U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1997
---------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17146
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
-------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2752249
-------- ----------
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ----------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
-------------------------------------
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant Part IV
dated July 1, 1982, as supplemented
Current Report on Form 8-K
of registrant dated July 15, 1997 Part IV
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
1997 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-4
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-28
<PAGE>
PART I
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-6 of
this Form 10-K.
Item 1. Business
Paine Webber Qualified Plan Property Fund Two, LP (the "Partnership") is a
limited partnership formed in March 1982 under the Uniform Limited Partnership
Act of the State of Delaware for the purpose of investing in a diversified
portfolio of existing income-producing real properties through land
purchase-leaseback transactions and first mortgage loans. From the sale of
Limited Partnership units (the "Units"), the Partnership raised $36,236,000
(36,236 Units at $1,000 per Unit) from July 1, 1982 to June 30, 1983 pursuant to
a Registration Statement filed on Form S-11 under the Securities Act of 1933
(Registration No. 2-76379). In addition, the Initial Limited Partner contributed
$5,000 for 5 Units of Limited Partnership Interest. Limited Partners will not be
required to make any additional capital contributions.
The Partnership originally owned land and made first mortgage loans secured
by buildings with respect to six operating properties. As discussed below, as of
August 31, 1997 the Partnership's original mortgage loan and land lease
investments on one of the properties were still outstanding, and the Partnership
owned an equity interest in one operating property through a joint venture
partnership which resulted from the settlement of a default under the terms of a
first mortgage loan held by the Partnership. In addition, the Partnership had
foreclosed on one operating property under the terms of its first mortgage loan
due to a payment default and owned that property directly. The Partnership's
operating property, the property securing its one remaining loan investment and
the property in which the Partnership has a joint venture interest are described
below.
<TABLE>
<CAPTION>
Type of
Property name Property and Type of
and Location Date of Investment Size Ownership (1)
- ------------ ------------------ ----------------- -------------------
<S> <C> <C> <C>
Mercantile Tower (2) Office Building Building has 213,500 Fee ownership of
Kansas City, MO 4/29/83 rentable sq. ft.; 32,000 land and
sq. ft. of land improvements
Marshall's at East Lake (3) Shopping Center Building has 55,175 net Fee ownership of
Marietta, GA 6/24/83 leasable sq. ft.; 6.7 land and improvements
acres of land (through joint venture)
The Timbers Apartments Apartments 176 units; 18 acres Fee ownership
Raleigh, NC 9/7/84 of land of land and first
mortgage lien
on improvements
</TABLE>
(1)See Notes to the Financial Statements filed with this Annual Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2)On April 12, 1993, the Partnership was granted title to the Mercantile Tower
property and assumed ownership as a result of certain defaults by the
borrower under the terms of the Partnership's mortgage loan receivable. The
Partnership has operated the property utilizing the services of a local
property management company. Subsequent to year-end, on November 10, 1997,
the Partnership sold the property to a third party for $7,283,000. See Note 6
to the financial statements accompanying this Annual Report for a further
discussion of this investment and the subsequent sale transaction.
(3)During the year ended August 31, 1990, the borrower of the mortgage loan
secured by the Marshall's at East Lake Shopping Center failed to make its
required monthly payments of interest in accordance with the terms of the
mortgage loan. On June 12, 1990, the borrower filed for protection under a
Chapter 11 Bankruptcy Petition. During fiscal 1991, the Partnership reached a
settlement agreement which involved the formation of a joint venture between
the Partnership and the borrower 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 on December 11, 1991. See Note 5 to the
financial statements accompanying this Annual Report for a further discussion
of these events.
Through August 31, 1997, the Partnership had been prepaid on its
investments with respect to three of the original operating properties,
including one during fiscal 1997. On April 1, 1994, the Partnership liquidated
its mortgage loan and land investments in a Howard Johnson's Motor Lodge,
located in Orlando, Florida. The total net proceeds received by the Partnership
amounted to approximately $5.9 million. In accordance with the third
modification of the mortgage loan agreement, such proceeds included the payment
of $292,000 of deferred debt service and ground rent. The remaining proceeds of
approximately $5,608,000 were less than the combined carrying value of the
mortgage loan and land investments of $6,150,000, resulting in a loss of
approximately $542,000 which was charged against an outstanding general loan
loss reserve. On August 25, 1995, the borrower of the loan secured by Harbour
Bay Plaza, a retail shopping center located in Sewall's Point, Florida, repaid
the Partnership's first leasehold mortgage loan and purchased the underlying
land for total consideration of $3,833,000. Such consideration included the
repayment of the principal balance of the mortgage loan, of $2,850,000, plus
interest accrued through August 25, 1995, of $23,000. The original cost of the
land to the Partnership 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. On July 15, 1997, the
Partnership received $3,500,000 from the borrower of the mortgage loan secured
by the Eden West Apartments, which represented the full repayment of the
outstanding first leasehold mortgage loan. Simultaneously, the Eden West owner
purchased the Partnership's interest in the underlying land at a price equal to
$900,000, which represented a premium of $500,000 over the Partnership's cost
basis in the land of $400,000. In addition, the Partnership received a mortgage
loan prepayment penalty of 1.25% of the mortgage note balance, or $43,750, and a
land lease termination fee of $10,000 in accordance with the terms of the
agreements. The net proceeds of all of these transactions were distributed to
the Limited Partners.
The Partnership's investment objectives are to:
(1) preserve and protect Limited Partners' capital and related buying power;
(2) provide the Limited Partners with cash distributions from investment
income; and
(3) achieve long-term capital appreciation in the value of the Partnership's
investments.
Through August 31, 1997, the Limited Partners had received cumulative cash
distributions totalling $46,754,000, or $1,318 per original $1,000 investment
for the Partnership's earliest investors. This return includes a distribution of
$155 per original $1,000 investment in May 1994 from the liquidation of the
Howard Johnson's mortgage loan and land investments, $106 per original $1,000
investment in October 1995 from the Harbour Bay Plaza prepayment transaction and
$129 per original $1,000 investment in August 1997 from the Eden West Apartments
prepayment transaction. As of August 31, 1997, the Partnership retained an
interest in three of the six properties underlying its original mortgage loan
and land investments.
As noted above, through August 31, 1997 the Partnership had made
distributions of capital proceeds to the Limited Partners totalling $390 per
original $1,000 investment. The three properties remaining as of year-end
consisted of a commercial office building, a retail shopping center and an
apartment complex. For the past several years, real estate values for commercial
office buildings in certain markets have been depressed due to an oversupply of
competing space and the trend toward corporate consolidations and downsizing
which followed the last national recession. Despite a general improvement in the
real estate market for office properties in the past year, the downtown office
market in Kansas City, Missouri, where the Partnership's Mercantile Tower
property is located, remains particularly competitive. As a result, the
Partnership has been unable to lease a significant amount of space at the
property, which was 64% occupied as of August 31, 1997. In response to an
unsolicited offer to purchase Mercantile Tower which was received during fiscal
1997, the Partnership initiated a sales program and selected a Kansas City firm
to market the property for sale. After reviewing the offers received as part of
the marketing process, the Partnership selected an offer from one of the
potential purchasers and, in August 1997, a purchase and sale agreement was
signed to sell the building. Subsequent to year-end, on November 10, 1997, the
sale was completed and the Mercantile Tower property was sold for $7,283,000.
The Partnership received net proceeds of $5,963,000 after closing costs, closing
prorations, certain credits to the buyer and the repayment of an outstanding
first mortgage note of $858,000. These net proceeds, along with an amount of
excess cash reserves which has yet to be determined, will be distributed the
Limited Partners in the form of a special distribution to be paid on December
15, 1997. While the net proceeds received from the sale of Mercantile Tower are
substantially less then the Partnership's original investment in the property,
of $10.5 million, management believes that the sale price was reflective of the
property's current fair market value, which is supported by the most recent
independent appraisal. Furthermore, management did not foresee the potential for
any significant near-term appreciation in the property's market value.
Accordingly, a current sale was deemed to be in the best interests of the
Limited Partners. The Partnership's success in meeting its capital appreciation
objective will depend upon the proceeds received from the final liquidation of
the remaining investments. The amount of such proceeds will ultimately depend
upon the value of the underlying investment properties at the time of their
final liquidation, which cannot presently be determined. At the present time,
values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. It remains to be seen whether the
Marshall's at East Lake Shopping Center, in which the Partnership has a joint
venture interest, will be affected by this general trend.
The Partnership's remaining loan and land investments are those secured by
The Timbers Apartments. The Timbers loan matures on September 1, 1998. If the
Partnership's investments secured by The Timbers Apartments are repaid by the
September 1, 1998 loan maturity date as expected, Marshalls at East Lake
Shopping Center would be the Partnership's only remaining investment. As a
result of these circumstances, the Partnership is analyzing near-term sale
strategies for this asset which could result in a sale of the property in 1998.
As a result, it is possible that a liquidation of the Partnership could be
completed in calendar year 1998. There are no assurances, however, that the
disposition of the remaining real estate assets and the liquidation of the
Partnership will be completed within this time frame.
The property in which the Partnership owns an equity interest and the
property securing the Partnership's mortgage loan investment, are located in
real estate markets in which they face significant competition for the revenues
they generate. The apartment complex competes with numerous projects of similar
type generally on the basis of price, location and amenities. Apartment
properties in all markets also compete with the local single family home market
for prospective tenants. The availability of low home mortgage interest rates
over the past several years has generally caused this competition to increase in
all areas of the country. The shopping center also competes for long-term
commercial tenants with numerous projects of similar type generally on the basis
of rental rates, location, tenant mix and tenant improvement allowances.
The Partnership has no real estate investments located outside the United
States. 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 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 Qualified Properties, Inc. and Properties Associates. Second Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing
General Partner of the Partnership. The Associate General Partner is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of 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.
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.
<PAGE>
Item 2. Properties
As of August 31, 1997, the Partnership owned, and had leased back to the
seller, the land related to the one investment referred to under Item 1 above to
which reference is made for the name, location and description of such property.
Additionally, the Partnership owned one operating property directly and owned an
equity interest in another operating property through a joint venture
partnership as noted in Item 1.
