-----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, DiKqP97/hOjyLumExWwGRKdwoFEptULIsI4lmEKYclsIzOsR9XykPJLJa6owQSVO 7KgKgUWv0H96N8y49QBWxQ== 0000700913-97-000003.txt : 19970415 0000700913-97-000003.hdr.sgml : 19970415 ACCESSION NUMBER: 0000700913-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970414 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17146 FILM NUMBER: 97579894 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398118 10-Q 1 THIS IS A 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number: 0-17146 PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP (Exact name of registrant as specified in its charter) Delaware 04-2752249 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 439-8118 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No ._____ ----- PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP BALANCE SHEETS February 28, 1997 and August 31, 1996 (Unaudited) (In thousands) ASSETS February 28 August 31 ----------- --------- Real estate investments: Land $ 1,000 $ 1,000 Mortgage loans receivable, net 7,775 7,775 Investment in joint venture, at equity 3,148 3,173 Investment property held for sale, net 7,500 7,500 -------- ------- 19,423 19,448 Cash and cash equivalents 1,602 1,653 Tax and insurance escrow 346 255 Interest and other receivable 126 129 Prepaid expenses 15 16 -------- -------- $ 21,512 $ 21,501 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accrued real estate taxes $ 40 $ 183 Accounts payable and accrued expenses 70 93 Accounts payable - affiliates 10 10 Tenant security deposits and other liabilities 61 55 Note payable 1,022 1,150 Total partners' capital 20,309 20,010 -------- --------- $ 21,512 $ 21,501 ======== ======== See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF INCOME For the three and six months ended February 28, 1997 and February 29, 1996 (Unaudited) (In thousands, except per Unit amounts) Three Months Ended Six Months Ended February 28/29 February 28/29, ------------------- ------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Interest from mortgage loans $ 307 $ 293 $ 613 $ 587 Land rent 29 29 58 58 Other interest income 21 21 41 70 ------- ------ ------- ------- 357 343 712 715 Expenses: Management fees 10 8 20 20 General and administrative 62 89 117 156 Provision for possible uncollectible amounts 124 110 247 166 ------- ------ ------- ------- 196 207 384 342 ------- ------ ------- ------- Operating income 161 136 328 373 Partnership's share of venture's income 48 46 88 89 Income from operations of investment property held for sale, net 210 214 221 319 ------- ------- -------- ------- Net income $ 419 $ 396 $ 637 $ 781 ======= ======= ======== ====== Net income per Limited Partnership Unit $ 11.39 $ 10.82 $ 17.41 $21.33 ======= ======= ======= ====== Cash distributions per Limited Partnership Unit $ 4.62 $ 4.62 $ 9.24 $115.90 ======= ======= ======== ======= The above net income and cash distributions per Limited Partnership Unit are based upon the 36,241 Units of Limited Partnership Interest outstanding during each period. See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the six months ended February 28, 1997 and February 29, 1996 (Unaudited) (In thousands) General Limited Partners Partners -------- -------- Balance at August 31, 1995 $(33) $23,882 Cash distributions (4) (4,200) Net income 8 773 ---- ------- Balance at February 29, 1996 $(29) $20,455 ==== ======= Balance at August 31, 1996 $(33) $20,043 Cash distributions (3) (335) Net income 6 631 ---- ------- Balance at February 28, 1997 $(30) $20,339 ==== ======= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF CASH FLOWS For the six months ended February 28, 1997 and February 29, 1996 (Unaudited) Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 637 $ 781 Adjustments to reconcile net income to net cash provided by operating activities: Partnership's share of venture's income (88) (89) Changes in assets and liabilities: Tax and insurance escrow (91) (52) Interest and other receivables 3 (31) Prepaid expenses 1 10 Accrued real estate taxes (143) (137) Accounts payable and accrued expenses (23) (79) Accounts payable - affiliates - (2) Tenant security deposits 6 (3) ------- -------- Total adjustments (335) (383) ------- -------- Net cash provided by operating activities 302 398 Cash flows from investing activities: Distributions from joint venture 113 - Cash flows from financing activities: Principal payments on note payable (128) (37) Distributions to partners (338) (4,204) ------- -------- Net cash used in financing activities (466) (4,241) ------- -------- Net decrease in cash and cash equivalents (51) (3,843) Cash and cash equivalents, beginning of period 1,653 5,379 ------- -------- Cash and cash equivalents, end of period $ 1,602 $ 1,536 ======= ======== Supplemental disclosure: Cash paid during the period for interest $ 52 $ 57 ======= ======== See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP Notes to Financial Statements (Unaudited) 1. General The accompanying financial statements, footnotes and discussion should be read in conjunction with the financial statements and footnotes contained in the Partnership's Annual Report for the year ended August 31, 1996. In the opinion of management, the accompanying financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim period. All of the accounting adjustments reflected in the accompanying interim financial statements are of a normal recurring nature. The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of February 