-----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, Wih2Rm50kHdtHWzVitdyaeM9E127veXpvKLjTCbLRJ7IsyuwoT/z79hW4FpWMVxW mIVli3dnPhK3bAgCe5gTAQ== 0000700913-97-000004.txt : 19970715 0000700913-97-000004.hdr.sgml : 19970715 ACCESSION NUMBER: 0000700913-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970714 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: 97640008 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 May 31, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____to ______ . Commission File Number: 0-17146 PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP ------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2752249 - ------------------------------ --------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 - ------------------------------------------ --------- Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 439-8118 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|. No |_| PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP BALANCE SHEETS May 31, 1997 and August 31, 1996 (Unaudited) (In thousands) ASSETS May 31 August 31 ------ --------- Real estate investments: Land $ 1,000 $ 1,000 Mortgage loans receivable, net 7,775 7,775 Investment in joint venture, at equity 3,051 3,173 Investment property held for sale, net 7,500 7,500 --------- --------- 19,326 19,448 Cash and cash equivalents 1,774 1,653 Tax and insurance escrow 212 255 Interest and other receivable 109 129 Prepaid expenses - 16 --------- --------- $ 21,421 $ 21,501 ========= ========= LIABILITIES AND PARTNERS' CAPITAL Accrued real estate taxes $ 100 $ 183 Accounts payable and accrued expenses 97 93 Accounts payable - affiliates 10 10 Tenant security deposits and other liabilities 62 55 Note payable 958 1,150 Total partners' capital 20,194 20,010 --------- --------- $ 21,421 $ 21,501 ========= ========= STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the nine months ended May 31, 1997 and 1996 (Unaudited) (In thousands) General Limited Partners Partners -------- -------- Balance at August 31, 1995 $(33) $23,882 Cash distributions (5) (4,368) Net income 9 926 ---- ------- Balance at May 31, 1996 $(29) $20,440 ==== ======= Balance at August 31, 1996 $(33) $20,043 Cash distributions (5) (502) Net income 7 684 ---- ------- Balance at May 31, 1997 $(31) $20,225 ==== ======= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF INCOME For the three and nine months ended May 31, 1997 and 1996 (Unaudited) (In thousands, except per Unit amounts) Three Months Ended Nine Months Ended May 31, May 31, ------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Interest from mortgage loans $ 316 $ 302 $ 929 $ 889 Land rent 29 29 87 87 Other interest income 23 20 64 90 ------- ------- ------- ------- 368 351 1,080 1,066 Expenses: Management fees 10 10 30 30 General and administrative 84 84 201 240 Provision for possible uncollectible amounts 131 118 378 284 ------- ------- ------- ------- 225 212 609 554 ------- ------- ------- ------- Operating income 143 139 471 512 Partnership's share of venture's income 63 64 151 153 Income (loss) from operations of investment property held for sale, net (152) (49) 69 270 ------- ------ ------- ------- Net income $ 54 $ 154 $ 691 $ 935 ======= ======= ======== ======= Net income per Limited Partnership Unit $ 1.46 $ 4.23 $ 18.87 $ 25.56 ======= ======= ======= ======= Cash distributions per Limited Partnership Unit $ 4.62 $ 4.62 $ 13.86 $120.52 ======= ======= ======= ======= The above net income and cash distributions per Limited Partnership Unit are based upon the 36,241 Units of Limited Partnership Interest outstanding during each period. See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF CASH FLOWS For the nine months ended May 31, 1997 and 1996 (Unaudited) Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 691 $ 935 Adjustments to reconcile net income to net cash provided by operating activities: Partnership's share of venture's income (151) (153) Changes in assets and liabilities: Tax and insurance escrow 43 (54) Interest and other receivables 20 (62) Prepaid expenses 16 15 Accrued real estate taxes (83) (68) Accounts payable and accrued expenses 4 (76) Accounts payable - affiliates - (2) Tenant security deposits 7 (5) -------- -------- Total adjustments (144) (405) -------- -------- Net cash provided by operating activities 547 530 Cash flows from investing activities: Distributions from joint venture 273 139 Cash flows from financing activities: Principal payments on note payable (192) (97) Distributions to partners (507) (4,373) -------- -------- Net cash used in financing activities (699) (4,470) -------- -------- Net increase (decrease) in cash and cash equivalents 121 (3,801) Cash and cash equivalents, beginning of period 1,653 5,379 -------- -------- Cash and cash equivalents, end of period $ 1,774 $ 1,578 ======== ======== Supplemental disclosure: Cash paid during the period for interest $ 75 $ 86 ======== ======== See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP Notes to Financial Statements (Unaudited) 1. General The accompanying financial statements, footnotes and discussion should be read in conjunction with the financial statements and footnotes contained in the Partnership's Annual Report for the year ended August 31, 1996. In the opinion of management, the accompanying financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim period. All of the accounting adjustments reflected in the accompanying interim financial statements are of a normal recurring nature. The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of May 31, 1997 and August 31, 1996 and revenues and expenses for the three and nine months ended May 31, 1997 and 1996. Actual results could differ from the estimates and assumptions used. 2. Mortgage Loan and Land Investments The outstanding first mortgage loans and the cost of the related land to the Partnership at May 31, 1997 and August 31, 1996 are as follows (in thousands): Amount Property of Mortgage Loan Cost of Land -------- ---------------- ------------ Eden West Apartments $ 3,500 $ 400 Omaha, NE The Timbers Apartments 4,275 (1) 600 Raleigh, NC -------- -------- $ 7,775 $ 1,000 ======== ======== (1) The balance shown is net of an allowance for possible uncollectible amounts of $3,081 and $2,703, respectively, as of May 31, 1997 and August 31, 1996 (see discussion below). The loans are secured by first mortgages on the properties, the owner's leasehold interest in the land and an assignment of all leases, where applicable. Interest on the Eden West and Timbers loans is payable monthly at rates of 11.5% and 11.75% per annum, respectively, and the principal on both loans is due at maturity. Among the provisions of the lease agreements, the Partnership is entitled to additional rent based upon the gross revenues in excess of a base amount, as defined. For the nine-month periods ended May 31, 1997 and 1996, no additional rents were received. As discussed in the Annual Report, the lessees have the option to purchase the land for specified periods of time at a price based on fair market value, as defined, but not less than the original cost to the Partnership. As of May 31, 1997, all of the options to purchase the land were exercisable. The objectives of the Partnership with respect to its mortgage loan and land investments are to provide current income from fixed mortgage interest payments and base land rents, and then to provide increases to this current income through participation in the annual revenues generated by the properties as they increase above the specified base amounts. In addition, the Partnership's investments are structured to share in the appreciation in value of the underlying real estate. Accordingly, upon either sale, refinancing, maturity of the mortgage loan or exercise of the option to repurchase the land, the terms of the leases call for the Partnership to receive a 40% to 52% share of the appreciation above a specified base amount. As discussed further below, the Eden West loan is expected to be prepaid in the fourth quarter of fiscal 1997, and the loan secured by The Timbers becomes prepayable without penalty as of September 1, 1997. As a result of these circumstances, the mortgage loan instruments have been valued, based on an expected short-term maturity, at the lesser of face value (prior to any allowance for possible uncollectible amounts) or the estimated fair value of the collateral property. Estimated fair values for the Partnership's mortgage loan investments as of both May 31, 1997 and August 31, 1996 are summarized below (in thousands): Fair Value of Mortgage Loan ------------- Eden West Apartments $ 3,500 The Timbers Apartments 6,700 ------- $10,200 ======= Eden West Apartments -------------------- During the quarter ended May 31, 1997, the Partnership reached an agreement with the owner of the Eden West Apartments on the terms of a transaction to prepay the first leasehold mortgage loan which is scheduled to mature on June 6, 1999 and purchase the underlying land from the Partnership. The parties have been having discussions concerning the terms of such a transaction for more than a year. The transaction is expected to close in the fourth quarter of fiscal 1997. Under the agreed upon terms of the transaction, the Partnership will receive $3,500,000 from the Eden West borrower, which represents the full repayment of the first leasehold mortgage loan. Simultaneously, the Eden West owner will purchase the Partnership's interest in the underlying land at a price equal to $900,000, which represents a premium of $500,000 over the Partnership's cost basis in the land of $400,000. In addition, the Partnership will receive a mortgage loan prepayment penalty of 1.25% of the mortgage note balance, or $43,750, and a land lease termination fee of $10,000 in accordance with the terms of the agreements. If this transaction closes as expected, the proceeds described above will be distributed to the Limited Partners. The Timbers Apartments ---------------------- Under the terms of the Timbers loan modification