UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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 or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ ---------
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No |_|
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
BALANCE SHEETS
May 31, 1997 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
------ ---------
Real estate investments:
Land $ 1,000 $ 1,000
Mortgage loans receivable, net 7,775 7,775
Investment in joint venture, at equity 3,051 3,173
Investment property held for sale, net 7,500 7,500
--------- ---------
19,326 19,448
Cash and cash equivalents 1,774 1,653
Tax and insurance escrow 212 255
Interest and other receivable 109 129
Prepaid expenses - 16
--------- ---------
$ 21,421 $ 21,501
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accrued real estate taxes $ 100 $ 183
Accounts payable and accrued expenses 97 93
Accounts payable - affiliates 10 10
Tenant security deposits and other liabilities 62 55
Note payable 958 1,150
Total partners' capital 20,194 20,010
--------- ---------
$ 21,421 $ 21,501
========= =========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended May 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1995 $(33) $23,882
Cash distributions (5) (4,368)
Net income 9 926
---- -------
Balance at May 31, 1996 $(29) $20,440
==== =======
Balance at August 31, 1996 $(33) $20,043
Cash distributions (5) (502)
Net income 7 684
---- -------
Balance at May 31, 1997 $(31) $20,225
==== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the three and nine months ended May 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Interest from mortgage loans $ 316 $ 302 $ 929 $ 889
Land rent 29 29 87 87
Other interest income 23 20 64 90
------- ------- ------- -------
368 351 1,080 1,066
Expenses:
Management fees 10 10 30 30
General and administrative 84 84 201 240
Provision for possible
uncollectible amounts 131 118 378 284
------- ------- ------- -------
225 212 609 554
------- ------- ------- -------
Operating income 143 139 471 512
Partnership's share of venture's
income 63 64 151 153
Income (loss) from operations of
investment property held for
sale, net (152) (49) 69 270
------- ------ ------- -------
Net income $ 54 $ 154 $ 691 $ 935
======= ======= ======== =======
Net income per Limited
Partnership Unit $ 1.46 $ 4.23 $ 18.87 $ 25.56
======= ======= ======= =======
Cash distributions per Limited
Partnership Unit $ 4.62 $ 4.62 $ 13.86 $120.52
======= ======= ======= =======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 36,241 Units of Limited Partnership Interest outstanding during
each period.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 691 $ 935
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of venture's income (151) (153)
Changes in assets and liabilities:
Tax and insurance escrow 43 (54)
Interest and other receivables 20 (62)
Prepaid expenses 16 15
Accrued real estate taxes (83) (68)
Accounts payable and accrued expenses 4 (76)
Accounts payable - affiliates - (2)
Tenant security deposits 7 (5)
-------- --------
Total adjustments (144) (405)
-------- --------
Net cash provided by operating activities 547 530
Cash flows from investing activities:
Distributions from joint venture 273 139
Cash flows from financing activities:
Principal payments on note payable (192) (97)
Distributions to partners (507) (4,373)
-------- --------
Net cash used in financing activities (699) (4,470)
-------- --------
Net increase (decrease) in cash and
cash equivalents 121 (3,801)
Cash and cash equivalents, beginning of period 1,653 5,379
-------- --------
Cash and cash equivalents, end of period $ 1,774 $ 1,578
======== ========
Supplemental disclosure:
Cash paid during the period for interest $ 75 $ 86
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended August 31, 1996. In the opinion
of management, the accompanying financial statements, which have not been
audited, reflect all adjustments necessary to present fairly the results for the
interim period. All of the accounting adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
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 May 31, 1997 and August 31, 1996 and revenues and expenses
for the three and nine months ended May 31, 1997 and 1996. Actual results could
differ from the estimates and assumptions used.