28, 1997 and August 31, 1996 and revenues and expenses for the three and six months ended February 28, 1997 and February 29, 1996. Actual results could differ from the estimates and assumptions used. 2. Mortgage Loan and Land Investments The outstanding first mortgage loans and the cost of the related land to the Partnership at February 28, 1997 and August 31, 1996 are as follows (in thousands): Amount Property of Mortgage Loan Cost of Land -------- ---------------- ------------ Eden West Apartments $ 3,500 $ 400 Omaha, NE The Timbers Apartments 4,275(1) 600 Raleigh, NC -------- ------- $ 7,775 $ 1,000 ======== ======= (1) The balance shown is net of an allowance for possible uncollectible amounts of $2,950 and $2,703, respectively, as of February 28, 1997 and August 31, 1996 (see discussion below). The loans are secured by first mortgages on the properties, the owner's leasehold interest in the land and an assignment of all leases, where applicable. Interest on the Eden West and Timbers loans is payable monthly at rates of 11.5% and 11.75% per annum, respectively, and the principal on both loans is due at maturity. Among the provisions of the lease agreements, the Partnership is entitled to additional rent based upon the gross revenues in excess of a base amount, as defined. For the six-month periods ended February 28, 1997 and February 29, 1996, no additional rents were received. As discussed in the Annual Report, the lessees have the option to purchase the land for specified periods of time at a price based on fair market value, as defined, but not less than the original cost to the Partnership. As of February 28, 1997, all of the options to purchase the land were exercisable. The objectives of the Partnership with respect to its mortgage loan and land investments are to provide current income from fixed mortgage interest payments and base land rents, then to provide increases to this current income through participation in the annual revenues generated by the properties as they increase above the specified base amounts. In addition, the Partnership's investments are structured to share in the appreciation in value of the underlying real estate. Accordingly, upon either sale, refinancing, maturity of the mortgage loan or exercise of the option to repurchase the land, the terms of the leases call for the Partnership to receive a 40% to 52% share of the appreciation above a specified base amount. As discussed further below, the Eden West loan is open to prepayment as of February 28, 1997, and the loan secured by The Timbers becomes prepayable without penalty as of September 1, 1997. Management believes there is the potential for a near term prepayment of both loans. As a result of these circumstances, the mortgage loan instruments have been valued, based on an expected short-term maturity, at the lesser of face value (prior to any allowance for possible uncollectible amounts) or the estimated fair value of the collateral property. Estimated fair values for the Partnership's mortgage loan investments as of February 28, 1997 are summarized below (in thousands): Face Value of Mortgage Loan ------------- Eden West Apartments $ 3,500 The Timbers Apartments 6,700 ------- $10,200 Eden West Apartments -------------------- During the last quarter of fiscal 1995, the Partnership received notice from the Eden West borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. The amount to be received by the Partnership as its share of the appreciation of the Eden West property has not been agreed upon to date. The terms of the Partnership's ground lease provide for the possible resolution of disputes between the parties over value issues through an arbitration process. In addition to the amount to be determined as the Partnership's share of the property's appreciation under the ground lease, the terms of the Eden West mortgage loan require a prepayment penalty which would be equal to 2.5% of the outstanding principal balance of $3,500,000 through May 1997. Subsequent to May 31, 1997, the prepayment penalty declines to 1.25% for the next twelve months, after which there would be no prepayment penalty for the remainder of the term, through maturity in June 1999. If completed, the proceeds of any prepayment transaction would be distributed to the Limited Partners. However, the transaction remains contingent on, among other things, a resolution of the value issue, and the borrower has not pursued negotiations in recent months. Accordingly, there are no assurances that a payment transaction will be consummated in the near term. The Timbers Apartments ---------------------- Under the terms of the Timbers loan modification executed in fiscal 1989, the amount payable to the Partnership is equal to the cash flow of the property available after the payment of operating expenses, not to exceed 11.75% of the note balance, but in no event less than 7.75% of the note balance. The amount deferred each year will accrue interest at the original rate of 11.75% beginning at the end of that year and the total deferred amount plus accrued interest will be payable upon maturity of the note in September of 1998. The total balance of the principal and deferred interest receivable at February 28, 1997 and August 31, 1996 was $7,225,000 and $6,978,000, respectively. The Partnership has established an allowance for possible uncollectible amounts for the cumulative amount of deferred interest owed under the Timbers modification ($2,950,000 at February 28, 1997 and $2,703,000 at August 