UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-12085
PAINE WEBBER GROWTH PROPERTIES TWO LP
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(Exact name of registrant as specified in its charter)
Delaware 04-2798594
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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(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
1998 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-6
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-6
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-34
<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, 1998, three of these investments had
been sold.
As of March 31, 1998, the Partnership owned, through a joint venture
partnership, an interest in the operating property set forth below:
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- -------- ---- ----------- -------------
Oregon Portland Associates 525 4/26/84 Fee ownership of land
Portland Center, Apartment apartment and improvements
and Office Complex units and (through joint
Portland, Oregon 28,328 venture)
sq. ft.
office
space
(1)See Notes to the Financial Statements of the Partnership filed in Item
14(a)(1) of this Annual Report for a description of the long-term
mortgage indebtedness secured by the Partnership's operating property
investment and for a description of the agreement through which the
Partnership has acquired this real estate investment.
As noted above, the Partnership's only remaining real estate asset is the
Portland Center Apartments. Since the first quarter of fiscal 1998, the
Partnership has been focusing on a near-term sale of the property and a
liquidation of the Partnership. The property has been marketed extensively and
sale packages have been distributed to international, national, regional and
local prospective purchasers. As a result of these efforts, the Partnership
received 13 offers, most of which were substantially in excess of the property's
1996 year-end appraised value. The prospective purchasers were then asked to
submit best and final offers, of which seven were received. After completing an
evaluation of the best and final offers, the Partnership selected an offer and,
on November 25, 1997, signed an agreement to sell Portland Center to a
prospective buyer. During the fourth quarter, the prospective buyer decided to
terminate the purchase and sale agreement and discontinued its efforts to
acquire the property. The Partnership subsequently re-opened discussions with
the other prospective purchasers who had previously submitted best and final
offers. These prospective purchasers were then provided with updated property
information, which included financial statements, a physical evaluation and
environmental assessment. Following negotiations, the Partnership selected an
offer from one of these prospective buyers and signed a purchase and sale
agreement. Because the Partnership's joint venture agreement gives the
co-venture partner a right of first refusal to purchase the property, this
purchase and sale agreement was then submitted to the partner for its review.
Under the terms of the agreement, the partner must decide whether to agree to
buy the property at the price and on the terms offered by the prospective
purchaser, or to waive its first refusal right and agree to a sale to this
prospective purchaser. On June 12, 1998, the co-venture partner notified the
Partnership that it would be exercising its right to buy the property. Under the
terms of the joint venture agreement, the co-venturer has an additional 90 days
to close the transaction. Any sale remains contingent upon, among other things,
the satisfactory completion of the buyer's due diligence. As a result, there are
no assurances that a near-term sale will be completed. Nonetheless, management
expects to close a sale and complete a liquidation of the Partnership in
calendar year 1998. Following the completion of a sale of the Portland Center
Apartments, the net sale proceeds along with the Partnership's remaining cash
reserves, after paying liquidation-related expenses, will be distributed to the
Limited Partners.
The Partnership's principal investment objectives have been 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 with certainty at the
present time. Notwithstanding this, the offers to purchase the Portland Center
property, discussed further above, are for amounts which would result in a net
return to the Partnership well in excess of its original $11.1 million
investment in the Portland Center joint venture. 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, 1998, the Limited Partners had received
cumulative cash distributions of approximately $23,490,000, or approximately
$703 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. Over the past two years,
development activity for multi-family properties in many markets has escalated
significantly. However, in the downtown Portland, Oregon market where Portland
Center is located, physical and political constraints on the development of new
multi-family properties have limited the addition of new supply to the market of
existing apartment units. The Portland Center property also has a small amount
of leasable commercial space. The property competes for long-term commercial
tenants with a number of other properties generally on the basis of price,
location and tenant improvement allowances.
The Partnership is engaged solely in the business of real estate
investment; therefore, a presentation of information about industry segments is
not applicable. The Partnership has no real estate investments located outside
the United States.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are
Second PW Growth Properties, Inc. and Properties Associates. Second PW Growth
Properties, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber, is the managing general partner of the Partnership. The associate
general partner is Properties Associates (the "Associate General Partner"), a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of March 31, 1998, 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 1998, along with an
average for the year, are presented below for the Partnership's remaining
property:
Percent Occupied At
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Fiscal
1998
6/30/97 9/30/97 12/31/97 3/31/98 Average
------- ------- -------- ------- -------
Portland Center 94% 94% 94% 88% 93%
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 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 had been delayed pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement over the objections of the two class members. As
part of the settlement agreement, PaineWebber 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, management believes that the resolution of
this matter will not 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, 1998 there were 2,965 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. Upon request, the Managing General
Partner will endeavor to assist a Unitholder desiring to transfer his Units and
may utilize the services of PWI in this regard. The price to be paid for the
Units will be subject to negotiation by the Unitholder. 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 1998.
Item 6. Selected Financial Data
PaineWebber Growth Properties Two LP
For the years ended March 31, 1998, 1997, 1996, 1995 and 1994
(in thousands, except for per Unit data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 249 $ 304 $ 259 $ 227 $ 201
Operating (loss) income $ (13) $ 45 $ (51) $ (65) $ (15)
Partnership's share of
ventures' income (losses) $ 280 $ (230) $ (134) $ (161) $ (309)
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) $ 267 $ (185) $ 4,041 $(2,245) $ (324)
Per Limited Partnership Unit:
Net income (loss) $ 7.91 $ (5.48) $ 117.36 $(66.54) $ (9.60)
Cash distributions:
Operations $ 18.13 $ 17.53 $ 21.26 $ 8.68 -
Sales and other
capital proceeds - $169.48 $ 23.00 - -
Total assets $ 696 $ 905 $ 6,726 $ 4,180 $ 6,671
</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.
