in Paine Webber
Growth Properties Two LP, also alleged 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 alleged 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 sought 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 sought 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. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
Based on the settlement agreement discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of this matter will have a material impact on the Partnership's
financial statements, taken as a whole.
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, 1997 there were 2,982 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.
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 1997.
Item 6. Selected Financial Data
PaineWebber Growth Properties Two LP
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands, except for per Unit data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 304 $ 259 $ 227 $ 201 $ 202
Operating income (loss) $ 45 $ (51) $ (65) $ (15) $ 22
Partnership's share of
ventures' losses $ (230) $ (134) $ (161) $ (309) $ (867)
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) $ (185) $ 4,041 $ (2,245) $ (324) $ (845)
Per Limited Partnership Unit:
Net income (loss) $ (5.48) $117.36 $ (66.54) $ (9.60) $ (25.05)
Cash distributions:
Operations $ 17.53 $ 21.26 $ 8.68 - -
Sales and
other capital
proceeds $169.48 $ 23.00 - - -
Total assets $ 905 $ 6,726 $ 4,180 $ 6,671 $ 7,021
</TABLE>
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
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
- ----------- --------------------------- ----------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results," which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- --------- --- ------- ---------
The 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. Through March 31, 1997, three of the
four original investments had been sold. The sales of the Walker House
Apartments and the Partnership's interest in the Hudson Apartments during fiscal
1996 have left the Partnership with one remaining real estate investment, a
majority interest in the joint venture which owns the Portland Center
Apartments. 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.
While the Partnership continues to be optimistic about the near-term
prospects for Portland Center and the downtown Portland apartment market,
management believes that it may be the appropriate time to sell the property.
There appears to be growing interest from institutional and local buyers for
well-located, quality apartment properties like Portland Center. As a result,
management has decided to market the property for sale and formal marketing
efforts are currently underway. Management is currently focusing on completing a
potential near-term sale of this property and the possible liquidation of the
Partnership prior to December 31, 1997. There are no assurances, however, that
both a sale of the remaining investment property and the liquidation of the
Partnership will be completed within this time frame. If completed, the
Partnership's share of the net proceeds from the sale of Portland Center, along
with the remaining Partnership cash reserves after the payment of all
liquidation-related expenses, would be distributed to the Limited Partners prior
to the liquidation of the Partnership.
The investment in the Portland Center joint venture comprised 41% of the
Partnership's original investment portfolio. Portland Center is a 525-unit
high-rise apartment building located in Portland, Oregon, which also contains
28,000 square feet of leasable commercial space. As previously reported,
management continues to be in the process of using the excess cash reserves from
the December 1993 Portland Center loan refinancing to complete a major
renovation program at the property, which includes upgrades to the common areas
and many individual apartment units. The property's apartment units are being
upgraded on a turnover basis. As of March 31, 1997, 59% of the apartment
interiors had been fully renovated and an additional 37% had been partially
renovated. To date, management has been able to lease the renovated units at
substantial rental rate increases, averaging approximately 10% above the rental
rate prior to the renovations. The implementation of the planned capital
improvements at Portland Center, which will continue throughout calendar 1997,
is expected to support management's ability to increase rents and add value to
the property while the sale efforts are in process. As a result of the
improvement in the net cash flow of the Portland Center joint venture during
fiscal 1997, the Partnership expects to increase its quarterly distribution rate
from 4.25% to 5% per annum on a Limited Partner's remaining capital account of
$362.52 per original $1,000 Unit. The distribution increase will be effective
for the payment to be made on August 15, 1997 for the quarter ending June 30,
1997.