Occupancy figures for each fiscal quarter during 1997, along with an
average for the year, are presented below for each property:
Percent Leased At
-------------------------------------------------
Fiscal
1997
11/30/96 2/28/97 5/31/97 8/31/97 Average
-------- ------- ------- ------- -------
Mercantile Tower 57% 60% 61% 64% 61%
Marshall's at East Lake 94% 94% 94% 94% 94%
Eden West Apartments 97% 97% 96% N/A N/A
The Timbers Apartments 94% 90% 91% 96% 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 Qualified Property Fund, Inc. and Properties
Associates ("PA"), which are the General Partners of the Partnership and
affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Qualified Plan
Property Fund Two, LP, PaineWebber, Second Qualified Property Fund, Inc and PA
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Qualified Plan Property Fund Two, LP, also alleged that following the sale of
the partnership interests, PaineWebber, Second Qualified Property Fund, Inc. and
PA misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Second Qualified
Property Fund, Inc. and PA 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.
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 alleged, 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 sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims in the
Abbate action as barred by applicable securities arbitration regulations.
Mediation with respect to the Abbate action was held in December 1996. As a
result of such mediation, a settlement between PaineWebber and the plaintiffs
was reached which provided for the complete resolution of this matter. Final
releases and dismissals with regard to this action were received during fiscal
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At August 31, 1997, there were 5,322 record holders of Units in the
Partnership. There is no public market for the resale of 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.
Item 6. Selected Financial Data
PaineWebber Qualified Plan Property Fund Two, LP
For the years ended August 31, 1997, 1996, 1995, 1994 and 1993
(In thousands, except per Unit data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 1,446 $ 1,422 $ 1,747 $ 1,945 $ 2,588
Operating income $ 593 $ 1,040 $ 1,029 $ 1,414 $ 1,395
Partnership's share of
venture's income $ 206 $ 198 $ 143 $ 168 $ 201
Gain on sale of land $ 500 - $ 211 - -
Loss on foreclosure - - - - $(1,000)
Provision for possible
investment loss $ (350) $ (800) - $(1,200) -
Income (loss) from
operations of
investment
property held
for sale, net $ 69 $ 265 $ (738) $ (766) $ 163
Net income (loss) $ 1,018 $ 703 $ 645 $ (384) $ 759
Per Limited Partnership Unit:
Net income (loss) $ 27.81 $ 19.20 $ 17.60 $(10.49) $ 20.72
Cash distributions
from operations $ 18.45 $ 19.14 $ 19.86 $ 20.25 $ 57.50
Cash distributions
from sale, refinancing
and other disposition
transactions $ 129.00 $ 106.00 - $ 155.00 -
Total assets $ 16,965 $ 21,501 $25,506 $ 25,010 $ 31,091
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
36,241 Limited Partnership Units outstanding during each year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Result of Operations
Information Relating to Forward-Looking Statements
- ----------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered Limited Partnership Interests to the public from
July 1982 to June 1983 pursuant to a Registration Statement filed under the
Securities Act of 1933. Gross proceeds of $36,241,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
$32,575,000 was invested in six operating property investments in the form of
mortgage loans and land purchase-leaseback transactions. During fiscal 1993, the
Partnership assumed ownership of the Mercantile Tower Office Building through a
deed-in-lieu of foreclosure transaction resulting from monetary defaults under
the terms of the Partnership's mortgage loan and ground lease. During fiscal
1992, the Partnership's mortgage loan and land investments with respect to the
Marshall's at East Lake Shopping Center were converted to an equity interest in
the operating property through a joint venture partnership as a result of the
settlement of a default under the terms of the related loan agreement. Through
August 31, 1997, the Partnership had been prepaid on its investments with
respect to three of the original operating properties, including one during
fiscal 1997. On April 1, 1994, the Partnership liquidated its mortgage loan and
land investments in a Howard Johnson's Motor Lodge, located in Orlando, Florida.
The total net proceeds received by the Partnership amounted to approximately
$5.9 million. In accordance with the third modification of the mortgage loan
agreement, such proceeds included the payment of $292,000 of deferred debt
service and ground rent. The remaining proceeds of approximately $5,608,000 were
less than the combined carrying value of the mortgage loan and land investments
of $6,150,000, resulting in a loss of approximately $542,000 which was charged
against an outstanding general loan loss reserve. The Partnership retained
approximately $283,000 of the net proceeds from the Howard Johnson's disposition
in order to maintain adequate cash reserve balances. The remainder was paid out
to the Limited Partners through a special distribution of approximately
$5,617,000, or $155 per original $1,000 investment, which was made on May 25,
1994. On August 25, 1995, the borrower of the loan secured by Harbour Bay Plaza,
a retail shopping center located in Sewall's Point, Florida, repaid the
Partnership's first leasehold mortgage loan and purchased the underlying land
for total consideration of $3,833,000. Such consideration included the repayment
of the principal balance of the mortgage loan, of $2,850,000, plus interest
accrued through August 25, 1995, of $23,000. The original cost of the land to
the Partnership 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, in the amount of approximately $3,842,000, or $106 per original
$1,000 investment, were distributed to the Limited Partners on October 13, 1995.
On July 15, 1997, the Partnership received $3,500,000 from the borrower of the
mortgage loan secured by the Eden West Apartments, which represented the full
repayment of the outstanding first leasehold mortgage loan. Simultaneously, the
Eden West owner purchased the Partnership's interest in the underlying land at a
price equal to $900,000, which represented a premium of $500,000 over the
Partnership's cost basis in the land of $400,000. In addition, the Partnership
received a mortgage loan prepayment penalty of 1.25% of the mortgage note
balance, or $43,750, and a land lease termination fee of $10,000 in accordance
with the terms of the agreements. As a result of the Eden West prepayment
transaction, the Partnership made a Special Distribution of approximately
$4,675,000, or $129 per original $1,000 investment, on August 15, 1997 to
unitholders of record on July 15, 1997. Of this amount, approximately $123
represented the net proceeds from the Eden West transactions and approximately
$6 represented a distribution from Partnership reserves that exceeded future
requirements.
The three properties remaining as of year-end consisted of a commercial
office building, a retail shopping center and an apartment complex. For the past
several years, real estate values for commercial office buildings in certain
markets have been depressed due to an oversupply of competing space and the
trend toward corporate consolidations and downsizing which followed the last
national recession. Despite a general improvement in the real estate market for
office properties in the past year, the downtown office market in Kansas City,
Missouri, where the Partnership's Mercantile Tower property is located, remains
particularly competitive. The occupancy level at the wholly-owned Mercantile
Tower Office Building increased to 64% at August 31, 1997, as compared to 61% as
of May 31, 1997 and 58% as of the same period in the prior year. This increase
in occupancy is attributable to expansions by three existing tenants. In
addition, during the fourth quarter of fiscal 1997 the property's leasing team
negotiated two additional lease expansions for 3,100 square feet of additional
space and two new leases for a total of 4,000 square feet. As previously
reported, the pace of the lease-up at Mercantile Tower has been well below
management's expectations. With significant competition in the downtown Kansas
City office market, management has found it difficult to obtain economically
viable lease terms from the number of tenants which are looking to lease space
in the market. During the quarter ended February 28, 1997, the Partnership
received an unsolicited offer to purchase the Mercantile Tower Office Building.
In response to this unsolicited offer, the Partnership initiated a sales program
and selected a Kansas City firm to market the property for sale. After reviewing
the offers received as part of the marketing process, the Partnership selected
an offer from one of the potential purchasers and, in August 1997, a purchase
and sale agreement was signed. Subsequent to year-end, on November 10, 1997, the
sale was completed and the Mercantile Tower property was sold for $7,283,000.
The Partnership received net proceeds of $5,963,000 after closing costs, closing
prorations, certain credits to the buyer and the repayment of the outstanding
first mortgage note of $858,000. These net proceeds, along with an amount of
excess cash reserves which has yet to be determined, will be distributed to the
Limited Partners in the form of a special distribution to be paid on December
15, 1997. While the net proceeds received from the sale of Mercantile Tower were
substantially less then the Partnership's original investment in the property,
of $10.5 million, management believes that the sale price was reflective of the
property's current fair market value, which is supported by the most recent
independent appraisal. Furthermore, management did not foresee the potential for
any significant near-term appreciation in the property's market value.
Accordingly, a current sale was deemed to be in the best interests of the
Limited Partners. A sale of the property at its current leasing level yielded
less proceeds than the sale of the property at a stabilized level, but
management concluded that the capital, time, and risk associated with the
substantial leasing activity required to achieve stabilized operations
outweighed the possibility of receiving a higher net sale price. As a result of
the sale of Mercantile Tower, the Managing General Partner is currently
reassessing the Partnership's future quarterly operating cash flow
distributions. A determination of the rate to be paid subsequent to the
distribution of the Mercantile Tower net proceeds will be made by the end of the
first quarter of fiscal 1998. Based on the subsequent sale of Mercantile Tower,
the Partnership wrote down the carrying value of the property by $350,000 as of
August 31, 1997 to reflect the net proceeds received subsequent to year-end.
The mortgage loan secured by The Timbers Apartments contained a prohibition
against prepayment until September 1, 1997 and matures on September 1, 1998.
There is a reasonable likelihood that this first mortgage loan investment may be
prepaid in the near term given the continued availability of credit in the
capital markets for real estate transactions at prevailing interest rates which
are considerably lower than the 11.75% currently being earned on the
Partnership's first mortgage loan investment. As discussed further in the notes
to the accompanying financial statements, while interest is accruing on the
Timbers loan at a rate of 11.75%, interest is being paid currently to the extent
of net operating cash flow generated by the property, but not less than a rate
of 7.75% per annum on the original non-recourse note balance of $4,275,000,
under the terms of a modification agreement reached in fiscal 1989. Deferred
interest under the modification agreement is added to the principal balance of
the mortgage note on an annual basis. Under the Partnership's accounting policy
for interest income, all deferred interest is fully reserved until collected in
cash. The balance of principal and deferred interest owed to the Partnership on
the Timbers first mortgage loan totalled $7,465,000 as of August 31, 1997. In
addition, the Partnership has a $600,000 investment in the underlying land.
Management's current estimate of the fair market value of The Timbers
Apartments, net of selling expenses, is below the amount of this aggregate loan
and land investment by approximately $1.2 million. Accordingly, it is unlikely
that the Partnership will be able to fully collect these amounts. The Timbers
borrower has recently initiated preliminary discussions with the Partnership
concerning a potential sale of the property which could result in a repayment of
a substantial portion of the outstanding obligations. There are no assurances,
however, that a sale of the property will be completed.
