-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RvFH2sTS0lETVCulxPAUCNPkZvS0LXMjMJW2BFyAcEjZ1hIXm54QBZO1kR4xV7Re ipbSOXFR4RraG+v0CKrYwA== 0000700913-96-000004.txt : 19961203 0000700913-96-000004.hdr.sgml : 19961203 ACCESSION NUMBER: 0000700913-96-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO LP CENTRAL INDEX KEY: 0000700913 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 042752249 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17146 FILM NUMBER: 96674532 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398118 10-K405 1 THIS IS A 10-K FOR QP2 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: AUGUST 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number: 0-17146 PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP (Exact name of registrant as specified in its charter) Delaware 04-2752249 (State of organization) (I.R.S. Employer Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (617) 439-8118 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference Prospectus of registrant Part IV dated July 1, 1982, as supplemented PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP 1996 FORM 10-K TABLE OF CONTENTS Part I Page Item 1 Business I-1 Item 2 Properties I-3 Item 3 Legal Proceedings I-4 Item 4 Submission of Matters to a Vote of Security Holders I-5 Part II Item 5 Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters II-1 Item 6 Selected Financial Data II-1 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations II-2 Item 8 Financial Statements and Supplementary Data II-6 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-6 Part III Item 10 Directors and Executive Officers of the Partnership III-1 Item 11 Executive Compensation III-2 Item 12 Security Ownership of Certain Beneficial Owners and Management III-3 Item 13 Certain Relationships and Related Transactions III-3 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Signatures IV-2 Index to Exhibits IV-3 Financial Statements and Supplementary Data F-1 to F-21 PART I Item 1. Business Paine Webber Qualified Plan Property Fund Two, LP (the "Partnership") is a limited partnership formed in March 1982 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of existing income-producing real properties through land purchase-leaseback transactions and first mortgage loans. From the sale of Limited Partnership units (the "Units"), the Partnership raised $36,236,000 (36,236 Units at $1,000 per Unit) from July 1, 1982 to June 30, 1983 pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-76379). In addition, the Initial Limited Partner contributed $5,000 for 5 Units of Limited Partnership Interest. Limited Partners will not be required to make any additional capital contributions. The Partnership originally owned land and made first mortgage loans secured by buildings with respect to six operating properties. As discussed below, as of August 31, 1996 the Partnership's mortgage loan and land lease investments on two of the original properties were still outstanding, and the Partnership owned an equity interest in one operating property through a joint venture partnership which resulted from the settlement of a default under the terms of a first mortgage loan held by the Partnership. In addition, the Partnership foreclosed on one operating property under the terms of its first mortgage loan due to a payment default and now owns that property directly. The Partnership's operating property, the properties securing its two remaining loan investments and the property in which the Partnership has a joint venture interest are described below.
Type of Property name Property and Type of and Location Date of Investment Size Ownership (1) - ------------ ------------------ ----------------------- --------------------- Mercantile Tower (2) Office Building Building has 213,500 Fee ownership of Kansas City, MO 4/29/83 rentable sq. ft.; 32,000 land and improvements sq. ft. of land Marshall's at East Lake (3) Shopping Center Building has 55,175 net Fee ownership of Marietta, GA 6/24/83 leasable sq. ft.; 6.7 land and improvements acres of land (through joint venture) Eden West Apartments Apartments 215 units; 10.2 acres Fee ownership of land and Omaha, NE 6/6/84 of land first mortgage lien on improvements The Timbers Apartments Apartments 176 units; 18 acres Fee ownership of land and Raleigh, NC 9/7/84 of land first mortgage lien on improvements
(1) See Notes to the Financial Statements filed with this Annual Report for a description of the transactions through which the Partnership has acquired these real estate investments. (2) On April 12, 1993, the Partnership was granted title to the Mercantile Tower property and assumed ownership as a result of certain defaults by the borrower under the terms of the Partnership's mortgage loan receivable. The Partnership is currently operating the property utilizing the services of a local property management company. See Note 6 to the financial statements accompanying this Annual Report for a further discussion of this investment. (3) During the year ended August 31, 1990, the borrower of the mortgage loan secured by the Marshall's at East Lake Shopping Center failed to make its required monthly payments of interest in accordance with the terms of the mortgage loan. On June 12, 1990, the borrower filed for protection under a Chapter 11 Bankruptcy Petition. During fiscal 1991, the Partnership reached a settlement agreement which involved the formation of a joint venture between the Partnership and the borrower to own and operate the property on a go-forward basis. The formation of the joint venture was approved by the Bankruptcy Court and became effective on December 11, 1991. See Note 5 to the financial statements accompanying this Annual Report for a further discussion of these events. To date, the Partnership has been prepaid on its investments with respect to two of the original operating properties. On April 1, 1994, the Partnership liquidated its mortgage loan and land investments in a Howard Johnson's Motor Lodge, located in Orlando, Florida. The total net proceeds received by the Partnership amounted to approximately $5.9 million. In accordance with the third modification of the mortgage loan agreement, such proceeds included the payment of $292,000 of deferred debt service and ground rent. The remaining proceeds of approximately $5,608,000 were less than the combined carrying value of the mortgage loan and land investments of $6,150,000, resulting in a loss of approximately $542,000 which was charged against an outstanding general loan loss reserve. On August 25, 1995, the borrower of the loan secured by Harbour Bay Plaza, a retail shopping center located in Sewall's Point, Florida, repaid the Partnership's first leasehold mortgage loan and purchased the underlying land for total consideration of $3,833,000. Such consideration included the repayment of the principal balance of the mortgage loan, of $2,850,000, plus interest accrued through August 25, 1995, of $23,000. The original cost of the land to the Partnership was $750,000. Pursuant to the ground lease, the Partnership received $211,000 in excess of the outstanding mortgage loan and land investments as its share of the appreciation in value of the operating investment property above a specified base amount. The Partnership's investment objectives are to: (1) preserve and protect Limited Partners' capital and related buying power; (2) provide the Limited Partners with cash distributions from investment income; and (3) achieve long-term capital appreciation in the value of the Partnership's investments. Through August 31, 1996, the Limited Partners had received cumulative cash distributions totalling $41,410,000, or $1,171 per original $1,000 investment for the Partnership's earliest investors. This return includes a distribution of $155 per original $1,000 investment in May 1994 from the liquidation of the Howard Johnson's mortgage loan and land investments and $106 per original $1,000 investment in October 1995 from the Harbour Bay Plaza prepayment transaction. As of August 31, 1996, the Partnership retained an interest in four of the six properties underlying its original mortgage loan and land investments. As noted above, to date the Partnership has made distributions of capital proceeds to the Limited Partners totalling $261 per original $1,000 investment. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final liquidation of its remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final liquidation, which cannot presently be determined. At the present time, real estate values for commercial office buildings in certain markets remain depressed due to an oversupply of competing space and the trend toward corporate consolidations and downsizing which followed the last national recession. The downtown office market in Kansas City, Missouri, where the Partnership's Mercantile Tower property is located, remains particularly competitive. As a result, the Partnership has been unable to lease a significant amount of space which remains vacant at the property. The estimated fair value of the Mercantile Tower property declined to $7.5 million as of August 31, 1996, which is substantially below the Partnership's original cost basis in the Mercantile Tower investments of $10.5 million. In addition, values for retail shopping centers in certain markets are being adversely impacted by the effects of overbuilding and consolidations among retailers which have resulted in an oversupply of space. It remains to be seen whether the Marshalls at East Lake Shopping Center, in which the Partnership has a joint venture interest, will be affected by this general trend. The Partnership expects to finance or sell its investments and have its mortgage loans repaid from time to time. It is expected that most sales and repayments will be made after a period of between seven and fifteen years after the conclusion of the offering period, although sales and repayments may occur at earlier or later dates. Due to the combination of relatively low mortgage interest rates and the increased availability of funds for sales and mortgage refinancings which has existed over the past three years, the likelihood of the Partnership's loans being prepaid has increased. In addition to the Harbour Bay Plaza transaction which closed at the end of the fourth quarter of fiscal 1995, the Partnership has been approached by another borrower regarding a potential prepayment transaction. See Item 7 for a further discussion. In determining the appropriate timing for the sale of any of the Partnership's equity investments, the Managing General Partner will consider such factors as the amount of appreciation in value, if any, to be realized, the risks of continued investment and the anticipated advantages to be gained from continuing to hold the investment. The Partnership's operating property, along with the property in which the Partnership owns an equity interest and the properties securing the Partnership's mortgage loan investments, are located in real estate markets in which they face significant competition for the revenues they generate. The apartment complexes compete with numerous projects of similar type generally on the basis of price, location and amenities. Apartment properties in all markets also compete with the local single family home market for prospective tenants. The availability of low home mortgage interest rates over the past several years has generally caused this competition to increase in all areas of the country. The shopping center and the office building also compete for long-term commercial tenants with numerous projects of similar