<PAGE>
The mortgage debt obtained by the Portland Center joint venture in
December 1993 contains a five-year prohibition on prepayment. The loan becomes
prepayable beginning in December 1998 with a prepayment penalty which begins at
5% of the outstanding principal balance and declines by 1% annually over the
next five years. While the loan cannot be prepaid prior to December 1998, it
could be assumed by a buyer of the property for a fee, subject to approval by
the lender and the U.S. Department of Housing and Urban Development, which
insured the mortgage loan. The requirement that a buyer would have to assume the
outstanding mortgage obligation could limit management's ability to effectively
market the property for sale prior to December 1998 because of the reserve and
reporting requirements associated with a HUD loan. However, the loan does have a
favorable interest rate of 7.125% per annum and does not mature until January 1,
2029. In addition, management's analysis of market conditions completed during
the third quarter of fiscal 1997 to assess whether it might be in the best
interests of the Limited Partners to seek a sale of the Portland Center property
in the near term revealed favorable results. Market conditions for residential
apartment properties in the Pacific Northwest in general and in the downtown
Portland market in particular are very strong at the present time as a result
of, among other factors, healthy employment gains, local restrictions on new
construction, a limited amount of buildable land sites and several projects that
have converted rental units into condominiums. Such favorable conditions may
result in the Partnership receiving a greater return on the current sale of this
investment property even prior to the completion of the ongoing improvement
program and prior to the expiration of the loan prepayment restrictions. Under
the terms of the Portland Center joint venture agreement, both the Partnership
and the co-venturer have certain first refusal rights with respect to a sale of
the property. The Partnership would expect to recognize a sizable gain for
financial reporting purposes upon the sale of the Portland Center property.
The occupancy level in Portland Center's commercial space has risen 8%
since September 1996 to reach 80% as of March 31, 1997. Two new tenants account
for this improvement. It is expected that the commercial space will be 94%
occupied by the end of June 1997. This projection is based upon new leases which
were signed subsequent to year-end and a recent decision to utilize
approximately 2,500 square feet of the vacant commercial space for a fitness
center. The new fitness center opened in May 1997 and is an important amenity
for the exclusive use of Portland Center residents. It replaces the former
fitness area of 1,200 square feet which will be converted to rentable office
space. Once the conversion is finished, there will be a total of 1,800 vacant
square feet, or 6% of the property's commercial space, available for lease as
office space.
The proposed light-rail transportation system for downtown Portland which
has been discussed in previous reports is presently on hold. Portland voters
rejected funding for this project in the November 1996 election. This light-rail
system, as proposed, included a nearby station that would have been convenient
for the tenants at Portland Center.
As previously reported, in March 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
repaid in conjunction with the sale, and the venture paid closing costs of
approximately $364,000. In addition, the joint venture had excess working
capital 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 Partnership's share of
the net proceeds was distributed to the Limited Partners as a special
distribution in the amount of approximately $5,312,000, or $159 per original
$1,000 investment, paid concurrently with the regular quarterly distribution on
May 15, 1996. An additional special distribution of approximately $350,000, or
$10.48 per original $1,000 investment, was made on December 13, 1996 in
connection with the Walker House transaction. Because the sale of the Walker
House Apartments was a taxable transaction in the state of Maryland, the
Partnership withheld Maryland state income tax equal to the amount of this
special distribution on behalf of most Limited Partners, as required by state
law.
At March 31, 1997, the Partnership had available cash and cash equivalents
of approximately $905,000. Such cash and cash equivalents, along with the
expected operating cash flow from the Portland Center property, will be utilized
for the working capital needs of the Partnership and for distributions to the
partners. The source of future liquidity and distributions to the partners is
expected to be through proceeds received from the sale or refinancing of the
remaining investment property. These sources of liquidity are expected to be
sufficient to meet the Partnership's needs on both a short-term and long-term
basis.
<PAGE>
Results of Operations
1997 Compared to 1996
- ---------------------
The Partnership reported a net loss of $185,000 for the year ended March
31, 1997, compared to net income of $4,041,000 for the prior year. The
unfavorable change in the Partnership's net operating results is primarily the
result of the $4,226,000 gain realized on the sale of the Walker House
Apartments in fiscal 1996. A $96,000 favorable change in the Partnership's
operating income (loss) was effectively offset by an increase of a like amount
in the Partnership's share of ventures' losses.
