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 February 28, 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
February 28, 1997 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
February 28 August 31
----------- ---------
Real estate investments:
Land $ 1,000 $ 1,000
Mortgage loans receivable, net 7,775 7,775
Investment in joint venture, at equity 3,148 3,173
Investment property held for sale, net 7,500 7,500
-------- -------
19,423 19,448
Cash and cash equivalents 1,602 1,653
Tax and insurance escrow 346 255
Interest and other receivable 126 129
Prepaid expenses 15 16
-------- --------
$ 21,512 $ 21,501
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accrued real estate taxes $ 40 $ 183
Accounts payable and accrued expenses 70 93
Accounts payable - affiliates 10 10
Tenant security deposits and other liabilities 61 55
Note payable 1,022 1,150
Total partners' capital 20,309 20,010
-------- ---------
$ 21,512 $ 21,501
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the three and six months ended February 28, 1997 and February 29, 1996
(Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Six Months Ended
February 28/29 February 28/29,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Interest from mortgage loans $ 307 $ 293 $ 613 $ 587
Land rent 29 29 58 58
Other interest income 21 21 41 70
------- ------ ------- -------
357 343 712 715
Expenses:
Management fees 10 8 20 20
General and administrative 62 89 117 156
Provision for possible
uncollectible amounts 124 110 247 166
------- ------ ------- -------
196 207 384 342
------- ------ ------- -------
Operating income 161 136 328 373
Partnership's share of venture's
income 48 46 88 89
Income from operations of
investment property held
for sale, net 210 214 221 319
------- ------- -------- -------
Net income $ 419 $ 396 $ 637 $ 781
======= ======= ======== ======
Net income per Limited
Partnership Unit $ 11.39 $ 10.82 $ 17.41 $21.33
======= ======= ======= ======
Cash distributions per Limited
Partnership Unit $ 4.62 $ 4.62 $ 9.24 $115.90
======= ======= ======== =======
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 CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended February 28, 1997 and February 29, 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1995 $(33) $23,882
Cash distributions (4) (4,200)
Net income 8 773
---- -------
Balance at February 29, 1996 $(29) $20,455
==== =======
Balance at August 31, 1996 $(33) $20,043
Cash distributions (3) (335)
Net income 6 631
---- -------
Balance at February 28, 1997 $(30) $20,339
==== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the six months ended February 28, 1997 and February 29, 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 637 $ 781
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of venture's income (88) (89)
Changes in assets and liabilities:
Tax and insurance escrow (91) (52)
Interest and other receivables 3 (31)
Prepaid expenses 1 10
Accrued real estate taxes (143) (137)
Accounts payable and accrued expenses (23) (79)
Accounts payable - affiliates - (2)
Tenant security deposits 6 (3)
------- --------
Total adjustments (335) (383)
------- --------
Net cash provided by operating activities 302 398
Cash flows from investing activities:
Distributions from joint venture 113 -
Cash flows from financing activities:
Principal payments on note payable (128) (37)
Distributions to partners (338) (4,204)
------- --------
Net cash used in financing activities (466) (4,241)
------- --------
Net decrease in cash and cash equivalents (51) (3,843)
Cash and cash equivalents, beginning of period 1,653 5,379
------- --------
Cash and cash equivalents, end of period $ 1,602 $ 1,536
======= ========
Supplemental disclosure:
Cash paid during the period for interest $ 52 $ 57
======= ========
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 February 28, 1997 and August 31, 1996 and revenues and
expenses for the three and six months ended February 28, 1997 and February 29,
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 February 28, 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 $2,950 and $2,703, respectively, as of February 28, 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 six-month periods ended February
28, 1997 and February 29, 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 February 28, 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, 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 open to prepayment as of
February 28, 1997, and the loan secured by The Timbers becomes prepayable
without penalty as of September 1, 1997. Management believes there is the
potential for a near term prepayment of both loans. 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 February 28, 1997 are summarized below (in thousands):
<PAGE>
Face Value of
Mortgage Loan
-------------
Eden West Apartments $ 3,500
The Timbers Apartments 6,700
-------
$10,200
Eden West Apartments
--------------------
During the last quarter of fiscal 1995, the Partnership received notice
from the Eden West borrower of its intent to prepay the Partnership's mortgage
loan and repurchase the underlying land. The amount to be received by the
Partnership as its share of the appreciation of the Eden West property has not
been agreed upon to date. The terms of the Partnership's ground lease provide
for the possible resolution of disputes between the parties over value issues
through an arbitration process. In addition to the amount to be determined as
the Partnership's share of the property's appreciation under the ground lease,
the terms of the Eden West mortgage loan require a prepayment penalty which
would be equal to 2.5% of the outstanding principal balance of $3,500,000
through May 1997. Subsequent to May 31, 1997, the prepayment penalty declines to
1.25% for the next twelve months, after which there would be no prepayment
penalty for the remainder of the term, through maturity in June 1999. If
completed, the proceeds of any prepayment transaction would be distributed to
the Limited Partners. However, the transaction remains contingent on, among
other things, a resolution of the value issue, and the borrower has not pursued
negotiations in recent months. Accordingly, there are no assurances that a
payment transaction will be consummated in the near term.