2. Mortgage Loan and Land Investments
The outstanding first mortgage loans and the cost of the related land to
the Partnership at May 31, 1997 and August 31, 1996 are as follows (in
thousands):
Amount
Property of Mortgage Loan Cost of Land
-------- ---------------- ------------
Eden West Apartments $ 3,500 $ 400
Omaha, NE
The Timbers Apartments 4,275 (1) 600
Raleigh, NC -------- --------
$ 7,775 $ 1,000
======== ========
(1) The balance shown is net of an allowance for possible uncollectible amounts
of $3,081 and $2,703, respectively, as of May 31, 1997 and August 31, 1996
(see discussion below).
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all leases, where
applicable. Interest on the Eden West and Timbers loans is payable monthly at
rates of 11.5% and 11.75% per annum, respectively, and the principal on both
loans is due at maturity. Among the provisions of the lease agreements, the
Partnership is entitled to additional rent based upon the gross revenues in
excess of a base amount, as defined. For the nine-month periods ended May 31,
1997 and 1996, no additional rents were received. As discussed in the Annual
Report, the lessees have the option to purchase the land for specified periods
of time at a price based on fair market value, as defined, but not less than the
original cost to the Partnership. As of May 31, 1997, all of the options to
purchase the land were exercisable.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, and then to provide increases to this current
income through participation in the annual revenues generated by the properties
as they increase above the specified base amounts. In addition, the
Partnership's investments are structured to share in the appreciation in value
of the underlying real estate. Accordingly, upon either sale, refinancing,
maturity of the mortgage loan or exercise of the option to repurchase the land,
the terms of the leases call for the Partnership to receive a 40% to 52% share
of the appreciation above a specified base amount.
As discussed further below, the Eden West loan is expected to be prepaid
in the fourth quarter of fiscal 1997, and the loan secured by The Timbers
becomes prepayable without penalty as of September 1, 1997. As a result of these
circumstances, the mortgage loan instruments have 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. Estimated fair values for the Partnership's mortgage loan
investments as of both May 31, 1997 and August 31, 1996 are summarized below (in
thousands):
<PAGE>
Fair Value of
Mortgage Loan
-------------
Eden West Apartments $ 3,500
The Timbers Apartments 6,700
-------
$10,200
=======
Eden West Apartments
--------------------
During the quarter ended May 31, 1997, the Partnership reached an
agreement with the owner of the Eden West Apartments on the terms of a
transaction to prepay the first leasehold mortgage loan which is scheduled to
mature on June 6, 1999 and purchase the underlying land from the Partnership.
The parties have been having discussions concerning the terms of such a
transaction for more than a year. The transaction is expected to close in the
fourth quarter of fiscal 1997. Under the agreed upon terms of the transaction,
the Partnership will receive $3,500,000 from the Eden West borrower, which
represents the full repayment of the first leasehold mortgage loan.
Simultaneously, the Eden West owner will purchase the Partnership's interest in
the underlying land at a price equal to $900,000, which represents a premium of
$500,000 over the Partnership's cost basis in the land of $400,000. In addition,
the Partnership will receive 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. If this transaction closes as
expected, the proceeds described above will be distributed to the Limited
Partners.
The Timbers Apartments
----------------------
Under the terms of the Timbers loan modification executed in fiscal 1989,
the amount payable to the Partnership is equal to the cash flow of the property
available after the payment of operating expenses, not to exceed 11.75% of the
note balance, but in no event less than 7.75% of the note balance. The amount
deferred each year will accrue interest at the original rate of 11.75% beginning
at the end of that year and the total deferred amount plus accrued interest will
be payable upon maturity of the note in September of 1998. The total balance of
the principal and deferred interest receivable at May 31, 1997 and August 31,
1996 was $7,356,000 and $6,978,000, respectively. The Partnership has
established an allowance for possible uncollectible amounts for the cumulative
amount of deferred interest owed under the Timbers modification ($3,081,000 at
May 31, 1997 and $2,703,000 at August 31, 1996) due to the Partnership's policy
of reserving for deferred interest until collected.
3. Investment in Joint Venture
As discussed in the Annual Report, on June 12, 1990, the borrower of the
mortgage loan secured by the Marshalls 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. Subsequent to the restructuring, the
Partnership has accounted for its investment in the Marshalls joint venture on
the equity method because the Partnership does not have a voting control
interest in the venture. Under the equity method, the investment is carried at
cost, adjusted for the Partnership's share of earnings, losses and
distributions.