type generally on the basis of rental rates, location and tenant improvement allowances. The Partnership has no real estate investments located outside the United States. The Partnership is engaged solely in the business of real estate investment. Therefore, a presentation of information about industry segments is not applicable. The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"). The general partners of the Partnership (the "General Partners") are Second Qualified Properties, Inc. and Properties Associates. Second Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser. The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. Item 2. Properties As of August 31, 1996, the Partnership owned, and had leased back to the sellers, the land related to the two investments referred to under Item 1 above to which reference is made for the name, location and description of each property. Additionally, the Partnership owned one operating property directly and owned an equity interest in another operating property through a joint venture partnership as noted in Item 1. Occupancy figures for each fiscal quarter during 1996, along with an average for the year, are presented below for each property: Percent Leased At ------------------------------------------------ Fiscal 1996 11/30/95 2/29/96 5/31/96 8/31/96 Average -------- ------- ------- ------- ------- Mercantile Tower 62% 61% 58% 58% 60% Marshall's at East Lake 97% 100% 94% 94% 96% Eden West Apartments 99% 99% 99% 99% 99% The Timbers Apartments 94% 92% 86% 89% 90% Item 3. Legal Proceedings In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Second Qualified Property Fund, Inc. and Properties Associates ("PA"), which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation. The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in Paine Webber Qualified Plan Property Fund Two, LP., PaineWebber, Second Qualified Property Fund, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in Paine Webber Qualified Plan Property Fund Two, LP, also alleged that following the sale of the partnership interests, PaineWebber, Second Qualified 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 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 has been preliminarily approved by the court and 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 proposed settlement is scheduled to continue in November 1996. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleges, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint seeks compensatory damages of $15 million plus punitive damages against PaineWebber. In September 1996, the court dismissed many of the plaintiffs' claims as barred by applicable securities arbitration regulations. Mediation hearings are scheduled to be held in December 1996. The eventual outcome of this litigation and the potential impact, if any, on the Partnership's unitholders cannot be determined at the present time. Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for any 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 cannot estimate the impact, if any, of the potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements of the Partnership. The Partnership is not subject to any other material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters At August 31, 1996, there were 5,540 record holders of Units in the Partnership. There is no public market for the resale of Units, and it is not anticipated that a public market for Units will develop. The Managing General Partner will not redeem or repurchase Units. Item 6. Selected Financial Data PaineWebber Qualified Plan Property Fund Two, LP For the years ended August 31, 1996, 1995, 1994, 1993 and 1992 (In thousands, except per Unit data) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues $ 1,422 $ 1,747 $ 1,945 $ 2,588 $ 3,427 Operating income $ 1,040 $ 1,029 $ 1,414 $ 1,395 $ 2,073 Partnership's share of venture's income $ 198 $ 143 $ 168 $ 201 $ 149 Gain on sale of land - $ 211 - - - Loss on foreclosure - - - $(1,000) - Provision for possible investment loss $ (800) - $ (1,200) - - Income (loss) from operations of investment property held for sale $ 265 $ (738) $ (766) $ 163 - Net income (loss) $ 703 $ 645 $ (384) $ 759 $ 2,221 Per Limited Partnership Unit: Net income (loss) $ 19.20 $ 17.60 $ (10.49) $ 20.72 $ 60.68 Cash distributions from operations $ 19.14 $ 19.86 $ 20.25 $ 57.50 $ 70.00 Cash distributions from sale, refinancing and other disposition transactions $ 106.00 - $ 155.00 - - Total assets $ 21,501 $25,506 $ 25,010 $ 31,091 $32,112 The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. The above per Limited Partnership Unit information is based upon the 36,241 Limited Partnership Units outstanding during each year. Item 7. Management's Discussion and Analysis of Financial Condition and Result of Operations Liquidity and Capital Resources The Partnership offered Limited Partnership Interests to the public from July 1982 to June 1983 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $36,241,000 were received by the Partnership and, after deducting selling expenses and offering costs, $32,575,000 was invested in six operating property investments in the form of mortgage loans and land purchase-leaseback transactions. Since the time that the original investments were made, the Partnership has been prepaid on its investments with respect to two of the operating properties and the nature of its investments in two other properties has changed. During fiscal 1995, the Partnership accepted repayment in full on the land and mortgage loan investments secured by the Harbour Bay Plaza Shopping Center which become fully prepayable without penalty in January 1994. The Partnership received total net proceeds from this transaction of approximately $3.8 million. The Partnership's mortgage loan and land investments had an aggregate cost basis of $3.6 million. Pursuant to the ground lease, the Partnership received $211,000 in excess of the outstanding mortgage loan and land investments as its share of the appreciation in value of the operating investment property above a specified base amount. The net proceeds from this transaction, in the amount of approximately $3,842,000, or $106 per original $1,000 investment, were distributed to the Limited Partners on October 13, 1995. During fiscal 1994, the Partnership was prepaid with respect to the land and mortgage loan investments secured by the Howard Johnson's Motor Lodge. Due to the poor performance of the Howard Johnson's property and its depressed market value at the time of the prepayment, the Partnership recovered less than the full amount of its investments in the land and mortgage loan by approximately $542,000. The Partnership retained approximately $283,000 of the net proceeds from the Howard Johnson's disposition in order to maintain adequate cash reserve balances. The remainder was paid out to the Limited Partners through a special distribution of approximately $5,617,000, or $155 per original $1,000 investment, which was made on May 25, 1994. During fiscal 1993, the Partnership assumed ownership of the Mercantile Tower Office Building through a deed-in-lieu of foreclosure transaction resulting from monetary defaults under the terms of the Partnership's mortgage loan and ground lease. And finally, during fiscal 1992 the Partnership's mortgage loan and land investments with respect to the Marshall's at East Lake Shopping Center were converted to an equity interest in the operating property through a joint venture partnership as a result of the settlement of a default under the terms of the related loan agreement. The mortgage loans secured by the Eden West Apartments and The Timbers Apartments bear interest at annual rates of 11.5% and 11.75%, respectively. The Eden West loan prohibited prepayment through June 1, 1994 and includes a prepayment premium for any prepayment between June 1994 and May 1998 at rates between 5% and 1.25% of the mortgage loan balance. The Timbers loan contains a prohibition against prepayment until September 1, 1997. 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, the likelihood of the Partnership's mortgage loan investments being prepaid in the near term is high. As previously reported, the Partnership received notice during the fourth quarter of fiscal 1995 from the Eden West borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. 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. Presently, the Partnership and the borrower continue to try to resolve their differences regarding the value of the property. If an agreement cannot be reached, the borrower could require the Partnership to submit to arbitration during fiscal 1997. 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 obtaining sufficient financing to repay its obligations to the Partnership. Accordingly, there are no assurances that this transaction will be consummated. Occupancy at the Marshall's at East Lake Shopping Center as of August 31, 1996 was 94%, down from its level of 97% as of August 31, 1995. The Partnership received cash flow distributions from the Marshall's joint venture of approximately $223,000 for the year ended August 31, 1996, which was $25,000 more than the distributions received in fiscal 1995. As of August 31, 1996, the property's management team continued to negotiate terms with a 7,600 square foot tenant that had notified management of its intent to exercise an option to terminate its lease as of December 31, 1996. Subsequently, the tenant had reconsidered and requested a proposal for a new lease. Subsequent to year-end, this tenant signed a new lease with a three-year term which includes the option to terminate the lease obligation as of December 31, 1997. Marshalls is the Center's anchor tenant, occupying almost 50% of the property's rentable space. As part of a nationwide program, the parent company of Marshalls has been closing its under-performing stores around the country. Although a new Marshalls store in the market was closed last May, the parent company has stated that there are no current plans to close the store located at the Partnership's property. There are no assurances, however, that such plans will not change in the future. No major capital improvements were required at Marshalls at East Lake during fiscal 1996, and only minor items are budgeted for the upcoming year. Cash flow to the Partnership from the Marshalls joint venture is expected to remain stable in fiscal 1997. The occupancy level at the wholly-owned Mercantile Tower Office Building had decreased to 58% at August 31, 1996, down from 67% as of August 31, 1995. This decline is the result of a downsizing by a major tenant and vacancies caused by several small firms which terminated their operations during fiscal 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. During the fourth quarter of fiscal 1996, lease renewals were signed for 6,200 square feet, or approximately 3% of the building's total space. Subsequent to the fiscal year-end, a new tenant leased approximately 3,000 square feet, bringing the occupancy level to 59%. Property improvements completed during the fiscal year included a new roof and upgrades to interior common areas. The installation of a new stairway to replace an outdoor escalator was in the process of being completed as of August 31, 1996. During fiscal 1994, the Partnership closed on a $2 million line of credit which was to be used to pay for the majority of the required tenant improvement and capital enhancement costs expected to be incurred to achieve a stabilized occupancy level. This nonrecourse, fully amortizable line of credit is payable with interest at 1% over prime, and