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.
<PAGE>
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, 1998, three of the
four original investments had been sold. The fiscal 1987 sale of The Hamlet
Apartments and 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, an 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.
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 over the past year. Given the
current buyer interest in the Portland apartment rental market, management
believes that this would be the appropriate time to sell the property.
Accordingly, since the first quarter of fiscal 1998 the Partnership has been
focusing on a near-term sale of the property and a liquidation of the
Partnership. The property has been marketed extensively and sale packages have
been distributed to international, national, regional and local prospective
purchasers. As a result of these efforts, the Partnership received 13 offers,
most of which were substantially in excess of the property's 1996 year-end
appraised value. The prospective purchasers were then asked to submit best and
final offers, of which seven were received. After completing an evaluation of
the best and final offers, the Partnership selected an offer and, on November
25, 1997, signed an agreement to sell the Portland Center Apartments to a
prospective buyer. During the fourth quarter, the prospective buyer decided to
terminate the purchase and sale agreement and discontinued its efforts to
acquire the property. The Partnership subsequently re-opened discussions with
the other prospective purchasers who had previously submitted best and final
offers. These prospective purchasers were then provided with updated property
information, which included financial statements, a physical evaluation and
environmental assessment. Following negotiations, the Partnership selected an
offer from one of these prospective buyers and signed a purchase and sale
agreement. Because the Partnership's joint venture agreement gives the
co-venture partner a right of first refusal to purchase the property, this
purchase and sale agreement was then submitted to the partner for its review.
Under the terms of the agreement, the partner must decide whether to agree to
buy the property at the price and on the terms offered by the prospective
purchaser, or to waive its first refusal right and agree to a sale to this
prospective purchaser. On June 12, 1998, the co-venture partner notified the
Partnership that it would be exercising its right to buy the property. Under the
terms of the joint venture agreement, the co-venturer has an additional 90 days
to close the transaction. Any sale remains contingent upon, among other things,
the satisfactory completion of the buyer's due diligence. As a result , there
are no assurances that a near-term sale will be completed. Nonetheless,
management expects to close a sale and complete a liquidation of the Partnership
in calendar year 1998. Following the completion of a sale of the Portland Center
Apartments, the net sale proceeds along with the Partnership's remaining cash
reserves after paying liquidation-related expenses will be distributed to the
Limited Partners.
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. Under the teams of the potential sale transaction described above, the
prospective buyer has agreed to assume the existing first mortgage loan.
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. During fiscal 1998, the
Portland Center Apartments maintained consistently high occupancy levels while
implementing significant increases in rental rates. The occupancy level averaged
93% for the year, which compares to the average occupancy level of 94% achieved
for fiscal 1997. However, the occupancy level did decline to 88% for the fourth
quarter of fiscal 1998. This decrease is attributable to a change in the
property management company. Following the transition in management, the
retention of existing tenants has increased, new leases have been signed and the
occupancy level has been climbing. Several key strategies have been adopted to
further enhance the property's occupancy level. These strategies include a
significantly expanded marketing program, the hiring of additional leasing
agents and visible physical improvements, such as power washing the walkways,
painting the entrances of the residential buildings, planting new flowers and
installing new directional signage and banners. In addition, the apartment
interiors continue to be upgraded as units are leased to new tenants. The
commercial space at Portland Center continues to be well leased with an
occupancy level of 98% as of March 31, 1998. As previously reported, the ongoing
renovation work at the Portland Center Apartments has been the primary strategy
for generating higher rental rates, maintaining occupancy levels and enhancing
the property's overall competitive position in the marketplace. The renovation
program began in fiscal year 1995 and focuses on the interiors of the 525
apartment units. As of year-end, 63% of the apartment units had been fully
renovated and all of the remaining units had been partially renovated. To date,
management has been able to lease the fully renovated units at substantial
rental rate increases, averaging approximately 10% above the rental rate prior
to the renovations. The healthy occupancy levels and increasing rental rates, in
combination with the property's positive attributes and a strong local economy,
have resulted in a materially higher property value which was reflected in the
sale offers received in connection with the marketing process described above.
The demand for rental units in Portland's downtown market has remained steady
and is being fueled by solid economic growth, as well as physical and political
constraints that have limited the construction of new apartments in the downtown
area. As a result of these constraints, there are no new apartment properties in
the immediate vicinity of Portland Center currently under development or being
added to the market. While there are no assurances that the potential sale
transaction described above will be successfully consummated, the offer to
purchase the Portland Center property is for an amount which would result in a
net return to the Partnership well in excess of its original $11.1 million gross
investment in the Portland Center joint venture.
At March 31, 1998, the Partnership had available cash and cash equivalents
of approximately $696,000. Such cash and cash equivalents, along with the
expected operating cash flow from the Portland Center property, will be utilized
for the working capital needs of the Partnership and for distributions to the
partners. The source of future liquidity and distributions to the partners is
expected to be through proceeds received from the sale of the remaining
investment property. These sources of liquidity are expected to be sufficient to
meet the Partnership's needs on both a short-term and long-term basis.