The estimated fair value of the Partnership's equity interest in the
Marshalls at East Lake joint venture is below the carrying value of the
investment on the accompanying balance sheet as of May 31, 1997 by approximately
$350,000. However, based on management's estimates of future cash flows, the
carrying value is expected to be recovered. Accordingly, no impairment writedown
has been recognized. If management's estimates of future cash flows or expected
holding period prove to be inaccurate, the Partnership may be unable to recover
the carrying value of the joint venture investment as of May 31, 1997.
<PAGE>
Summarized operating results of the venture for the three- and nine-month
periods ended May 31, 1997 and 1996 are as follows (in thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
-------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and
expense reimbursements $ 149 $ 140 $ 412 $ 383
Expenses:
Property operating expenses 35 29 99 94
Real estate taxes 15 11 52 29
Depreciation and amortization 36 36 110 107
------ ------ ------ ------
86 76 261 230
------ ------ ------ ------
Net income $ 63 $ 64 $ 151 $ 153
====== ====== ====== ======
Net income:
Partnership's share of
net income $ 63 $ 64 $ 151 $ 153
Co-venturer's share of
net income - - - -
------ ------ ------ ------
$ 63 $ 64 $ 151 $ 153
====== ====== ====== ======
4. Investment Property Held for Sale
Mercantile Tower Office Building
--------------------------------
As discussed in the Annual Report, the Partnership assumed ownership of
the Mercantile Tower Office Building, in Kansas City, Missouri, through a
deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain
uncured defaults on the Partnership's mortgage loan receivable. The Partnership
complies with the guidelines set forth in the Statement of Position entitled
"Accounting for Foreclosed Assets," issued by the American Institute of
Certified Public Accountants, to account for its investment properties acquired
through foreclosures. Under the Statement of Position, a foreclosed asset is
recorded at the lower of cost or estimated fair value, reduced by the estimated
costs to sell the asset. Cost is defined as the fair value of the asset at the
date of the foreclosure. Adjustments to the carrying value of the assets
subsequent to foreclosure are recorded through the use of a valuation allowance.
The combined balance of the land and the mortgage loan investment at the time
title was transferred was $10,500,000. The estimated fair value of the operating
property at the date of foreclosure, net of selling expenses, was $9,500,000.
Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in
fiscal 1993. Since the date of the foreclosure, the Partnership has recorded
provisions for possible investment loss totalling $2,000,000 to reflect
additional declines in management's estimate of the fair value of the investment
property. The net carrying value of the Mercantile Tower investment property as
of May 31, 1997 and August 31, 1996, of $7,500,000, is classified as an
investment property held for sale on the accompanying balance sheets.
The occupancy level at the Mercantile Tower Office Building was 61% as of
May 31, 1997. Stabilizing the operations of the Mercantile Tower property, which
represented 32% of the Partnership's original investment portfolio, remains the
primary goal of management. Until a stabilized occupancy level is achieved, the
Partnership's investment in Mercantile Tower is not expected to generate any
significant excess cash flow. Available cash flow, for the most part, will be
reinvested in enhancements aimed at improving the marketability of the vacant
space at the property as well as for leasing costs for new and renewing tenants
above the amounts available under the $2 million line of credit obtained in
fiscal 1994 (see Note 6). During the quarter ended February 28, 1997, the
Partnership received an unsolicited offer to purchase the Mercantile Tower
Office Building. While a sale of the property at its current leasing level would
yield less proceeds than the sale of the property at a stabilized level, the
time, capital and risk associated with the leasing activity required to achieve
stabilized operations may outweigh the potential benefits of receiving a higher
sale price. In response to the unsolicited offer, management initiated a program
to market the property for sale and, as a result, obtained several offers from
interested buyers. Management has selected the highest offer and is currently in
the process of negotiating an agreement to sell the property. Although a
purchase and sale agreement is being negotiated, there are no assurances that a
sale transaction will be completed.