executed in fiscal 1989, the amount payable to the Partnership is equal to the cash flow of the property available after the payment of operating expenses, not to exceed 11.75% of the note balance, but in no event less than 7.75% of the note balance. The amount deferred each year will accrue interest at the original rate of 11.75% beginning at the end of that year and the total deferred amount plus accrued interest will be payable upon maturity of the note in September of 1998. The total balance of the principal and deferred interest receivable at May 31, 1997 and August 31, 1996 was $7,356,000 and $6,978,000, respectively. The Partnership has established an allowance for possible uncollectible amounts for the cumulative amount of deferred interest owed under the Timbers modification ($3,081,000 at May 31, 1997 and $2,703,000 at August 31, 1996) due to the Partnership's policy of reserving for deferred interest until collected. 3. Investment in Joint Venture As discussed in the Annual Report, on June 12, 1990, the borrower of the mortgage loan secured by the Marshalls at East Lake Shopping Center, Oxford/Concord Associates, filed a Chapter 11 petition with the United States Bankruptcy Court for the Northern District of Georgia. On November 14, 1990, the Bankruptcy Court ordered that both the Partnership and the borrower submit plans for the restructuring of the mortgage loan and ground lease agreements. During fiscal 1991, the Partnership and the borrower reached a settlement agreement which involved the formation of a joint venture to own and operate the property on a go-forward basis. The formation of the joint venture was approved by the Bankruptcy Court and became effective in December of 1991. The Partnership contributed its rights and interests under its mortgage loan to the joint venture and the loan was extinguished. In addition, the Partnership contributed the land underlying the operating property to the joint venture and the related ground lease was terminated. Oxford/Concord Associates contributed all of its rights, title and interest in and to the improvements, subject to the Partnership's loan, to the joint venture. Subsequent to the restructuring, the Partnership has accounted for its investment in the Marshalls joint venture on the equity method because the Partnership does not have a voting control interest in the venture. Under the equity method, the investment is carried at cost, adjusted for the Partnership's share of earnings, losses and distributions. The estimated fair value of the Partnership's equity interest in the Marshalls at East Lake joint venture is below the carrying value of the investment on the accompanying balance sheet as of May 31, 1997 by approximately $350,000. However, based on management's estimates of future cash flows, the carrying value is expected to be recovered. Accordingly, no impairment writedown has been recognized. If management's estimates of future cash flows or expected holding period prove to be inaccurate, the Partnership may be unable to recover the carrying value of the joint venture investment as of May 31, 1997. Summarized operating results of the venture for the three- and nine-month periods ended May 31, 1997 and 1996 are as follows (in thousands): Three Months Ended Nine Months Ended May 31, May 31, -------------------- ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Rental revenues and expense reimbursements $ 149 $ 140 $ 412 $ 383 Expenses: Property operating expenses 35 29 99 94 Real estate taxes 15 11 52 29 Depreciation and amortization 36 36 110 107 ------ ------ ------ ------ 86 76 261 230 ------ ------ ------ ------ Net income $ 63 $ 64 $ 151 $ 153 ====== ====== ====== ====== Net income: Partnership's share of net income $ 63 $ 64 $ 151 $ 153 Co-venturer's share of net income - - - - ------ ------ ------ ------ $ 63 $ 64 $ 151 $ 153 ====== ====== ====== ====== 4. Investment Property Held for Sale Mercantile Tower Office Building -------------------------------- As discussed in the Annual Report, the Partnership assumed ownership of the Mercantile Tower Office Building, in Kansas City, Missouri, through a deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain uncured defaults on the Partnership's mortgage loan receivable. The Partnership complies with the guidelines set forth in the Statement of Position entitled "Accounting for Foreclosed Assets," issued by the American Institute of Certified Public Accountants, to account for its investment properties acquired through foreclosures. Under the Statement of Position, a foreclosed asset is recorded at the lower of cost or estimated fair value, reduced by the estimated costs to sell the asset. Cost is defined as the fair value of the asset at the date of the foreclosure. Adjustments to the carrying value of the assets subsequent to foreclosure are recorded through the use of a valuation allowance. The combined balance of the land and the mortgage loan investment at the time title was transferred was $10,500,000. The estimated fair value of the operating property at the date of foreclosure, net of selling expenses, was $9,500,000. Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in fiscal 1993. Since the date of the foreclosure, the Partnership has recorded provisions for possible investment loss totalling $2,000,000 to reflect additional declines in management's estimate of the fair value of the investment property. The net carrying value of the Mercantile Tower investment property as of May 31, 1997 and August 31, 1996, of $7,500,000, is classified as an investment property held for sale on the accompanying balance sheets. The occupancy level at the Mercantile Tower Office Building was 61% as of May 31, 1997. Stabilizing the operations of the Mercantile Tower property, which represented 32% of the Partnership's original investment portfolio, remains the primary goal of management. Until a stabilized occupancy level is achieved, the Partnership's investment in Mercantile Tower is not expected to generate any significant excess cash flow. Available cash flow, for the most part, will be reinvested in enhancements aimed at improving the marketability of the vacant space at the property as well as for leasing costs for new and renewing tenants above the amounts available under the $2 million line of credit obtained in fiscal 1994 (see Note 6). During the quarter ended February 28, 1997, the Partnership received an unsolicited offer to purchase the Mercantile Tower Office Building. While a sale of the property at its current leasing level would yield less proceeds than the sale of the property at a stabilized level, the time, capital and risk associated with the leasing activity required to achieve stabilized operations may outweigh the potential benefits of receiving a higher sale price. In response to the unsolicited offer, management initiated a program to market the property for sale and, as a result, obtained several offers from interested buyers. Management has selected the highest offer and is currently in the process of negotiating an agreement to sell the property. Although a purchase and sale agreement is being negotiated, there are no assurances that a sale transaction will be completed. The Partnership records income from the investment property held for sale in the amount of the difference between the property's gross revenues and property operating expenses (including leasing costs and improvement expenses), taxes and insurance. Summarized operating results for Mercantile Tower for the three- and nine-month periods ended May 31, 1997 and 1996 are as follows (in thousands): Three Months Ended Nine Months Ended May 31, May 31, -------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Rental revenues and expense recoveries $ 418 $ 428 $1,431 $1,392 Interest and other income 4 3 14 10 ------ ------ ------ ------ 422 431 1,445 1,402 Expenses: Property operating expenses 486 392 1,143 889 Interest expense 23 29 75 86 Property taxes and insurance 65 59 158 157 ------ ------ ------ ------ 574 480 1,376 1,132 ------ ------- ------ ------ Income (loss) from operations of investment property held for sale, net $ (152) $ (49) $ 69 $ 270 ====== ====== ====== ====== The above property operating expenses for the three and nine months ended May 31, 1997 include capital improvements and leasing costs of $227,000 and $343,000, respectively. 5. Related Party Transactions The Adviser earned basic management fees of $30,000 for each of the nine-month periods ended May 31, 1997 and 1996. Accounts payable affiliates at both May 31, 1997 and August 31, 1996 consists of management fees of $10,000 payable to the Adviser. Included in general and administrative expenses for the nine-month periods ended May 31, 1997 and 1996 is $112,000 and $118,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership. Also included in general and administrative expenses for each of the nine-month periods ended May 31, 1997 and 1996 is $3,000 representing fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the Partnership's cash assets. 6. Note payable Note payable as of May 31, 1997 and August 31, 1996 consists of the following secured indebtedness (in thousands): May 31 August 31 ------ --------- Line of credit borrowings secured by the Mercantile Tower property (see Note 4). Draws under the line, up to a maximum of $2,000,000, can be made through February 28, 1998, only to fund approved leasing and capital improvement costs related to the Mercantile Tower property. The outstanding borrowings bear interest at the prime rate (8.25% at May 31, 1997) plus 1% per annum. Interest-only payments were due on a monthly basis through February 1995. Thereafter, monthly principal and interest payments are due through maturity on February 10, 2001. The fair value of the note approximated its carrying amount as of May 31, 1997 and August 31, 1996. $ 958 $ 1,150 ====== ======== PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- During the quarter ended May 31, 1997, the Partnership reached an agreement with the owner of the Eden