31, 1996) due to the Partnership's policy of reserving for deferred interest until collected. Harbour Bay Plaza ----------------- On August 24, 1995, the borrower of the Harbour Bay Plaza loan repaid the Partnership's first leasehold mortgage loan secured by Harbour Bay Plaza Shopping Center and purchased the Partnership's interest in the underlying land for total consideration of $3,833,000. The principal balance of the mortgage loan was $2,850,000 plus interest accrued through August 25, 1995 of $23,000. The Partnership's cost basis in the land was $750,000. Pursuant to the ground lease, the Partnership received $211,000 in excess of the outstanding mortgage loan and land investments as its share of the appreciation in value of the operating investment property above a specified base amount. The net proceeds from this transaction were distributed to the Limited Partners as a Special Distribution of approximately $3,842,000, or $106 per original $1,000 investment, on October 13, 1995. 3. Investment in Joint Venture As discussed in the Annual Report, on June 12, 1990, the borrower of the mortgage loan secured by the Marshalls at East Lake Shopping Center, Oxford/Concord Associates, filed a Chapter 11 petition with the United States Bankruptcy Court for the Northern District of Georgia. On November 14, 1990, the Bankruptcy Court ordered that both the Partnership and the borrower submit plans for the restructuring of the mortgage loan and ground lease agreements. During fiscal 1991, the Partnership and the borrower reached a settlement agreement which involved the formation of a joint venture to own and operate the property on a go-forward basis. The formation of the joint venture was approved by the Bankruptcy Court and became effective in December of 1991. The Partnership contributed its rights and interests under its mortgage loan to the joint venture and the loan was extinguished. In addition, the Partnership contributed the land underlying the operating property to the joint venture and the related ground lease was terminated. Oxford/Concord Associates contributed all of its rights, title and interest in and to the improvements, subject to the Partnership's loan, to the joint venture. Subsequent to the restructuring, the Partnership has accounted for its investment in the Marshalls joint venture on the equity method because the Partnership does not have a voting control interest in the venture. Under the equity method, the investment is carried at cost, adjusted for the Partnership's share of earnings, losses and distributions. The estimated fair value of the Partnership's equity interest in the Marshalls at East Lake joint venture is below the carrying value of the investment on the accompanying balance sheet as of February 28, 1997 by approximately $450,000. However, based on management's estimates of future cash flows, the carrying value is expected to be recovered. Accordingly, no impairment writedown has been recognized. If management's estimates of future cash flows or expected holding period prove to be inaccurate, the Partnership may be unable to recover the carrying value of the joint venture investment as of February 28, 1997. Summarized operating results of the venture for the three- and six-month periods ended February 28, 1997 and February 29, 1996 are as follows (in thousands): Three Months Ended Six Months Ended February 28/29, February 28/29, ------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Rental revenues and expense reimbursements $ 134 $ 119 $ 263 $ 243 Expenses: Property operating expenses 33 29 64 65 Real estate taxes 16 9 37 18 Depreciation and amortization 37 35 74 71 ------ ------ ------ ------ 86 73 175 154 ------ ------ ------ ------ Net income $ 48 $ 46 $ 88 $ 89 ====== ====== ====== ====== Net income: Partnership's share of net income $ 48 $ 46 $ 88 $ 89 Co-venturer's share of net income - - - - ------ ------ ------ ------ $ 48 $ 46 $ 88 $ 89 ====== ====== ====== ====== 4. Investment Property Held for Sale Mercantile Tower Office Building -------------------------------- As discussed in the Annual Report, the Partnership assumed ownership of the Mercantile Tower Office Building, in Kansas City, Missouri, through a deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain defaults on the Partnership's mortgage loan receivable. The Partnership complies with the guidelines set forth in the Statement of Position entitled "Accounting for Foreclosed Assets," issued by the American Institute of Certified Public Accountants, to account for its investment properties acquired through foreclosures. Under the Statement of Position, a foreclosed asset is recorded at the lower of cost or estimated fair value, reduced by the estimated costs to sell the asset. Cost is defined as the fair value of the asset at the date of the foreclosure. Adjustments to the carrying value of the assets subsequent to foreclosure are recorded through the use of a valuation allowance. The combined balance of the land and the mortgage loan investment at the time title was transferred was $10,500,000. The estimated fair value of the operating property at the date of foreclosure, net of selling expenses, was $9,500,000. Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in fiscal 1993. Since the date of the foreclosure, the Partnership has recorded provisions for possible investment loss totalling $2,000,000 to reflect additional declines in management's estimate of the fair value of the investment property. The net carrying value of the Mercantile Tower investment property as of February 28, 1997 and August 31, 1996, of $7,500,000, is classified as an investment property held for sale on the accompanying balance sheets. The Partnership records income from the investment property held for sale in the amount of the difference between the property's gross revenues and property operating expenses (including leasing costs and improvement expenses), taxes and insurance. Summarized operating results for Mercantile Tower for the three- and six-month periods ended February 28, 1997 and February 29, 1996 are as follows (in thousands): Three Months Ended Six Months Ended February 28/29, February 28/29, ----------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Rental revenues and expense recoveries $ 596 $ 552 $ 1,013 $ 964 Interest and other income 6 5 10 7 ----- ------ -------- ----- 602 557 1,023 971 Expenses: Property operating expenses 335 278 657 497 Interest expense 25 32 52 57 Property taxes and insurance 32 33 93 98 ----- ------ ------- ----- 392 343 802 652 ----- ------ ------- ----- Income from operations of investment property held for sale, net $ 210 $ 214 $ 221 $ 319 ===== ====== ======= ===== The above property operating expenses for the three and six months ended February 28, 1997 include capital improvements and leasing costs of $62,000 and $116,000, respectively. 5. Related Party Transactions The Adviser earned basic management fees of $20,000 for each of the six-month periods ended February 28, 1997 and February 29, 1996. Accounts payable - affiliates at both February 28, 1997 and August 31, 1996 consists of management fees of $10,000 payable to the Adviser. Included in general and administrative expenses for the six-month periods ended February 28, 1997 and February 29, 1996 is $75,000 and $77,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership. Also included in general and administrative expenses for each of the six-month periods ended February 28, 1997 and February 29, 1996 is $2,000 representing fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the Partnership's cash assets. 6. Note payable Note payable as of February 28, 1997 and August 31, 1996 consists of the following secured indebtedness (in thousands): February 28 August 31 ----------- --------- Line of credit borrowings secured by the Mercantile Tower property (see Note 4). Draws under the line, up to a maximum of $2,000,000, can be made through February 28, 1998, only to fund approved leasing and capital improvement costs related to the Mercantile Tower property. The outstanding borrowings bear interest at the prime rate (8.25% at February 28, 1997) plus 1% per annum. Interest-only payments were due on a monthly basis through February 1995. Thereafter, monthly principal and interest payments are due through maturity on February 10, 2001. The fair value of the note approximated its carrying amount as of February 28, 1997. $ 1,022 $ 1,150 ======= ======= PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- The occupancy level at the wholly-owned Mercantile Tower Office Building increased to 60% as of February 28, 1997, from 57% as of November 30, 1996. As previously reported, the pace of the lease-up at Mercantile Tower has been well below management's expectations. With significant competition in the downtown Kansas City office market, management is finding it difficult to obtain economically viable lease terms from the number of tenants which are looking to lease space in the market. Leasing activity during the second quarter of fiscal 1997 at Mercantile Tower includes the signing of two new lease for approximately 6,400 square feet, an expansion of by an existing tenant for 4,500 square feet and one lease termination of 4,200 square feet. In addition, subsequent to the quarter-end, two additional lease expansions were executed for another 4,200 square feet which will add 2% to the building's overall occupancy level. Also subsequent to February 28, 1997, the installation of a new exterior stairway to replace an outdoor escalator at the office building was completed. Stabilizing the operations of the Mercantile Tower property, which represented 32% of the Partnership's original investment portfolio, remains the primary goal of management. Until a stabilized occupancy level is achieved, the Partnership's investment in Mercantile Tower is not expected to generate any significant excess cash flow. Available cash flow, for the most part, will be reinvested in enhancements aimed at improving the marketability of the vacant space at the property as well as for leasing costs for new and renewing tenants above the amounts available under the $2 million line of credit obtained in fiscal 1994. During the quarter ended February 28, 1997, the Partnership received an unsolicited offer to purchase the Mercantile Tower Offices Building. Management is now analyzing the potential benefits to the Limited Partners of pursuing a sale of the property in the near term. While a sale of the property at its current leasing level would yield less proceeds than the sale of the property at a stabilized level, the time, capital and risk associated with the leasing activity required to achieve stabilized operations may out weigh the potential benefits of receiving a higher sale price. Management intends to explore the market for a possible sale of the property over the next several months. However, there are no assurances that a sale transaction will be completed. Occupancy at the Marshalls at East Lake Shopping Center as