The favorable change in the Partnership's operating income (loss) is
primarily due to a $43,000 increase in interest and other income and a $51,000
decrease in the Partnership's operating expenses. Interest and other income
increased partly due to higher outstanding cash reserve balances for the current
year as a result of the temporary investment of the Walker House sale proceeds
prior to the May 15, 1996 special distribution, as discussed further above. The
Partnership's operating expenses decreased primarily due to a $38,000 decrease
in general and administrative expenses stemming from a reduction in certain
required professional services in the current year. In addition, management fees
declined by $13,000 due to the return of capital associated with the Walker
House and Hudson transactions and the related reduction in the amount of the
ongoing Partnership distributions upon which management fees are based.
The Partnership recognized a net loss of $230,000 from its share of
ventures' operations for the year ended March 31, 1997, as compared to a net
loss of $134,000 for the same period in the prior year. This increase in
ventures' losses is primarily attributable to the inclusion of $122,000 in net
income attributable to the Walker House joint venture in the prior year's
results. As discussed further above, the Walker House joint venture sold its
operating property during the fourth quarter of fiscal 1996. The impact of the
Walker House sale on the Partnership's share of ventures' losses was slightly
offset by a decrease in the net loss from the Portland Center joint venture as a
result of an increase in rental income. Rental income from Portland Center
increased by approximately 11% over fiscal 1996 due to increases in rental rates
and an increase in the property's average occupancy level. The increase in the
venture's rental income was partially offset by an increase in repairs and
maintenance and depreciation charges as a result of the venture's ongoing
overall enhancement and capital improvement program, as discussed further
above.
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 fiscal 1995. The favorable
change in the Partnership's net operating results was 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. 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
fiscal 1996 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 fiscal 1996 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 fiscal 1996 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. 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 was 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. 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 calendar 1993.
Such increases in rental income were 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 exceeded 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.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investment will be significantly impacted by the competition from
comparable properties in its local market area. The occupancy levels and rental
rates achievable at the property are largely a function of supply and demand in
the market. To date the pace of job and population growth in the Portland area
has kept pace with the rate of new apartment development activity. However, in
many other markets across the country development of new multi-family properties
has surged in the past 12 months. Existing properties in such markets have
generally experienced increased vacancy levels, declines in effective rental
rates and, in some cases, declines in estimated market values as a result of the
increased competition. There are no assurances that such an increase in
development activity will not affect the Portland Center property in the near
term.
Impact of Joint Venture Structure. The ownership of the remaining
investment through a joint venture partnership could adversely impact the timing
of the Partnership's planned liquidation and the amount of proceeds received
from the disposition of the final investment. It is possible that the
Partnership's co-venture partner could have economic or business interests which
are inconsistent with those of the Partnership. Given the rights which both
parties have under the terms of the joint venture agreement, any conflict
between the partners could result in delays in completing a sale of the property
and could lead to an impairment in the marketability of the property to third
parties for purposes of achieving the highest possible sale price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining asset is
critical to the Partnership's ability to realize the current estimated fair
market value of the Portland Center investment property and to complete the
liquidation of the Partnership on a timely basis. Demand by buyers of
multi-family apartment properties is affected by many factors, including the
size, quality, age, condition and location of the subject property, potential
environmental liability concerns, the existing debt structure, the liquidity in
the debt and equity markets for asset acquisitions, the general level of market
interest rates and the general and local economic climates.
INFLATION
- ---------
The Partnership completed its thirteenth full year of operations in
fiscal 1997. 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 resulting from inflation.
<PAGE>
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
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 54 6/1/83 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 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:
Bruce J. Rubin is President and Director of the Managing General Partner.
Mr. Rubin was named President and Chief Executive Officer of PWPI in August
1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November
1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was
employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc.
Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and
Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr.
Rubin was a First Vice President and a real estate workout specialist at
Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr.
Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr.
Rubin is a graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a
result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible
for the origination and execution of all of PaineWebber's REIT transactions,
advisory assignments for real estate clients and certain of the firm's real
estate debt and principal activities. He joined Kidder, Peabody in 1985 and,
beginning in 1989, was one of the senior executives responsible for building
Kidder, Peabody's real estate department. Mr. Fancher previously worked for a
major law firm in New York City. He has a J.D. from Harvard Law School, an
M.B.A. from Harvard Graduate School of Business Administration and an A.B. from
Harvard College.
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.
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, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
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 level of 4.25% per
annum for the quarter ended March 31, 1996 and will increase to 5.0% per annum
beginning with the distribution to be made on August 15, 1997 for the quarter
ended June 30, 1997. 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.
<PAGE>
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 which have continued through fiscal 1997.
Accordingly, the Adviser was paid management fees of $58,000 for fiscal 1997.
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, 1997 is $61,000,
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 $7,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended March 31, 1997. 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) No Current Reports on Form 8-K were filed during the last
quarter of fiscal 1997.
(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/ Bruce J. Rubin
--------------------
Bruce J. Rubin
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 27, 1997
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/ Bruce J. Rubin Date: June 27, 1997
---------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 27, 1997
----------------------- -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER GROWTH PROPERTIES TWO LP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------- ------------------
<S> <C> <C> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated October 6, 1983, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Amended and
Restated Certificate and
Agreement of Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant
filed as exhibits to registration to Section 13 or 15(d) of the
statements and amendments thereto Securities Act of 1934 and
of the registrant together with incorporated herein by reference.
all such contracts filed as
exhibits of previously filed
Forms 8-K and Forms 10-K are
hereby incorporated herein by
reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal year
1997 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 1 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.
</TABLE>
<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, 1997 and 1996 F-5
Statements of operations for the years ended March 31,
1997, 1996 and 1995 F-6
Statements of changes in partners' capital (deficit) for the years
ended March 31, 1997, 1996 and 1995 F-7
Statements of cash flows for the years ended March 31, 1997,
1996 and 1995 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, 1996 and 1995 F-21
Statements of operations for the years ended December 31,
1996, 1995 and 1994 F-22
Statements of changes in venturers' capital (deficit) for the
years ended December 31, 1996, 1995 and 1994 F-23
Statements of cash flows for the years ended December 31,
1996, 1995 and 1994 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, 1997 and 1996, 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, 1997. 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. The financial statements of Montgomery Village HWH
Associates as of December 31, 1995 and 1994 and for the years then ended have
been audited by other auditors whose report has been furnished to us; insofar as
our opinion on the financial statements relates to Montgomery Village HWH
Associates as of December 31, 1995 and for each of the two years in the period
ended December 31, 1995, it is based solely on their report. In the financial
statements, the Partnership's equity in the net income of Montgomery Village HWH
Associates is stated at $122,000 and $105,000, respectively, for the years ended
March 31, 1996 and 1995.