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 February 28, 1997 and August
31, 1996 was $7,225,000 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 ($2,950,000 at
February 28, 1997 and $2,703,000 at August 31, 1996) due to the Partnership's
policy of reserving for deferred interest until collected.
Harbour Bay Plaza
-----------------
On August 24, 1995, the borrower of the Harbour Bay Plaza loan repaid the
Partnership's first leasehold mortgage loan secured by Harbour Bay Plaza
Shopping Center and purchased the Partnership's interest in the underlying land
for total consideration of $3,833,000. The principal balance of the mortgage
loan was $2,850,000 plus interest accrued through August 25, 1995 of $23,000.
The Partnership's cost basis in the land was $750,000. Pursuant to the ground
lease, the Partnership received $211,000 in excess of the outstanding mortgage
loan and land investments as its share of the appreciation in value of the
operating investment property above a specified base amount. The net proceeds
from this transaction were distributed to the Limited Partners as a Special
Distribution of approximately $3,842,000, or $106 per original $1,000
investment, on October 13, 1995.
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 February 28, 1997 by
approximately $450,000. 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 February 28, 1997.
Summarized operating results of the venture for the three- and six-month
periods ended February 28, 1997 and February 29, 1996 are as follows (in
thousands):
Three Months Ended Six Months Ended
February 28/29, February 28/29,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and
expense reimbursements $ 134 $ 119 $ 263 $ 243
Expenses:
Property operating expenses 33 29 64 65
Real estate taxes 16 9 37 18
Depreciation and amortization 37 35 74 71
------ ------ ------ ------
86 73 175 154
------ ------ ------ ------
Net income $ 48 $ 46 $ 88 $ 89
====== ====== ====== ======
Net income:
Partnership's share
of net income $ 48 $ 46 $ 88 $ 89
Co-venturer's share
of net income - - - -
------ ------ ------ ------
$ 48 $ 46 $ 88 $ 89
====== ====== ====== ======
<PAGE>
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
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 February 28, 1997 and August 31, 1996, of $7,500,000, is classified as an
investment property held for sale on the accompanying 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
three- and six-month periods ended February 28, 1997 and February 29, 1996 are
as follows (in thousands):
Three Months Ended Six Months Ended
February 28/29, February 28/29,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 596 $ 552 $ 1,013 $ 964
Interest and other income 6 5 10 7
----- ------ -------- -----
602 557 1,023 971
Expenses:
Property operating expenses 335 278 657 497
Interest expense 25 32 52 57
Property taxes and insurance 32 33 93 98
----- ------ ------- -----
392 343 802 652
----- ------ ------- -----
Income from operations of investment
property held for sale, net $ 210 $ 214 $ 221 $ 319
===== ====== ======= =====
The above property operating expenses for the three and six months ended
February 28, 1997 include capital improvements and leasing costs of $62,000 and
$116,000, respectively.
<PAGE>
5. Related Party Transactions
The Adviser earned basic management fees of $20,000 for each of the
six-month periods ended February 28, 1997 and February 29, 1996. Accounts
payable - affiliates at both February 28, 1997 and August 31, 1996 consists of
management fees of $10,000 payable to the Adviser.