If the Partnership's investments secured by The Timbers Apartments are
repaid by the September 1, 1998 loan maturity date as expected, Marshall's at
East Lake Shopping Center would be the Partnership's only remaining investment.
As a result of these circumstances, the Partnership is analyzing near-term sale
strategies for this asset which could result in a sale of the property in 1998.
As a result, it is possible that a liquidation of the Partnership could be
completed in calendar year 1998. There are no assurances, however, that the
disposition of the remaining real estate assets and the liquidation of the
Partnership will be completed within this time frame. Occupancy at the
Marshall's at East Lake Shopping Center as of August 31, 1997 was 94%, unchanged
from the prior year. The Partnership received cash flow distributions from the
Marshall's joint venture of approximately $319,000 for the year ended August 31,
1997, which was $96,000 more than the distributions received in fiscal 1996. As
of August 31, 1997, the property's leasing team was negotiating with two
potential tenants interested in leasing the remaining vacancy of 3,300 square
feet at Marshall's at East Lake. Also, during the fourth quarter of fiscal 1997,
one of the Center's kiosk tenants whose lease was scheduled to expire in
September 1997 signed a new five-year lease. Market conditions in the suburban
Atlanta sub-market in which Marshall's at East Lake is located remain soft with
many properties reporting significant vacancy levels. The competition resulting
from the surplus of available space has made the leasing efforts at Marshall's
at East Lake more difficult. As a result, there are no assurances that the
vacant space at Marshall's will be leased in the near term. No major capital
improvements were required at Marshall's at East Lake during fiscal 1997,
however, the property's management team is currently reviewing proposals for
improvements that would enhance the appearance of the Center. Bids are being
reviewed to improve the property's signage, repaint the wood trim on the front
of the buildings and resurface the roofs as part of the fiscal 1998 capital
improvement budget.
At August 31, 1997, the Partnership had available cash and cash equivalents
of $1,555,000. 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 loan receivable and
the proceeds from the sales or refinancings of the underlying land, and the
joint venture investment property. Such sources of liquidity are expected to be
adequate to meet the Partnership's needs on both a short-term and long-term
basis.
Results of Operations
1997 Compared to 1996
- ---------------------
For the year ended August 31, 1997, the Partnership reported net income of
$1,018,000, as compared to net income of $703,000 in fiscal 1996. This increase
in net income is mainly due to the fiscal 1997 gain of $500,000 realized on the
sale of the land underlying the Eden West Apartments, as discussed further
above, a decrease in the provision for possible investment loss of $450,000 and
an increase in interest and other income of $55,000. In fiscal 1996, the
Partnership recognized an $800,000 provision for possible loss to reflect a
decline in management's estimate of the fair market value of the Mercantile
Tower property. The $350,000 provision for possible investment loss recognized
in fiscal 1997 resulted from a decline in the fair value of the Mercantile Tower
property in the current year based on the sale transaction which was completed
subsequent to year-end, as discussed further above. The increase in interest and
other income was primarily due to the prepayment penalty and ground lease
cancellation fee received in fiscal 1997 as part of the Eden West transaction,
as discussed further above. The net income of the Marshall's joint venture
increased slightly in fiscal 1997 due to an increase in rental revenue which was
partially offset by higher property operating expenses.
These favorable changes in the Partnership's net income were partially
offset by an increase of $527,000 in the provision for possible uncollectible
amounts and a decrease of $196,000 in the net income of the wholly-owned
Mercantile Tower property. The increase in the provision for possible
uncollectible amounts was mainly due to the $448,000 balance of a general loss
reserve that was reversed in fiscal 1996 due to the improved operating results
of the properties securing the Partnership's two remaining mortgage loans. As a
result of the continued improvement in the operating performances of those two
properties and in the market for residential apartment properties in general at
that time, management determined that the reserve account was no longer required
as of August 31, 1996. The provision for possible uncollectible amounts in both
years reflects the accrued but unpaid interest due under the modified terms of
The Timbers mortgage loan. The decrease in net income from the Mercantile Tower
property was primarily attributable to increases in repairs and maintenance
expense, capital improvement costs and leasing commissions which were partially
offset by an increase in rental revenues. Repairs and maintenance expense at
Mercantile Tower increased by $138,000 mainly due to current year window and
lighting replacements and the installation of an exterior stairway that was
needed for safety reasons to replace an older, outdoor escalator. Capital
improvement costs and leasing commissions increased by $94,000 as a result of
increases in occupancy and tenant turnover. As a result of the Partnership's
accounting policy for assets held for sale, all capital improvement and leasing
costs are expensed as incurred. Rental revenues at Mercantile Tower increased in
fiscal 1997 due to an increase in average occupancy compared to the prior year.
1996 Compared to 1995
- ---------------------
For the year ended August 31, 1996, the Partnership reported net income of
$703,000 as compared to net income of $645,000 recognized in fiscal 1995. This
increase in net income was primarily due to a change in the net operating
results of the wholly-owned Mercantile Tower property. The major portion of this
change resulted from a decline of $806,000 in capital enhancement costs, tenant
improvement expenses and leasing commissions due to a drop in leasing activity
at the Mercantile Tower property. As discussed further in the notes to the
accompanying financial statements, all costs associated with holding this
investment property held for sale are expensed as incurred. In addition,
revenues from Mercantile Tower were higher by $162,000 for fiscal 1996 when
compared to fiscal 1995, largely due to additional percentage rent collected
from the parking facility during fiscal 1996. The $448,000 balance of a general
loan loss reserve was reversed during fiscal 1996 as well. The Partnership's two
remaining mortgage loans as of August 31, 1996 were secured by residential
apartment properties. As a result of the continued improvement in the operating
performances of these two properties and in the market for residential apartment
properties in general, management determined that this reserve account was no
longer required as of August 31, 1996. The recovery of $448,000 was netted with
the provision for possible uncollectible amounts on the fiscal 1996 statement of
operations. An increase of $55,000 in the Partnership's share of the net income
of the Marshall's at East Lake joint venture also contributed to the increase in
the Partnership's net income during fiscal 1996. The increase in the venture's
net income resulted mainly from an improvement in rental revenues due to a
higher average occupancy level in fiscal 1996.
The favorable changes in the Partnership's net income were partially offset
by a decrease in mortgage interest and land rent revenues of $368,000 and a
provision for possible investment loss of $800,000 recognized in fiscal 1996, as
well as the effect of a $211,000 gain on the sale of the Harbour Bay Plaza land
recorded in fiscal 1995. In addition, the provision for possible uncollectible
amounts, prior to the recovery referred to above, increased by $173,000 in
fiscal 1996. The decrease in mortgage interest and land rent revenues resulted
from the prepayment and sale transactions involving the Harbour Bay Plaza
mortgage loan and land investments during the fourth quarter of fiscal 1995. The
$800,000 provision for possible investment loss recognized in fiscal 1996
resulted from a decline in the estimated fair value of the Mercantile Tower
property during fiscal 1996. Due to the extremely competitive conditions which
continued to face the operating property, management revised downward its
estimate of the fair value of the Mercantile Tower property as of August 31,
1996. In accordance with the Partnership's accounting policy for foreclosed
assets, such properties are carried at the lower of cost or estimated fair value
(net of selling expenses). The provision for possible uncollectible amounts in
both years reflected the accrued but unpaid interest due under the modified
terms of The Timbers mortgage loan. In fiscal 1995, the Partnership collected an
additional $124,000 from the owner of The Timbers property which was offset
against the provision in fiscal 1995. Additional payments of only $54,000 were
collected during fiscal 1996, which, combined with the compounding effect of the
interest owed under the terms of the modification agreement, accounted for the
increase in the provision.
1995 Compared to 1994
- ---------------------
For the year ended August 31, 1995, the Partnership reported net income of
$645,000 as compared to a net loss of $384,000 recognized in fiscal 1994. This
change in the Partnership's net operating results was primarily due to a
provision for possible investment loss of $1,200,000 recognized in fiscal 1994
due to a decline in management's estimate of the fair value of the Mercantile
Tower property. The gain of $211,000 recognized in fiscal 1995 on the sale of
the Harbour Bay Plaza land offset a decline of $214,000 in mortgage interest
income and land rent compared to fiscal 1994. The fiscal 1994 revenues included
income from the Howard Johnson's investments through April 1, 1994, the date of
the sale. A decline in the provision for possible uncollectible amounts of
$135,000 also contributed to the favorable change in the Partnership's net
operating results for fiscal 1995. In both years, the provision reflected the
accrued but unpaid interest due under the modified terms of The Timbers mortgage
loan. In fiscal 1995, the Partnership collected an additional $178,000 from the
owner of The Timbers which was offset against the fiscal 1995 provision. A
recovery of bad debt of $292,000 recorded in fiscal 1994 partly offset the
favorable changes in net operating results. This recovery related to the Howard
Johnson's prepayment transaction, in which the Partnership recovered an amount
of previously reserved mortgage interest and land rent receivable.
A decline of $28,000 in the net loss recognized from the operations of the
wholly-owned Mercantile Tower property offset a decline of $25,000 in the net
income from the Marshall's at East Lake joint venture in fiscal 1995. Revenues
from Mercantile Tower were higher for the twelve months ended August 31, 1995 as
a result of the occupancy gains achieved during fiscal 1995. The net operating
results of the Mercantile Tower Office Building in fiscal 1995 and 1994 include
the costs of the improvements and leasing costs incurred at the property. As a
result of the Partnership's accounting policy with regard to its investment
properties held for sale, all costs associated with holding the asset are
expensed as incurred. The Partnership's share of venture's income decreased in
fiscal 1995 due to lower rental revenues at the Marshall's at East Lake Shopping
Center as a result of a decline in effective rental rates experienced during
fiscal 1995 and 1994 as well as a decrease in cost recoveries.
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, or requires its borrower
to carry, comprehensive liability, fire, flood, extended coverage and rental
loss insurance with respect to its properties with insured limits and policy
specifications that management believes are customary for similar properties.
There are, however, certain types of losses (generally of a catastrophic nature
such as wars, floods or earthquakes) which may be either uninsurable, or, in
management's judgment, not economically insurable. Should an uninsured loss
occur, the Partnership could lose both its invested capital in and anticipated
profits from the affected property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has increased significantly in the past year. Existing
apartment 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. The retail
segment of the real estate market is currently suffering from an oversupply of
space in many markets resulting from overbuilding in recent years and the trend
of consolidations and bankruptcies among retailers prompted by the generally
flat rate of growth in overall retail sales. There are no assurances that these
competitive pressures will not adversely affect the operations and/or market
values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of one of the remaining
investments 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 its joint venture 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 real estate
assets is critical to the Partnership's ability to realize the current estimated
fair market values of such assets and to complete the liquidation of the
Partnership on a timely basis. Demand by buyers of multi-family apartment and
retail properties is affected by many factors, including the size, quality, age,
condition and location of the subject property, the quality and stability of the
tenant roster, the terms of any long-term leases, 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 fifteenth full year of operations in fiscal
1997, and the effects of inflation and changes in prices on revenues and
expenses to date have not been significant.
