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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to ______.
Commission File Number: 0-17146
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, 1998 and August 31, 1997 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
------ ---------
Real estate investments:
Land $ 600 $ 600
Mortgage loan receivable, net 4,275 4,275
Investment in joint venture, at equity 2,998 3,060
Investment property held for sale, net - 7,150
--------- ---------
7,873 15,085
Cash and cash equivalents 1,440 1,555
Tax and insurance escrow - 215
Interest and other receivables 28 96
Prepaid expenses and other assets - 14
--------- ---------
$ 9,341 $ 16,965
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 36 $ 160
Accounts payable - affiliates 7 10
Accrued real estate taxes - 160
Tenant security deposits and other
liabilities - 64
Note payable - 894
Partners' capital 9,298 15,677
--------- ---------
$ 9,341 $ 16,965
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the three and nine months ended May 31, 1998 and 1997 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Interest from mortgage
loans $ 223 $ 316 $ 637 $ 929
Land rent 18 29 53 87
Other interest income 22 23 96 64
----- ------ ------ -------
263 368 786 1,080
Expenses:
Management fees 7 10 22 30
General and administrative 70 84 229 201
Provision for (recovery of)
possible uncollectible
amounts (74) 131 174 378
----- ------ ------ -------
3 225 425 609
----- ------ ------ -------
Operating income 260 143 361 471
Partnership's share of
venture's income 50 63 147 151
Income (loss) from
operations of investment
property held for sale, net - (152) 302 69
Loss on sale of investment
property - - (23) -
----- ------ ------ -------
Net income $ 310 $ 54 $ 787 $ 691
===== ====== ====== =======
Net income per Limited
Partnership Unit $8.46 $ 1.46 $ 21.50 $18.87
===== ====== ======= ======
Cash distributions per
Limited Partnership Unit $3.18 $ 4.62 $197.61 $13.86
===== ====== ======= ======
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 nine months ended May 31, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1996 $(33) $20,043
Cash distributions (5) (502)
Net income 7 684
---- -------
Balance at May 31, 1997 $(31) $20,225
==== =======
Balance at August 31, 1997 $(30) $15,707
Cash distributions (4) (7,162)
Net income 8 779
---- -------
Balance at May 31, 1998 $(26) $ 9,324
===== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 787 $ 691
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of venture's income (147) (151)
Loss on sale of investment property 23 -
Changes in assets and liabilities:
Tax and insurance escrow 215 43
Interest and other receivables 68 20
Prepaid expenses 14 16
Accrued real estate taxes (160) (83)
Accounts payable and accrued expenses (124) 4
Accounts payable - affiliates (3) -
Tenant security deposits (64) 7
------ -------
Total adjustments (178) (144)
------ -------
Net cash provided by operating activities 609 547
------ -------
Cash flows from investing activities:
Distributions from joint venture 209 273
Proceeds from sale of investment property 7,127 -
------ -------
Net cash provided by investing activities 7,336 273
------ -------
Cash flows from financing activities:
Principal payments on note payable (894) (192)
Distributions to partners (7,166) (507)
------ -------
Net cash used in financing activities (8,060) (699)
------ -------
Net (decrease) increase in cash and cash equivalents (115) 121
Cash and cash equivalents, beginning of period 1,555 1,653
------ -------
Cash and cash equivalents, end of period $1,440 $ 1,774
====== =======
Supplemental disclosure:
Cash paid during the period for interest $ 21 $ 75
====== =======
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, 1997. 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, 1998 and August 31, 1997 and revenues and expenses
for the three and nine months ended May 31, 1998 and 1997. Actual results could
differ from the estimates and assumptions used.
As discussed further in Note 4, the Partnership sold its wholly-owned
Mercantile Tower Office Building in November 1997. Subsequent to the end of the
third quarter of fiscal 1998, on June 4, 1998, the borrower of the loan secured
by The Timbers Apartments prepaid the Partnership's first leasehold mortgage
loan and purchased the Partnership's interest in the underlying land (see Note
2). With the sale of the Mercantile Tower property and the subsequent
disposition of The Timbers mortgage loan and land investments, the Partnership's
only remaining real estate asset is its joint venture interest in the Marshalls
at East Lake Shopping Center (see Note 3). This property is currently in the
process of being actively marketed for sale. Consequently, it is likely that a
liquidation of the Partnership will be completed by calendar year-end 1998.
There are no assurances, however, that the sale of the final asset and the
liquidation of the Partnership will be completed within this time frame.