has a 7-year term with interest-only payments in the first year. Monthly payments due under the borrowing agreement began to include scheduled principal amortization effective in March 1995. The line of credit borrowings are collateralized by a first lien against the Mercantile Tower property, which includes an adjoining parking facility. During the second quarter of fiscal 1996, the draw period, which originally had a 2-year term, was extended through February 28, 1998. Draw downs under the line of credit can only be made in connection with costs associated with signed leases and contracts for capital improvements. As of August 31, 1996, the Partnership had drawn approximately $1,482,000 under the line of credit. Only $67,000 was drawn under the line of credit during fiscal 1996 as a result of the lack of significant leasing activity. With the drop-off in leasing activity during fiscal 1996, the Partnership found it necessary to obtain the two-year extension on the draw period on the line of credit in order to continue to try to achieve its leasing goals. However, even with the extension of the line of credit draw period, there are no assurances that the Partnership will be able to successfully secure leases with new tenants which would be necessary to achieve a stabilized occupancy level at the property. Stabilizing the operations of the Mercantile Tower property, which represented 32% of the Partnership's original investment portfolio, remains the primary goal of management. Until a stabilized occupancy level is achieved, the Partnership's investment in Mercantile Tower is not expected to generate any significant excess cash flow. Available cash flow, for the most part, will be reinvested in 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 line of credit. At August 31, 1996, the Partnership had available cash and cash equivalents of $1,653,000. 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. However, to the extent that the potential Eden West loan prepayment and land sale transaction discussed above is completed and the net proceeds are returned to the Limited Partners, the Partnership's quarterly distribution rate on remaining invested capital may have to be adjusted downward to reflect the reduction in cash flows which would result from such a transaction. Results of Operations 1996 Compared to 1995 For the year ended August 31, 1996, the Partnership reported net income of $703,000 as compared to net income of $645,000 recognized in fiscal 1995. This increase in net income was primarily due to a change in the net operating results of the wholly-owned Mercantile Tower property. The major portion of this change resulted from a decline of $806,000 in capital enhancement costs, tenant improvements and leasing commissions due to the drop in leasing activity at the Mercantile Tower property discussed further above. As discussed further in the notes to the accompanying financial statements, all costs associated with holding this investment property acquired through foreclosure are expensed as incurred. In addition, revenues from Mercantile Tower were higher by $162,000 for fiscal 1996 when compared to fiscal 1995, largely due to additional percentage rent collected from the parking facility during the current year. The $448,000 balance of a general loan loss reserve was reversed during fiscal 1996 as well. The Partnership's two remaining mortgage loans are secured by residential apartment properties. As a result of the continued improvement in the operating performances of these two properties and in the market for residential apartment properties in general, management determined that this reserve account was no longer required as of August 31, 1996. The recovery of $448,000 is netted with the provision for possible uncollectible amounts on the fiscal 1996 statement of operations. An increase of $55,000 in the Partnership's share of the net income of the Marshalls at East Lake joint venture also contributed to the increase in the Partnership's net income during fiscal 1996. The increase in the venture's net income resulted mainly from an improvement in rental revenues due to a higher average occupancy level in the current year. The favorable changes in the Partnership's net income were partially offset by a decrease in mortgage interest and land rent revenues of $368,000 and a provision for possible investment loss of $800,000 recognized in fiscal 1996, as well as the effect of a $211,000 gain on the sale of the Harbour Bay Plaza land recorded in fiscal 1995. In addition, the provision for possible uncollectible amounts, prior to the recovery referred to above, increased by $173,000 in fiscal 1996. The decrease in mortgage interest and land rent revenues resulted from the prepayment and sale transactions involving the Harbour Bay Plaza mortgage loan and land investments during the fourth quarter of fiscal 1995. The $800,000 provision for possible investment loss recognized in fiscal 1996 resulted from a decline in the estimated fair value of the Mercantile Tower property in the current year. As discussed further above, the leasing progress which had been made at Mercantile Tower during fiscal 1995 stalled during fiscal 1996, as occupancy actually declined during the year. Due to these circumstances and the extremely competitive conditions which continue to face the operating property, management revised downward its estimate of the fair value of the Mercantile Tower property as of August 31, 1996. In accordance with the Partnership's accounting policy for foreclosed assets, such properties are carried at the lower of cost or estimated fair value (net of selling expenses). The provision for possible uncollectible amounts in both years reflects the accrued but unpaid interest due under the modified terms of The Timbers mortgage loan. In fiscal 1995, the Partnership collected an additional $124,000 from the owner of The Timbers property which was offset against the provision in fiscal 1995. Additional payments of only $54,000 were collected during fiscal 1996, which, combined with the compounding effect of the interest owed under the terms of the modification agreement, accounted for the increase in the provision. 1995 Compared to 1994 For the year ended August 31, 1995, the Partnership reported net income of $645,000 as compared to a net loss of $384,000 recognized in fiscal 1994. This change in the Partnership's net operating results was primarily due to a provision for possible investment loss of $1,200,000 recognized in fiscal 1994 due to a decline in management's estimate of the fair value of the Mercantile Tower property. The gain of $211,000 recognized in fiscal 1995 on the sale of the Harbour Bay Plaza land offset a decline of $214,000 in mortgage interest income and land rent compared to fiscal 1994. The fiscal 1994 revenues include income from the Howard Johnson's investments through April 1, 1994, the date of the sale. A decline in the provision for possible uncollectible amounts of $135,000 also contributed to the favorable change in the Partnership's net operating results for fiscal 1995. In both years, the provision reflects the accrued but unpaid interest due under the modified terms of The Timbers mortgage loan. In fiscal 1995, the Partnership collected an additional $178,000 from the owner of The Timbers which was offset against the fiscal 1995 provision. A recovery of bad debt of $292,000 recorded in fiscal 1994 partly offset the favorable changes in net operating results. This recovery related to the Howard Johnson's prepayment transaction, in which the Partnership recovered an amount of previously reserved mortgage interest and land rent receivable. A decline of $28,000 in the net loss recognized from the operations of the wholly-owned Mercantile Tower property offset a decline of $25,000 in the net income from the Marshall's at East Lake joint venture in fiscal 1995. Revenues from Mercantile Tower were higher for the twelve months ended August 31, 1995 as a result of the occupancy gains achieved during fiscal 1995. The net operating results of the Mercantile Tower Office Building in fiscal 1995 and 1994 include the costs of the improvements and leasing costs incurred at the property. As a result of the Partnership's accounting policy with regard to its investment properties held for sale, all costs associated with holding the asset are expensed as incurred. The Partnership's share of venture's income decreased in fiscal 1995 due to lower rental revenues at the Marshall's at East Lake Shopping Center as a result of a decline in effective rental rates experienced during fiscal 1995 and 1994 as well as a decrease in cost recoveries. 1994 Compared to 1993 For the year ended August 31, 1994, the Partnership reported a net loss of $384,000 as compared to net income of $759,000 recognized in fiscal 1993. This unfavorable change in the Partnership's net operating results was primarily due to a decline in mortgage interest income and land rent, along with an increase in property operating expenses at the Mercantile Tower property which is reflected in the income (loss) from investment property held for sale. The decrease in mortgage interest income and land rent resulted primarily from the foreclosure of the Mercantile Tower Office Building on April 12, 1993. This resulted in a combined reduction in interest income and land rent of $426,000 for the year ended August 31, 1994. Also contributing to the decrease in mortgage interest and ground rent was the sale of the Howard Johnson's Motor Lodge effective April 1, 1994. The Partnership recorded only seven months of mortgage interest and ground rent from the Howard Johnson's investments in fiscal 1994, as compared to twelve months in fiscal 1993. The net operating results of the Mercantile Tower Office Building in fiscal 1994 included the costs of the improvements implemented by the management company prior to obtaining the line of credit referred to above, as well as certain leasing costs incurred in the fourth quarter subsequent to obtaining the credit line. As noted above, as a result of the Partnership's accounting policy with regard to its investment properties acquired through foreclosures, all costs associated with holding the asset are expensed as incurred. The Partnership also recognized a provision for possible investment loss of $1,200,000 in fiscal 1994 due to a decline in management's estimate of the fair value of the Mercantile Tower property. Such provision exceeded the $1 million loss recorded in fiscal 1993 to write down the carrying value of the property as of the date of foreclosure. In addition, the Partnership's share of venture's income decreased by $32,000 in fiscal 1994 due to a decline in rental revenues at Marshall's at East Lake as a result of a decline in occupancy and effective rental rates. The unfavorable changes in the Partnership's net operating results were partially offset by the receipt of accrued interest owed on the Howard Johnson's mortgage loan in the amount of approximately $292,000 at the time of the repayment in fiscal 1994. The accrued interest had been fully reserved for in fiscal 1993, and accordingly, was recorded as a recovery of bad debt in fiscal 1994. Excluding the recovery of the Howard Johnson's accrued interest receivable, the provision for possible uncollectible amounts decreased by $253,000 in fiscal 1994 due to the foreclosure of the Mercantile Tower Office Building and the sale of the Howard Johnson's Motor Lodge. During fiscal 1993, the Partnership was reflecting interest income and a corresponding reserve due to the default status of the mortgage loans secured by these investments. Also offsetting the adverse change in net operating results were declines in management fees and general and administrative expenses during fiscal 1994. General and administrative expenses decreased by $59,000 mainly due to a decline in legal fees. Legal fees were higher in fiscal 1993 due to costs incurred in connection with the borrower defaults on the Mercantile Tower and Howard Johnson's investments. Inflation The Partnership completed its fourteenth full year of operations in fiscal 1996, and the effects of inflation and changes in prices on revenues and expenses to date have not been significant. The impact of inflation in future periods may be offset, in part, by an increase in revenues because the Partnership's land leases provide for additional rent based upon increases in the revenues of the related operating properties which would be expected to rise with inflation. Revenues from the Mercantile Tower Office Building and Marshall's at East Lake Shopping Center would also be expected to rise with inflation due to the tenant leases which contain rental escalation and/or expense reimbursement clauses based on increases in tenant sales and property operating expenses. Such increases in revenues would be expected to at least partially offset the increases in Partnership and property operating expenses resulting from inflation. As noted above, the wholly-owned Mercantile Tower Office Building currently has a significant amount of unleased space. During a period of significant inflation, increased operating expenses attributable to space which remained unleased at such time would not be recoverable and would adversely affect the Partnership's net cash flow. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are included under Item 14 of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Partnership The Managing General Partner of the Partnership is Second Qualified Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operations, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract. (a) and (b) The names and ages of the directors and executive officers of the Managing General Partner of the Partnership are as follows: Date elected Name Office Age to Office ---- ------ --- ---------- Bruce J. Rubin President and Director 37 8/22/96 Terrence E. Fancher Director 43 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 49 10/29/85 James A. Snyder Senior Vice President 51 7/6/92 David F. Brooks First Vice President and Assistant Treasurer 54 2/2/82 * Timothy J. Medlock Vice President and Treasurer 35 6/1/88 Thomas W. Boland Vice President 34 12/1/91 Dorothy F. Haughey Secretary 70 2/2/82 * * The date of incorporation of the Managing General Partner. (c) There are no other significant employees in addition to the directors and executive officers mentioned above. (d) There is no family relationship among any of the foregoing directors and executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner. (e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which Paine Webber Properties Incorporated serves as the Adviser. The business experience of each of the directors and executive officers of the Managing General Partner is as follows: Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer at PaineWebber Properties in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School. Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College. Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and a Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of Texas. James A. Snyder is a Senior Vice President of the Managing General Partner and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously as an officer of PWPI from July 1980 to August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution Trust Corporation where he served as the Vice President of Asset Sales prior to re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am Investors, Inc., a real estate investment company. During the period August 1987 to February 1989, Mr. Snyder was Executive Vice President and Chief Financial Officer of Southeast Regional Management Inc., a real estate development company. David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services. Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and a Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985. Thomas W. Boland is a Vice President of the Managing General Partner and a Vice President and Manager of Financial Reporting of the Adviser which he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University. Dorothy F. Haughey is Secretary of the Managing General Partner, Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined PaineWebber in 1962. (f) None of the directors and officers was involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a director or officer. (g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended August 31, 1996 all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with. Item 11. Executive Compensation The directors and officers of the Partnership's Managing General Partner receive no current or proposed renumeration from the Partnership. The Partnership is required to pay certain fees to the Adviser and the General Partners are entitled to receive a share of Partnership cash distributions and a share of profits and losses. These items are described in Item 13. The Partnership has paid cash distributions to the Unitholders on a quarterly basis at rates ranging from 2% to 7% per annum on remaining invested capital over the past five years. However, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) The Partnership is a limited partnership issuing Units of Limited Partnership Interest, not voting securities. All the outstanding stock of the Managing General Partner, Second Qualified Properties, Inc., is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, general partners of which are also officers of the Adviser and the Managing General Partner. Properties Associates is the Initial Limited Partner of the Partnership and owns 5 Units of Limited Partnership Interest in the Partnership. No Limited Partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. (b) Neither the directors and officers of the Managing General Partner nor the general partners of the Associate General Partner, individually own any Units of limited partnership interest of the Partnership. No director or officer of the Managing General Partner nor the general partner of the Associate General Partner possesses a right to acquire beneficial ownership of Units of Limited Partnership Interest of the Partnership. (c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions The Managing General Partner of the Partnership is Second Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"). The Associate General Partner is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. In connection with investing Partnership capital, the Adviser received acquisition fees paid by the borrowers and sellers aggregating approximately 3% of the gross proceeds of the offering. The Adviser may receive a real estate brokerage commission, in an amount not yet determinable, upon the disposition of certain Partnership investments. All distributable cash, as defined, for each fiscal year will be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. Residual proceeds resulting from disposition of Partnership investments will be distributed, generally, 85% to the Limited Partners and 15% to the General Partners, after the prior receipt by the Limited Partners of their original capital contributions and a cumulative annual return based upon a formula related to U.S. Treasury Bill interest rates, as defined in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, any taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's net income or loss for financial accounting purposes have been made in conformity with the allocations of taxable income or loss. Taxable income or tax loss arising from disposition of Partnership investments will be allocated to the Limited and General Partners generally as residual proceeds are distributed. Under the advisory contract, the Adviser has specific management responsibilities; to administer the day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the General Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow) and an incentive management fee (3% of adjusted cash flow subordinated to a non-cumulative annual return to the Limited Partners equal to 10% based upon their adjusted capital contribution) for services rendered. The Adviser earned basic management fees of $41,000 for the year ended August 31, 1996. No incentive management fees have been earned to date. An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services are allocated among several entities, including the Partnership. Included in general and administrative expenses for the year ended August 31, 1996 is $144,000, representing reimbursements to this affiliate for providing such services to the Partnership. The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $8,000 (included in general and administrative expenses) for managing the Partnership's cash assets during the year ended August 31, 1996. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: (1) and (2) Financial Statements and Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. Financial statements for the properties securing the Partnership's mortgage loans have not been included since the Partnership has no contractual right to the information and cannot otherwise practicably obtain the information. (3) Exhibits: The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report. (b) No reports on Form 8-K were filed during the fourth quarter of fiscal 1996. (c) Exhibits See (a)(3) above. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP By: Second Qualified Properties, Inc. Managing General Partner By: /s/ Bruce J. Rubin Bruce J. Rubin President and Chief Executive Officer By: /s/ Walter V. Arnold Walter V. Arnold Senior Vice President and Chief Financial Officer By: /s/ Thomas W. Boland Thomas W. Boland Vice President Dated: November 27, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacity and on the dates indicated. By: /s/ Bruce J. Rubin Date: November 27, 1996 ---------------------- ----------------- Bruce J. Rubin Director By: /s/ Terrence E. Fancher Date: November 27, 1996 ------------------------ ----------------- Terrence E. Fancher Director ANNUAL REPORT ON FORM 10-K Item 14(a)(3) PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP INDEX TO EXHIBITS
Page Number in the Report Exhibit No. Description of Document or Other Reference - ----------- ----------------------- ------------------ (3) and (4) Prospectus of the Registrant Filed with the Commission dated July 1, 1982, supplemented, pursuant to Rule 424(c) with particular reference to the and incorporated herein by Restated Certificate and Agreement reference. Limited Partnership. (10) Material contracts previously filed as Filed with the Commission exhibits to registration statements and pursuant to Section 13 or 15(d) amendments thereto of the registrant of the Securities Exchange Act together with all such contracts filed of 1934 and incorporated as exhibits of previously filed Forms herein by reference. 8-K and Forms 10-K are hereby incorporated herein by reference. (13) Annual Reports to Limited Partners No Annual Report for the year ended August 31, 1996 has been sent to the Limited Partners. An Annual Report will be sent to the Limited Partners subsequent to this filing. (27) Financial Data Schedule Filed as last page of EDGAR submission following the Financial Statements and Financial Statement Schedule required by Item 14.