The impact of inflation in future periods may be partially offset by an
increase in revenues because the Partnership's land lease provides for
additional rent based upon increases in the revenues of the related operating
property which would be expected to rise with inflation. Revenues from the
Marshall's at East Lake Shopping Center would also be expected to rise with
inflation due to the tenant leases which contain rental escalation and/or
expense reimbursement clauses based on increases in tenant sales and property
operating expenses. Such increases in revenues would be expected to at least
partially offset the increases in Partnership and property operating expenses
resulting from inflation. During a period of significant inflation, increased
operating expenses attributable to space which remained unleased at such time
would not be recoverable and would adversely affect the Partnership's net cash
flow.
<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 Qualified
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 operations, 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 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 2/2/82 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President and Controller 35 12/1/91
Dorothy F. Haughey Secretary 71 2/2/82 *
* 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
and executive officers of the Managing General Partner of the Partnership. All
of the foregoing directors and executive 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 Paine Webber Properties Incorporated serves as the
Adviser. The business experience of each of the directors and 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 at
PaineWebber Properties 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.
<PAGE>
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. 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 a 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.
Dorothy F. Haughey is Secretary of the Managing General Partner,
Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.
(f) None of the directors and officers was 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 August 31, 1997 all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed renumeration from the Partnership.
The Partnership is required to pay certain fees to the Adviser and the
General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described in
Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 2% to 7% per annum on remaining invested
capital over the past five years. However, the Partnership's Units of Limited
Partnership Interest 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 Qualified Properties, Inc., is owned by
PaineWebber. Properties Associates, the Associate General Partner, is a
Massachusetts general partnership, general partners of which are also officers
of the Adviser and the Managing General Partner. Properties Associates is the
Initial Limited Partner of the Partnership and owns 5 Units of Limited
Partnership Interest in the Partnership. No Limited Partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) Neither the directors and officers 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 director or officer
of the Managing General Partner nor the 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 Managing General Partner of the Partnership is Second Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Managing General Partner and PaineWebber Properties
Incorporated. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties Incorporated
(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 connection with investing Partnership capital, the Adviser received
acquisition fees paid by the borrowers and sellers aggregating approximately 3%
of the gross proceeds of the offering. The Adviser may receive a real estate
brokerage commission, in an amount not yet determinable, upon the disposition of
certain Partnership 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. Residual proceeds resulting from disposition of Partnership
investments will be distributed, generally, 85% to the Limited Partners and 15%
to the General Partners, after the prior receipt by the Limited Partners of
their original capital contributions and a cumulative annual return based upon a
formula related to U.S. Treasury Bill interest rates, as defined in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, any taxable income or
tax loss of the Partnership will be allocated 99% to the Limited Partners and 1%
to the General Partners. Allocations of the Partnership's net income or loss for
financial accounting purposes have been made in conformity with the allocations
of taxable income or loss. Taxable income or tax loss arising from disposition
of Partnership investments will be allocated to the Limited and General Partners
generally as residual proceeds are distributed.
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 General
Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow)
and an incentive management fee (3% of adjusted cash flow subordinated to a
non-cumulative annual return to the Limited Partners equal to 10% based upon
their adjusted capital contribution) for services rendered. The Adviser earned
basic management fees of $41,000 for the year ended August 31, 1997.
No incentive management fees have been earned to date.
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 August 31, 1997 is $147,000, representing reimbursements to this
affiliate 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 $5,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended August 31, 1997. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
<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.
Financial statements for the properties securing the
Partnership's mortgage loans have not been included since the
Partnership has no contractual right to the information and
cannot otherwise practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this Report.
(b) A Current Report on Form 8-K dated July 15, 1997 was filed during the
last quarter of fiscal 1997 to report the sale of the land underlying
the Eden West Apartments and the prepayment of the related first
leasehold mortgage loan and is hereby incorporated by reference.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN
PROPERTY FUND TWO, LP
By: Second Qualified 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: November 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By: /s/ Bruce J. Rubin Date: November 26, 1997
-------------------- -----------------
Bruce J. Rubin
Director
By: /s/ Terrence E. Fancher Date: November 26, 1997
------------------------ -----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND 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 Registrant Filed with the Commission
dated July 1, 1982, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended August 31, 1997 has been
sent to the Limited Partners. An
Annual Report will be sent to the
Limited Partners subsequent to
this filing.
(27) Financial Data Schedule Filed as 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 14(d)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Two, LP:
Report of independent auditors F-2
Independent auditors' report relating to Marshall's at East
Lake Partnership F-3
Balance sheets as of August 31, 1997 and 1996 F-4
Statements of income for the years ended August 31, 1997,
1996 and 1995 F-5
Statements of changes in partners' capital (deficit) for the years
ended August 31, 1997, 1996 and 1995 F-6
Statements of cash flows for the years ended August 31, 1997,
1996 and 1995 F-7
Notes to financial statements F-8
Financial statement schedules:
Schedule III - Real Estate Owned F-18
Schedule IV - Investments in Mortgage Loans on Real Estate F-19
Marshall's at East Lake Partnership:
Independent Auditor's Report F-20
Balance sheets as of August 31, 1997 and 1996 F-21
Statements of income for the years ended August 31, 1997,
1996 and 1995 F-22
Statements of partners' capital for the years ended
August 31, 1997, 1996 and 1995 F-23
Statements of cash flows for the years ended August 31, 1997,
1996 and 1995 F-24
Notes to financial statements F-25
Schedule III - Real Estate and Accumulated Depreciation F-28
Other schedules have been omitted since the required information is not
present or 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 of
Paine Webber Qualified Plan Property Fund Two, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified
Plan Property Fund Two, LP as of August 31, 1997 and 1996, and the related
statements of income, changes in partners' capital (deficit) and cash flows for
each of the three years in the period ended August 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
financial statements of Marshall's at East Lake Partnership (an unconsolidated
venture). The Partnership's equity investment in Marshall's at East Lake
Partnership totalled $3,060,000 and $3,173,000 as of August 31, 1997 and 1996,
respectively, and the Partnership's share of the net income of Marshall's at
East Lake Partnership totalled $206,000, $198,000, and $143,000 for the years
ended August 31, 1997, 1996 and 1995, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Marshall's at East Lake
Partnership, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Paine Webber Qualified Plan Property Fund Two, LP at
August 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
November 20, 1997
<PAGE>
SMITH & RADIGAN
Certified Public Accountants
Suite 675 Ashford Perimeter
4151 Ashford-Dunwoody Road, N.E.
Atlanta, Georgia 30319-1462
INDEPENDENT AUDITORS' REPORT
To the Partners
Marshall's at East Lake Partnership
We have audited the balance sheets of Marshall's at East Lake Partnership
as of August 31, 1997 and 1996, and the related statements of income, partners'
capital and cash flows for each of the three years in the period ended August
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 Marshall's at East Lake
Partnership as of August 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended August 31,
1997 in conformity with generally accepted accounting principles.
/s/ Smith & Radigan
-------------------
SMITH & RADIGAN
Atlanta, Georgia
September 19, 1997
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
BALANCE SHEETS
August 31, 1997 and 1996
(In thousands, except per Unit data)
ASSETS
1997 1996
---- ----
Real estate investments:
Land $ 600 $ 1,000
Mortgage loans receivable, net of allowance
for possible uncollectible amounts of
$3,190 ($2,703 in 1996) 4,275 7,775
Investment in joint venture, at equity 3,060 3,173
Investment property held for sale,
net of allowance for possible
investment loss of $2,350 ($2,000 in 1996) 7,150 7,500
--------- ---------
15,085 19,448
Cash and cash equivalents 1,555 1,653
Tax and insurance escrow 215 255
Interest and other receivables 96 129
Prepaid expenses 14 16
--------- ---------
$ 16,965 $ 21,501
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accrued real estate taxes $ 160 $ 183
Accounts payable and accrued expenses 160 93
Accounts payable - affiliates 10 10
Tenant security deposits and other liabilities 64 55
Note payable 894 1,150
--------- ---------
Total liabilities 1,288 1,491
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 299 289
Cumulative cash distributions (330) (323)
Limited Partners ($1,000 per Unit,
36,241 Units issued):
Capital contributions, net of offering costs 32,906 32,906
Cumulative net income 29,555 28,547
Cumulative cash distributions (46,754) (41,410)
--------- ---------
Total partners' capital 15,677 20,010
--------- ---------
$ 16,965 $ 21,501
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the years ended August 31, 1997, 1996 and 1995
(In thousands, except per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Interest from mortgage loans $ 1,168 $ 1,195 $ 1,477
Land rent 113 117 203
Interest and other income 165 110 67
--------- --------- ---------
1,446 1,422 1,747
Expenses:
Management fees 41 41 45
General and administrative 325 381 438
Provision for (recovery of) possible
uncollectible amounts 487 (40) 235
--------- --------- ---------
853 382 718
--------- --------- ---------
Operating income 593 1,040 1,029
Partnership's share of venture's income 206 198 143
Gain on sale of land 500 - 211
Investment property held for sale:
Provision for possible investment loss (350) (800) -
Income (loss) from operations, net 69 265 (738)
--------- --------- ---------
(281) (535) (738)
--------- --------- ---------
Net income $ 1,018 $ 703 $ 645
========= ========= =========
Net income per
Limited Partnership Unit $ 27.81 $ 19.20 $ 17.60
========= ========= =========
Cash distributions per
Limited Partnership Unit $ 147.45 $ 125.14 $ 19.86
========= ========= ==========
The above net income and cash distributions per Limited Partnership Unit are
based upon 36,241 Units of Limited Partnership Interest outstanding during each
year.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended August 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at August 31, 1994 $ (32) $ 23,963 $ 23,931
Cash distributions (7) (720) (727)
Net income 6 639 645
------ -------- --------
Balance at August 31, 1995 (33) 23,882 23,849
Cash distributions (7) (4,535) (4,542)
Net income 7 696 703
------ -------- --------
Balance at August 31, 1996 (33) 20,043 20,010
Cash distributions (7) (5,344) (5,351)
Net income 10 1,008 1,018
------- --------- --------
Balance at August 31, 1997 $ (30) $ 15,707 $ 15,677
======= ========= ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 1,018 $ 703 $ 645
Adjustments to reconcile net income
to net cash provided
by operating activities:
Recovery of possible
uncollectible amounts - (448) -
Gain on sale of land (500) - (211)
Partnership's share of venture's income (206) (198) (143)
Provision for possible investment loss 350 800 -
Changes in assets and liabilities:
Tax and insurance escrow 40 (58) (9)
Interest and other receivables 33 (39) 196
Prepaid expenses 2 (1) (1)
Accrued real estate taxes (23) - 13
Accounts payable and accrued expenses 67 (2) (151)
Accounts payable - affiliates - (2) 1
Tenant security deposits and
other liabilities 9 (1) 8
Total adjustments (228) 51 (297)
-------- -------- -------
Net cash provided by
operating activities 790 754 348
-------- -------- -------
Cash flows from investment activities:
Proceeds received from repayment of
mortgage loan and sale of land 4,400 - 3,811
Distributions from joint venture 319 223 198
-------- -------- -------
Net cash provided by
investing activities 4,719 223 4,009
-------- -------- -------
Cash flows from financing activities:
Proceeds received from issuance of
note payable - 67 811
Principal payments on note payable (256) (228) (104)
Distributions to partners (5,351) (4,542) (727)
-------- -------- -------
Net cash used in
financing activities (5,607) (4,703) (20)
-------- -------- -------
Net (decrease) increase in cash and
cash equivalents (98) (3,726) 4,337
Cash and cash equivalents,
beginning of year 1,653 5,379 1,042
-------- -------- -------
Cash and cash equivalents, end of year $ 1,555 $ 1,653 $ 5,379
======== ======== ========
Cash paid during the year for interest $ 98 $ 115 $ 105
======== ======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
-------------------------------------
Paine Webber Qualified Plan Property Fund Two, LP (the "Partnership") is a
limited partnership organized pursuant to the laws of the State of Delaware in
March 1982 for the purpose of investing in a diversified portfolio of existing
income-producing real properties through land purchase-leaseback transactions
and first mortgage loans. The Partnership authorized the issuance of units (the
"Units") of Partnership interests, of which 36,241 (at $1,000 per Unit) were
subscribed and issued between July 1, 1982 and June 30, 1983.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to six operating investment properties.