2. Mortgage Loan and Land Investments
----------------------------------
The outstanding first mortgage loan and the cost of the related land to
the Partnership at May 31, 1998 and August 31, 1997 were as follows (in
thousands):
Amount
Property of Mortgage Loan Cost of Land
-------- ---------------- ------------
The Timbers Apartments $ 4,275 (1) $ 600
Raleigh, NC
(1) The balance shown is net of an allowance for possible uncollectible
amounts of $3,364 and $3,190, respectively, as of May 31, 1998 and August
31, 1997 (see discussion below).
The loan was secured by a first mortgage on the property, the owner's
leasehold interest in the land and an assignment of all leases, where
applicable. Interest on the Timbers loan was payable monthly at rate of 11.75%
per annum (see discussion of modification below), and the principal on the loan
was due at maturity. Among the provisions of the lease agreement, the
Partnership was 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,
1998 and 1997, no additional rents were received. As discussed in the Annual
Report, the lessee had the option to purchase the land for a specified period 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, 1998, the option to purchase the
land was exercisable. In addition, the Partnership's investment was 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 lease called for
the Partnership to receive a 40% share of the appreciation above a specified
base amount.
Under the terms of the Timbers loan modification executed in fiscal 1989,
the amount payable to the Partnership was 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 continued to accrue interest at the original rate of 11.75%
beginning at the end of that year and the total deferred amount plus accrued
interest was to be payable upon maturity of the note in September of 1998. The
loan secured by The Timbers became prepayable without penalty as of September 1,
1997. The total balance of the principal and deferred interest receivable at May
31, 1998 and August 31, 1997 was $7,639,000 and $7,465,000, respectively. The
Partnership had established an allowance for possible uncollectible amounts for
the cumulative amount of deferred interest owed under the Timbers modification
($3,364,000 at May 31, 1998 and $3,190,000 at August 31, 1997) due to the
Partnership's policy of reserving for deferred interest until collected.
Subsequent to the end of the third quarter of fiscal 1998, on June 4,
1998, the borrower of the loan secured by The Timbers Apartments prepaid the
Partnership's first leasehold mortgage loan and purchased the Partnership's
interest in the underlying land for total consideration of approximately
$7,803,000. The principal balance of the mortgage loan was $4,275,000, and the
Partnership's original investment in the land was $600,000. In addition, the
Partnership received $2,928,000 of accrued interest owed on the mortgage loan.
The amount of accrued interest which was due at June 4, 1998 was $3,369,000. The
Partnership will also receive a final payment from the borrower in an amount
equal to any remaining cash flow from the operations of The Timbers Apartments
after the payment of all final operating expenses. The amount of this final
payment cannot be determined at the present time, but it is expected to be
significantly below the outstanding balance of the remaining accrued interest
owed, which totals $441,000. The remaining balance of accrued interest
receivable after this final payment will be forgiven in accordance with an
agreement between the Partnership and the borrower. From the proceeds of the
sale transaction, an affiliate of the borrower received a payment of $65,000 as
a commission in return for facilitating the sale transaction as agreed to by the
Partnership. The net proceeds from the Timbers prepayment transaction, along
with an amount of Partnership cash reserves that exceeded expected future
requirements, were distributed to the Limited Partners as part of a special
distribution paid on July 1, 1998. The distribution totalled approximately
$8,698,000, or $240 per original $1,000 investment, of which $215 represented
the net proceeds from the Timbers transaction and $25 represented excess cash
reserves.
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.
Summarized operating results of the venture for the three- and nine-month
periods ended May 31, 1998 and 1997 are as follows (in thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and
expense reimbursements $ 141 $ 149 $ 397 $ 412
Expenses:
Property operating expenses 38 35 99 99
Real estate taxes 15 15 39 52
Depreciation and
amortization 38 36 112 110
------- ------ ------ -------
91 86 250 261
------- ------ ------ -------
Net income $ 50 $ 63 $ 147 $ 151
======= ====== ====== =======
Net income:
Partnership's share
of net income $ 50 $ 63 $ 147 $ 151
Co-venturer's share of
net income - - - -
------- ------ ------ -------
$ 50 $ 63 $ 147 $ 151
======= ====== ====== =======
<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
uncured defaults on the Partnership's mortgage loan receivable. 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. Subsequent to the date of the foreclosure, the Partnership recorded
provisions for possible investment loss totalling $2,350,000 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 August 31, 1997 was $7,150,000, which comprises the balance of investment
property held for sale on the accompanying balance sheet at that date.