West Apartments on the terms of a transaction to prepay the first leasehold mortgage loan which is scheduled to mature on June 6, 1999 and purchase the underlying land from the Partnership. The parties have been having discussions concerning the terms of such a transaction for more than a year. The transaction is expected to close in the fourth quarter of fiscal 1997. Under the agreed upon terms of the transaction, the Partnership will receive $3,500,000 from the Eden West borrower, which represents the full repayment of the first leasehold mortgage loan. Simultaneously, the Eden West owner will purchase the Partnership's interest in the underlying land at a price equal to $900,000, which represents a premium of $500,000 over the Partnership's cost basis in the land of $400,000. In addition, the Partnership will receive a mortgage loan prepayment penalty of 1.25% of the mortgage note balance, or $43,750, and a land lease termination fee of $10,000 in accordance with the terms of the agreements. If this transaction closes as expected, the proceeds described above will be distributed to the Limited Partners. Although the mortgage loan secured by The Timbers Apartments contains a prohibition against prepayment until September 1, 1997, there is a reasonable likelihood that this first mortgage loan investment may also be prepaid in the near term given the continued availability of credit in the capital markets for real estate transactions at current interest rates which are considerably lower than the 11.75% currently being earned on the Partnership's first mortgage loan investment. As discussed further in the notes to the accompanying financial statements, while interest is accruing on the Timbers loan at a rate of 11.75%, interest is being paid currently to the extent of net operating cash flow generated by the property, but not less than a rate of 7.75% per annum on the original note balance of $4,275,000, under the terms of a modification agreement reached in fiscal 1989. Deferred interest under the modification agreement is added to the principal balance of the mortgage note on an annual basis. The balance of principal and deferred interest owed to the Partnership on the Timbers first mortgage loan totalled $7,356,000 as of May 31, 1997. Management's current estimate of the fair market value of The Timbers Apartments is below the amount of this outstanding receivable by approximately $700,000. Accordingly, it is uncertain whether the Partnership will be able to fully collect these amounts. Under the Partnership's accounting policy for interest income, all deferred interest is fully reserved until collected in cash. The occupancy level at the wholly-owned Mercantile Tower Office Building increased by 1% to reach 61% as of May 31, 1997. This increase in occupancy is attributable to expansions by three existing tenants. Subsequent to May 31, 1997, the property's leasing team negotiated two additional lease expansions and two new leases that will bring the building's overall occupancy level to 64%. As previously reported, the pace of the lease-up at Mercantile Tower has been well below management's expectations. With significant competition in the downtown Kansas City office market, management has found it difficult to obtain economically viable lease terms from the number of tenants which are looking to lease space in the market. During the third quarter of fiscal 1997, work was completed on the installation of an exterior stairway that was needed for safety reasons to replace an older, outdoor escalator. Property improvements scheduled for the fourth quarter include new roofs over two sections of the parking garage. Stabilizing the operations of the Mercantile Tower property, which represented 32% of the Partnership's original investment portfolio, remains the primary goal of management. Until a stabilized occupancy level is achieved, the Partnership's investment in Mercantile Tower is not expected to generate any significant excess cash flow. Available cash flow, for the most part, will be reinvested in enhancements aimed at improving the marketability of the vacant space at the property as well as for leasing costs for new and renewing tenants above the amounts available under the $2 million line of credit obtained in fiscal 1994. During the quarter ended February 28, 1997, the Partnership received an unsolicited offer to purchase the Mercantile Tower Office Building. While a sale of the property at its current leasing level would yield less proceeds than the sale of the property at a stabilized level, the time, capital and risk associated with the leasing activity required to achieve stabilized operations may outweigh the potential benefits of receiving a higher sale price. In response to the unsolicited offer, management initiated a program to market the property for sale and, as a result, obtained several offers from interested buyers. Management has selected the highest offer and is currently in the process of negotiating an agreement to sell the property. Although