Included in general and administrative expenses for the six-month periods
ended February 28, 1997 and February 29, 1996 is $75,000 and $77,000,
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
six-month periods ended February 28, 1997 and February 29, 1996 is $2,000
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 February 28, 1997 and August 31, 1996 consists of the
following secured indebtedness (in thousands):
February 28 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 February 28, 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 February 28, 1997. $ 1,022 $ 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
- -------------------------------
The occupancy level at the wholly-owned Mercantile Tower Office Building
increased to 60% as of February 28, 1997, from 57% as of November 30, 1996. 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 is finding it difficult to obtain
economically viable lease terms from the number of tenants which are looking to
lease space in the market. Leasing activity during the second quarter of fiscal
1997 at Mercantile Tower includes the signing of two new lease for approximately
6,400 square feet, an expansion of by an existing tenant for 4,500 square feet
and one lease termination of 4,200 square feet. In addition, subsequent to the
quarter-end, two additional lease expansions were executed for another 4,200
square feet which will add 2% to the building's overall occupancy level. Also
subsequent to February 28, 1997, the installation of a new exterior stairway to
replace an outdoor escalator at the office building was completed. 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 Offices Building. Management
is now analyzing the potential benefits to the Limited Partners of pursuing a
sale of the property in the near term. 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 out weigh the potential
benefits of receiving a higher sale price. Management intends to explore the
market for a possible sale of the property over the next several months.
However, there are no assurances that a sale transaction will be completed.
Occupancy at the Marshalls at East Lake Shopping Center as of February 28,
1997 was 94%, 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. The only property improvements planned for
Marshalls at East Lake for fiscal 1997 are to the parking area at the rear of
the center.
As discussed in the Annual Report, the mortgage loans secured by the Eden
West Apartments and The Timbers Apartments bear interest at annual rates of
11.5% and 11.75%, respectively. With current market interest rates for first
mortgage loans considerably lower than the rates on the Partnership's mortgage
loan investments, and with the continued availability of credit in the capital
markets for real estate transactions, there is a reasonable likelihood of the
Partnership's mortgage loan investments being prepaid in the near term. The Eden
West loan is currently open to prepayment, but the Timbers loan contains a
prohibition against prepayment until September 1, 1997. The Partnership received
notice during the fourth quarter of fiscal 1995 from the Eden West borrower of
its intent to prepay the Partnership's mortgage loan and repurchase the
underlying land. However, the amount to be received by the Partnership as its
share of the appreciation of the Eden West property has not been agreed upon to
date. The terms of the Partnership's ground lease provide for the possible
resolution of disputes between the parties over value issues through an
arbitration process. The borrower could require the Partnership to submit to
such an arbitration process during fiscal 1997, although to date it has given no
formal indication of an intent to do so. In addition to the amount to be
determined as the Partnership's share of the property's appreciation under the
ground lease, the terms of the Eden West mortgage loan require a prepayment
penalty which would be equal to 2.5% of the outstanding principal balance of
$3,500,000 through May 1997. Subsequent to May 31, 1997, the prepayment penalty
declines to 1.25% for the next twelve months, after which there would be no
prepayment penalty for the remainder of the term, through maturity in June 1999.
If completed, the proceeds of any prepayment transaction would be distributed to
the Limited Partners. However, a prepayment transaction remains contingent on,
among other things, a resolution of the value issue, and the borrower has not
pursued negotiations in recent months. Accordingly, there are no assurances that
a prepayment transaction will be consummated in the near term.
At February 28, 1997, the Partnership had available cash and cash
equivalents of $1,602,000. 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 February 28, 1997
- ------------------------------------
The Partnership reported net income of $419,000 for the three months ended
February 28, 1997 compared to $396,000 for the same period in the prior year.