On November 10, 1997, 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. The sale price, net of closing
costs, was lower than the net carrying value of the investment property by
$23,000, which is reflected as a loss on the sale on the accompanying income
statement for the nine months ended May 31, 1998. The net proceeds from the sale
of Mercantile Tower, along with an amount of excess cash reserves, were
distributed to the Limited Partners in the form of a special distribution in the
amount of approximately $6,741,000, or $186 per original $1,000 investment,
which was 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 believed that the sale
price was reflective of the property's fair market value, which was 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 recorded 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
period September 1, 1997 through the date of sale, November 10, 1997, and for
the three- and nine-month periods ended May 31, 1997 are as follows (in
thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ - $ 418 $ 591 $1,431
Interest and other income - 4 14 14
------- ------- ------- ------
- 422 605 1,445
Expenses:
Property operating expenses - 486 244 1,143
Interest expense - 23 21 75
Property taxes and insurance - 65 38 158
------- ------- ------- ------
- 574 303 1,376
------- ------- ------- ------
Income (loss) from operations
of investment property held
for sale, net $ - $ (152) $ 302 $ 69
====== ======== ======= ======
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.
<PAGE>
5. Related Party Transactions
--------------------------
The Adviser earned basic management fees of $22,000 and $30,000 for the
nine-month periods ended May 31, 1998 and 1997, respectively. Accounts payable -
affiliates at May 31, 1998 and August 31, 1997 consist of management fees
payable to the Adviser of $7,000 and $10,000, respectively.
Included in general and administrative expenses for the nine-month periods
ended May 31, 1998 and 1997 is $108,000 and $112,000, 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, 1998 and 1997 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 August 31, 1997 consisted of the following secured
indebtedness (in thousands):
August 31
---------
Line of credit borrowings secured
by the Mercantile Tower property.
Draws under the line, up to a
maximum of $2,000,000, could be
made through February 28, 1998,
only to fund approved leasing and
capital improvement costs related
to the Mercantile Tower property.
The outstanding borrowings bore
interest at the prime rate (8.25%
at August 31, 1997) plus 1% per
annum. Interest-only payments were
due on a monthly basis through
February 1995. Thereafter, monthly
principal and interest payments
were due through maturity on
February 10, 2001. The fair value
of the note approximated its
carrying amount as of August 31,
1997. The note was repaid in full
on November 10, 1997 upon the sale
of the Mercantile Tower property
(see Note 4). $ 894
=========
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
As discussed further below, the Partnership sold its wholly-owned
Mercantile Tower Office Building on November 10, 1997. In addition, subsequent
to the end of the third quarter, on June 4, 1998, the borrower of the loan
secured by The Timbers Apartments prepaid the Partnership's first leasehold
mortgage loan and purchased the Partnership's interest in the underlying land.
With the sale of the Mercantile Tower property and the subsequent disposition of
The Timbers mortgage loan and land investments, the Partnership's only remaining
real estate asset is its joint venture interest in the Marshalls at East Lake
Shopping Center. As discussed further below, this property is currently in the
process of being actively marketed for sale. Consequently, it is likely that a
liquidation of the Partnership will be completed by calendar year-end 1998.
There are no assurances, however, that the sale of the final asset and the
liquidation of the Partnership will be completed within this time frame. The net
proceeds from the final sale transaction will be distributed to the Limited
Partners along with the remaining Partnership cash reserves after the payment of
all liquidation-related expenses.
On November 10, 1997, 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. The net proceeds from the sale of
Mercantile Tower, along with an amount of excess cash reserves, were distributed
to the Limited Partners in the form of a special distribution in the amount of
approximately $6,741,000, or $186 per original $1,000 investment, which was 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 believed that the sale
price was reflective of the property's fair market value, which was 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. While a sale of the property at its November 1997
leasing level, of below 70%, yielded less proceeds than the sale of the property
at a stabilized level, 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
previously reported, all of the operating cash flow at the Mercantile Tower
property had been used to help pay for ongoing leasing costs and capital
improvements at the building. As a result of the sale of the property and the
payment of the December 15, 1997 special capital distribution, the Partnership's
earnings were sufficient to support an increase in the distribution rate paid on
the remaining invested capital. Accordingly, the annualized distribution rate
was increased from 2.5% to 3% effective with the distribution for the quarter
ended February 28, 1998, which was paid on April 15, 1998.