of February 28, 1997 was 94%, unchanged from the preceding three quarters. The leasing team continues to seek one or more long-term users for the property's remaining vacancy of 3,300 square feet. The only property improvements planned for Marshalls at East Lake for fiscal 1997 are to the parking area at the rear of the center. As discussed in the Annual Report, the mortgage loans secured by the Eden West Apartments and The Timbers Apartments bear interest at annual rates of 11.5% and 11.75%, respectively. With current market interest rates for first mortgage loans considerably lower than the rates on the Partnership's mortgage loan investments, and with the continued availability of credit in the capital markets for real estate transactions, there is a reasonable likelihood of the Partnership's mortgage loan investments being prepaid in the near term. The Eden West loan is currently open to prepayment, but the Timbers loan contains a prohibition against prepayment until September 1, 1997. The Partnership received notice during the fourth quarter of fiscal 1995 from the Eden West borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. However, the amount to be received by the Partnership as its share of the appreciation of the Eden West property has not been agreed upon to date. The terms of the Partnership's ground lease provide for the possible resolution of disputes between the parties over value issues through an arbitration process. The borrower could require the Partnership to submit to such an arbitration process during fiscal 1997, although to date it has given no formal indication of an intent to do so. In addition to the amount to be determined as the Partnership's share of the property's appreciation under the ground lease, the terms of the Eden West mortgage loan require a prepayment penalty which would be equal to 2.5% of the outstanding principal balance of $3,500,000 through May 1997. Subsequent to May 31, 1997, the prepayment penalty declines to 1.25% for the next twelve months, after which there would be no prepayment penalty for the remainder of the term, through maturity in June 1999. If completed, the proceeds of any prepayment transaction would be distributed to the Limited Partners. However, a prepayment transaction remains contingent on, among other things, a resolution of the value issue, and the borrower has not pursued negotiations in recent months. Accordingly, there are no assurances that a prepayment transaction will be consummated in the near term. At February 28, 1997, the Partnership had available cash and cash equivalents of $1,602,000. Such cash and cash equivalents will be used for the Partnership's working capital requirements and for distributions to the partners. The source of future liquidity and distributions to the partners is expected to be through cash generated from the operations of the Partnership's real estate and mortgage loan investments, repayment of the Partnership's mortgage loans receivable and the proceeds from the sales or refinancings of the underlying land, the operating investment property and the joint venture investment property. Such sources of liquidity are expected to be adequate to meet the Partnership's needs on both a short-term and long-term basis. Results of Operations Three Months Ended February 28, 1997 - ------------------------------------ The Partnership reported net income of $419,000 for the three months ended February 28, 1997 compared to $396,000 for the same period in the prior year. This $23,000 increase in the Partnership's net income resulted from a $25,000 increase in the Partnership's operating income and a $2,000 increase in the Partnership's share of venture's income which were partially offset by a $4,000 decrease in income from operations of investment property held for sale. The Partnership's operating income increased primarily due to a $14,000 increase in mortgage interest income and a $11,000 decline in the Partnership's total operating expenses. Mortgage interest income increased due to the ongoing compounding of deferred interest on the Timbers mortgage loan. The decline in total operating expenses resulted from a $27,000 decrease in general and administrative expenses which was partially offset by a $14,000 increase in the provision for possible uncollectible amounts. General and administrative expenses decreased primarily due to additional professional fees incurred during the three-month period ended February 29, 1996. The increase in the provision for possible uncollectible amounts is attributable to the corresponding increase in deferred interest income from the Timbers mortgage loan. The increase in the Partnership's share of venture's income is attributable to a $15,000 increase in the rental revenues from the Marshalls at East Lake Shopping Center which was partially offset by a $13,000 increase in the venture's total expenses. Rental revenues increased due to an increase in expense reimbursements from the tenants during the current three-month period while total expenses increase due to an increase the property's tax assessment. The Partnership's income from the operations of the investment property held for sale decreased by $4,000 primarily due to increases in repairs and maintenance and capital improvement expenses which was partially offset by an increase in rental revenues. Rental revenues at Mercantile Tower increased due to higher garage income and expense reimbursements during the current three-month period. Six Months Ended February 