Through August 31, 1997, the Partnership had been prepaid on its investments
with respect to three of the original operating properties. As of August 31,
1997, only one of the Partnership's original mortgage loans and land lease
investments on the properties was still outstanding, and the Partnership owned
an equity interest in one operating property through a joint venture partnership
which resulted from the settlement of a default under the terms of a first
mortgage loan held by the Partnership. In addition, the Partnership owned one
operating property directly as a result of foreclosing under the terms of its
mortgage loan receivable. See Notes 4, 5 and 6 for a further discussion of the
Partnership's remaining real estate investments.
As discussed further in Notes 4, 5 and 6, subsequent to year-end the
Partnership completed the sale of its wholly-owned investment property. In
addition, the outstanding mortgage loan is scheduled to mature in September
1998. As a result of these circumstances, the Partnership is exploring potential
sales opportunities with respect to the remaining joint venture investment
property. The disposition of all of the remaining real estate investments would
be followed by a liquidation of the Partnership which could be accomplished
prior to the end of calendar 1998. There are no assurances, however, that the
disposition of the remaining assets and the liquidation of the Partnership will
be completed within this time frame.
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 require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended August 31, 1997. Actual results
could differ from the estimates and assumptions used.
The Partnership's investments in land subject to ground leases are carried
at cost 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," which was adopted in fiscal 1997. 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. The
Partnership generally assesses indicators of impairment by a review of
independent appraisal reports on each operating investment property. Such
appraisals make use of a combination of certain generally accepted valuation
techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of.
Investment property held for sale represents an asset acquired by the
Partnership through foreclosure proceedings on a first mortgage loan. Pursuant
to SFAS No. 121, the Partnership's policy is to carry this asset at the lower of
cost or estimated fair value (net of selling expenses). The Partnership's cost
basis is equal to the fair value of the asset at the date of foreclosure.
Declines in the estimated fair value of the asset subsequent to foreclosure are
recorded through the use of a valuation allowance. Subsequent increases in the
estimated fair value of the asset result in reductions in the valuation
allowance, but not below zero. All costs incurred to hold the asset, including
capital improvements and leasing costs, are charged to expense and no
depreciation expense is recorded.
Mortgage loans receivable are carried at the lower of cost or fair value.
Amounts representing deferred interest and land rent receivable resulting from
loan and ground lease modifications are fully reserved until collected. The
Partnership's policy is to provide for any valuation allowances on its mortgage
loan investments on a specific identification basis, principally by evaluating
the market value of the underlying collateral since the loans are collateral
dependent. In addition, a general loan loss reserve was recorded in fiscal 1990
in an amount equal to $990,000, reflecting management's assessment of the
general credit risk applicable to the Partnership's portfolio of mortgage loan
investments taken as a whole. During fiscal 1994, $542,000 of this loan loss
reserve was applied against the loss incurred in conjunction with the repayment
of the Howard Johnson's mortgage loan. In fiscal 1996, the remainder of this
loan loss reserve, of $448,000, was reversed as a result of continued
improvements in the operating performances of the underlying collateral
properties and in real estate market conditions in general.
The accompanying financial statements include the Partnership's investment
in a joint venture partnership which owns one operating property. The
Partnership accounts for its investment in the joint venture using the equity
method because the Partnership does not have a voting control interest in the
venture. Under the equity method the venture is carried at cost adjusted for the
Partnership's share of the venture's earnings or losses and distributions. See
Note 5 for a description of the joint venture partnership.
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 mortgage loans receivable, cash and cash equivalents and note payable
appearing on the accompanying balance sheets represent financial instruments for
purposes of Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments." The carrying amount of cash and cash
equivalents approximates its fair value as of August 31, 1997 and 1996 due to
the short-term maturities of these instruments. Information regarding the fair
value of the Partnership's remaining mortgage loan receivable is provided in
Note 4. Due to the likelihood of near term prepayment, the mortgage loan
receivable has been valued at the lesser of face value or the estimated fair
value of the collateral property, net of selling expenses, as determined by an
independent appraisal (see Note 4 for a further discussion). The fair value of
the note payable is estimated using discounted cash flow analysis, based on the
current market rates for similar types of borrowing arrangements (see Note 7).
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The Managing General Partner of the Partnership is Second Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Managing General Partner and PaineWebber Properties
Incorporated. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties Incorporated
(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 connection with investing Partnership capital, the Adviser received
acquisition fees paid by the borrowers and sellers aggregating approximately 3%
of the gross proceeds of the offering. The Adviser may receive a real estate
brokerage commission, in an amount not yet determinable, upon the disposition of
certain Partnership 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. Residual proceeds resulting from disposition of Partnership
investments will be distributed, generally, 85% to the Limited Partners and 15%
to the General Partners, after the prior receipt by the Limited Partners of
their original capital contributions and a cumulative annual return based upon a
formula related to U.S. Treasury Bill interest rates, as defined in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, any taxable income or
tax loss of the Partnership will be allocated 99% to the Limited Partners and 1%
to the General Partners. Allocations of the Partnership's net income or loss for
financial accounting purposes have been made in conformity with the allocations
of taxable income or loss. Taxable income or tax loss arising from disposition
of Partnership investments will be allocated to the Limited and General Partners
generally as residual proceeds are distributed.
Under the advisory contract, the Adviser has specific management
responsibilities; to administer the day-to-day operations of the Partnership,
and to periodically report the performance of the Partnership to the General
Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow)
and an incentive management fee (3% of adjusted cash flow subordinated to a
non-cumulative annual return to the Limited Partners equal to 10% based upon
their adjusted capital contribution) for services rendered. The Adviser earned
basic management fees of $41,000, $41,000 and $45,000 for the years ended August
31, 1997, 1996 and 1995, respectively. No incentive management fees have been
earned to date. Accounts payable - affiliates at both August 31, 1997 and 1996
consists of management fees payable to the Adviser of $10,000.
Included in general and administrative expenses for the years ended August
31, 1997, 1996 and 1995 is $147,000, $144,000 and $176,000, 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 $5,000, $8,000 and $2,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1997, 1996 and 1995,
respectively.
4. Mortgage Loan and Land Investments
----------------------------------
The following first mortgage loans were outstanding at August 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
Date
of Loan
Amount of Loan and
Property 1997 1996 Interest Rate Maturity
-------- ---- ---- ------------- --------
<S> <C> <C> <C> <C>
Eden West Apts. $ - $ 3,500 Years 1 to 3 - 11% 6/6/84
Omaha, NE Years 4 to 6 - 11.25% 6/6/99
Thereafter - 11.50%
The Timbers 7,465 6,978 11.75% 9/7/84
Apartments (1) (3,190) (2,703) 9/1/98
-------- --------
Raleigh, NC 4,275 4,275
-------- --------
$ 4,275 $ 7,775
======== ========
</TABLE>
(1)See discussion below regarding interest pay rate modifications for the
Timbers mortgage loan. Deferred interest is added to the principal
balance of the mortgage loan receivable. The Partnership's policy is to
reserve for deferred interest until collected.
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all tenant leases, where
applicable. Interest is payable monthly and the principal is due at maturity.
In relation to the above-mentioned mortgage loans, the following land
purchase-leaseback transactions had also been entered into as of August 31, 1997
and 1996 (in thousands):
Cost of Land
to the Partnership
Property 1997 1996 Annual Base Rent
-------- ---- ---- ------------------
Eden West Apartments $ - $ 400 Years 1 to 3 - $44,000
Years 4 to 6 - $45,000
Thereafter - $46,000
The Timbers Apartments 600 600 $ 70,500
------ ------
$ 600 $1,000
====== ======
The land leases have terms of 40 years. 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. No additional rent was received
during fiscal 1997, 1996 or 1995. The lessees have the option to purchase the
land, beginning at a specified time, at a price based on the fair market value,
as defined, but not less than the original cost to the Partnership. As of August
31, 1997, the Timbers option to purchase the land was 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 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
Partnership will receive a 40% share of the appreciation above a specified base
amount.