As noted above, on June 4, 1998 the borrower of The Timbers Apartments
loan prepaid the Partnership's first mortgage loan and purchased the
Partnership's interest in the underlying land for total consideration of
approximately $7,803,000. The principal balance of the mortgage loan was
$4,275,000, and the Partnership's original investment in the land was $600,000.
In addition, the Partnership received $2,928,000 of accrued interest owed on the
mortgage loan. The amount of accrued interest which was due at June 4, 1998 was
$3,369,000. The Partnership will also receive a final payment from the borrower
in an amount equal to any remaining cash flow from the operations of The Timbers
Apartments after the payment of all final operating expenses. The amount of this
final payment cannot be determined at the present time, but it is expected to be
significantly below the outstanding balance of the remaining accrued interest
owed, which totals $441,000. The owner of The Timbers Apartments believed that
improvements in the apartment segment of the real estate market provided them
with the opportunity to market the property for sale in early 1998. While the
Partnership's first leasehold mortgage loan did not mature until September 1,
1998, the Partnership agreed with the owner that it was the appropriate time to
take advantage of any potential sale opportunities. The Partnership also
believed that a sale at this time would provide it with full payment of its
original net investments plus a substantial portion of the deferred interest
accrued on its loan. Because the loan was non-recourse, a sale on terms
acceptable to the Partnership would likely provide it with more net proceeds
than if it pursued a foreclosure action to take title to the property and sell
it at a later date. Consequently, on March 25, 1998, the Partnership and the
owner agreed to a sale of the property at a price of $8,100,000. It was also
agreed that the net proceeds received by the Partnership after prepayment of the
Partnership's loan, sale of the Partnership's land and payment of closing costs
would be accepted by the Partnership as payment in full of the deferred interest
owned. From the proceeds of the sale transaction, an affiliate of the borrower
received a payment of $65,000 as a commission in return for facilitating the
sale transaction as agreed to by the Partnership. Interest on the Timbers loan
had been accruing at a rate of 11.75%. However, interest was only 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.
The net proceeds from the Timbers prepayment transaction, along with an amount
of Partnership cash reserves that exceeded expected future requirements, was
distributed to the Limited Partners as part of a special distribution paid on
July 1, 1998. The distribution totalled approximately $8,698,000, or $240 per
original $1,000 investment, of which $215 represented the net proceeds from the
Timbers transaction and $25 represented excess cash reserves.
As part of management's plan to liquidate the Partnership in calendar year
1998, the Partnership initiated discussions with area real estate brokerage
firms during the third quarter to define potential marketing strategies for
selling the Marshalls at East Lake Shopping Center. During the quarter, the
Partnership solicited marketing proposals from two of these firms. After
reviewing their proposals and conducting in-depth interviews, the Partnership
selected a regional brokerage firm with extensive experience marketing shopping
center properties like Marshalls at East Lake. Initial sale efforts began in May
1998, and subsequent to the end of the quarter a comprehensive marketing package
was completed and widely marketed. The occupancy level for the Marshalls at East
Lake Shopping Center remained at 98% as of May 31, 1998, unchanged from the end
of the second quarter. During the third quarter, the property's leasing team
secured a commitment from a 1,200 square foot tenant to renew its lease which
was set to expire in June 1998. The lease extension will be for 3 years and is
at a higher rental rate than the rent in the existing lease. Over the next
twelve months, three additional leases totaling 6,400 square feet are scheduled
to expire. It is expected that the largest of these tenants will exercise a five
year option to renew its lease for 3,200 square feet at a higher rental rate.
Additionally, a tenant occupying 7,613 square feet with a lease that is
scheduled to expire in December 1999, has been receptive to discussions for a
three-year lease extension also at a higher rental rate. These negotiations are
expected to enhance the marketability of the Center.
At May 31, 1998, the Partnership had available cash and cash equivalents
of $1,440,000. 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 and future sale of the remaining 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, 1998
- -------------------------------
The Partnership reported net income of $310,000 for the three months ended
May 31, 1998, as compared to net income of $54,000 for the same period in the
prior year. This increase in net income is attributable to a $117,000 increase
in the Partnership's operating income and a $152,000 decrease in the net loss
from the operations of investment property held for sale which were partially
offset by a reduction of $13,000 in the Partnership's share of venture's income.