<PAGE>
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
three- and nine-month periods ended May 31, 1997 and 1996 are as follows (in
thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 418 $ 428 $1,431 $1,392
Interest and other income 4 3 14 10
------ ------ ------ ------
422 431 1,445 1,402
Expenses:
Property operating expenses 486 392 1,143 889
Interest expense 23 29 75 86
Property taxes and insurance 65 59 158 157
------ ------ ------ ------
574 480 1,376 1,132
------ ------- ------ ------
Income (loss) from operations
of investment property
held for sale, net $ (152) $ (49) $ 69 $ 270
====== ====== ====== ======
The above property operating expenses for the three and nine months ended May
31, 1997 include capital improvements and leasing costs of $227,000 and
$343,000, respectively.
5. Related Party Transactions
The Adviser earned basic management fees of $30,000 for each of the
nine-month periods ended May 31, 1997 and 1996. Accounts payable affiliates at
both May 31, 1997 and August 31, 1996 consists of management fees of $10,000
payable to the Adviser.
Included in general and administrative expenses for the nine-month periods
ended May 31, 1997 and 1996 is $112,000 and $118,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for each of the
nine-month periods ended May 31, 1997 and 1996 is $3,000 representing fees
earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
6. Note payable
Note payable as of May 31, 1997 and August 31, 1996 consists of the
following secured indebtedness (in thousands):
May 31 August 31
------ ---------
Line of credit borrowings secured
by the Mercantile Tower property
(see Note 4). Draws under the line,
up to a maximum of $2,000,000, can
be made through February 28, 1998,
only to fund approved leasing and
capital improvement costs related
to the Mercantile Tower property.
The outstanding borrowings bear
interest at the prime rate (8.25%
at May 31, 1997) 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
approximated its carrying amount as
of May 31, 1997 and August 31,
1996. $ 958 $ 1,150
====== ========
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
During the quarter ended May 31, 1997, the Partnership reached an
agreement with the owner of the Eden West Apartments on the terms of a
transaction to prepay the first leasehold mortgage loan which is scheduled to
mature on June 6, 1999 and purchase the underlying land from the Partnership.
The parties have been having discussions concerning the terms of such a
transaction for more than a year. The transaction is expected to close in the
fourth quarter of fiscal 1997. Under the agreed upon terms of the transaction,
the Partnership will receive $3,500,000 from the Eden West borrower, which
represents the full repayment of the first leasehold mortgage loan.
Simultaneously, the Eden West owner will purchase the Partnership's interest in
the underlying land at a price equal to $900,000, which represents a premium of
$500,000 over the Partnership's cost basis in the land of $400,000. In addition,
the Partnership will receive 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. If this transaction closes as
expected, the proceeds described above will be distributed to the Limited
Partners.
Although the mortgage loan secured by The Timbers Apartments contains a
prohibition against prepayment until September 1, 1997, there is a reasonable
likelihood that this first mortgage loan investment may also be prepaid in the
near term given the continued availability of credit in the capital markets for
real estate transactions at current 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 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. The
balance of principal and deferred interest owed to the Partnership on the
Timbers first mortgage loan totalled $7,356,000 as of May 31, 1997. Management's
current estimate of the fair market value of The Timbers Apartments is below the
amount of this outstanding receivable by approximately $700,000. Accordingly, it
is uncertain whether the Partnership will be able to fully collect these
amounts. Under the Partnership's accounting policy for interest income, all
deferred interest is fully reserved until collected in cash.
The occupancy level at the wholly-owned Mercantile Tower Office Building
increased by 1% to reach 61% as of May 31, 1997. This increase in occupancy is
attributable to expansions by three existing tenants. Subsequent to May 31,
1997, the property's leasing team negotiated two additional lease expansions and
two new leases that will bring the building's overall occupancy level to 64%. 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 third quarter of fiscal 1997, work was
completed on the installation of an exterior stairway that was needed for safety
reasons to replace an older, outdoor escalator. Property improvements scheduled
for the fourth quarter include new roofs over two sections of the parking
garage. Stabilizing the operations of the Mercantile Tower property, which
represented 32% of the Partnership's original investment portfolio, remains the
primary goal of management. Until a stabilized occupancy level is achieved, the
Partnership's investment in Mercantile Tower is not expected to generate any
significant excess cash flow. Available cash flow, for the most part, will be
reinvested in enhancements aimed at improving the marketability of the vacant
space at the property as well as for leasing costs for new and renewing tenants
above the amounts available under the $2 million line of credit obtained in
fiscal 1994. During the quarter ended February 28, 1997, the Partnership
received an unsolicited offer to purchase the Mercantile Tower Office Building.