ANNUAL REPORT ON FORM 10-K Item 14(a)(1) and (2) and 14(d) PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Reference Paine Webber Qualified Plan Property Fund Two, LP: Report of independent auditors F-2 Independent auditors' report relating to Marshall's at East Lake Partnership F-3 Balance sheets as of August 31, 1996 and 1995 F-4 Statements of operations for the years ended August 31, 1996, 1995 and 1994 F-5 Statements of changes in partners' capital (deficit) for the years ended August 31, 1996, 1995 and 1994 F-6 Statements of cash flows for the years ended August 31, 1996, 1995 and 1994 F-7 Notes to financial statements F-8 Financial statement schedules: Schedule III - Real Estate Owned F-20 Schedule IV - Investments in Mortgage Loans on Real Estate F-21 Other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto. REPORT OF INDEPENDENT AUDITORS The Partners of Paine Webber Qualified Plan Property Fund Two, LP: We have audited the accompanying balance sheets of Paine Webber Qualified Plan Property Fund Two, LP as of August 31, 1996 and 1995, and the related statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended August 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of Marshall's at East Lake Partnership (an unconsolidated venture). The Partnership's equity investment in Marshall's at East Lake Partnership totalled $3,173,000 and $3,198,000 as of August 31, 1996 and 1995, respectively, and the Partnership's share of the net income of Marshall's at East Lake Partnership totalled $198,000, $143,000 and $168,000 for the years ended August 31, 1996, 1995 and 1994, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Marshall's at East Lake Partnership, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Paine Webber Qualified Plan Property Fund Two, LP at August 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Boston, Massachusetts November 27, 1996 SMITH & RADIGAN Certified Public Accountants Suite 675 Ashford Perimeter 4151 Ashford-Dunwoody Road, N.E. Atlanta, Georgia 30319-1462 INDEPENDENT AUDITORS' REPORT To the Partners Marshall's at East Lake Partnership We have audited the balance sheets of Marshall's at East Lake Partnership as of August 31, 1996 and 1995, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended August 31, 1996 (not presented herein). These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above (not presented herein) present fairly, in all material respects, the financial position of Marshall's at East Lake Partnership as of August 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. /s/ Smith & Radigan SMITH & RADIGAN Atlanta, Georgia September 20, 1996 PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP BALANCE SHEETS August 31, 1996 and 1995 (In thousands, except per Unit data) ASSETS 1996 1995 ---- ---- Real estate investments: Land $ 1,000 $ 1,000 Mortgage loans receivable, net of allowance for possible uncollectible amounts of $2,703 ($2,743 in 1995) 7,775 7,327 Investment in joint venture, at equity 3,173 3,198 Investment property held for sale, net of allowance for possible investment loss of $2,000 ($1,200 in 1995) 7,500 8,300 ------- ------- 19,448 19,825 Cash and cash equivalents 1,653 5,379 Tax and insurance escrow 255 197 Interest and other receivables 129 90 Prepaid expenses 16 15 ------- ------- $21,501 $25,506 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Accrued real estate taxes $ 183 $ 183 Accounts payable and accrued expenses 93 95 Accounts payable - affiliates 10 12 Tenant security deposits and other liabilities 55 56 Note payable 1,150 1,311 ------- ------- Total liabilities 1,491 1,657 Partners' capital: General Partners: Capital contributions 1 1 Cumulative net income 289 282 Cumulative cash distributions (323) (316) Limited Partners ($1,000 per Unit, 36,241 Units issued): Capital contributions, net of offering costs 32,906 32,906 Cumulative net income 28,547 27,851 Cumulative cash distributions (41,410) (36,875) ------- ------- Total partners' capital 20,010 23,849 ------- ------- $21,501 $25,506 ======= ======= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF OPERATIONS For the years ended August 31, 1996, 1995 and 1994 (In thousands, except per Unit data) 1996 1995 1994 ---- ---- ---- Revenues: Interest from mortgage loans $ 1,195 $ 1,477 $1,612 Land rent 117 203 282 Interest and other income 110 67 51 ------- ------- ------ 1,422 1,747 1,945 Expenses: Management fees 41 45 42 General and administrative 381 438 411 (Recovery of) provision for possible uncollectible amounts (40) 235 78 ------- ------- ------ 382 718 531 ------- ------- ------ Operating income 1,040 1,029 1,414 Partnership's share of venture's income 198 143 168 Gain on sale of land - 211 - Investment property held for sale: Provision for possible investment loss (800) - (1,200) Income (loss) from operations, net 265 (738) (766) ------- ------- ------ (535) (738) (1,966) ------- ------- ------ Net income (loss) $ 703 $ 645 $ (384) ======= ======= ====== Net income (loss) per Limited Partnership Unit $ 19.20 $17.60 $(10.49) ======= ====== ======== Cash distributions per Limited Partnership Unit $125.14 $19.86 $175.25 ======= ====== ======= The above net income (loss) and cash distributions per Limited Partnership Unit are based upon 36,241 Units of Limited Partnership Interest outstanding during each year. See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended August 31, 1996, 1995 and 1994 (In thousands) General Limited Partners Partners Total -------- -------- ----- Balance at August 31, 1993 $ (21) $ 30,695 $ 30,674 Cash distributions (7) (6,352) (6,359) Net loss (4) (380) (384) ------ --------- --------- Balance at August 31, 1994 (32) 23,963 23,931 Cash distributions (7) (720) (727) Net income 6 639 645 ------ -------- -------- Balance at August 31, 1995 (33) 23,882 23,849 Cash distributions (7) (4,535) (4,542) Net income 7 696 703 ------- -------- -------- Balance at August 31, 1996 $ (33) $ 20,043 $ 20,010 ======= ======== ======== See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF CASH FLOWS For the years ended August 31, 1996, 1995 and 1994 Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 703 $ 645 $ (384) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Recovery of allowance for possible uncollectible amounts (448) - - Gain on sale of land - (211) - Partnership's share of venture's income (198) (143) (168) Provision for possible investment loss 800 - 1,200 Changes in assets and liabilities: Tax and insurance escrow (58) (9) 111 Interest and other receivables (39) 196 (100) Prepaid expenses (1) (1) (1) Accrued real estate taxes - 13 (94) Accounts payable and accrued expenses (2) (151) 169 Accounts payable - affiliates (2) 1 (44) Tenant security deposits and other liabilities (1) 8 27 ------- ------ ------ Total adjustments 51 (297) 1,100 ------- ------ ------ Net cash provided by operating activities 754 348 716 ------- ------ ------ Cash flows from investment activities: Proceeds received from repayment of mortgage loan and sale of land - 3,811 5,608 Distributions from joint venture 223 198 255 ------ ------ ------ Net cash provided by investing activities 223 4,009 5,863 ------- ------ ------ Cash flows from financing activities: Proceeds received from issuance of note payable 67 811 604 Principal payments on note payable (228) (104) - Distributions to partners (4,542) (727) (6,359) ------- ------- ------ Net cash used in financing activities (4,703) (20) (5,755) ------- ------- ------- Net (decrease) increase in cash and cash equivalents (3,726) 4,337 824 Cash and cash equivalents, beginning of year 5,379 1,042 218 ------- ------- ------- Cash and cash equivalents, end of year $ 1,653 $ 5,379 $ 1,042 ======= ======= ======= Cash paid during the year for interest $ 115 $ 105 $ 4 ======= ======= ======= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP NOTES TO FINANCIAL STATEMENTS 1. Organization and Nature of Operations Paine Webber Qualified Plan Property Fund Two, LP (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in March 1982 for the purpose of investing in a diversified portfolio of existing income-producing real properties through land purchase-leaseback transactions and first mortgage loans. The Partnership authorized the issuance of units (the "Units") of Partnership interests, of which 36,241 (at $1,000 per Unit) were subscribed and issued between July 1, 1982 and June 30, 1983. The Partnership originally owned land and made first mortgage loans secured by buildings with respect to six operating investment properties. To date, the Partnership has been prepaid on its investments with respect to two of the original operating properties. As of August 31, 1996, the Partnership's mortgage loans and land lease investments on two of the original properties were still outstanding, and the Partnership owned an equity interest in one operating property through a joint venture partnership which resulted from the settlement of a default under the terms of a first mortgage loan held by the Partnership. In addition, the Partnership owns one operating property directly as a result of foreclosing under the terms of its mortgage loan receivable. See Notes 4, 5 and 6 for a further discussion of the Partnership's outstanding real estate investments. 2. Use of Estimates and Summary of Significant Accounting Policies The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of August 31, 1996 and 1995 and revenues and expenses for each of the three years in the period ended August 31, 1996. Actual results could differ from the estimates and assumptions used. The Partnership's investments in land subject to ground leases are carried at the lower of cost or net realizable value. The net realizable value of a real estate investment held for long-term investment purposes is measured by the recoverability of the investment through expected future cash flows on an undiscounted basis, which may exceed the property's current market value. The net realizable value of a property held for sale approximates its current market value. None of the Partnership's land investments were held for sale as of August 31, 1996 or 1995. The Partnership has reviewed FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" which is effective for financial statements for years beginning after December 15, 1995, and believes this new pronouncement will not have a material effect on the Partnership's financial statements. Mortgage loans receivable are carried at the lower of cost or fair value. Amounts representing deferred interest and land rent receivable resulting from loan and ground lease modifications are fully reserved until collected. The Partnership's policy is to provide for any valuation allowances on its mortgage loan investments on a specific identification basis, principally by evaluating the market value of the underlying collateral since the loans are collateral dependent. In addition, a general loan loss