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, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1997, 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 13, 1997
<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, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
1997 1996
---- ----
Investments in joint ventures, at equity $ - $ 257
Cash and cash equivalents 905 6,278
Accounts receivable - 191
------- --------
$ 905 $ 6,726
======= ========
LIABILITIES AND PARTNERS' CAPITAL
Equity in losses of joint venture in excess
of investment and advances $ 618 $ -
Accounts payable and accrued expenses 46 46
-------- --------
Total liabilities 664 46
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 7 9
Cumulative cash distributions (16) (10)
Limited Partners ($1,000 per Unit,
33,410 Units outstanding):
Capital contributions, net o
offering costs 29,778 29,778
Cumulative net losses (6,645) (6,462)
Cumulative cash distributions (22,884) (16,636)
--------- ----------
Total partners' capital 241 6,680
-------- ----------
$ 905 $ 6,726
======== ==========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the years ended March 31, 1997, 1996 and 1995
(In thousands, except for per Unit data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Interest and other income $ 111 $ 68 $ 50
Reimbursements from affiliate 193 191 177
-------- --------- ---------
304 259 227
Expenses:
Management fees 58 71 29
General and administrative 201 239 263
-------- --------- ---------
259 310 292
-------- --------- ---------
Operating income (loss) 45 (51) (65)
Partnership's share of ventures' losses (230) (134) (161)
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) $ (185) $ 4,041 $ (2,245)
========== ========= =========
Per Limited Partnership Unit:
Net income (loss) $ (5.48) $ 117.36 $ (66.54)
========= ======== =========
Cash distributions $ 187.01 $ 44.26 $ 8.68
========= ========= =========
</TABLE>
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, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Net loss (2) (183) (185)
Cash distributions (6) (6,248) (6,254)
-------- -------- ---------
Balance at March 31, 1997 $ (8) $ 249 $ 241
======== ======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (185) $ 4,041 $ (2,245)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Partnership's share of gain on sale of
operating investment property - (4,226) -
Reimbursements from affiliate (193) (191) (177)
Partnership's share of ventures' losses 230 134 161
Loss on write-down of investment to fair value - - 2,019
Changes in assets and liabilities:
Accounts receivable 191 - -
Accounts payable and accrued expenses - (9) 47
-------- --------- ---------
Total adjustments 228 (4,292) 2,050
-------- --------- ---------
Net cash provided by (used in) operating activities 43 (251) (195)
Cash flows from investing activities:
Distributions from joint ventures 838 6,629 1,034
Additional investments in joint ventures - (17) (7)
Proceeds from sale of investment - 350 -
--------- --------- ----------
Net cash provided by investing activities 838 6,962 1,027
Cash flows from financing activities:
Distributions to partners (6,254) (1,486) (293)
---------- --------- ----------
Net (decrease) increase in cash and cash equivalents (5,373) 5,225 539
Cash and cash equivalents, beginning of year 6,278 1,053 514
---------- --------- -----------
Cash and cash equivalents, end of year $ 905 $ 6,278 $ 1,053
========== ========= ==========
</TABLE>
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
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 joint venture partnerships. Through March 31, 1997, three of
these investments had been sold. The joint venture that owns the remaining asset
is currently in the process of marketing the final investment property for sale.
Management is currently focusing on completing a potential near-term sale of
this property and the possible liquidation of the Partnership prior to December
31, 1997. There are no assurances, however, that both a sale of the remaining
investment property and the liquidation of the Partnership will be completed
within this time frame. See Note 4 for a further discussion of the Partnership's
investments.
2. Use of Estimates and 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, 1997 and 1996 and revenues and expenses for each
of the three years in the period ended March 31, 1997. Actual results could
differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investment in one joint venture partnership (three in fiscal 1996) 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 in the ventures. 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 or were 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 and
a discussion of the significant lag-period transaction recognized in fiscal
1996.
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 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 approximates their fair value
as of March 31, 1997 and 1996 due to the short-term maturities of these
instruments.
No provision for income taxes has been made in the accompanying
financial statements as the liability for such taxes is that of the individual
partners rather than the Partnership. Upon sale or disposition of the
Partnership's investments, the taxable gain or the tax loss incurred will be
allocated among the partners. In cases where the disposition of the investment
involves the lender foreclosing on the investment, taxable income could occur
without distribution of cash. This income would represent passive income to the
partners which could be offset by each partners' existing passive losses,
including any passive loss carryovers from prior years.
<PAGE>
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, 1997, 1996 and 1995, the Adviser earned $58,000, $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, 1997, 1996 and 1995 are $61,000, $69,000 and $72,000, 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 $7,000, $3,000, and $2,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during the years ended March 31,
1997, 1996 and 1995, respectively.