The increase in the Partnership's operating income is primarily due to a
$205,000 reduction in the provision for possible uncollectible amounts. The
provision for possible uncollectible amounts decreased as a result of an
additional cash payment of $215,000 received from the borrower of the Timbers
loan during the current three-month period which was applied to accrued interest
owed that had previously been reserved for. The decrease in the provision for
possible uncollectible amounts was partially offset by decreases in interest
from mortgage loans and land rent. The decreases in interest from mortgage loans
and land rent were a result of the repayment of the Eden West first mortgage
loan and the repurchase of the underlying land on July 15, 1997. The reduction
in interest from mortgage loans and land rent attributable to the Eden West
repayment/repurchase amounted to $101,000 and $11,000, respectively.
The decrease in net loss from the operations of the investment property
held for sale for the three months ended May 31, 1998 resulted from the sale of
Mercantile Tower on November 10, 1997. The $152,000 net loss represents the
operating loss of the Mercantile Tower property for the three months ended May
31, 1997. The decrease in the Partnership's share of venture's income is largely
due to additional revenues recognized at the Marshalls at East Lake Shopping
Center during the three months ended May 31, 1997 as a result of additional
expense recoveries relating to calendar year 1996.
Nine Months Ended May 31, 1998
- ------------------------------
The Partnership reported net income of $787,000 for the nine months ended
May 31, 1998, as compared to net income of $691,000 for the same period in the
prior year. This increase in net income is attributable to a $233,000 increase
in income from the operations of investment property held for sale which was
partially offset by a $110,000 decrease in operating income, a $23,000 loss on
the sale of the Mercantile Tower property and a $4,000 decrease in the
Partnership's share of venture's income for the current nine-month period.
The increase in net income from the operations of the investment property
held for sale is mainly due to a substantial decrease in property operating
expenses at Mercantile Tower prior to its sale in November 1997, as well as
additional expense recoveries which resulted from a final billing of recoverable
expenses through the date of the sale. The lower operating expenses resulted
mainly from a decline in leasing activity prior to the sale of the Mercantile
Tower property.
The Partnership's operating income decreased mainly due to the reduction
in interest from mortgage loans and land rent which resulted from the repayment
of the Eden West first mortgage loan and the repurchase of the underlying land
on July 15, 1997. The reduction in interest from mortgage loans and land rent
attributable to the Eden West repayment/repurchase amounted to $302,000 and
$34,000, respectively. These decreases in interest from mortgage loans and land
rents were partially offset by an increase in other interest income of $31,000
and a decrease in the Partnership's operating expenses. Other interest income
increased due to an increase in the average outstanding cash reserve balance,
which resulted mainly from the temporary investment of the net proceeds from the
sale of Mercantile Tower on November 10, 1997 prior to the special distribution
to the Limited Partners made on December 15, 1997. The Partnership's operating
expenses decreased primarily due to a $204,000 reduction in the provision for
possible uncollectible amounts. The provision for possible uncollectible amounts
decreased as a result of an additional cash payment of $215,000 received from
the borrower of the Timbers loan during the third quarter of fiscal 1998 which
was applied to accrued interest owed that had previously been reserved for.
The loss on the sale of Mercantile Tower was the result of the excess of
the property's carrying value, net of prior provisions for possible investment
loss, over the sale price, net of closing costs. The decrease in the
Partnership's share of venture's income is attributable to a $15,000 decrease in
rental revenues and expense reimbursements which was partially offset by a
$11,000 decrease in total expenses at the Marshalls at East Lake Shopping
Center. Rental revenues and expense reimbursements decreased mainly due to
additional revenues recognized at Marshalls at East Lake Shopping Center during
the prior nine-month period as a result of additional expense recoveries
relating to calendar year 1996. Total expenses decreased mainly due to a
reduction in the property's tax assessment.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated June 4, 1998 was filed to report the
prepayment of the first leasehold mortgage loan secured by The Timbers
Apartments and the purchase of the underlying land and is hereby incorporated
herein by reference.
<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 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended May 31, 1998
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-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,440
<SECURITIES> 0
<RECEIVABLES> 7,667
<ALLOWANCES> 3,364
<INVENTORY> 0
<CURRENT-ASSETS> 5,743
<PP&E> 3,598
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,341
<CURRENT-LIABILITIES> 43
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 9,298
<TOTAL-LIABILITY-AND-EQUITY> 9,341
<SALES> 0
<TOTAL-REVENUES> 1,235
<CGS> 0
<TOTAL-COSTS> 251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 197
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 787
<INCOME-TAX> 0
<INCOME-CONTINUING> 787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 787
<EPS-PRIMARY> 21.50
<EPS-DILUTED> 21.50
</TABLE>