As noted above, the Partnership expects to be liquidated during calendar
year 1998. Notwithstanding this, the Partnership believes that it has made all
necessary modifications to its existing systems to make them year 2000 compliant
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Partnership's results of operations or financial
position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership reported net income of $267,000 for the year ended March
31, 1998, compared to a net loss of $185,000 for the prior year. The favorable
change in the Partnership's net operating results is primarily the result of a
favorable change of $510,000 in the Partnership's share of venture's income
(loss) from the Portland Center Apartments. The Partnership recognized net
income of $280,000 from its share of the operations of the Portland Center joint
venture for the year ended March 31, 1998, as compared to a net loss of $230,000
for the prior year. This favorable change in Portland Center's operating results
was mainly due to an increase in rental income of $210,000 and a decrease in
repairs and maintenance expenses of $392,000. Rental income increased due, in
part, to the extensive capital improvement program at the property during the
past few years. The capital improvement program, combined with a general
improvement in overall market conditions, has allowed the property to generate
higher rental rates, maintain occupancy levels and enhance the property's
overall competitive position in the marketplace. Repairs and maintenance
expenses decreased in the current year as the ongoing renovation work approached
completion. The increase in rental income and the decline in repairs and
maintenance expenses were partially offset by increases in certain other expense
categories, mainly salaries expense which was $89,000 higher than in the prior
year.
The favorable change in the Partnership's share of venture's income (loss)
was partially offset by an unfavorable change in the Partnership's operating
income (loss). The Partnership reported an operating loss of $13,000 for fiscal
1998 as compared to operating income of $45,000 during fiscal 1997. This
unfavorable change was primarily due to a decrease in interest and other income
of $57,000. Interest and other income declined primarily due to lower
outstanding cash reserve balances for the current year as a result of the
temporary investment of the Walker House sale proceeds during fiscal 1997 prior
to the May 15, 1996 special distribution.
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 was 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) was
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 fiscal 1997
as a result of the temporary investment of the Walker House sale proceeds prior
to the May 15, 1996 special distribution. 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
during fiscal 1997. In addition, management fees declined by $13,000 due to the
return of capital associated with the Walker House and Hudson sale 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 prior year. This increase in ventures' losses was
primarily attributable to the inclusion of $122,000 in net income attributable
to the Walker House joint venture in the fiscal 1996 results. 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 was primarily attributable to a reduction in costs
incurred in fiscal 1996 in connection with 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.
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
remaining property 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 remaining
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 downtown
Portland area has kept pace with the rate of new apartment development activity,
which has been limited by certain physical and political constraints. However,
in many other markets across the country development of new multi-family
properties has increased significantly in the past two years. Existing
properties in such markets could be expected to experience 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 future.
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 fourteenth full year of operations in fiscal
1998. 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 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 50 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 55 6/1/83 *
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President and Controller 35 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 and Controller of the Managing
General Partner and a Vice President and Controller 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, 1998, 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 was then
increased gradually in subsequent quarters to the level of 4.25% per annum for
the quarter ended March 31, 1996 and then was increased to 5.25% per annum on
remaining invested capital beginning with the distribution 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.
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 1998.
Accordingly, the Adviser was paid management fees of $61,000 for fiscal 1998
under the terms of the advisory contract.
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, 1998 is $63,000, 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 $4,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended March 31, 1998. 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 1998.
(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 and Controller
Dated: June 26, 1998
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 26, 1998
---------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 26, 1998
---------------------------- -------------
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>
(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
1998 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, 1998 and 1997 F-5
Statements of operations for the years ended March 31, 1998,
1997 and 1996 F-6
Statements of changes in partners' capital (deficit) for the years
ended March 31, 1998, 1997 and 1996 F-7
Statements of cash flows for the years ended March 31, 1998,
1997 and 1996 F-8
Notes to financial statements F-9
Schedule III-Real Estate and Accumulated Depreciation F-17
Oregon Portland Associates:
Report of independent auditors F-18
Balance sheets as of December 31, 1997 and 1996 F-19
Statements of operations for the years ended December 31,
1997, 1996 and 1995 F-20
Statements of changes in venturers' capital (deficit) for the
years ended December 31, 1997, 1996 and 1995 F-21
Statements of cash flows for the years ended December 31,
1997, 1996 and 1995 F-22
Notes to financial statements F-23
<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
---------
Montgomery Village HWH Associates:
Independent Auditors' Report F-27
Balance sheets as of December 31, 1995 and 1994 F-28
Statements of operations for the years ended December 31,
1995, 1994 and 1993 F-29
Statements of changes in partners' equity for the years
ended December 31, 1995, 1994 and 1993 F-30
Statements of cash flows for the years ended December 31,
1995, 1994 and 1993 F-31
Notes to financial statements F-32
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, 1998 and 1997, 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, 1998. Our audits 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 have been audited by other auditors whose report has been furnished
to us; insofar as our opinion on the financial statements of PaineWebber Growth
Properties Two LP relates to data included for Montgomery Village HWH
Associates, 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 for the year ended March 31, 1996.