reserve was recorded in fiscal 1990 in an amount equal to $990,000, reflecting management's assessment of the general credit risk applicable to the Partnership's portfolio of mortgage loan investments taken as a whole. During fiscal 1994, $542,000 of this loan loss reserve was applied against the loss incurred in conjunction with the repayment of the Howard Johnson's mortgage loan. In fiscal 1996, the remainder of this loan loss reserve, of $448,000, was reversed as a result of continued improvements in the operating performances of the underlying collateral properties and in real estate market conditions in general (see Note 4). The accompanying financial statements include the Partnership's investment in a joint venture partnership which owns one operating property. The Partnership accounts for its investment in the joint venture using the equity method because the Partnership does not have a voting control interest in the venture. Under the equity method the venture is carried at cost adjusted for the Partnership's share of the venture's earnings or losses and distributions. See Note 5 for a description of the joint venture partnership. Investment property held for sale represents an asset acquired by the Partnership through foreclosure proceedings on a first mortgage loan. The Partnership's policy is to carry this asset at the lower of cost or estimated fair value (net of selling expenses). The Partnership's cost basis is equal to the fair value of the asset at the date of foreclosure. Declines in the estimated fair value of the asset subsequent to foreclosure are recorded through the use of a valuation allowance. Subsequent increases in the estimated fair value of the asset result in reductions in the valuation allowance, but not below zero. All costs incurred to hold the asset are charged to expense and no depreciation expense is recorded. For purposes of reporting cash flows, the Partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The mortgage loans receivable, cash and cash equivalents, tax and insurance escrow, interest and other receivables, accounts payable affiliates, accounts payable and accrued liabilities and note payable appearing on the accompanying balance sheets represent financial instruments for purposes of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." With the exception of mortgage loans receivable and note payable, the carrying amount of these assets and liabilities approximates their fair value as of August 31, 1996 due to the short-term maturities of these instruments. Information regarding the fair value of the Partnership's mortgage loans receivable is provided in Note 4. Due to the likelihood of near term prepayment, the mortgage loans receivable have been valued at the lesser of face value or the estimated fair value of the collateral property, as determined by an independent appraisal. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis (see Note 4 for a further discussion). The fair value of the note payable is estimated using discounted cash flow analysis, based on the current market rates for similar types of borrowing arrangements (see Note 7). Certain prior year amounts have been reclassified to conform to the current year presentation. No provision for income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. 3. The Partnership Agreement and Related Party Transactions The Managing General Partner of the Partnership is Second Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"). The Associate General Partner is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. In connection with investing Partnership capital, the Adviser received acquisition fees paid by the borrowers and sellers aggregating approximately 3% of the gross proceeds of the offering. The Adviser may receive a real estate brokerage commission, in an amount not yet determinable, upon the disposition of certain Partnership investments. All distributable cash, as defined, for each fiscal year will be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. Residual proceeds resulting from disposition of Partnership investments will be distributed, generally, 85% to the Limited Partners and 15% to the General Partners, after the prior receipt by the Limited Partners of their original capital contributions and a cumulative annual return based upon a formula related to U.S. Treasury Bill interest rates, as defined in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, any taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's net income or loss for financial accounting purposes have been made in conformity with the allocations of taxable income or loss. Taxable income or tax loss arising from disposition of Partnership investments will be allocated to the Limited and General Partners generally as residual proceeds are distributed. Under the advisory contract, the Adviser has specific management responsibilities; to administer the day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the General Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow) and an incentive management fee (3% of adjusted cash flow subordinated to a non-cumulative annual return to the Limited Partners equal to 10% based upon their adjusted capital contribution) for services rendered. The Adviser earned basic management fees of $41,000, $45,000 and $42,000 for the years ended August 31, 1996, 1995 and 1994, respectively. No incentive management fees have been earned to date. Accounts payable - affiliates at August 31, 1996 and 1995 consists of management fees payable to the Adviser of $10,000 and $12,000, respectively. Included in general and administrative expenses for the years ended August 31, 1996, 1995 and 1994 is $144,000, $176,000 and $161,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership. The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $8,000, $2,000 and $1,000 (included in general and administrative expenses) for managing the Partnership's cash assets during fiscal 1996, 1995 and 1994, respectively. 4. Mortgage Loan and Land Investments The following first mortgage loans were outstanding at August 31, 1996 and 1995 (in thousands):
Date of Loan Amount of Loan and Property 1996 1995 Interest Rate Maturity -------- ---- ---- ------------- -------- Eden West Apts. $ 3,500 $ 3,500 Years 1 to 3 - 11% 6/6/84 Omaha, NE Years 4 to 6 - 11.25% 6/6/99 Thereafter - 11.50% The Timbers 6,978 6,570 11.75% 9/7/84 Apartments (1) (2,703) (2,295) 9/1/98 -------- ------- Raleigh, NC 4,275 4,275 -------- ------- Subtotal 7,775 7,775 Less: General loan reserve (2) - (448) -------- ------- $ 7,775 $ 7,327 ======== =======
(1) See discussion below regarding interest pay rate modifications for the Timbers mortgage loan. Deferred interest is added to the principal balance of the mortgage loan receivable. The Partnership's policy is to reserve for deferred interest until collected. (2) The Partnership recorded a general loan loss reserve of $990,000 in 1990 (see Note 2). During fiscal 1994, $542,000 of this loan loss reserve was applied against the loss incurred in connection with the repayment of the Howard Johnson's mortgage loan (see discussion below). As a result of the continued improvement in the operating performances of the two remaining properties securing the Partnership's mortgage loans receivable and in light of the favorable market conditions which continue to exist for most residential apartment properties in general, the Partnership reversed the remainder of this loan loss reserve in fiscal 1996. The recovery of $448,000 is netted with the provision for possible uncollectible amounts on the accompanying statement of operations. The loans are secured by first mortgages on the properties, the owner's leasehold interest in the land and an assignment of all tenant leases, where applicable. Interest is payable monthly and the principal is due at maturity. In relation to the above-mentioned mortgage loans, the following land purchase-leaseback transactions had also been entered into as of August 31, 1996 and 1995 (in thousands): Cost of Land to the Partnership Property 1996 1995 Annual Base Rent -------- ---- ---- ------------------ Eden West Apartments $ 400 $ 400 Years 1 to 3 - $44,000 Years 4 to 6 - $45,000 Thereafter - $46,000 The Timbers Apartments 600 600 $ 70,500 ------- ------ $ 1,000 $1,000 ======== ====== The land leases have terms of 40 years. Among the provisions of the lease agreements, the Partnership is entitled to additional rent based upon the gross revenues in excess of a base amount, as defined. No additional rent was received during fiscal 1996, 1995 or 1994. The lessees have the option to purchase the land for specified periods of time at a price based on the fair market value, as defined, but not less than the original cost to the Partnership. As of August 31, 1996, both 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 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 loans or exercise of the options to repurchase the land, the Partnership will receive a 40% share of the appreciation above a specified base amount. As discussed further below, the Eden West loan is open to prepayment as of August 31, 1996, and the loan secured by The Timbers becomes prepayable without penalty as of September 1, 1997. Management believes the potential for a near term prepayment of both loans is high. 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 or the estimated fair value of the collateral property. Estimated fair values for the Partnership's mortgage loan investments as of August 31, 1996 are summarized below (in thousands): Mortgage Loan ------------- Eden West Apartments $ 3,500 The Timbers Apartments 6,700 ------- $10,200 ======= The Timbers Apartments ---------------------- During fiscal 1987, the Partnership agreed to modify the payment terms of the loan secured by The Timbers Apartments. Under the terms of The Timbers modification, which was effective on October 1, 1986, for a period of approximately thirty months, a portion of the interest payable was deferred and added to the principal balance. During fiscal 1989, the debt modification expired and a new modification was negotiated. The terms included an extension of the deferral period and the loan maturity to September of 1998. The amount due to the Partnership will continue to be equal to the cash flow of the property available after the payment of operating expenses not to exceed 11.75% of the note balance, but in no event less than 7.75% of the note balance. The amount deferred each year will accrue interest at the original rate of 11.75% beginning at the end of that year and the total deferred amount plus accrued interest will be payable upon maturity of the note in September of 1998. The loan may be prepaid without penalty at any time after September 1, 1997. During fiscal 1994, the Partnership received the minimum payments due under the note of $331,000. During fiscal 1996 and 1995, the Partnership received payments totalling $385,000 and $509,000 respectively, toward the interest owed on the loan secured by The Timbers. Due to the Partnership's policy of reserving for deferred interest until collected, such cash payments reflect the interest income recognized in the Partnership's statements of operations for such years (net of the provision for possible uncollectible amounts). Gross interest income at the original rate of 11.75% per annum would have accrued for each of the three years ended August 31, 1996, 1995 and 1994 in the amount of $502,000 had the modifications referred to above not been necessary. The Partnership has established an allowance for possible uncollectible amounts for the cumulative amount of deferred interest owed under the Timbers modification ($2,703,000 and $2,295,000 at August 31, 1996 and 1995, respectively) due to the uncertainty as to the collection of the deferred interest from this investment. 