While a sale of the property at its current leasing level would yield less
proceeds than the sale of the property at a stabilized level, the time, capital
and risk associated with the leasing activity required to achieve stabilized
operations may outweigh the potential benefits of receiving a higher sale price.
In response to the unsolicited offer, management initiated a program to market
the property for sale and, as a result, obtained several offers from interested
buyers. Management has selected the highest offer and is currently in the
process of negotiating an agreement to sell the property. Although a purchase
and sale agreement is being negotiated, there are no assurances that a sale
transaction will be completed.
Occupancy at the Marshalls at East Lake Shopping Center was 94% as of May
31, 1997, unchanged from the preceding three quarters. The leasing team
continues to seek one or more long-term users for the property's remaining
vacancy of 3,300 square feet. Market conditions in the suburban Atlanta
sub-market in which Marshalls 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 Marshalls at East
Lake more difficult. A lease assignment was signed during the quarter with a
1,200 square foot tenant for a one-year term with an option to renew for an
additional two years. Subsequent to the end of the quarter, one of the Center's
kiosk tenants whose lease was scheduled to expire in September 1997 signed a new
five-year lease.
At May 31, 1997, the Partnership had available cash and cash equivalents
of $1,774,000. Such cash and cash equivalents will be used for the Partnership's
working capital requirements and for distributions to the partners. The source
of future liquidity and distributions to the partners is expected to be through
cash generated from the operations of the Partnership's real estate and mortgage
loan investments, repayment of the Partnership's mortgage loans receivable and
the proceeds from the sales or refinancings of the underlying land, the
operating investment property and the joint venture investment property. 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
Three Months Ended May 31, 1997
- -------------------------------
The Partnership reported net income of $54,000 for the three months ended
May 31, 1997 compared to $154,000 for the same period in the prior year. This
$100,000 decrease in net income resulted from a $103,000 increase in loss from
operations of investment property held for sale and a $1,000 decrease in the
Partnership's share of venture's income, which were partially offset by a $4,000
increase in the Partnership's operating income. The decrease in the
Partnership's loss from operations of the investment property held for sale was
primarily due to an increase in property operating expenses as a result of
increases in repairs and maintenance and capital improvement expenditures at the
Mercantile Tower Office Building during the current three-month period. As a
result of the Partnership's accounting policy for assets acquired through
foreclosure, all capital improvement costs are expensed as incurred.
The decrease in the Partnership's share of venture's income is
attributable to a $10,000 increase in total expenses at the Marshalls at East
Lake Shopping Center which was partially offset by a $9,000 increase in the
property's rental revenues. Total expenses increased primarily due to an
increase the property's tax assessment and an increase in repairs and
maintenance expense while rental revenues increased due to an increase in
expense reimbursements from the tenants during the current three-month period.
The Partnership's operating income increased due to a $17,000 increase in
total revenues which was partially offset by a $13,000 increase in the provision
for possible uncollectible amounts. Operating revenues increased due to an
increase in mortgage interest income due to the ongoing compounding of deferred
interest on the Timbers mortgage loan, as discussed further above, and as a
result of an increase in interest earned on the Partnership's invested cash
reserves. The increase in the provision for possible uncollectible amounts is
attributable to the corresponding increase in deferred interest income from the
Timbers mortgage loan. The Partnership's policy is to fully reserve for deferred
interest until collected in cash.