4. Investments in Joint Venture Partnerships
As of March 31, 1997 and 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 or were
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, 1996 and 1995 includes
only the accounts of the Portland Center joint venture. The condensed combined
statement of operations for the year ended December 31, 1996 includes only the
results 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. And finally, the condensed
combined statement of operations for the year ended December 31, 1994 includes
the results of all three joint ventures.
Condensed Combined Balance Sheets
December 31, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 1,938 $ 1,814
Operating investment property, net 18,280 19,126
Other assets 2,839 3,079
--------- ---------
$ 23,057 $ 24,019
========= =========
Liabilities and Venturers' Deficit
Current liabilities $ 737 $ 859
Other liabilities 494 913
Long-term mortgage debt, less
current portion 22,351 22,540
Partnership's share of combined deficit (413) (183)
Co-venturers' share of combined deficit (112) (110)
--------- ---------
$ 23,057 $ 24,019
========== =========
Reconciliation of Partnership's Investment
March 31, 1997 and 1996
(in thousands)
1996 1995
---- ----
Partnership's share of
combined deficit
at December 31,
as shown above $ (413) $ (183)
Reimbursement of management
fees and expenses
receivable from
joint venture (1) 494 913
Timing difference due
to contributions
(distributions)
made subsequent to
December 31 (see Note 2) (699) (473)
---------- ----------
Investment in joint venture
at equity, at March 31 $ (618) $ 257
========== ==========
(1) In accordance with the Portland Center joint venture agreement, the
Partnership recorded reimbursement revenues for the years ended March 31,
1997, 1996 and 1995 of $193,000, $191,000 and $177,000, 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 $494,000 and $913,000 remained unpaid as of
March 31, 1997 and 1996, 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, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental revenues and expense recoveries $ 6,054 $ 7,549 $ 7,757
Interest and other income 199 337 233
--------- --------- ---------
6,253 7,886 7,990
Expenses:
Property operating expenses 3,351 3,945 3,874
Interest expense 1,780 2,373 2,684
Depreciation and amortization 1,354 1,703 1,621
--------- ---------- ----------
6,485 8,021 8,179
--------- ---------- ----------
Operating loss (232) (135) (189)
Gain on sale of operating investment property - 4,580 -
--------- ---------- ----------
Net income (loss) $ (232) $ 4,445 $ (189)
========= ========= ==========
Net income (loss):
Partnership's share of combined net income (loss) $ (230) $ 4,092 $ (161)
Co-venturers' share of combined net income (loss) (2) 353 (28)
--------- ---------- ----------
$ (232) $ 4,445 $ (189)
========== ========== ==========
</TABLE>
<PAGE>
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):
1996 1995 1994
---- ---- ----
Partnership's share of ventures' losses $ (230) $ (134) $ (161)
Partnership's share of gain on sale of
operating investment property - 4,226 -
------- ------- -------
$ (230) $ 4,092 $ (161)
====== ======= =======
Investment in joint venture, at equity, is the Partnership's net
investment in the Portland Center joint venture partnership. This joint venture
is subject to a partnership agreement which determines the distribution of
available funds, the disposition of the venture's assets and the rights of the
partners, regardless of the Partnership's percentage ownership interest in the
venture. As a result, substantially all of the Partnership's investment in this
joint venture is restricted as to distributions.
The cash distributions received from the Partnership's joint venture
investments during fiscal 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
---- ---- ----
Montgomery Village HWH Associates $ - $ 5,656 $ 445
Oregon Portland Associates 838 973 586
Hudson Partners - - 3
------ ------ --------
$ 838 $ 6,629 $ 1,034
====== ======= ========
A description of the ventures' properties, relevant sales transactions
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. During fiscal 1997, 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. An
additional amount of $10.48 per original $1,000 investment related to the Walker
House sale was distributed to the Limited Partners in December 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 resulting from a sale of the properties was allocated
between the Partnership and the co-venturer generally as sales proceeds were
distributed.
(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 $2.1 million and $2.3
million as of December 31, 1996 and 1995, 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. Under the terms of the joint venture
agreement, both the Partnership and the co-venturer have certain first refusal
rights with respect to a sale of the operating investment property.