As discussed further below, the loan secured by The Timbers Apartments
becomes prepayable without penalty as of September 1, 1997. Management believes
the potential for a near term prepayment of The Timbers Apartments loan is high.
As a result of these circumstances, the mortgage loan instrument has been
valued, based on an expected short-term maturity, at the lesser of face value
(prior to any allowance for possible uncollectible amounts) or the estimated
fair value of the collateral property, net of selling expenses. The estimated
fair value of the Partnership's remaining mortgage loan investment as of August
31, 1997 was $6,300,000.
The Timbers Apartments
- ----------------------
During fiscal 1987, the Partnership agreed to modify the payment terms of
the loan secured by The Timbers Apartments. Under the terms of The Timbers
modification, which was effective on October 1, 1986, for a period of
approximately thirty months, a portion of the interest payable was deferred and
added to the principal balance. During fiscal 1989, the debt modification
expired and a new modification was negotiated. The terms included an extension
of the deferral period and the loan maturity to September of 1998. The amount
due to the Partnership will continue to be 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
loan may be prepaid without penalty at any time after September 1, 1997.
During fiscal 1997, the Partnership received the minimum payments due
under the note of $331,000. During fiscal 1996 and 1995, the Partnership
received payments totalling $385,000 and $509,000 respectively, toward the
interest owed on the loan secured by The Timbers. Due to the Partnership's
policy of reserving for deferred interest until collected, such cash payments
reflect the interest income recognized in the Partnership's statements of
operations for such years (net of the provision for possible uncollectible
amounts). Gross interest income at the original rate of 11.75% per annum would
have accrued for each of the three years ended August 31, 1997, 1996 and 1995 in
the amount of $502,000 had the modifications referred to above not been
necessary. The Partnership has established an allowance for possible
uncollectible amounts for the cumulative amount of deferred interest owed under
the Timbers modification ($3,190,000 and $2,703,000 at August 31, 1997 and 1996,
respectively) due to the uncertainty as to the collection of the deferred
interest from this investment.
Eden West Apartments
- --------------------
On July 15, 1997, the Partnership received $3,500,000 from the Eden West
borrower, which represented the full repayment of the first leasehold mortgage
loan secured by the Eden West Apartments. Simultaneously, the Eden West owner
purchased the Partnership's interest in the underlying land at a price equal to
$900,000, which represented a premium of $500,000 over the Partnership's cost
basis in the land of $400,000. In addition, the Partnership received a mortgage
loan prepayment penalty of 1.25% of the mortgage note balance, or $43,750, and a
land lease termination fee of $10,000 in accordance with the terms of the
agreements. As previously reported, the owner of the Eden West Apartments had
given notice of an intent to repurchase the underlying land from the Partnership
and prepay its first leasehold mortgage loan, which was scheduled to mature on
June 6, 1999. The Partnership and the owner of the Eden West Apartments had been
discussing the terms of a prepayment transaction for more than a year, and
during the quarter ended May 31, 1997 the parties reached an agreement on the
terms of the prepayment transaction which closed on July 15, 1997.
As a result of the disposition on July 15, 1997 of the Partnership's
investments secured by the Eden West Apartments, the Partnership made a Special
Distribution of approximately $4,675,000, or $129 per original $1,000
investment, on August 15, 1997 to unitholders of record on July 15, 1997. Of
this amount, approximately $123 represented the net proceeds from the Eden West
transactions and approximately $6 represented a distribution from Partnership
reserves that exceeded future requirements.
Harbour Bay Plaza
- -----------------
Effective August 25, 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. Such consideration included the
repayment of the principal balance of the mortgage loan, of $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 $106 per original $1,000 investment on October 13, 1995.
<PAGE>
5. Investment in Joint Venture
---------------------------
On June 12, 1990, the borrower of the mortgage loan secured by the
Marshall's 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 Marshall's 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 Marshall's joint venture is accounted for on the
equity method in the Partnership's financial statements. Under the equity
method, the investment is carried at cost, adjusted for the Partnership's share
of earnings, losses and distributions.
Condensed financial statements of this joint venture follow.
Condensed Balance Sheet
August 31, 1997 and 1996
(in thousands)
Assets
1997 1996
---- ----
Current assets $ 135 $ 115
Operating investment property, net 2,916 3,034
Other assets 66 73
---------- ----------
$ 3,117 $ 3,222
========== ==========
Liabilities and Partners' Capital
Current liabilities $ 38 $ 30
Other liabilities 19 19
Partnership's share of capital 3,060 3,173
---------- ----------
$ 3,117 $ 3,222
========== ==========
<PAGE>
Condensed Summary of Operations
For the years ended August 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Rental income and
expense reimbursements $ 542 $ 506 $ 444
Interest and other income 3 2 2
-------- -------- --------
545 508 446
Property operating expenses 190 163 161
Depreciation and amortization 149 147 142
-------- -------- --------
339 310 303
-------- -------- --------
Net income $ 206 $ 198 $ 143
======== ======== ========
Net income:
Partnership's share of net income $ 206 $ 198 $ 143
Co-venturer's share of net income - - -
-------- -------- --------
$ 206 $ 198 $ 143
======== ======== ========
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. Substantially all of the Partnership's investment in
this joint venture is restricted as to distributions.
A description of the operating property owned by the joint venture and the
terms of the joint venture agreement are summarized below:
Marshall's at East Lake Partnership
- -----------------------------------
Marshall's at East Lake Partnership, a Delaware general partnership ("the
joint venture") was organized on December 11, 1991 by the Partnership and
Oxford/Concord Associates ("Oxford"), a Georgia joint venture, to acquire, own
and operate Marshall's at East Lake Shopping Center. The property, which was 94%
leased as of August 31, 1997, is a 55,175 square foot shopping center on
approximately 6.7 acres of land in suburban Atlanta, Georgia.
The joint venture agreement provides that all taxable income for any
fiscal year will, in general, be allocated to the Partnership until it has
received income allocations equal to a cumulative 9% return upon its defined
invested capital ($4,250,000 at August 31, 1997). Thereafter, taxable income
will be allocated 80% to the Partnership and 20% to Oxford. In general, all tax
losses will be allocated to the Partnership.
The joint venture agreement also provides that cash flow, as defined, be
distributed monthly to the Partnership until it has received cumulative
distributions equal to a 9% return upon its defined invested capital.
Thereafter, cash flow will be distributed 80% to the Partnership and 20% to
Oxford. The Partnership received distributions from the joint venture totalling
$319,000, $223,000 and $198,000 during the years ended August 31, 1997, 1996 and
1995, respectively. The Partnership would need to receive additional
distributions of $661,000 to reach a cumulative non-compounded return of nine
percent on its defined investment capital as of August 31, 1997. Proceeds from
any capital transaction, as defined, shall be distributed first to the
Partnership until it has received aggregate distributions equal to a 9% return
upon its defined invested capital; second, to the Partnership until it has
received an amount equal to its defined invested capital; and the balance, if
any, will be distributed 80% to the Partnership and 20% to Oxford.
The Partnership entered into a property management contract with New
Market Management Company (the "Manager"), an affiliate of Oxford, for the
management of the property. As compensation for management services provided to
the joint venture, the Manager receives a management fee equal to 5% of gross
cash receipts, as defined, subject to a monthly minimum of $2,000. Such fees
amounted to $27,000, $25,000 and $25,000 for the years ended August 31, 1997,
1996 and 1995, respectively. The Partnership and Oxford must make all decisions
unanimously relating to the business and affairs of the joint venture. However,
the Partnership can unilaterally, without the approval of Oxford, terminate upon
thirty days' written notice the current management company.
<PAGE>
6. Investment Property Held for Sale
---------------------------------
Mercantile Tower Office Building
- --------------------------------
The Partnership assumed ownership of the Mercantile Tower office building,
in Kansas City, Missouri, on April 12, 1993 through a deed-in-lieu of
foreclosure action following a default under the terms of a first mortgage loan
held by the Partnership. The Partnership complies with the guidelines set forth
in SFAS No. 121 (see Note 2) to account for its investment properties held for
sale. Under SFAS No. 121, a foreclosed asset deemed to be held for sale 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. Declines in the estimated fair value of the asset
subsequent to foreclosure are recorded through the use of a valuation allowance.
Subsequent increases in the estimated fair value of the asset result in
reductions in the valuation allowance, but not below zero. 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 the statement
of operations for fiscal 1993.
The occupancy level at the wholly-owned Mercantile Tower Office Building
increased to 64% at August 31, 1997, as compared to 61% as of May 31, 1997 and
58% as of the same period in the prior year. The pace of the lease-up at
Mercantile Tower has been well below management's expectations. With significant
competition in the downtown Kansas City office market, management has found it
difficult to obtain economically viable lease terms from the number of tenants
which are looking to lease space in the market. During the quarter ended
February 28, 1997, the Partnership received an unsolicited offer to purchase the
Mercantile Tower Office Building. In response to this unsolicited offer, the
Partnership initiated a sales program and selected a Kansas City firm to market
the property for sale. After reviewing the offers received as part of the
marketing process, the Partnership selected an offer from one of the potential
purchasers and, in August 1997, a purchase and sale agreement was signed.
Subsequent to year-end, on November 10, 1997, the sale was completed and the
Mercantile Tower property was sold for $7,283,000. The Partnership received net
proceeds of $5,963,000 after closing costs, closing prorations, certain credits
to the buyer and the repayment of the outstanding first mortgage note of
$858,000. These net proceeds, along with an amount of excess cash reserves which
has yet to be determined, will be distributed to the Limited Partners in the
form of a special distribution to be paid on December 15, 1997. While the net
proceeds received from the sale of Mercantile Tower were substantially less then
the Partnership's original investment in the property, of $10.5 million,
management believes that the sale price was reflective of the property's current
fair market value, which is supported by the most recent independent appraisal.
Furthermore, management did not foresee the potential for any significant
near-term appreciation in the property's market value. Accordingly, a current
sale was deemed to be in the best interests of the Limited Partners. A sale of
the property at its current leasing level yielded less proceeds than the sale of
the property at a stabilized level, but management concluded that the time,
capital and risk associated with the leasing activity required to achieve
stabilized operations outweighed the potential benefits of receiving a higher
sale price. Based on the subsequent sale of Mercantile Tower, the Partnership
wrote down the carrying value of the property by $350,000 as of August 31, 1997
to reflect the net proceeds received subsequent to year-end. In fiscal 1996 and
1994, the Partnership had recorded provisions for possible investment loss in
the amounts of $800,000 and $1,200,000, respectively, to reflect declines in
management's estimate of the fair value of the investment property. The net
carrying value of the Mercantile Tower investment property at August 31, 1997
and 1996, of $7,150,000 and $7,500,000, respectively, is classified as
investment property held for sale on the Partnership's balance sheets.
