UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17146
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
(Exact name of registrant as specified in its charter)
Delaware 04-2752249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
BALANCE SHEETS
May 31, 1996 and August 31, 1995 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
---------- ---------
Real estate investments:
Land $ 1,000 $ 1,000
Mortgage loans, net 7,327 7,327
Investment in joint venture, at equity 3,212 3,198
Investment property held for sale,
net of allowance for possible
investment loss of $1,200 8,300 8,300
---------- ---------
19,839 19,825
Cash and cash equivalents 1,578 5,379
Tax and insurance escrow 251 197
Interest and other receivables 152 90
Prepaid expenses - 15
----------- --------
$ 21,820 $ 25,506
=========== ========
LIABILITIES AND PARTNERS' CAPITAL
Accrued real estate taxes $ 115 $ 183
Accounts payable and accrued expenses 19 95
Accounts payable - affiliates 10 12
Tenant security deposits and other liabilities 51 56
Note payable 1,214 1,311
Partners' capital 20,411 23,849
----------- ---------
$ 21,820 $ 25,506
=========== ========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended May 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1994 $(33) $23,964
Cash distributions (5) (528)
Net income 4 398
---- -------
Balance at May 31, 1995 $(34) $23,834
==== =======
Balance at August 31, 1995 $(33) $23,882
Cash distributions (5) (4,368)
Net income 9 926
---- -------
Balance at May 31, 1996 $(29) $20,440
==== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the three and nine months ended May 31, 1996 and 1995
(Unaudited) (In thousands, except per Unit data)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Interest from mortgage loans $ 302 $ 373 $ 889 $ 1,105
Land rent 29 51 87 153
Recovery of bad debt - 14 - -
Interest earned on short-term
investments 20 17 90 44
------ ------- ------ -------
351 455 1,066 1,302
Expenses:
Management fees 10 12 30 33
General and administrative 84 102 240 312
Provision for possible
uncollectible amounts 118 - 284 183
------- ---------- ------- -------
212 114 554 528
------- ------- ------- -------
Operating income 139 341 512 774
Partnership's share of venture's
income 64 29 153 100
Income (loss) from operations of
investment property held for
sale, net (49) (29) 270 (472)
-------- -------- ------ ------
Net income $ 154 $ 341 $ 935 $ 402
====== ======= ====== ======
Net income per Limited
Partnership Unit $4.23 $9.32 $ 25.56 $10.98
===== ===== ======== ======
Cash distributions per Limited
Partnership Unit $4.61 $5.07 $120.51 $14.58
===== ===== ======= ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 36,241 Units of Limited Partnership Interest outstanding during
each period.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 935 $ 402
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of venture's income (153) (100)
Changes in assets and liabilities:
Tax and insurance escrow (54) (150)
Interest and other receivables (62) 128
Prepaid expenses 15 14
Accrued real estate taxes (68) (55)
Accounts payable and accrued expenses (76) 1
Accounts payable - affiliates (2) (163)
Tenant security deposits (5) 8
-------- --------
Total adjustments (405) (317)
-------- --------
Net cash provided by operating activities 530 85
-------- --------
Cash flows from investing activities:
Distributions from joint venture 139 113
--------- --------
Net cash provided by investing activities 139 113
--------- --------
Cash flows from financing activities:
Additional borrowings under note payable - 594
Principal payments on note payable (97)
Distributions to partners (4,373) (533)
-------- --------
Net cash provided by (used in)
financing activities (4,470) 61
-------- --------
Net increase (decrease) in cash
and cash equivalents (3,801) 259
Cash and cash equivalents, beginning of period 5,379 1,042
-------- -------
Cash and cash equivalents, end of period $ 1,578 $ 1,301
======== =======
Supplemental disclosure:
Cash paid during the period for interest $ 86 $ 72
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended August 31, 1995.
In the opinion of management, the accompanying financial statements, which
have not been audited, reflect all adjustments necessary to present fairly the
results for the interim period. All of the accounting adjustments reflected in
the accompanying interim financial statements are of a normal recurring nature.
2. Related Party Transactions
The Adviser earned basic management fees of $30,000 and $33,000 for the
nine-month periods ended May 31, 1996 and 1995, respectively. Accounts payable -
affiliates at May 31, 1996 and August 31, 1995 consists of management fees of
$10,000 and $12,000, respectively, payable to the Adviser.