28, 1997 - ---------------------------------- The Partnership reported net income of $637,000 for the six months ended February 28, 1997 compared to net income of $781,000 for the same period in the prior year. This decrease in the Partnership's net income is attributable to a $98,000 decrease in income from operations of investment property held for sale, a $45,000 decrease in the Partnership's operating income and a $1,000 decrease in the Partnership's share of venture's income. The decrease in income from operations of investment property held for sale resulted primarily due to a $160,000 increase in operating expenses which was partially offset by a $49,000 increase in rental revenues at Mercantile Tower during the current six-month period. Property operating expenses increased mainly due to an increase in capital expenditures, including the completion of the exterior stairway, as well as higher leasing commissions and tenant improvements associated with the new leases discussed further above. Rental revenues increased mainly due to an increase in expense reimbursements during the current six month period. The decrease in the Partnership's operating income is mainly attributable to a decrease in the provision for possible uncollectible amounts of $81,000 and a $29,000 decline in other interest income which were partially offset by a $39,000 decrease in general and administrative expenses and a $26,000 increase in interest from mortgage loans. The provisions for possible uncollectible amounts increased by $81,000 mainly due to lower payments received from the borrower of the Timbers mortgage loan toward deferred interest receivable when compared to the same six-month period in the prior year. The compounding effect of the deferred interest income on the Timbers mortgage loan also contributed to the increase in the provision. Other interest income decreased by $29,000 during the current six-month period mainly due to the decrease in average outstanding cash balances as a result of the temporary investment of the Harbour Bay Plaza repayment proceeds prior to the special distribution to the Limited Partners in October 1995. General and administrative expenses decreased by $39,000 primarily due to additional professional fees incurred during the six-month period ended February 29, 1996. Interest from mortgage loans increased by $26,000 in the current period as a result of the ongoing compounding of interest on the Timbers mortgage loan. The $1,000 decrease in the Partnership's share of ventures income is attributable to a $21,000 increase in expenses which was partially offset by a $20,000 increase in rental revenues at Marshalls at East Lake. Rental revenues increased largely due to an increase in reimbursement income during the current six-month period while real estate taxes increased due to an increase in the property tax assessment in the current period. PART II Other Information Item 1. Legal Proceedings As previously reported, In November 1994 a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Second Qualified Property Fund, Inc. and Properties Associates ("PA"), which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation. The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in Paine Webber Qualified Plan Property Fund Two, LP., PaineWebber, Second Qualified Property Fund, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in Paine Webber Qualified Plan Property Fund Two, LP, also alleged that following the sale of the partnership interests, PaineWebber, Second Qualified Properties, Inc. and PA misrepresented financial information about the Partnership's value and performance. The amended complaint alleged that PaineWebber, Second Qualified Properties, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO. In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the settlement was held in December 1996, and in March 1997 the court issued a final approval of the settlement. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleges, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint sought compensatory damages of $15 million plus punitive damages against PaineWebber. Mediation with respect to the Abbate action was held in December 1996. As a result of such mediation, a settlement between PaineWebber and the plaintiffs was reached which provides for the complete resolution of such action. Final releases and dismissals with regard to this action are expected to be received in April 1997. Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for the amounts it is required to pay in connection with the settlement of the New York Limited Partnership Actions. At the present time, the General Partners believe that the resolution of these matters will not have a material impact on the Partnership's financial statements, taken as a whole. Item 2. through 5. NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: NONE (b) Reports on Form 8-K: None PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP By: SECOND QUALIFIED PROPERTIES, INC. Managing General Partner By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer Dated: April 14, 1997 EX-27 2 ARTICLE 5 FDS FOR THE SIX MONTHS ENDED 2/28/97
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the quarter ended February 28,1997 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS AUG-31-1997 FEB-28-1997 1,602 0 10,851 2,950 0 2,089 11,648 0 21,512 181 1,022 0 0 0 20,309 21,512 0 1,021 0 137 0 247 0 637 0 637 0 0 0 637 17.41 17.41
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