The Partnership records income from the investment property held for sale
in the amount of the difference between the property's gross revenues and
property operating expenses (including leasing costs and improvement expenses),
taxes and insurance. Summarized operating results for Mercantile Tower for the
years ended August 31, 1997, 1996 and 1995 (in thousands):
<PAGE>
1997 1996 1995
---- ---- ----
Rental revenues and expense recoveries $1,906 $1,811 $1,654
Other income 5 5 -
------ ------ ------
1,911 1,816 1,654
Property operating expenses (1) 1,521 1,193 1,993
Property taxes and insurance 223 244 287
Interest expense 98 114 112
------ ------ ------
1,842 1,551 2,392
------ ------ ------
Income (loss) from investment property
held for sale, net $ 69 $ 265 $ (738)
======= ====== ======
(1) As discussed in Note 2, in accordance with the Partnership's accounting
policy for assets held for sale, capital improvement costs are expensed as
incurred. Included in property operating expenses for the years ended
August 31, 1997, 1996 and 1995 is capital improvement costs of $394,000,
$159,000 and $965,000, respectively.
7. Note payable
------------
Note payable as of August 31, 1997 and 1996 consists of the following
secured indebtedness (in thousands):
1997 1996
---- ----
Line-of-credit borrowings secured by the
Mercantile Tower property (see Note 6).
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 improvements costs related
to the Mercantile Tower property. The
outstanding borrowings bear interest at
the prime rate 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. The fair
value of the note payable approximated
its carrying amount as of August 31,
1997 and 1996. $ 894 $ 1,150
======= =======
Scheduled maturities of the outstanding debt for the next four years are as
follows (in thousands):
1998 $ 256
1999 255
2000 255
2001 128
--------
$ 894
========
As discussed further in Note 6, the Mercantile Tower property was sold
subsequent to year-end and the mortgage note described above was repaid in full
at the time of the sale.
8. Subsequent Events
-----------------
On October 15, 1997, the Partnership distributed $167,000 to the Limited
Partners and $2,000 to the General Partners for the quarter ended August 31,
1997.
<PAGE>
<TABLE>
Schedule III - Real Estate Owned
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
August 31, 1997
(In thousands)
<CAPTION>
Cost Basis of Gross Amount at Date of
Investment to Which Carried Original Size
Description Encumbrances Partnership (A) at Close of Period (A) Investment of Investment
- ----------- ------------ --------------- ---------------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Office Building $ 894 $10,500 $ 9,500 4/29/83 13,500 net
Kansas City, MO (1) rentable sq. ft.
on 32,000 sq. ft.
of land
Land underlying - 600 600 9/7/84 18 acres
Apartment Complex (B)
Raleigh, NC ------- ------- -------
$ 894 $11,100 $10,100
======= ======= =======
</TABLE>
Notes:
(A) These amounts represent the original cost of each investment and the
gross amount at which these investments are carried on the balance
sheet at August 31, 1997. The aggregate cost for federal income tax
purposes at August 31, 1997 is approximately $13,652,000.
(B) All senior mortgages on the land investments are held by Paine Webber
Qualified Plan Property Fund Two, LP. See Schedule IV.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 10,500 $ 10,500 $ 11,250
Acquisitions - - -
Dispositions (2) (400) - (750)
-------- -------- --------
Balance at end of year $ 10,100 $ 10,500 $ 10,500
======== ======== ========
(1) The Partnership assumed ownership of the Mercantile Tower Office
Building located in Kansas City, Missouri, on April 12, 1993 as a
result of foreclosure proceedings. The balance of the mortgage note at
the time title was transferred was $9,500,000 and the land had a cost
basis to the Partnership of $1,000,000. The Partnership recorded a
$1,000,000 write-down to reflect the estimate of the property's fair
value at the time of foreclosure, net of selling expenses. In fiscal
1997, 1996 and 1994, the Partnership recorded provisions for possible
investment loss in the amounts of $350,000, $800,000 and $1,200,000,
respectively, to reflect declines in management's estimate of the fair
value of the investment property. Accordingly, the net carrying value
of the investment on the Partnership's balance sheet at August 31, 1997
amounted to $7,150,000. Subsequent to August 31, 1997, the Partnership
sold the Mercantile Tower property to a third party for $7,283,000
(prior to deducting selling expenses). See Note 6 to the financial
statements accompanying this Annual Report for a further discussion of
these events.
(2) See Note 4 to the financial statements for a discussion of the sale of
the land underlying the Harbour Bay Plaza Shopping Center during fiscal
1995 and the sale of the land underlying the Eden West Apartments
during fiscal 1997.
<PAGE>
<TABLE>
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
August 31, 1997
(In thousands)
<CAPTION>
Principal
amount of
loans subject
Carrying to delinquent
Final maturity Periodic Face amount of amount of principal
Description Interest rate Date payment terms mortgage mortgage or interest
----------- ------------- ----------------- ------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Loan:
Apartment Complex 11.75% (1) September 1, 1998 Interest monthly, $ 7,465 $ 7,465 -
Raleigh, NC principal at maturity (3,190)(1)
-------- --------
TOTALS $ 7,465 $ 4,275
======== ========
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 7,775 $ 7,327 $ 10,177
Additions during the period:
Interest deferrals, net (1) - 408 235
Dispositions during the period:
Repayment of mortgage loans receivable (2) (3,500) - (2,850)
Recovery of (provision for) possible
uncollectible amounts (1) - 40 (235)
--------- --------- ---------
Balance at end of period $ 4,275 $ 7,775 $ 7,327
========= ========= =========
</TABLE>
(1) See Note 4 to the financial statements for information regarding certain
valuation accounts and modifications to the payment terms associated with
The Timbers (Raleigh) mortgage loan. Deferred interest is added to the
principal balance of the mortgage loan receivable. The Partnership's policy
is to reserve for deferred interest until collected.
(2) During fiscal 1995, the Harbour Bay Plaza mortgage loan was repaid. During
fiscal 1997, the Eden West Apartments mortgage loan was repaid. See Note 4
to the Financial Statements accompanying this Annual Report for a further
discussion of these events.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Marshall's at East Lake Partnership
We have audited the balance sheets of Marshall's at East Lake Partnership as of
August 31, 1997 and 1996, and the related statements of income, partners'
capital and cash flows for each of the three years in the period ended August
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 Marshall's at East Lake
Partnership as of August 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended August 31,
1997 in conformity with generally accepted accounting principles.
/s/ Smith & Radigan
-------------------
SMITH & RADIGAN
Atlanta, Georgia
September 19, 1997
<PAGE>
Balance Sheets
MARSHALL'S AT EAST LAKE PARTNERSHIP
ASSETS
August 31,
1997 1996
---- ----
CURRENT ASSETS
Cash $ 113,587 $ 98,097
Tenant receivables 3,302 4,080
Property tax reimbursement receivable 13,562 7,560
Prepaid expenses 4,661 4,998
---------- ----------
TOTAL CURRENT ASSETS 135,112 114,735
OPERATING INVESTMENT PROPERTY
Land 400,000 400,000
Building and improvements 3,231,786 3,221,786
---------- ----------
3,631,786 3,621,786
Less accumulated depreciation 716,318 587,560
---------- ----------
2,915,468 3,034,226
OTHER ASSETS
Deposits 3,825 3,825
Deferred rent 26,756 26,401
Deferred charges, net of amortization of
$47,392 in 1997 and $39,159 in 1996 35,752 42,370
---------- ----------
66,333 72,596
---------- ----------
$3,116,913 $3,221,557
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accrued property taxes $ 36,133 $ 27,485
Other accrued expenses 2,027 2,000
---------- ----------
TOTAL CURRENT LIABILITIES 38,160 29,485
OTHER LIABILITIES
Security deposit liability 18,805 18,805
PARTNERS' CAPITAL 3,059,948 3,173,267
---------- ----------
$3,116,913 $3,221,557
========== ==========
The Notes to Financial Statements are an integral part of these Statements.
<PAGE>
Statements of Income
MARSHALL'S AT EAST LAKE PARTNERSHIP
For the Years Ended
August 31,
-----------------------------------
1997 1996 1995
---- ---- ----
REVENUES
Rental income $ 408,559 $ 415,766 $ 367,114
Property operating expense
reimbursements 133,628 90,769 76,948
Interest and other income 3,202 2,133 2,054
--------- --------- ---------
545,389 508,668 446,116
EXPENSES
Depreciation 128,758 128,621 127,167
Amortization 20,174 18,427 15,299
Real estate taxes 64,666 39,553 34,427
Insurance 6,552 6,477 6,323
Management fees 26,562 25,152 24,682
Property operating expenses 63,654 63,721 64,347
Professional fees 6,998 6,670 11,664
General and administrative 21,823 21,110 18,857
--------- --------- ---------
339,187 309,731 302,766
--------- --------- ---------
NET INCOME $ 206,202 $ 198,937 $ 143,350
========= ========= =========
The Notes to Financial Statements are an integral part of these Statements.
<PAGE>
Statements of Partners' Capital
MARSHALL'S AT EAST LAKE PARTNERSHIP
PaineWebber
Oxford/ Qualified Plan Total
Concord Property Fund Partners'
Associates Two, L.P. Capital
---------- -------------- ---------
Balance at August 31, 1994 $ -0- $ 3,252,646 $ 3,252,646
Net income -0- 143,350 143,350
Distributions to partners -0- (198,333) (198,333)
---------- ----------- -----------
Balance at August 31, 1995 -0- 3,197,663 3,197,663
Net income -0- 198,937 198,937
Distributions to partners -0- (223,333) (223,333)
---------- ----------- -----------
Balance at August 31, 1996 -0- 3,173,267 3,173,267
Net income -0- 206,202 206,202
Distributions to partners -0- (319,521) (319,521)
---------- ----------- -----------
Balance at August 31, 1997 $ -0- $ 3,059,948 $ 3,059,948
========== =========== ===========
The Notes to Financial Statements are an integral part of these Statements.