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, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1998, 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 12, 1998
<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, 1998 and 1997
(In thousands, except for per Unit data)
ASSETS
1998 1997
---- ----
Cash and cash equivalents $ 696 $ 905
======== =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Losses from joint venture in excess
of investment and advances $ 777 $ 618
Accounts payable and accrued expenses 23 46
--------- ---------
Total liabilities 800 664
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 10 7
Cumulative cash distributions (22) (16)
Limited Partners ($1,000 per Unit,
33,410 Units outstanding):
Capital contributions, net of offering costs 29,778 29,778
Cumulative net losses (6,381) (6,645)
Cumulative cash distributions (23,490) (22,884)
--------- ---------
Total partners' capital (deficit) (104) 241
--------- ---------
$ 696 $ 905
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF OPERATIONS
For the years ended March 31, 1998, 1997 and 1996
(In thousands, except for per Unit data)
1998 1997 1996
---- ---- ----
Revenues:
Interest and other income $ 54 $ 111 $ 68
Reimbursements from affiliate 195 193 191
--------- --------- ---------
249 304 259
Expenses:
Management fees 61 58 71
General and administrative 201 201 239
---------- --------- ---------
262 259 310
---------- --------- ---------
Operating (loss) income (13) 45 (51)
Partnership's share of ventures'
income (losses) 280 (230) (134)
Partnership's share of gain on sale of
operating investment property - - 4,226
---------- --------- ---------
Net income (loss) $ 267 $ (185) $ 4,041
========== ========== =========
Per Limited Partnership Unit:
Net income (loss) $ 7.91 $ (5.48) $ 117.36
========== ========= =========
Cash distributions $ 18.13 $ 187.01 $ 44.26
========== ========= =========
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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Net income 3 264 267
Cash distributions (6) (606) (612)
-------- -------- --------
Balance at March 31, 1998 $ (11) $ (93) $ (104)
======== ======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER GROWTH PROPERTIES TWO LP
STATEMENTS OF CASH FLOWS
For the years ended March 31, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 267 $ (185) $ 4,041
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Partnership's share of gain on sale of
operating investment property - - (4,226)
Reimbursements from affiliate (195) (193) (191)
Partnership's share of ventures' income (losses) (280) 230 134
Changes in assets and liabilities:
Accounts receivable - 191 -
Accounts payable and accrued expenses (23) - (9)
------- ------- --------
Total adjustments (498) 228 (4,292)
------- ------- --------
Net cash (used in) provided by operating
activities (231) 43 (251)
Cash flows from investing activities:
Distributions from joint ventures 634 838 6,629
Additional investments in joint ventures - - (17)
Proceeds from sale of investment - - 350
------- ------- --------
Net cash provided by investing activities 634 838 6,962
Cash flows from financing activities:
Distributions to partners (612) (6,254) (1,486)
------- ------- --------
Net (decrease) increase in cash and cash equivalents (209) (5,373) 5,225
Cash and cash equivalents, beginning of year 905 6,278 1,053
------- ------- --------
Cash and cash equivalents, end of year $ 696 $ 905 $ 6,278
======= ======= ========
</TABLE>
See accompanying notes.
<PAGE>
PAINEWEBBER 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, 1998, 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, 1998. There are no assurances, however, that both a sale of the remaining
investment property and the liquidation of the Partnership will be completed
within this time frame. See Note 4 for a further discussion of the Partnership's
remaining investment.
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, 1998 and 1997 and revenues and expenses for each
of the three years in the period ended March 31, 1998. 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 owns an operating
property. 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.
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,
1998 and 1997 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.
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, 1998, 1997 and 1996, the Adviser earned $61,000, $58,000 and $71,000,
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, 1998, 1997 and 1996 are $63,000, $61,000 and $69,000, 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 $4,000, $7,000, and $3,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during the years ended March 31,
1998, 1997 and 1996, respectively.
4. Investments in Joint Venture Partnerships
-----------------------------------------
As of March 31, 1998 and 1997, the Partnership has an investment in one
joint venture. 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 joint venture's
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.
<PAGE>
Condensed combined financial statements of these joint ventures, for the
periods indicated, are as follows.
Condensed Balance Sheets
------------------------
December 31, 1997 and 1996
(in thousands)
Assets
------
1997 1996
---- ----
Current assets $ 1,750 $ 1,938
Operating investment property, net 17,621 18,280
Other assets 2,552 2,839
--------- ---------
$ 21,923 $ 23,057
========= =========
Liabilities and Venturers' Deficit
----------------------------------
Current liabilities $ 670 $ 737
Other liabilities - 494
Long-term mortgage debt, less current portion 22,148 22,351
Partnership's share of combined deficit (779) (413)
Co-venturers' share of combined deficit (116) (112)
--------- ---------
$ 21,923 $ 23,057
========= =========
Reconciliation of Partnership's Investment
------------------------------------------
March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
Partnership's share of combined deficit
at December 31, as shown above $ (779) $ (413)
Reimbursement of management fees and expenses
receivable from joint venture (1) 2 494
Timing difference due to contributions
(distributions) made subsequent to
December 31 (see Note 2) - (699)
--------- ---------
Investment in joint venture, at equity, at March 31 $ (777) $ (618)
========= =========
(1)In accordance with the Portland Center joint venture agreement, the
Partnership recorded reimbursement revenues for the years ended March 31,
1998, 1997 and 1996 of $195,000, $193,000 and $191,000, 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 $2,000 and $494,000 remained unpaid as of March 31, 1998
and 1997, respectively, which is recorded in the joint venture investment
balance on the accompanying balance sheets.
<PAGE>
Condensed Combined Summary of Operations
----------------------------------------
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 6,264 $ 6,054 $ 7,549
Interest and other income 168 199 337
------- ------- --------
6,432 6,253 7,886
Expenses:
Property operating expenses 3,020 3,351 3,945
Interest expense 1,769 1,780 2,373
Depreciation and amortization 1,360 1,354 1,703
------- ------- --------
6,149 6,485 8,021
------- ------- --------
Operating income (loss) 283 (232) (135)
Gain on sale of operating investment
property - - 4,580
------- ------- --------
Net income (loss) $ 283 $ (232) $ 4,445
======= ======== ========
Net income (loss):
Partnership's share of
combined net income (loss) $ 280 $ (230) $ 4,092
Co-venturers' share of combined
net income (loss) 3 (2) 353
-------- -------- --------
$ 283 $ (232) $ 4,445
======== ======== ========
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):
1998 1997 1996
---- ---- ----
Partnership's share of ventures'
income (losses) $ 280 $ (230) $ (134)
Partnership's share of gain on sale of
operating investment property - - 4,226
-------- --------- --------
$ 280 $ (230) $ 4,092
======== ========= ========
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 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996
---- ---- ----
Oregon Portland Associates $ 634 $ 838 $ 973
Montgomery Village HWH Associates - - 5,656
Hudson Partners - - -
------- ------- -------
$ 634 $ 838 $ 6,629
======= ======= =======
A description of the ventures' properties, relevant sales transactions and
the terms of the joint venture agreements are summarized below:
(a) 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 $1.9 million and $2.1
million as of December 31, 1997 and 1996, respectively. The excess loan
proceeds, after repayment of the outstanding indebtedness, were used to pay
transaction costs and to fund the required escrow accounts.