This $23,000 increase in the Partnership's net income resulted from a $25,000
increase in the Partnership's operating income and a $2,000 increase in the
Partnership's share of venture's income which were partially offset by a $4,000
decrease in income from operations of investment property held for sale. The
Partnership's operating income increased primarily due to a $14,000 increase in
mortgage interest income and a $11,000 decline in the Partnership's total
operating expenses. Mortgage interest income increased due to the ongoing
compounding of deferred interest on the Timbers mortgage loan. The decline in
total operating expenses resulted from a $27,000 decrease in general and
administrative expenses which was partially offset by a $14,000 increase in the
provision for possible uncollectible amounts. General and administrative
expenses decreased primarily due to additional professional fees incurred during
the three-month period ended February 29, 1996. 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 increase in the Partnership's share of venture's income is attributable
to a $15,000 increase in the rental revenues from the Marshalls at East Lake
Shopping Center which was partially offset by a $13,000 increase in the
venture's total expenses. Rental revenues increased due to an increase in
expense reimbursements from the tenants during the current three-month period
while total expenses increase due to an increase the property's tax assessment.
The Partnership's income from the operations of the investment property held
for sale decreased by $4,000 primarily due to increases in repairs and
maintenance and capital improvement expenses which was partially offset by an
increase in rental revenues. Rental revenues at Mercantile Tower increased due
to higher garage income and expense reimbursements during the current
three-month period.
Six Months Ended February 28, 1997
- ----------------------------------
The Partnership reported net income of $637,000 for the six months ended
February 28, 1997 compared to net income of $781,000 for the same period in the
prior year. This decrease in the Partnership's net income is attributable to a
$98,000 decrease in income from operations of investment property held for sale,
a $45,000 decrease in the Partnership's operating income and a $1,000 decrease
in the Partnership's share of venture's income. The decrease in income from
operations of investment property held for sale resulted primarily due to a
$160,000 increase in operating expenses which was partially offset by a $49,000
increase in rental revenues at Mercantile Tower during the current six-month
period. Property operating expenses increased mainly due to an increase in
capital expenditures, including the completion of the exterior stairway, as well
as higher leasing commissions and tenant improvements associated with the new
leases discussed further above. Rental revenues increased mainly due to an
increase in expense reimbursements during the current six month period.
The decrease in the Partnership's operating income is mainly attributable to
a decrease in the provision for possible uncollectible amounts of $81,000 and a
$29,000 decline in other interest income which were partially offset by a
$39,000 decrease in general and administrative expenses and a $26,000 increase
in interest from mortgage loans. The provisions for possible uncollectible
amounts increased by $81,000 mainly due to lower payments received from the
borrower of the Timbers mortgage loan toward deferred interest receivable when
compared to the same six-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. Other interest income decreased by $29,000 during
the current six-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 prior to the special distribution to the Limited Partners in
October 1995. General and administrative expenses decreased by $39,000 primarily
due to additional professional fees incurred during the six-month period ended
February 29, 1996. Interest from mortgage loans increased by $26,000 in the
current period as a result of the ongoing compounding of interest on the Timbers
mortgage loan.
The $1,000 decrease in the Partnership's share of ventures income is
attributable to a $21,000 increase in expenses which was partially offset by a
$20,000 increase in rental revenues at Marshalls at East Lake. Rental revenues
increased largely due to an increase in reimbursement income during the current
six-month period while real estate taxes increased due to an increase in the
property tax assessment in the current period.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously reported, 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 Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Second Qualified
Properties, 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 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.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
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 provides for the complete resolution of such action. Final
releases and dismissals with regard to this action are expected to be received
in April 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
the amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
believe that the resolution of these matters will not have a material impact on
the Partnership's financial statements, taken as a whole.
<PAGE>
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
None
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY
FUND TWO, LP
By: SECOND QUALIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: April 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 February
28,1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 1,602
<SECURITIES> 0
<RECEIVABLES> 10,851
<ALLOWANCES> 2,950
<INVENTORY> 0
<CURRENT-ASSETS> 2,089
<PP&E> 11,648
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,512
<CURRENT-LIABILITIES> 181
<BONDS> 1,022
0
0
<COMMON> 0
<OTHER-SE> 20,309
<TOTAL-LIABILITY-AND-EQUITY> 21,512
<SALES> 0
<TOTAL-REVENUES> 1,021
<CGS> 0
<TOTAL-COSTS> 137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 247
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 637
<INCOME-TAX> 0
<INCOME-CONTINUING> 637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 637
<EPS-PRIMARY> 17.41
<EPS-DILUTED> 17.41
</TABLE>