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, 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
alleged 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
purported to be suing on behalf of all persons who invested in Paine Webber
Growth Properties Two LP, also alleged 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 alleged 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 sought 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 sought 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. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pendng the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
Based on the settlement agreement discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of this matter will have a material impact on the Partnership's
financial statements, taken as a whole.
<PAGE>
6. Subsequent Event
On May 15, 1997, the Partnership distributed $129,000 to the Limited
Partners and $1,000 to the General Partners for the quarter ended March 31,
1997.
<PAGE>
<TABLE>
<CAPTION>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER GROWTH PROPERTIES TWO LP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
Cost Life on Which
Capitalized 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 of Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Acquisition is Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Complex
Portland,
Oregon $22,540 $4,700 $19,453 $7,433 $4,700 $26,886 $31,586 $13,306 4/26/84 7-25 yrs.
======= ====== ======= ====== ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $36,276.
(B) See Note 4 to the financial statements for a description of the agreement though which the Partnership owns an interest in
the above property and for a discussion of the debt encumbering the operating investment property.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $40,487 $39,649 $37,738
Increase due to acquisition and improvements 508 839 1,911
Decrease due to sale of Walker House (9,409) - -
Decrease due to disposals - (1) -
------- ------- -------
Balance at end of period $31,586 $40,487 $39,649
======== ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $15,452 $13,832 $12,474
Depreciation expense 1,354 1,621 1,358
Decrease due to sale of Walker House (3,500) - -
Write-offs due to disposals - (1) -
------- ------ -------
Balance at end of period $13,306 $15,452 $13,832
======= ======= =======
</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, 1996 and 1995, and
the related statements of operations, changes in venturers' capital (deficit),
and cash flows for each of the three years in the period ended December 31,
1996. 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
-----------------
ERNST & YOUNG LLP
Boston, Massachusetts
February 12, 1997
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
Assets
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 903 $ 939
Tenant receivables 22 9
Repair escrow deposits 32 32
Mortgage escrow deposits - restricted 344 359
Tenant security deposits - held in trust 354 216
Prepaid real estate taxes 248 222
Prepaid insurance 25 29
Other assets 10 8
-------- ---------
Total current assets 1,938 1,814
HUD reserve for replacements 2,123 2,299
Operating investment property, at cost:
Land 4,700 4,700
Buildings and improvements 23,134 22,874
Equipment 3,752 3,504
-------- ---------
31,586 31,078
Less accumulated depreciation (13,306) (11,952)
---------- ---------
Net operating investment property 18,280 19,126
Deferred financing costs and deferred leasing
commissions, net of accumulated
amortization of $161 ($98 in 1995) 716 780
--------- ---------
$ 23,057 $ 24,019
========= =========
Liabilities and Venturers' Deficit
Current liabilities:
Current portion of long-term debt $ 189 $ 176
Accounts payable and accrued expenses 292 372
Prepaid rental and other deferred income 43 113
Tenant security deposits 178 188
Payable to property manager and affiliates 35 10
--------- ---------
Total current liabilities 737 859
Long-term debt 22,351 22,540
Management fee and expense reimbursement due
to majority partner 494 913
Venturers' deficit (525) (293)
---------- ---------
$ 23,057 $ 24,019
========== =========
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental income $ 6,054 $ 5,456 $ 5,295
Interest income 119 217 74
Other income 80 76 73
------- ------- -------
6,253 5,749 5,442
Expenses:
Interest and amortization
of related financing fees 1,780 1,808 1,943
Depreciation 1,354 1,319 1,059
Repairs and maintenance 961 675 504
Utilities 351 298 296
Real estate taxes, net of
refunds of $15 in 1994 469 455 468
Professional fees 38 34 30
General and administrative 370 279 243
Salaries and related costs 436 465 446
Management and related fees 501 504 521
Insurance 95 93 106
Security 130 77 68
------- -------- --------
Total expenses 6,485 6,007 5,684
------- -------- --------
Net loss $ (232) $ (258) $ (242)
======= ======== ========