As discussed in Note 1, the investment in the Portland Center Apartments
is the Partnership's only remaining real estate asset. Since the first quarter
of fiscal 1998, the Partnership has been focusing on a near-term sale of the
property and a liquidation of the Partnership. The property has been marketed
extensively and sale packages have been distributed to international, national,
regional and local prospective purchasers. As a result of these efforts, the
Partnership received 13 offers, most of which were substantially in excess of
the property's 1996 year-end appraised value. The prospective purchasers were
then asked to submit best and final offers, of which seven were received. After
completing an evaluation of the best and final offers, the Partnership selected
an offer and, on November 25, 1997, signed an agreement to sell the Portland
Center Apartments to a prospective buyer. During the fourth quarter of fiscal
1998, the prospective buyer decided to terminate the purchase and sale agreement
and discontinued its efforts to acquire the property. The Partnership
subsequently re-opened discussions with the other prospective purchasers who had
previously submitted best and final offers. Following negotiations, the
Partnership selected an offer from one of these prospective buyers and signed a
purchase and sale agreement. Because the Partnership's joint venture agreement
gives the co-venture partner a right of first refusal to purchase the property,
this purchase and sale agreement was then submitted to the partner for its
review. Under the terms of the agreement, the partner must decide whether to
agree to buy the property at the price and on the terms offered by the
prospective purchaser, or to waive its first refusal right and agree to a sale
to this prospective purchaser. On June 12, 1998, the co-venture partner notified
the Partnership that it would be exercising its right to buy the property. Under
the terms of the joint venture agreement, the co-venturer has an additional 90
days to close the transaction. Any sale remains contingent upon, among other
things, the satisfactory completion of the buyer's due diligence. As a result,
there are no assurances that a near-term sale will be completed. Nonetheless,
management expects to close a sale and complete a liquidation of the Partnership
in calendar year 1998. Following the completion of a sale of the Portland Center
Apartments, the net sale proceeds along with the Partnership's remaining cash
reserves after paying liquidation-related expenses will be distributed to the
Limited Partners.
Pursuant to the joint venture agreement, the Partnership is to be
reimbursed each year by the joint venture for the joint venture's share of the
management fee and expenses (a "deferred fee") allocable to or incurred by the
Partnership in connection with the management of the property. These fees are
payable only out of net cash flow, as defined, and are cumulative to the extent
not paid.
The joint venture agreement provides that net cash flow, as defined, will
be allocated first to the payment of any deferred fees then payable, then to the
payment of interest and principal on any loans made by the partners to the joint
venture, and any remaining amounts 99% to the Partnership and 1% to the
co-venturer as a distribution to the partners. Such distributions are subject to
the terms of the first mortgage and a regulatory agreement.
Net proceeds (after repayment of third-party indebtedness and the
establishment of any necessary reserves) from a sale or refinancing will be
distributed first to the payment of all deferred fees then payable, then to the
payment of principal and interest on certain loans made by the partners to the
joint venture. The Partnership will then receive an amount equal to its
investment in the property plus a 6% noncompounded cumulative return on its
investment. Interest and principal on any remaining loans made by the partners
to the joint venture will then be paid. Next, the co-venturer will be paid an
amount equal to its remaining investment. Any remaining proceeds will be split
between the Partnership and the co-venturer in varying proportions which
increase in the co-venturer's favor from 5% to 40% in accordance with the joint
venture agreement. Such payments to the partners, except for the payment of
interest and principal on any remaining loans as described above, will not be
made if a partner's account in the joint venture equals zero, until sufficient
distributions have been made to the other partner in order to bring that
partner's capital account to zero.
Taxable income and tax loss from operations in each year are allocated 99%
to the Partnership and 1% to the co-venturer. Allocations of the joint venture
operations between the partners for financial accounting purposes have been made
in conformity with the allocations of taxable income or tax loss. Taxable income
and tax loss resulting from a sale of the property will be allocated between the
Partnership and the co-venturer generally as sales proceeds are distributed.
The joint venture originally entered into a property management agreement
with an affiliate of the co-venturer, cancellable at the Partnership's option
upon the occurrence of certain events, that provided for management and leasing
commission fees to be paid to the property manager. The management fee was 5% of
gross rents, as defined. In September of 1989 the Partnership exercised its
right to terminate the contract and hired an unaffiliated party to manage the
property. The joint venture continues to pay a joint venture management fee to
the original property manager. This fee is equal to 1% of gross rents, as
defined.
In the event the joint venture requires additional funds, such funds are
to be provided 90% by the Partnership and 10% by the co-venturer as capital
contributions or interim borrowings in accordance with the terms of the joint
venture agreement.
(b) 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. For financial reporting purposes, the
Partnership was allocated a gain of $4,226,000 from the sale of the Walker House
property which it recognized in fiscal 1996. 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 were
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.
(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 a refinancing of the venture's
first mortgage loan. 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. 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.
5. Subsequent Event
----------------
On May 15, 1998, the Partnership distributed $159,000 to the Limited
Partners and $2,000 to the General Partners for the quarter ended March 31,
1998.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER GROWTH PROPERTIES TWO LP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(In thousands)
<CAPTION>
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 $22,351 $4,700 $19,453 $8,134 $4,700 $27,587 $32,287 $14,666 4/26/84 5-25 yrs.
======= ====== ======= ====== ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $36,977.