Nine Months Ended May 31, 1997
- ------------------------------
The Partnership reported net income of $691,000 for the nine months ended
May 31, 1997 compared to net income of $935,000 for the same period in the prior
year. This decrease in the Partnership's net income is attributable to a
$201,000 decrease in income from operations of investment property held for
sale, a $41,000 decrease in the Partnership's operating income and a $2,000
decrease in the Partnership's share of venture's income. The decrease in income
from operations of investment property held for sale resulted primarily from a
$244,000 increase in operating expenses which was partially offset by a $43,000
increase in rental revenues at Mercantile Tower during the current nine-month
period. Property operating expenses increased mainly due to an increase in
capital expenditures, including the completion of the exterior stairway referred
to above, as well as certain leasing commissions and tenant improvements
associated with new leases. As a result of the Partnership's accounting policy
for assets acquired through foreclosure, all capital improvement costs are
expensed as incurred. Rental revenues increased mainly due to an increase in the
building's average occupancy level as compared to the same period in the prior
year.
The decrease in the Partnership's operating income is mainly attributable
to an increase in the provision for possible uncollectible amounts of $94,000
and a $26,000 decline in other interest income which were partially offset by a
$39,000 decrease in general and administrative expenses and a $40,000 increase
in interest from mortgage loans. The provision for possible uncollectible
amounts increased by $94,000 mainly due to lower payments received from the
borrower of the Timbers mortgage loan toward deferred interest receivable when
compared to the same nine-month period in the prior year. The compounding effect
of the deferred interest income on the Timbers mortgage loan also contributed to
the increase in the provision for possible uncollectible amounts. Other interest
income decreased by $26,000 during the current nine-month period mainly due to
the decrease in average outstanding cash balances as a result of the temporary
investment of the Harbour Bay Plaza repayment proceeds during the prior period
prior to the special distribution to the Limited Partners in October 1995.
General and administrative expenses decreased primarily due to a reduction in
certain required professional services during the current nine-month period.
Interest from mortgage loans increased by $40,000 in the current period as a
result of the ongoing compounding of interest on the Timbers mortgage loan.
The $2,000 decrease in the Partnership's share of venture's income is
attributable to a $31,000 increase in expenses which was offset by a $29,000
increase in rental revenues at Marshalls at East Lake. Rental revenues increased
largely due to an increase in reimbursement income during the current nine-month
period while expenses increased mainly due to higher real estate taxes resulting
from an increase in the property tax assessment in the current period.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously reported, the Partnership's General Partners were named as
defendants in a class action lawsuit against PaineWebber Incorporated
("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of
70 direct investment offerings of interests in various limited partnership
investments and REIT stocks, including those offered by the Partnership. In
January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and 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 the General Partners, and the allocation of the
$125 million settlement fund among investors in the various partnerships 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. 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 settlement was held in December 1996, and in March 1997 the
court issued a final approval of the settlement. The release of the $125 million
of settlement proceeds has not occurred to date pending the resolution of an
appeal of the settlement agreement by two of the plaintiff class members. As
part of the settlement agreement, PaineWebber has agreed not to seek
indemnification from the related partnerships and real estate investment trusts
at issue in the litigation (including the Partnership) for any amounts that it
is required to pay under the settlement.
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 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 such action. Final releases and dismissals with
regard to this action were received during the quarter ended May 31, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
By: SECOND QUALIFIED PROPERTIES, INC.
---------------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: July 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended May 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,774
<SECURITIES> 0
<RECEIVABLES> 10,965
<ALLOWANCES> 3,081
<INVENTORY> 0
<CURRENT-ASSETS> 2,095
<PP&E> 11,551
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,421
<CURRENT-LIABILITIES> 269
<BONDS> 958
0
0
<COMMON> 0
<OTHER-SE> 20,194
<TOTAL-LIABILITY-AND-EQUITY> 21,421
<SALES> 0
<TOTAL-REVENUES> 1,300
<CGS> 0
<TOTAL-COSTS> 231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 378
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 691
<INCOME-TAX> 0
<INCOME-CONTINUING> 691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> 18.87
<EPS-DILUTED> 18.87
</TABLE>