Included in general and administrative expenses for nine months ended May
31, 1996 and 1995 is $118,000 and $132,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the nine months
ended May 31, 1996 and 1995 is $3,000 and $2,000, respectively, representing
fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
3. Mortgage Loan and Land Investments
The outstanding first mortgage loans and the cost of the related land to
the Partnership at May 31, 1996 and August 31, 1995 are as follows (in
thousands):
Amount
Property of Mortgage Loan Cost of Land
-------- ---------------- ------------
Eden West Apartments $ 3,500 $ 400
Omaha, NE
The Timbers Apartments 4,275 600
Raleigh, NC -------- --------
Subtotal 7,775 1,000
Less: General loan reserve (448) -
-------- --------
$ 7,327 $ 1,000
======== =======
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all leases, where
applicable. Interest is payable monthly at rates between 11.5% and 11.75% per
annum and the principal is due at maturity. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the gross
revenues in excess of a base amount, as defined. For the nine-month periods
ended May 31, 1996 and 1995, no additional rents were received. As discussed in
the Annual Report, the lessees have the option to purchase the land for
specified periods of time at a price based on fair market value, as defined, but
not less than the original cost to the Partnership. As of May 31, 1996, all of
the options to purchase the land were exercisable.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current income
through participation in the annual revenues generated by the properties as they
increase above the specified base amounts. In addition, the Partnership's
investments are structured to share in the appreciation in value of the
underlying real estate. Accordingly, upon either sale, refinancing, maturity of
the mortgage loan or exercise of the option to repurchase the land, the terms of
the leases call for the Partnership to receive a 37% to 52% share of the
appreciation above a specified base amount.
Eden West Apartments
As previously reported, the Partnership received notice during the fourth
quarter of fiscal 1995 from the Eden West borrower of its intent to prepay the
Partnership's mortgage loan and repurchase the underlying land. The amount to be
received by the Partnership as its share of the appreciation of the Eden West
Property has not been agreed upon to date. The terms of the Partnership's ground
lease provide for the possible resolution of disputes between the parties over
value issues through an arbitration process. If an agreement cannot be reached,
the borrower could require the Partnership to submit to arbitration during
fiscal 1996. In addition to the amount to be determined as the Partnership's
share of the property's appreciation under the ground lease, the terms of the
Eden West mortgage loan require a prepayment penalty which would be equal to
2.5% of the outstanding principal balance of $3,500,000 through May 1997. If
completed, the proceeds of this transaction would be distributed to the Limited
Partners. However, the transaction remains contingent on, among other things, a
resolution of the value issue and the borrower obtaining sufficient financing to
repay its obligations to the Partnership. Accordingly, there are no assurances
that this transaction will be consummated.
The Timbers Apartments
Under the terms of the Timbers modification executed in fiscal 1989, the
amount payable to the Partnership is equal to the cash flow of the property
available after the payment of operating expenses, not to exceed 11.75% of the
note balance, but in no event less than 7.75% of the note balance. The amount
deferred each year will accrue interest at the original rate of 11.75% beginning
at the end of that year and the total deferred amount plus accrued interest will
be payable upon maturity of the note in September of 1998. The total balance of
the principal and deferred interest receivable at May 31, 1996 and August 31,
1995 was $6,855,000 and $6,570,000, respectively. The Partnership has
established an allowance for possible uncollectible amounts for the cumulative
amount of deferred interest owed under the Timbers modification ($2,580,000 at
May 31, 1996 and $2,295,000 at August 31, 1995) due to the uncertainty as to the
collection of the deferred interest from this investment. During the nine months
ended May 31, 1996 and 1995, the Partnership received $54,000 and $178,000,
respectively, from the Timbers' borrower as partial payments of deferred
interest owed.
Harbour Bay Plaza
On August 24, 1995, the borrower of the Harbour Bay Plaza loan repaid the
Partnership's first leasehold mortgage loan secured by Harbour Bay Plaza
Shopping Center and purchased the Partnership's interest in the underlying land
for total consideration of $3,833,000. The principal balance of the mortgage
loan was $2,850,000 plus interest accrued through August 25, 1995 of $23,000.