(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:
1997 1996 1995
---- ---- ----
Balance at beginning of period $31,586 $40,487 $39,649
Increase due to acquisition and improvements 701 508 839
Decrease due to sale of Walker House - (9,409) -
Decrease due to disposals - - (1)
------- ------- -------
Balance at end of period $32,287 $31,586 $40,487
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $13,306 $15,452 $13,832
Depreciation expense 1,360 1,354 1,621
Decrease due to sale of Walker House - (3,500) -
Write-offs due to disposals - - (1)
------- ------- -------
Balance at end of period $14,666 $13,306 $15,452
======= ======= =======
</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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, 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
January 30, 1998
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
BALANCE SHEETS
December 31, 1997 and 1996
(In thousands)
Assets
------
1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 440 $ 903
Tenant receivables 34 22
Repair escrow deposits 32 32
Mortgage escrow deposits - restricted 319 344
Tenant security deposits - held in trust 629 354
Prepaid real estate taxes 255 248
Prepaid insurance 26 25
Other assets 15 10
------- --------
Total current assets 1,750 1,938
HUD reserve for replacements 1,899 2,123
Operating investment property, at cost:
Land 4,700 4,700
Buildings and improvements 23,510 23,134
Equipment 4,077 3,752
------- --------
32,287 31,586
Less accumulated depreciation (14,666) (13,306)
------- --------
Net operating investment property 17,621 18,280
Deferred financing costs and deferred leasing
commissions, net of accumulated
amortization of $225 ($161 in 1996) 653 716
------- --------
$21,923 $ 23,057
======= ========
Liabilities and Venturers' Deficit
----------------------------------
Current liabilities:
Current portion of long-term debt $ 203 $ 189
Accounts payable and accrued expenses 187 292
Prepaid rental and other deferred income 58 43
Tenant security deposits 181 178
Payable to property manager and affiliates 34 35
Distribution payable to minority partner 7 -
------- --------
Total current liabilities 670 737
Long-term debt 22,148 22,351
Management fee and expense reimbursements due
to majority partner - 494
Venturers' deficit (895) (525)
------- --------
$21,923 $ 23,057
======= ========
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental income $ 6,264 $ 6,054 $ 5,456
Interest income 93 119 217
Other income 75 80 76
------- ------- -------
6,432 6,253 5,749
Expenses:
Interest and amortization of related
financing fees 1,769 1,780 1,808
Depreciation 1,360 1,354 1,319
Repairs and maintenance 569 961 675
Utilities 373 351 298
Real estate taxes 503 469 455
Professional fees 26 38 34
General and administrative 334 370 279
Salaries and related costs 525 436 465
Management and related fees 501 501 504
Insurance 103 95 93
Security 86 130 77
------- ------- -------
6,149 6,485 6,007
------- ------- -------
Net income (loss) $ 283 $ (232) $ (258)
======= ======= =======
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the years ended December 31, 1997, 1996 and 1995
(In thousands)
Majority Minority
Partner Partner Total
------- ------- -----
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)
Partner distributions (646) (7) (653)
Net income 280 3 283
------- -------- ---------
Balance at December 31, 1997 $ (779) $ (116) $ (895)
====== ========= =========
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
For the years ended December 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) $ 283 $ (232) $ (258)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 1,360 1,354 1,319
Amortization of deferred financing costs 57 56 27
Amortization of deferred leasing commissions 6 6 4
Interest added to HUD reserve for replacements (80) (109) (195)
Net changes in operating assets and liabilities:
Tenant receivables (12) (13) -
Mortgage escrow deposits (250) (123) (39)
Prepaid real estate taxes (7) (26) 28
Prepaid insurance (1) 4 8
Other assets (5) (2) 12
Accounts payable and accrued expenses (105) (79) 75
Prepaid rental and other deferred income 16 (71) 73
Tenant security deposits 3 (10) 16
Payable to property manager and affiliates (1) 25 1
Management fee and expense reimbursements due
to majority partner 494) (419) (502)
------ ------- --------
Net cash provided by operating activities 770 361 569
------ ------- --------
Cash flows from investing activities:
Additions to operating investment property, net (701) (508) (809)
Repair escrow withdrawals - - 1,010
HUD reserve for replacements - deposits (79) (79) (79)
HUD reserve for replacements - withdrawals 382 366 278
Increase in deferred leasing commissions - - (18)
------ ------- --------
Net cash (used in) provided by investing activities (398) (221) 382
------ ------- --------
Cash flows from financing activities:
Debt payments (189) (176) (164)
Distributions to partners (646) - -
------ ------- --------
Net cash used in financing activities (835) (176) (164)
------ ------- --------
Net (decrease) increase in cash and cash equivalents (463) (36) 787
Cash and cash equivalents, beginning of year 903 939 152
------ ------- --------
Cash and cash equivalents, end of year $ 440 $ 903 $ 939
====== ======= ========
Cash paid during the year for interest $1,600 $ 1,613 $ 1,624
====== ======= ========
</TABLE>
See accompanying notes.
<PAGE>
OREGON PORTLAND ASSOCIATES
(AN OREGON GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies
------------------------------------------
Organization
------------
Oregon Portland Associates, an Oregon General Partnership (the
"Partnership"), was organized on October 28, 1983 in accordance with an
agreement between PaineWebber Growth Properties Two LP ("majority partner") and
Libra Portland Partners ("minority partner"). The Partnership was organized to
purchase and operate the residential portion (and a limited amount of commercial
office space) (the "property") of the Portland Center (the "Project") from
Portland Center Associates ("PCA" or "seller"). Portland Center is located in
Portland, Oregon and was purchased on April 26, 1984 by the Partnership.