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 obtaining sufficient financing to repay its obligations to the Partnership. Accordingly, there are no assurances that this transaction will be consummated. Harbour Bay Plaza ----------------- Effective August 25, 1995, the borrower of the Harbour Bay Plaza loan repaid the Partnership's first leasehold mortgage loan secured by Harbour Bay Plaza Shopping Center and purchased the Partnership's interest in the underlying land for total consideration of $3,833,000. Such consideration included the repayment of the principal balance of the mortgage loan, of $2,850,000, plus interest accrued through August 25, 1995, of $23,000. The Partnership's cost basis in the land was $750,000. Pursuant to the ground lease, the Partnership received $211,000 in excess of the outstanding mortgage loan and land investments as its share of the appreciation in value of the operating investment property above a specified base amount. The net proceeds from this transaction were distributed to the Limited Partners as a Special Distribution of $106 per original $1,000 investment on October 13, 1995. Howard Johnson's Motor Lodge ---------------------------- An agreement for a third modification of the Howard Johnson's mortgage loan was reached between the borrower and the Partnership during fiscal 1993. As part of the workout agreement, the borrower had until June 30, 1994 to market the property for sale. Under the agreement, the Partnership earned a blended rate of 7% per annum on the unpaid principal balance of the loan ($5,050,000) and the cost basis of the land ($1,100,000). In the event that the borrower failed to comply with the terms of this modification, the deed to the property, which was placed in escrow, was to have been released to the Partnership, resulting in a foreclosure pursuant to the terms of the first mortgage loan and a termination of the ground lease. The borrower was also required to personally guarantee payment of the mortgage interest and land rent until the property was sold or deeded back to the Partnership. The agreement further provided that if there had been no default, as defined, and the property was sold, all proceeds up to $5.2 million would be paid to the Partnership. Additional proceeds would go to the Partnership until delinquent debt service through April 30, 1993, as defined, was paid in full. Thereafter, any additional proceeds would be paid 25% to the Partnership and 75% to the borrower. Effective April 1, 1994, the borrower sold the Howard Johnson's Motor Lodge and repaid the Partnership's land and loan investments in accordance with the terms of the third modification agreement. The total net proceeds received by the Partnership amounted to approximately $5.9 million. In accordance with the third modification agreement, such proceeds included the payment of $292,000 of deferred debt service and ground rent, which had previously been fully reserved for. The remaining proceeds of approximately $5,608,000 were less than the combined carrying value of the mortgage loan and land investments of $6,150,000. The resulting deficiency, of approximately $542,000, was charged against the outstanding general loan loss reserve. Accordingly, the aforementioned transaction did not result in the recognition of a loss for financial reporting purposes in fiscal 1994. The Partnership retained approximately $283,000 of the net proceeds from the Howard Johnson's disposition in order to maintain adequate cash reserve balances. The remainder was paid out to the Limited Partners through a special distribution of approximately $5,617,000, or $155 per original $1,000 investment, which was made on May 25, 1994. 5. Investment in Joint Venture On June 12, 1990, the borrower of the mortgage loan secured by the Marshall's at East Lake Shopping Center, Oxford/Concord Associates, filed a Chapter 11 petition with the United States Bankruptcy Court for the Northern District of Georgia. On November 14, 1990, the Bankruptcy Court ordered that both the Partnership and the borrower submit plans for the restructuring of the mortgage loan and ground lease agreements. During fiscal 1991, the Partnership and the borrower reached a settlement agreement which involved the formation of a joint venture to own and operate the property on a go-forward basis. The formation of the joint venture was approved by the Bankruptcy Court and became effective in December of 1991. The Partnership contributed its rights and interests under its mortgage loan to the joint venture and the loan was extinguished. In addition, the Partnership contributed the land underlying the operating property to the joint venture and the related ground lease was terminated. Oxford/Concord Associates contributed all of its rights, title and interest in and to the improvements, subject to the Partnership's loan, to the joint venture. Since the Partnership received an equity interest in full satisfaction of its outstanding mortgage loan receivable, the transaction was accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". Accordingly, the Partnership would have recognized a loss to the extent that the face amount of the mortgage loan and the carrying value of the land exceeded the fair value of the equity interest acquired. However, management estimated that the fair value of the equity interest acquired was approximately equal to the face amount of the loan and the investment in land. Therefore, no loss was recorded at the time of the restructuring. The carrying value of the mortgage loan receivable and land comprising the Partnership's investment in Marshall's at East Lake, which totalled $3,500,000, was reclassified to investment in joint venture effective December 11, 1991. Subsequent to the restructuring, the Partnership has accounted for its equity investment as if it had acquired the interest for cash, in accordance with SFAS No. 15. Based upon the provisions of the joint venture agreement, the Partnership's investment in the Marshall's joint venture is accounted for on the equity method in the Partnership's financial statements. Under the equity method, the investment is carried at cost, adjusted for the Partnership's share of earnings, losses and distributions. 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 August 31, 1996 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 August 31, 1996. Condensed financial statements of this joint venture follow. Condensed Balance Sheet August 31, 1996 and 1995 (in thousands) Assets 1996 1995 ---- ---- Current assets $ 115 $ 16 Operating investment property, net 3,034 3,162 Other assets 73 74 --------- --------- $ 3,222 $ 3,252 ========= ========= Liabilities and Partners' Capital Current liabilities $ 30 $ 37 Other liabilities 19 17 Partnership's share of capital 3,173 3,198 ---------- ---------- $ 3,222 $ 3,252 ========== ========== Condensed Summary of Operations For the years ended August 31, 1996, 1995, 1994 (in thousands) 1996 1995 1994 ---- ---- ---- Rental income and expense reimbursements $ 506 $ 444 $ 468 Interest and other income 2 2 1 ------- ------ ------- 508 446 469 Interest expense - - 2 Property operating expenses 163 161 167 Depreciation and amortization 147 142 132 -------- ------ ------- 310 303 301 -------- ------ ------- Net income $ 198 $ 143 $ 168 ======== ====== ======= Net income: Partnership's share of net income $ 198 $ 143 $ 168 Co-venturer's share of net income - - - -------- ------ -------- $ 198 $ 143 $ 168 ======== ====== ======== This joint venture is subject to a partnership agreement which determines the distribution of available funds, the disposition of the venture's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the venture. Substantially all of the Partnership's investment in this joint venture is restricted as to distributions. A description of the operating property owned by the joint venture and the terms of the joint venture agreement are summarized below: Marshall's at East Lake Partnership ----------------------------------- Marshall's at East Lake Partnership, a Delaware general partnership ("the joint venture") was organized on December 11, 1991 by the Partnership and Oxford/Concord Associates ("Oxford"), a Georgia joint venture, to acquire, own and operate Marshall's at East Lake Shopping Center. The property, which was 94% leased as of August 31, 1996, is a 55,175 square foot shopping center on approximately 6.7 acres of land in suburban Atlanta, Georgia. The joint venture agreement provides that all taxable income for any fiscal year will, in general, be allocated to the Partnership until it has received income allocations equal to a cumulative 9% return upon its defined invested capital ($4,250,000 at August 31, 1996). Thereafter, taxable income will be allocated 80% to the Partnership and 20% to Oxford. In general, all tax losses will be allocated to the Partnership. The joint venture agreement also provides that cash flow, as defined, be distributed monthly to the Partnership until it has received cumulative distributions equal to a 9% return upon its defined invested capital. Thereafter, cash flow will be distributed 80% to the Partnership and 20% to Oxford. The Partnership received distributions from the joint venture totalling $223,000, $198,000 and $255,000 during the years ended August 31, 1996, 1995 and 1994, respectively. The Partnership would need to receive additional distributions of $598,000 to reach a cumulative non-compounded return of nine percent on its defined investment capital as of August 31, 1996. Proceeds from any capital transaction, as defined, shall be distributed first to the Partnership until it has received aggregate distributions equal to a 9% return upon its defined invested capital; second, to the Partnership until it has received an amount equal to its defined invested capital; and the balance, if any, will be distributed 80% to the Partnership and 20% to Oxford. The Partnership entered into a property management contract with New Market Management Company (the "Manager"), an affiliate of Oxford, for the management of the property. As compensation for management services provided to the joint venture, the Manager receives a management fee equal to 5% of gross cash receipts, as defined, subject to a monthly minimum of $2,000. Such fees amounted to $25,000, $25,000 and $23,000 for the years ended August 31, 1996, 1995 and 1994, respectively. The Partnership and Oxford must make all decisions unanimously relating to the business and affairs of the joint venture. However, the Partnership can unilaterally, without the approval of Oxford, terminate upon thirty days' written notice the current management company. 