The Partnership's cost basis in the land was $750,000. Pursuant to the ground
lease, the Partnership received $211,000 in excess of the outstanding mortgage
loan and land investments as its share of the appreciation in value of the
operating investment property above a specified base amount. The net proceeds
from this transaction were distributed to the Limited Partners as a Special
Distribution of approximately $3,842,000, or $106 per original $1,000
investment, on October 13, 1995.
<PAGE>
4. Investment in Joint Venture
As discussed in the Annual Report, on June 12, 1990, the borrower of the
mortgage loan secured by the Marshals at East Lake Shopping Center,
Oxford/Concord Associates, filed a Chapter 11 petition with the United States
Bankruptcy Court for the Northern District of Georgia. On November 14, 1990, the
Bankruptcy Court ordered that both the Partnership and the borrower submit plans
for the restructuring of the mortgage loan and ground lease agreements. During
fiscal 1991, the Partnership and the borrower reached a settlement agreement
which involved the formation of a joint venture to own and operate the property
on a go-forward basis. The formation of the joint venture was approved by the
Bankruptcy Court and became effective in December of 1991. The Partnership
contributed its rights and interests under its mortgage loan to the joint
venture and the loan was extinguished. In addition, the Partnership contributed
the land underlying the operating property to the joint venture and the related
ground lease was terminated. Oxford/Concord Associates contributed all of its
rights, title and interest in and to the improvements, subject to the
Partnership's loan, to the joint venture.
Since the Partnership received an equity interest in full satisfaction of
its outstanding mortgage loan receivable, the transaction was accounted for as a
troubled debt restructuring in accordance with Statement of Financial Accounting
Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." Accordingly, the Partnership would have recognized a loss to
the extent that the face amount of the mortgage loan and the carrying value of
the land exceeded the fair value of the equity interest acquired. However,
management estimated that the fair value of the equity interest acquired was
approximately equal to the face amount of the loan and the investment in land.
Therefore, no loss was recorded at the time of the restructuring. The carrying
value of the mortgage loan receivable and land comprising the Partnership's
investment in Marshals at East Lake, which totalled $3,500,000, was reclassified
to investment in joint venture, effective December 11, 1991. Subsequent to the
restructuring, the Partnership has accounted for its equity investment as if it
had acquired the interest for cash, in accordance with SFAS No. 15. Based upon
the provisions of the joint venture agreement, the Partnership's investment in
the Marshals joint venture is accounted for on the equity method in the
Partnership's financial statements because the Partnership does not have a
voting control interest in the venture. Under the equity method, the investment
is carried at cost, adjusted for the Partnership's share of earnings, losses and
distributions.
<PAGE>
Summarized operating results of the venture for the three and nine-month
periods ended May 31, 1996 and 1995 are as follows (in thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
----------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues and
expense reimbursements $140 $ 109 $ 383 $ 325
Expenses:
Property operating expenses 29 36 94 101
Real estate taxes 11 11 29 25
Depreciation and amortization 36 33 107 99
------ ------- ------- --------
76 80 230 225
------ ------- ------- -------
Net income $ 64 $ 29 $ 153 $ 100
======= ====== ====== ======
Net income:
Partnership's share of
net income $ 64 $ 29 $ 153 $ 100
Co-venturer's share
of net income - - - -
------- ------ ----- ------
$ 64 $ 29 $ 153 $ 100
======= ======= ====== ======
5. Investment Property Held for Sale
Mercantile Tower Office Building
As discussed in the Annual Report, the Partnership assumed ownership of
the Mercantile Tower Office Building, in Kansas City, Missouri, through a
deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain
uncured defaults on the Partnership's mortgage loan receivable. The Partnership
complies with the guidelines set forth in the Statement of Position entitled
"Accounting for Foreclosed Assets," issued by the American Institute of
Certified Public Accountants, to account for its investment properties acquired
through foreclosures. Under the Statement of Position, a foreclosed asset is
recorded at the lower of cost or estimated fair value, reduced by the estimated
costs to sell the asset. Cost is defined as the fair value of the asset at the
date of the foreclosure. Adjustments to the carrying value of the assets
subsequent to foreclosure are recorded through the use of a valuation allowance.
The combined balance of the land and the mortgage loan investment at the time
title was transferred was $10,500,000. The estimated fair value of the operating
property at the date of foreclosure, net of selling expenses, was $9,500,000.
Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in
fiscal 1993. An additional write-down of $1,200,000 was recorded as a provision
for possible investment loss in fiscal 1994 to reflect a further decline in
management's estimate of the fair value of the investment property. The net
carrying value of the Mercantile Tower investment property as of May 31, 1996
and August 31, 1995, of $8,300,000, is classified as an investment property held
for sale on the accompanying balance sheets.
The Partnership records income or loss from the investment property held
for sale in the amount of the difference between the property's gross revenues
and the sum of property operating expenses (including leasing costs and
improvement expenses) and interest on the line of credit borrowings described in
Note 6.
<PAGE>
Summarized operating results for Mercantile Tower for the three and
nine-month periods ended May 31, 1996 and 1995 are as follows (in thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 428 $ 397 $ 1,392 $ 1,252
Interest and other income 3 3 10 8
------- ----- ------ -------
431 400 1,402 1,260
Expenses:
Property operating expenses 392 398 889 1,465
Interest expense 29 31 86 72
Property taxes and insurance 59 - 157 195
--------- --------- -------- --------
480 429 1,132 1,732
-------- ------ ------- -------
Income (loss) from operations
of investment property held
for sale, net $ (49) $ (29) $ 270 $ (472)
======== ======= ====== =======
6. Note payable
Note payable as of May 31, 1996 and August 31, 1995 consists of the
following secured indebtedness (in thousands):
May 31 August 31
------ ---------
Line of credit borrowings secured
by the Mercantile Tower property (see
Note 5). Draws under the line, up to a
maximum of $2,000,000, can be made
through February 28, 1998, only to fund
approved leasing and capital improvement
costs related to the Mercantile Tower
property. The outstanding borrowings
bear interest at the prime rate (8.25%
at May 31, 1996) plus 1% per annum.
Interest-only payments were due on a
monthly basis through February 1995.
Thereafter, monthly principal and
interest payments are due through
maturity on February 10, 2001. $ 1,214 $1,311
======= ======
7. Contingencies
The Partnership is involved in certain legal actions. At the present time,
the Managing General Partner is unable to estimate the impact, if any, of
these matters on the Partnership's financial statements, taken as a whole.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As previously reported, since current market interest rates for first
mortgage loans are considerably lower than the rates on the Partnerships
mortgage loan investments (11.5% to 11.75%), and with the continued availability
of credit in the capital markets for real estate transactions, the likelihood of
the Partnership's mortgage loan investments being prepaid has been high for
those mortgage loans which have terms that allow for prepayment. The Harbour Bay
Plaza loan became fully prepayable without penalty in January 1994. The loan
secured by the Harbour Bay Plaza Shopping Center bore interest at 11.75%. On
August 24, 1995, the owner of Harbour Bay Plaza repaid the Partnership's
mortgage loan and purchased the underlying land. The total net proceeds received
by the Partnership amounted to approximately $3.8 million. The Partnership's
mortgage loan and land investments had an aggregate cost basis of $3.6 million.
Pursuant to the ground lease, the Partnership received $211,000 in excess of the
outstanding mortgage loan and land investments as its share of the appreciation
in value of the operating investment property above a specified amount. The net
proceeds from this transaction, in the amount of approximately $3,842,000, or
$106 per original $1,000 unit, were distributed to the Limited Partners on
October 13, 1995.
The mortgage loans secured by the Eden West Apartments and The Timbers
Apartments bear interest at annual rates of 11.5% and 11.75%, respectively. The
Eden West loan prohibited prepayment through June 1, 1994 and includes a
prepayment premium for any prepayment between June 1994 and May 1998 at rates
between 5% and 1.25% of the mortgage loan balance. The Timbers loan contains a
prohibition against prepayment until September 1, 1997. The terms of the
Partnership's ground lease provide the lessee the option to purchase the land at
a price based on the fair market value, as defined. As previously reported, the
Partnership received notice during the fourth quarter of fiscal 1995 from the
Eden West borrower of its intent to prepay the Partnership's mortgage loan and
repurchase the underlying land The amount to be received by the Partnership as
its share of the appreciation of the Eden West Property has not been agreed upon
to date. The terms of the Partnership's ground lease provide for the possible
resolution of disputes between the parties over value issues through an
arbitration process. If an agreement cannot be reached, the borrower could
require the Partnership to submit to arbitration during fiscal 1996. In addition
to the amount to be determined as the Partnership's share of the property's
appreciation under the ground lease, the terms of the Eden West mortgage loan
require a prepayment penalty which would be equal to 2.5% of the outstanding
principal balance of $3,500,000 through May 1997. If completed, the proceeds of
this transaction would be distributed to the Limited Partners. However, the
transaction remains contingent on, among other things, a resolution of the value
issue and the borrower obtaining sufficient financing to repay its obligations
to the Partnership. Accordingly, there are no assurances that this transaction
will be consummated.