At the date of purchase, the Project was encumbered under a first mortgage
and was subject to a regulatory agreement with the Department of Housing and
Urban Development ("HUD"). PCA received a wraparound mortgage note from the
Partnership for a portion of the purchase price, and PCA continues to own and
operate a portion of the Project. While the first mortgage was still
outstanding, the Partnership was required to sign a regulatory agreement with
HUD containing restrictive covenants which, among other things, limit annual
distributions of net operating receipts to "surplus cash" (as defined in the
regulatory agreement). The regulatory agreement also requires that a reserve
fund for replacements for the property be funded monthly and that no
distributions (as defined in the regulatory agreement) be made from the
property's operations, except upon satisfaction of certain conditions in the
regulatory agreement.
The Partnership refinanced the wraparound mortgage during 1993. This
mortgage is also subject to a regulatory agreement with HUD. The new regulatory
agreement contains the same restrictive covenants as described above.
2. Use of Estimates
----------------
The preparation of financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates and assumptions
used.
Credit Risk
-----------
Financial instruments which potentially subject the Partnership to
concentrations of credit risk include cash and cash equivalents and restricted
cash accounts. The Partnership places its cash deposits with credit worthy, high
quality financial institutions. The concentration of such cash deposits is not
deemed to create a significant risk to the Partnership.
Cash and Cash Equivalents
-------------------------
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Operating Investment Property
-----------------------------
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 (see Note 5).
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, $193,000 and $191,000 in 1997, 1996 and 1995,
respectively. At December 31, 1996, $494,000 of the amounts previously accrued
had not been paid. During 1997, these fees and expenses were paid in full. 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 1997,
1996 and 1995, $687,000, $612,000 and $693,000, respectively, 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 $246,000, $244,000 and $221,000 for 1997,
1996 and 1995, 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, $61,000 and $55,000 in 1997, 1996
and 1995, 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 1997, 1996 or
1995. 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 and $36,000 were paid in 1996, and 1995, respectively. No fees were paid
in 1997.
5. Long-term debt
--------------
Long-term debt aggregated $22,351,000 and $22,540,000 at December 31, 1997
and 1996, respectively (fair value approximates the carrying value at December
31, 1997 and 1996). 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 loan for years ending December 31 are
as follows (in thousands):
Year Amount
---- ------
1998 $ 203
1999 218
2000 234
2001 252
2002 270
Thereafter 21,174
-------
$22,351
=======
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 was expended during
1995. No amounts were expended from the repair escrow during 1997 and 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, 1995 and 1994, and the related statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Montgomery Village HWH
Associates at December 31, 1995 and 1994, and the results of its operations, the
changes in partners' equity, and its cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Reznick Fedder & Silverman
------------------------------
Reznick Fedder & Silverman
Baltimore, Maryland
January 5, 1996, except for Note E,
as to which the date is March 13, 1996
<PAGE>
MONTGOMERY VILLAGE HWH ASSOCIATES
BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
ASSETS
1995 1994
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 123 $ 107
Escrow deposits 191 205
Accounts receivable 24 49
Prepaid expenses 68 63
Other current assets 16 -
------- ------
Total current assets 422 424
------- ------
RENTAL PROPERTY
Land 1,211 1,211
Buildings, improvements and furniture
and fixtures 8,198 8,168
------- -------
9,409 9,379
Less accumulated depreciation (3,500) (3,198)
------- -------
5,909 6,181
------- -------
DEFERRED EXPENSES, net of accumulated
amortization of $104 and $87 16 33
------- ------
$ 6,347 $6,638
======= ======
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,953 $ 31
Accounts payable and accrued expenses 22 55
Accrued interest payable 39 39
Tenant security deposits payable 67 63
Rents received in advance 7 13
Other current liabilities 4 8
------- ------
Total current liabilities 5,092 209
LONG-TERM DEBT, net of current maturities - 4,952
PARTNERS' EQUITY 1,255 1,477
------- ------
$ 6,347 $6,638
======= ======
See notes to financial statements
<PAGE>
MONTGOMERY VILLAGE HWH ASSOCIATES
STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
---- ---- ----
Revenue
Rents $1,740 $1,683 $1,637
Interest income 6 10 8
Other revenue 31 23 47
------ ------ ------
Total revenue 1,777 1,716 1,692
------ ------ ------
Expenses
Mortgage interest 472 475 477
Depreciation and amortization 320 316 316
Repairs and maintenance 124 134 154
Utilities 267 267 273
Real estate taxes and licenses 129 128 130
Salaries and related costs 140 145 135
General and administrative 59 56 55
Management fees 62 60 58
Insurance 25 24 24
Bad debts 2 5 7
------ ------ ------
Total expenses 1,600 1,610 1,629
------ ------- -------
EXCESS OF REVENUE OVER EXPENSES $ 177 $ 106 $ 63
====== ======= =======
See notes to financial statements
<PAGE>
MONTGOMERY VILLAGE HWH ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
(In thousands)
Growth II MVLP Total
--------- ---- -----
Partners' equity (deficit),
December 31, 1992 $2,106 $ (103) $2,003
Distributions (200) - (200)
Excess of revenue over expenses 63 - 63
------ ------- ------
Partners' equity (deficit),
December 31, 1993 1,969 (103) 1,866
Distributions (481) (15) (496)
Excess of revenue over expenses 106 1 107
------ ------- ------
Partners' equity (deficit),
December 31, 1994 1,594 (117) 1,477
Distributions (395) (4) (399)
Excess of revenue over expenses 175 2 177
------ ------- ------
Partners' equity (deficit),
December 31, 1995 $1,374 $ (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)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Excess of revenue over expenses $ 177 $ 106 $ 63
Adjustments to reconcile excess of revenue
over expenses to net cash provided by
operating activities:
Depreciation and amortization 320 316 316
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 25 8 (32)
Decrease (increase) in escrow deposits 14 25 (22)
(Increase) decrease in prepaid expenses (5) 3 (2)
(Increase) decrease in other current assets (16) 51 (51)
(Decrease) increase in accounts payable
and accrued expenses (33) 32 (22)
Increase in tenant security deposits 4 6 3
(Decrease) increase in rents received in
advance (6) 11 -
(Decrease) increase in other current
liabilities (3) 3 -
------- ------ ------
Net cash provided by operating
activities 477 561 253
------- ------ ------
Cash flows from investing activities:
Additions to rental property (30) (45) (29)
------- ------ ------
Net cash used in investing activities (30) (45) (29)
------- ------ ------
Cash flows from financial activities:
Distributions to partners (400) (491) (200)
Principal payments on long-term debt (31) (28) (25)
------- ------- -------
Net cash used in financial activities (431) (519) (225)
------- ------ ------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16 (3) (1)
Cash and cash equivalents, beginning of year 107 110 111
------- ------ ------
Cash and cash equivalents, end of year $ 123 $ 107 $ 110
======= ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 472 $ 475 $ 477
======= ====== ======
See note to financial statements
<PAGE>
MONTGOMERY VILLAGE HWH ASSOCIATES
NOTE TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Montgomery Village HWH Associates (the Partnership) was organized on
December 29, 1983, in accordance with a partnership agreement between
PaineWebber Growth Properties Two LP (Growth II) and General American Real
Estate and Development, Inc. (GARE). In 1985, GARE transferred its interest
in the Partnership to Montgomery Village Limited Partnership (MVLP) effective
June 15, 1984.