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the years ended December 31, 1996, 1995 and 1994
(In thousands)
Majority Minority
Partner Partner Total
------- ------- ------
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)
Net loss (230) (2) (232)
-------- --------- -------
Balance at December 31, 1996 $ (413) $ (112) $ (525)
========= ========= =======
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (232) $ (258) $ (242)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 1,354 1,319 1,059
Amortization of deferred financing costs 56 27 57
Amortization of deferred leasing commissions 6 4 9
Interest added to HUD reserve for replacements (109) (195) -
Net changes in operating assets and liabilities:
Tenant receivables (13) - 2
Mortgage escrow deposits (123) (39) (130)
Prepaid real estate taxes (26) 28 16
Prepaid insurance 4 8 (11)
Other assets (2) 12 164
Accounts payable and accrued expenses (79) 75 125
Prepaid rental and other deferred income (71) 73 8
Tenant security deposits (10) 16 (24)
Payable to property manager and affiliates 25 1 (41)
Management fee and expense reimbursement due
to majority partner (419) (502) (62)
---------- ------- ---------
Net cash provided by operating activities 361 569 930
Cash flows from investing activities:
Additions to operating investment property, net (508) (809) (1,866)
Repair escrow withdrawals - 1,010 363
HUD reserve for replacements - deposits (79) (79) (77)
HUD reserve for replacements - withdrawals 366 278 441
Increase in deferred leasing commissions - (18) -
----------- -------- ---------
Net cash (used in) provided by investing activities (221) 382 (1,139)
Cash flows from financing activities:
Debt payments (176) (164) (141)
Repayment of loan from majority partner - - (117)
------------ -------- ---------
Net cash used in financing activities (176) (164) (258)
------------ -------- ---------
Net (decrease) increase in cash and cash equivalents (36) 787 (467)
Cash and cash equivalents, beginning of year 939 152 619
------------ -------- ---------
Cash and cash equivalents, end of year $ 903 $ 939 $ 152
============ ======== =========
Cash paid during the year for interest $ 1,613 $ 1,624 $ 1,510
============ ======== =========
</TABLE>
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIAES
(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
-----------------------------
Operating investment property is stated at cost, net of accumulated
depreciation, or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 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. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.
The acquisition of the 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 or less.
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 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.
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 $193,000, $191,000 and $217,000 in 1996, 1995 and 1994,
respectively. At December 31, 1996 and 1995, $494,000 and $913,000,
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 1996
and 1995, $612,000 and $693,000 of fees and expenses were paid to the majority
partner.
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 $244,000, $221,000 and $215,000 for 1996,
1995 and 1994, 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 $61,000, $55,000 and $54,000 in 1996, 1995
and 1994, 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 1996, 1995 or
1994. 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
$3,000, $36,000 and $36,000 were paid in 1996, 1995 and 1994, respectively.
5. Long-term debt
Long-term debt aggregated $22,540,000 and $22,716,000 at December 31,
1996 and 1995, respectively (fair value approximates the carrying value at
December 31, 1996 and 1995). 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
---- ------
1997 $ 189
1998 203
1999 218
2000 234
2001 270
Thereafter 21,426
-------
$22,540
=======
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. No amounts were expended from the
repair escrow during 1996. 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, 1996 and 1995, 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, 1996 and 1995, 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 $ (119) $ 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)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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 treat
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.
<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, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 905
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 905
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 905
<CURRENT-LIABILITIES> 46
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 241
<TOTAL-LIABILITY-AND-EQUITY> 905
<SALES> 0
<TOTAL-REVENUES> 304
<CGS> 0
<TOTAL-COSTS> 259
<OTHER-EXPENSES> 230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185)
<EPS-PRIMARY> (5.48)
<EPS-DILUTED> (5.48)
</TABLE>