Occupancy at the Marshals at East Lake Shopping Center as of May 31, 1996
was 94%, up from its level of 89% as of one year ago but down from its level of
100% as of February 29, 1996. As of May 31, 1996, a tenant which had occupied
3,300 square feet closed its retail clothing store upon the expiration of its
lease agreement. This tenant had been experiencing declining sales in this
location and had indicted prior to the Christmas and New Year's holiday shopping
periods that it might not renew its lease. As a result, the property's leasing
agent has been marketing this space to potential replacement tenants for the
last several months. Also during the quarter ended May 31, 1996, a health club
operator which occupies 7,600 square feet, or 14% of the leasable area at
Marshals at East Lake, informed management that it would exercise an option to
terminate its lease as of December 31, 1996. While this tenant has given notice
to terminate, it has simultaneously proposed several renewal options for
remaining in the Center. Management will negotiate with this existing tenant
while examining potential re-leasing opportunities. Costs to re-lease this
space, along with the current vacancy, could be significant and would be funded
from the Partnership's cash reserves.
The occupancy level at the wholly-owned Mercantile Tower Office Building
was 58% at May 31, 1996, down from 60% as of February 29, 1996. Even prior to
the recent decline in occupancy, the pace of the lease-up was below management's
expectations. With significant competition in the downtown Kansas City office
market, management is finding it difficult to obtain economically viable lease
terms from the number of tenants which are looking to lease space in the market.
During fiscal 1994, the Partnership closed on a $2 million line of credit which
was to be used to pay for the majority of the required tenant improvement and
capital enhancement costs expected to be incurred to achieve a stabilized
occupancy level. This nonrecourse, fully amortizable line of credit is payable
with interest at 1% over prime, and has a 7-year term. The line of credit
borrowings are collateralized by a first lien against the Mercantile Tower
property, which includes an adjoining parking facility. During the second
quarter of fiscal 1996, the draw period, which originally had a 2-year term, was
extended through February 28, 1998. Draw downs under the line of credit can only
be made in connection with costs associated with signed leases and contracts for
approved capital improvements. As of May 31, 1996, the Partnership had drawn
approximately $1,482,000 under the line of credit. With the recent drop-off in
leasing activity, the Partnership found it necessary to obtain the two-year
extension on the draw period on the line of credit in order to continue to try
to achieve its leasing goals. However, even with the extension of the line of
credit draw period, there are no assurances that the Partnership will be able to
successfully secure leases with new tenants which would be necessary to achieve
a stabilized occupancy level at the property. Stabilizing the operations of the
Mercantile Tower property, which represented 32% of the Partnership's original
investment portfolio, remains the primary goal of management. Until a stabilized
occupancy level is achieved, the Partnership's investment in Mercantile Tower is
not expected to generate any significant excess cash flow. Available cash flow,
for the most part, will be reinvested in capital enhancements aimed at improving
the marketability of the vacant space at the property as well as for leasing
costs for new and renewing tenants.
At May 31, 1996, the Partnership had available cash and cash equivalents of
approximately $1,578,000. Such cash and cash equivalents will be used for the
Partnership's working capital requirements and for distributions to the
partners. The source of future liquidity and distributions to the partners is
expected to be through cash generated from the operations of the Partnership's
real estate and mortgage loan investments, repayment of the Partnership's
mortgage loans receivable and the proceeds from the sales or refinancings of the
underlying land, the operating investment property and the joint venture
investment property.