The Partnership was organized to purchase and operate two residential
apartment complexes (Walker House and The Hamlet) in Montgomery Village,
Montgomery County, Maryland. On September 30, 1986, The Hamlet was sold.
All leases between the Partnership and tenants of the property are
operating leases.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
For the purpose of reporting cash flows, the Partnership treats all highly
liquid investments with original maturities at date of purchase of 90 days or
less as cash equivalents.
Rental Property
---------------
Rental property is carried at cost. Depreciation is computed on a
straight-line basis over estimated useful lives of 5 to 30 years.
Deferred Expenses
-----------------
Deferred expenses consist of permanent mortgage fees and other expenses
incurred in connection with the Partnership's mortgage which are being
amortized, using the straight-line method, over the seven-year term of the
mortgage.
Rental Income
-------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RELATED PARTY TRANSACTIONS
- -----------------------------------
Under an agreement dated August 30, 1988, the Partnership received
$500,000 as a partial prepayment of the note and interest receivable related
to the sale of The Hamlet. MVLP received $427,000 of the $500,000 prepayment,
consisting of $100,000 of deferred consulting fees, $177,000 for a
disposition fee (compensation for negotiating the sale of The Hamlet), and
$150,000 for capital proceeds distributions deferred at the time of the sale
of The Hamlet. The partners agreed that these payments represented full and
complete compensation to MVLP and their affiliates for all rights or claims
MVLP or their affiliates had, or may have with respect to capital proceeds
from the sale of The Hamlet. Accordingly, the partners agreed that MVLP and
its affiliates will not be entitled to any further distributions of capital
proceeds until Growth II has received at least the amount set forth in the
agreement, consisting of the Growth II Investment and other stipulated
returns. On September 30, 1991, the Partnership received payment of the
remaining principal balance of the note and accrued interest receivable
related to the sale of The Hamlet, totalling approximately $2,357,000. As
discussed above, and in accordance with the terms of the agreement, the
entire amount of these proceeds was distributed to Growth II.
Any net proceeds arising from the refinancing, sale, exchange or other
disposition of the property or any part thereof, and after payment of any
debt other than loans made by the partners to the Partnership, the
establishment of any reasonable reserves for taxes and the payment of other
costs and expenses, will be distributed in the following order of priority:
1) to Growth II, an amount equal to the Growth II Investment, as defined, 2)
to Growth II, until Growth II has received a cumulative, noncompounded return
at the rate of 7% per annum on the Growth II Investment, 3) payment of
accrued interest and then unpaid principal balance of any outstanding Default
Notes and then Operating Notes, as defined, 4) to MVLP an amount equal to the
MVLP Investment, as defined, and 5) any remaining proceeds distributed to
Growth II and MVLP in varying percentages, until Growth II has received
certain cumulative, noncompounded returns on the Growth II Investment, as set
forth in the Partnership agreement.
NOTE C - ESCROW DEPOSITS
- ------------------------
The Partnership and debt agreements provide that cash escrow accounts be
maintained for real estate taxes, insurance premiums and tenant security
deposits, as well as a reserve for capital expenditures, property enhancement
and other improvement expenditures. These escrow accounts are under the
control of the mortgage lender and may only be used for the purposes
specified in the agreement. The loan agreement requires that real estate tax
and insurance premium liabilities be fully funded on a current basis and that
the Partnership add an amount of $3,267 per month to the capital reserve
account. Such reserves were fully funded at December 31, 1995 and 1994.
At December 31, 1995 and 1994, cash was on deposit in escrow for the
following purposes (in thousands)
1995 1994
---- ----
Real estate taxes $ 34 $ 49
Insurance premium 12 7
Tenant security deposits 65 64
Capital reserve 80 85
----- -----
$ 191 $ 205
===== =====
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 unaudited financial statements for the year ended March 31, 1998
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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 696
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 696
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 696
<CURRENT-LIABILITIES> 23
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (104)
<TOTAL-LIABILITY-AND-EQUITY> 696
<SALES> 0
<TOTAL-REVENUES> 529
<CGS> 0
<TOTAL-COSTS> 262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 267
<INCOME-TAX> 0
<INCOME-CONTINUING> 267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 267
<EPS-PRIMARY> 7.91
<EPS-DILUTED> 7.91
</TABLE>