<PAGE>
Statements of Cash Flows
MARSHALL'S AT EAST LAKE PARTNERSHIP
For the Years Ended
August 31,
---------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 206,202 $ 198,937 $ 143,350
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 148,932 147,048 142,466
Decrease (increase) in:
Tenant receivables 778 (412) (1,292)
Prepaid expenses 337 (187) 11,837
Property tax reimbursement receivable (6,002) (176) 1,256
Deferred rent (355) (7,698) 15,259
Deferred charges (13,556) (8,949) (27,090)
Increase (decrease) in:
Accounts payable and
accrued expenses 8,675 (3,131) (37,144)
Tenant security deposit liability 0 1,400 (450)
--------- ---------- ----------
Total adjustments 138,809 127,895 104,842
--------- ---------- ----------
Net cash provided by
operating activities 345,011 326,832 248,192
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital improvements to property (10,000) (1,200) (62,866)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to partners (319,521) (223,333) (198,333)
Increase (decrease) in obligations
in excess of cash - (4,202) 4,202
--------- ---------- ----------
Net cash used in
financing activities (319,521) (227,535) (194,131)
--------- ---------- ----------
NET INCREASE (DECRASE) IN CASH 15,490 98,097 (8,805)
CASH BALANCE AT BEGINNING OF PERIOD 98,097 - 8,805
--------- ---------- ----------
CASH BALANCE AT END OF PERIOD $ 113,587 $ 98,097 $ -0-
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ - $ - $ 1,090
========== ========== ==========
The Notes to Financial Statements are an integral part of these Statements.
<PAGE>
Notes to Financial Statements
MARSHALL'S AT EAST LAKE PARTNERSHIP
August 31, 1997
Note A - Summary of Significant Accounting Policies
- ---------------------------------------------------
Organization
Marshall's at East Lake Partnership, a Delaware general partnership ("the
Partnership"), was organized on December 11, 1991 by PaineWebber Qualified Plan
Property Fund Two, L.P. ("QP2"), a Delaware limited partnership, and Oxford/
Concord Associates ("Oxford"), a Georgia joint venture, to acquire, own,
operate, develop, lease, manage, finance, refinance and sell or otherwise
dispose of certain land and improvements located at 2199-2211 Roswell Road,
Marietta, Georgia, also known as Marshall's at East Lake Shopping Center.
Prior to December 11, 1991, Oxford owned Marshall's at East Lake Shopping
Center, which secured a mortgage loan from QP2 with a principal balance of
$3,100,000. In addition, QP2 owned the land underlying the operating property
and had a ground lease with Oxford. Oxford was delinquent on the mortgage
payments and filed a Chapter 11 petition with the United States Bankruptcy Court
on June 12, 1990.
During December 1991, QP2 and Oxford reached a settlement agreement which
involved the formation of a partnership to own and operate the property on a
go-forward basis. The formation of the Partnership was approved by the
Bankruptcy Court and became effective December 11, 1991. QP2 contributed its
rights and interests under its mortgage loan to the Partnership, and the loan
was extinguished. In addition, QP2 contributed the land underlying the operating
property to the Partnership and the related ground lease was terminated. Oxford
contributed all of its rights, title to and interest in the improvements,
subject to QP2's loan, to the Partnership. The land, building and improvements
had an estimated total fair market value of $3,500,000 at December 11, 1991. For
financial reporting purposes, QP2's capital contribution was deemed to be
$3,500,000 and Oxford's capital contribution was deemed to be zero.
Operating Investment Property
The operating investment property was recorded at its fair market value on
the date of contribution. Depreciation expense is computed using the
straight-line method over the estimated useful life of twenty-seven and one-half
years for the building and improvements.
Subsequent expenditures for new facilities and replacements or betterments
to existing facilities are capitalized and recorded at cost and depreciated over
their estimated useful lives. Expenditures for normal maintenance and repairs
are charged to expense as incurred.
Cash
The Company frequently maintains cash deposits in excess of federal
insurance limits in the ordinary course of its operations.
Deferred Rent
Deferred rent results from rent concessions provided to certain tenants by
the Partnership through free rent and stepped rent. Rental income is recognized
on a straight-line basis over the life of the lease. During the period of free
and stepped rent, rental income for the difference between the average rent over
the lease term and actual cash received is recognized by recording a deferred
rent asset. The amortization of the deferred rent asset begins when the amount
of cash received exceeds the average rent over the lease term and continues
through the remaining life of the lease.
Deferred Charges
Deferred charges result from costs incurred in leasing spaces in the
shopping center. These costs are capitalized and amortized over the remaining
terms of the operating leases. (See Note C.)
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
Fair Value of Financial Instruments
The Partnership estimates that the aggregate fair value of all financial
instruments at August 31, 1997 does not differ materially from the aggregate
carrying values of its financial instruments recorded in the balance sheet. The
estimated fair value amounts of cash and cash equivalents, receivables,
short-term investments, accounts payable and accrued liabilities approximate
fair value due to their short-term nature. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not necessarily indicative of the amounts that
the Partnership could realize in a current market exchange.
Income Taxes
A partnership is not liable for income taxes and, therefore, no provision
for income taxes is made in the financial statements of the Partnership. A
proportionate share of the Partnership's income or loss is included on the tax
returns of the partners.
Note B - Partnership Agreement
- ------------------------------
The partnership agreement provides that all taxable income for any fiscal
year will, in general, be allocated to QP2 until it has received income
allocations equal to a nine percent return upon its defined invested capital
($4,250,000 at August 31, 1997). Thereafter, taxable income will be allocated
eighty percent to QP2 and twenty percent to Oxford. In general, all taxable
losses will be allocated to QP2.
The partnership agreement also provides that cash flow, as defined, be
distributed monthly to QP2 until it has received distributions equal to a nine
percent return upon its defined invested capital. Thereafter, cash flow will be
distributed eighty percent to QP2 and twenty percent to Oxford. Proceeds from
any capital transaction, as defined, shall be distributed first to QP2 until it
has received aggregate distributions equal to a nine percent return upon its
defined invested capital; second, to QP2 until it has received an amount equal
to its defined invested capital; and the balance, if any, will be distributed
eighty percent to QP2 and twenty percent to Oxford.
The Partnership paid distributions to QP2 totaling $319,521, $223,333 and
$198,333 for the years ended August 31, 1997, 1996 and 1995, respectively. QP2
would need to receive additional distributions of $661,312 to reach a cumulative
non-compounded return of nine percent on its defined invested capital as of
August 31, 1997.
QP2 and Oxford must make all decisions unanimously relating to the
business and affairs of the Partnership. QP2 can unilaterally, without the
approval of Oxford, terminate upon thirty days written notice the current
management company, which is an affiliate of Oxford (see Note D).
Note C - Rental Income
- ----------------------
The Partnership derives rental income from leasing shopping center space.
All of the Partnership's leasing agreements are operating leases expiring in one
to ten years. Base rental income of $408,559, $415,766 and $367,114 was earned
for the years ended August 31, 1997, 1996 and 1995, respectively. The following
is a schedule of minimum future rentals provided for in noncancellable operating
leases as of August 31, 1997:
Year Ending
August 31, Amount
----------- ------
1998 $ 391,493
1999 345,712
2000 200,320
2001 171,263
2002 145,130
Thereafter 56,374
----------
$1,310,292
==========
Total minimum future rentals do not include percentage rentals due under
certain leases, which are based upon the lessees' sales volume. Tenant leases
also require lessees to pay all or a portion of real estate taxes, insurance,
and common area costs.
<PAGE>
Rental income of $200,942 (forty-nine percent of total rental income) for
the year ended August 31, 1997, $198,038 (forty-eight percent of total rental
income) for the year ended August 31, 1996 and $198,545 (fifty-four percent of
total rental income) for the year ended August 31, 1995 was received from the
following tenants:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- --------------------
Income Percent Income Percent Income Percent
Tenant Earned of total Earned of total Earned of total
- ------ ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Marshall's $132,840 32% $132,840 32% $132,840 36%
Australian Body Works 68,102 17% 65,198 16% 65,705 18%
-------- -- -------- -- -------- --
$200,942 49% $198,038 48% $198,545 54%
======== == ======== == ======== ==
</TABLE>
No other tenant accounted for more than ten percent of rental income during
the years ended August 31, 1997, 1996 and 1995.
Note D - Property Management Agreement
- --------------------------------------
The Partnership maintains an agreement for the management of the property
that provides for the Partnership to pay a management fee equal to five percent
of gross cash receipts, subject to a monthly minimum fee of $2,000. Management
fee expense for the years ended August 31, 1997, 1996 and 1995 was $26,562,
$25,152 and $24,682, respectively.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
MARSHALL'S AT EAST LAKE PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1997
<CAPTION>
Cost Life on Which
Initial Cost to Capitalized Gross Amount at Which Carries at Depreciation
Partnership Subsequent to End of Year in Latest
------------------- Acquisition -------------------------------- 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>
Retail Shopping Center
Marietta, Georgia $ 0 $400,000 $3,100,000 $131,786 $400,000 $3,231,786 $3,631,786 $716,318 12/11/91 7-27.5 yrs.
===== ======== ========== ======== ======== ========== ========== ========
Notes
(A) The aggregate cost of real estate owned at August 31, 1997 for Federal income tax purposes is approximately $3,632,000.
(B) See Note B to the financial statements for a description of the agreement through which the Partnership owns an interest in the
above property.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 3,621,786 $3,620,586 $3,557,720
Increase due to improvements 10,000 1,200 62,866
Decrease due to disposals - - -
----------- ---------- ----------
Balance at end of period $ 3,631,786 $ 3,621,786 $ 3,620,586
=========== =========== ===========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 587,560 $ 458,939 $ 331,772
Depreciation expense 128,758 128,621 127,167
Write-offs due to disposals - - -
----------- ----------- -----------
Balance at end of period $ 716,318 $ 587,560 $ 458,939
=========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the twelve months ended August
31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 1,555
<SECURITIES> 0
<RECEIVABLES> 7,561
<ALLOWANCES> 3,190
<INVENTORY> 0
<CURRENT-ASSETS> 1,880
<PP&E> 10,810
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,965
<CURRENT-LIABILITIES> 1,288
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,677
<TOTAL-LIABILITY-AND-EQUITY> 16,965
<SALES> 0
<TOTAL-REVENUES> 2,221
<CGS> 0
<TOTAL-COSTS> 853
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,018
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,018
<EPS-PRIMARY> 27.81
<EPS-DILUTED> 27.81
</TABLE>