Results of Operations
Three Months Ended May 31, 1996
The Partnership's net income decreased by $187,000, to $154,000, for the
three months ended May 31, 1996, as compared to the same period in the prior
year, primarily due to a decrease in operating income of $202,000. Operating
income decreased primarily due to the combined effect of an increase in the
Partnership's provision for possible uncollectible amounts and a decrease in
mortgage interest and land rent revenues. The Partnership's provision for
possible uncollectible amounts increased primarily due to the lower payments
received during the current three-month period toward deferred interest
receivable which were made by the borrower of the Timbers mortgage loan when
compared to the same three-month period in the prior year. Interest and land
rent revenues decreased as a result of the prepayment and sale transactions
involving the Harbour Bay Plaza mortgage loan and land investments during the
fourth quarter of fiscal 1995. The decrease in operating income was partially
offset by an increase in the Partnership's share of venture's income mainly due
to an increase in rental revenues resulting from a higher average occupancy
level at the Marshalls East Lake Shopping Center as compared to the third
quarter of fiscal 1995.
Nine Months Ended May 31, 1996
The Partnership's net income increased by $533,000, to $935,000, for the
nine months ended May 31, 1996, when compared to the same period in the prior
year, primarily due to a $621,000 decline in capital enhancement costs, tenant
improvements and leasing commissions due to the drop in leasing activity at the
wholly-owned Mercantile Tower property. As discussed further in the notes to the
accompanying financial statements, all costs associated with holding this
investment property acquired through foreclosure are expensed as incurred. In
addition, revenues from Mercantile Tower were higher by $142,000 for the nine
months ended May 31, 1996, as a result of an overall increase in occupancy
achieved over the past two years as well as additional percentage rent collected
from the parking facility during the current nine-month period. An increase of
$53,000 in the Partnership's share of the net income of the Marshals at East
Lake joint venture also contributed to the increase in the Partnership's net
income for the current nine-month period. The increase in the venture's net
income resulted mainly from an improvement in rental revenues due to a higher
average occupancy level as compared to the same nine-month period in the prior
year. The changes in the net operating result of the Mercantile Tower property
and the Marshalls at East Lake joint venture were partially offset by a decrease
in operating income of $262,000 during the current nine-month period. The
decrease in operating income resulted primarily from a decrease in mortgage
interest and land rent revenues due to the prepayment and sale transactions
involving the Harbour Bay Plaza mortgage loan and land investments during the
fourth quarter of fiscal 1995. This decline in revenues was partially offset by
an increase in interest income earned on short-term investments. Interest income
on short-term investments increased due to higher average outstanding cash
balances in the current nine-month period due, in large part, to the receipt of
the Harbour Bay Plaza prepayment proceeds which were distributed to the Limited
Partners on October 13, 1995.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, Second Qualified Properties, Inc. and Properties
Associates., the General Partners of the Partnership, were named as defendants
in a class action lawsuit against PaineWebber Incorporated ("PaineWebber") and a
number of its affiliates relating to PaineWebber's sale of 70 direct investment
offerings, including the offering of interests in the Partnership. In January
1996, PaineWebber signed a memorandum of understanding with the plaintiffs in
the class action outlining the terms under which the parties have agreed to
settle the case. Pursuant to that memorandum of understanding, PaineWebber
irrevocably deposited $125 million into an escrow fund under the supervision of
the United States District Court for the Southern District of New York to be
used to resolve the litigation in accordance with a definitive settlement
agreement and a plan of allocation which the parties expect to submit to the
court for its consideration and approval within the next several months. Until a
definitive settlement and plan of allocation is approved by the court, there can
be no assurance what, if any, payment or non-monetary benefits will be made
available to unitholders in PaineWebber Qualified Plan Property Fund Two, LP.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the General Partners cannot estimate the impact, if any, of
these potential indemnification claims on the Partnership's financial
statements, taken as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: None
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY
FUND TWO, LP
By: SECOND QUALIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: July 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the nine months ended May 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 1578
<SECURITIES> 0
<RECEIVABLES> 10507
<ALLOWANCES> 3028
<INVENTORY> 0
<CURRENT-ASSETS> 1981
<PP&E> 12512
<DEPRECIATION> 0
<TOTAL-ASSETS> 21820
<CURRENT-LIABILITIES> 195
<BONDS> 1214
0
0
<COMMON> 0
<OTHER-SE> 20411
<TOTAL-LIABILITY-AND-EQUITY> 21820
<SALES> 0
<TOTAL-REVENUES> 1489
<CGS> 0
<TOTAL-COSTS> 270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 935
<INCOME-TAX> 0
<INCOME-CONTINUING> 935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 935
<EPS-PRIMARY> 25.56
<EPS-DILUTED> 25.56
</TABLE>