6. Investment Property Held for Sale Mercantile Tower Office Building -------------------------------- The Partnership assumed ownership of the Mercantile Tower office building, in Kansas City, Missouri, on April 12, 1993 through a deed-in-lieu of foreclosure action following a default under the terms of a first mortgage loan held by the Partnership. The Partnership complies with the guidelines set forth in 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. Declines in the estimated fair value of the asset subsequent to foreclosure are recorded through the use of a valuation allowance. Subsequent increases in the estimated fair value of the asset result in reductions in the valuation allowance, but not below zero. The combined balance of the land and the mortgage loan investment at the time title was transferred was $10,500,000. The estimated fair value of the operating property at the date of foreclosure, net of selling expenses, was $9,500,000. Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in the statement of operations for fiscal 1993. In fiscal 1996 and 1994, the Partnership recorded provisions for possible investment loss in the amounts of $300,000 and $1,200,000, respectively, to reflect declines in management's estimate of the fair value of the investment property. The net carrying value of the Mercantile Tower investment property at August 31, 1996 and 1995, of $8,000,000 and $8,300,000, respectively, is classified as investment property held for sale on the Partnership's balance sheets. The Partnership records income from the investment property held for sale in the amount of the difference between the property's gross revenues and property operating expenses (including leasing costs and improvement expenses), taxes and insurance. Summarized operating results for Mercantile Tower for the years ended August 31, 1996, 1995 and 1994 (in thousands): 1996 1995 1994 ---- ---- ---- Rental revenues and expense recoveries $1,811 $1,654 $1,574 Other income 5 - 2 ------- ------ ------- 1,816 1,654 1,576 Property operating expenses (1) 1,193 1,993 2,044 Property taxes and insurance 244 287 294 Interest expense 114 112 4 ------- ------ ------- 1,551 2,392 2,342 ------- ------ ------- Income (loss) from investment property held for sale, net $ 265 $ (738) $ (766) ======= ====== ======= (1) As discussed in Note 2, in accordance with the Partnership's accounting policy for assets held for sale, capital improvement costs are expensed as incurred. Included in property operating expenses for the years ended August 31, 1996, 1995 and 1994 is capital improvement costs of $159,000, $965,000 and $1,141,000, respectively. 7. Note payable Note payable as of August 31, 1996 and 1995 consists of the following secured indebtedness (in thousands): 1996 1995 ---- ---- Line-of-credit borrowings secured by the Mercantile Tower property (see Note 6). Draws under the line, up to a maximum of $2,000,000, can be made through February 28, 1998, only to fund approved leasing and capital improvements costs related to the Mercantile Tower property. The outstanding borrowings bear interest at the prime rate plus 1% per annum. Interest-only payments were due on a monthly basis through February 1995. Thereafter, monthly principal and interest payments are due through maturity on February 10, 2001. The fair value of the note payable approximated its carrying amount as of August 31, 1996. $ 1,150 $ 1,311 ======= ======= Scheduled maturities of the outstanding debt for the next six years are as follows (in thousands): 1997 $ 256 1998 256 1999 255 2000 255 2001 128 ------- $ 1,150 ======= 8. Leases The Partnership leases office space at the Mercantile Tower office building under operating leases which provide for fixed minimum rents and reimbursements of certain operating costs. Rental revenues are recognized on a straight-line basis over the life of the related lease. Minimum future rental revenues to be received by the Partnership under noncancellable operating leases for the next five years and thereafter are as follows (in thousands): 1997 $ 1,554 1998 1,261 1999 982 2000 840 2001 766 Thereafter 1,936 --------- $ 7,339 ========= 9. Contingencies 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 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 has been preliminarily approved by the court and 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 proposed settlement is scheduled to continue in November 1996. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleges, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint seeks compensatory damages of $15 million plus punitive damages against PaineWebber. In September 1996, the court dismissed many of the plaintiffs' claims as barred by applicable securities arbitration regulations. Mediation hearings are scheduled to be held in December 31, 1996. The eventual outcome of this litigation and the potential impact, if any, on the Partnership's unitholders cannot be determined at the present time. Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for any 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 cannot estimate the impact, if any, of the potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. 10. Subsequent Events On October 15, 1996, the Partnership distributed $167,000 to the Limited Partners and $2,000 to the General Partners for the quarter ended August 31, 1996. Schedule III - Real Estate Owned PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP August 31, 1996 (In thousands)
Cost Basis of Gross Amount at Date of Investment to Which Carried Original Size Description Encumbrances Partnership (A) at Close of Period (A) Investment of Investment - ----------- ------------ --------------- ---------------------- ---------- ------------- Office Building $ 1,150 $10,500 $ 9,500 4/29/83 13,500 net Kansas City, MO (1) rentable sq. ft. on 32,000 sq. ft. of land Land underlying - 400 400 6/6/84 10.2 acres Apartment Complex (B) Omaha, NE Land underlying - 600 600 9/7/84 18 acres Apartment Complex (B) Raleigh, NC ------- ------- ------- $ 1,150 $11,500 $10,500 ======= ======= =======
Notes: (A) These amounts represent the original cost of each investment and the gross amount at which these investments are carried on the balance sheet at August 31, 1996. The aggregate cost for federal income tax purposes at August 31, 1996 is approximately $8,327,000. (B) All senior mortgages on the land investments are held by Paine Webber Qualified Plan Property Fund Two, LP. See Schedule IV. (C) Reconciliation of real estate owned: 1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 10,500 $11,250 $12,350 Acquisitions - - - Dispositions (2) - (750) (1,100) -------- ------- ------- Balance at end of year $ 10,500 $10,500 $11,250 ======== ======= ======= (1) The Partnership assumed ownership of the Mercantile Tower Office Building located in Kansas City, Missouri, on April 12, 1993 as a result of foreclosure proceedings. The balance of the mortgage note at the time title was transferred was $9,500,000 and the land had a cost basis to the Partnership of $1,000,000. The Partnership recorded a $1,000,000 write-down to reflect the estimate of the property's fair value at the time of foreclosure, net of selling expenses. In fiscal 1996 and 1994, the Partnership recorded provisions for possible investment loss in the amounts of $800,000 and $1,200,000, respectively, to reflect declines in management's estimate of the fair value of the investment property. Accordingly, the net carrying value of the investment on the Partnership's balance sheet at August 31, 1996 amounted to $7,500,000. See Note 6 to the financial statements accompanying this Annual Report for a further discussion of these events. (2) See Note 4 to the financial statements for a discussion of the sale of the land underlying the Howard Johnson's Motor Lodge during fiscal 1994 and the sale of the land underlying the Harbour Bay Plaza Shopping Center during fiscal 1995. Schedule IV - Investments in Mortgage Loans on Real Estate PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP August 31, 1996 (In thousands)
Principal amount of loans subject Carrying to delinquent Final maturity Periodic Face amount of amount of principal Description Interest rate Date payment terms mortgage mortgage or interest ----------- ------------- ----------------- ------------- -------- -------- ----------- First Mortgage Loans: Apartment Complex 11.5% June 6, 1999 Interest monthly, $ 3,500 $ 3,500 - Omaha, NE principal at maturity Apartment Complex 11.75% (1) September 1, 1998 Interest monthly, 6,978 6,978 - Raleigh, NC principal at maturity (2,703) (1) -------- 4,275 -------- -------- TOTALS $ 10,478 $ 7,775 ======== ======== 1996 1995 1994 ---- ---- ---- Balance at beginning of period $ 7,327 $10,177 $14,685 Additions during the period: Interest deferrals, net (1) 408 235 370 Dispositions during the period: Repayment of mortgage loans receivable (2) - (2,850) (4,508) Recovery of (provision for) possible uncollectible amounts (1) 40 (235) (370) ------- ------- ------- Balance at end of period $ 7,775 $ 7,327 $10,177 ======= ======= =======
(1) See Note 4 to the financial statements for information regarding certain valuation accounts and modifications to the payment terms associated with The Timbers (Raleigh) mortgage loan. Deferred interest is added to the principal balance of the mortgage loan receivable. The Partnership's policy is to reserve for deferred interest until collected. (2) During fiscal 1994, the Howard Johnson's Motor Lodge was sold and the Partnership's land and loan investments were repaid in accordance with the terms of the third modification agreement. During fiscal 1995, the Harbour Bay Plaza mortgage loan was repaid. See Note 4 to the Financial Statements accompanying this Annual Report for a further discussion of these events. EX-27 2 ARTICLE 5 FDS FOR THE TWELVE MONTHS ENDED 8/31/96
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the year ended August 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS AUG-31-1996 AUG-31-1996 1,653 0 10,607 2,703 0 2,053 11,673 0 21,501 341 1,150 0 0 0 20,010 21,501 0 1,885 0 422 0 760 0 703 0 703 0 0 0 703 19.20 19.20
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