a purchase and sale agreement is being negotiated, there are no assurances that a sale transaction will be completed. Occupancy at the Marshalls at East Lake Shopping Center was 94% as of May 31, 1997, unchanged from the preceding three quarters. The leasing team continues to seek one or more long-term users for the property's remaining vacancy of 3,300 square feet. Market conditions in the suburban Atlanta sub-market in which Marshalls at East Lake is located remain soft with many properties reporting significant vacancy levels. The competition resulting from the surplus of available space has made the leasing efforts at Marshalls at East Lake more difficult. A lease assignment was signed during the quarter with a 1,200 square foot tenant for a one-year term with an option to renew for an additional two years. Subsequent to the end of the quarter, one of the Center's kiosk tenants whose lease was scheduled to expire in September 1997 signed a new five-year lease. At May 31, 1997, the Partnership had available cash and cash equivalents of $1,774,000. Such cash and cash equivalents will be used for the Partnership's working capital requirements and for distributions to the partners. The source of future liquidity and distributions to the partners is expected to be through cash generated from the operations of the Partnership's real estate and mortgage loan investments, repayment of the Partnership's mortgage loans receivable and the proceeds from the sales or refinancings of the underlying land, the operating investment property and the joint venture investment property. Such sources of liquidity are expected to be adequate to meet the Partnership's needs on both a short-term and long-term basis. Results of Operations Three Months Ended May 31, 1997 - ------------------------------- The Partnership reported net income of $54,000 for the three months ended May 31, 1997 compared to $154,000 for the same period in the prior year. This $100,000 decrease in net income resulted from a $103,000 increase in loss from operations of investment property held for sale and a $1,000 decrease in the Partnership's share of venture's income, which were partially offset by a $4,000 increase in the Partnership's operating income. The decrease in the Partnership's loss from operations of the investment property held for sale was primarily due to an increase in property operating expenses as a result of increases in repairs and maintenance and capital improvement expenditures at the Mercantile Tower Office Building during the current three-month period. As a result of the Partnership's accounting policy for assets acquired through foreclosure, all capital improvement costs are expensed as incurred. The decrease in the Partnership's share of venture's income is attributable to a $10,000 increase in total expenses at the Marshalls at East Lake Shopping Center which was partially offset by a $9,000 increase in the property's rental revenues. Total expenses increased primarily due to an increase the property's tax assessment and an increase in repairs and maintenance expense while rental revenues increased due to an increase in expense reimbursements from the tenants during the current three-month period. The Partnership's operating income increased due to a $17,000 increase in total revenues which was partially offset by a $13,000 increase in the provision for possible uncollectible amounts. Operating revenues increased due to an increase in mortgage interest income due to the ongoing compounding of deferred interest on the Timbers mortgage loan, as discussed further above, and as a result of an increase in interest earned on the Partnership's invested cash reserves. The increase in the provision for possible uncollectible amounts is attributable to the corresponding increase in deferred interest income from the Timbers mortgage loan. The Partnership's policy is to fully reserve for deferred interest until collected in cash. Nine Months Ended May 31, 1997 - ------------------------------ The Partnership reported net income of $691,000 for the nine months ended May 31, 1997 compared to net income of $935,000 for the same period in the prior year. This decrease in the Partnership's net income is attributable to a $201,000 decrease in income from operations of investment property held for sale, a $41,000 decrease in the Partnership's operating income and a $2,000 decrease in the Partnership's share of venture's income. The decrease in income from operations of investment property held for sale resulted primarily from a $244,000 increase in operating expenses which was partially offset by a $43,000 increase in rental revenues at Mercantile Tower during the current nine-month period. Property operating expenses increased mainly due to an increase in capital expenditures, including the completion of the exterior stairway referred to above, as well as certain leasing commissions and tenant improvements associated with new leases. As a result of the Partnership's accounting policy for assets acquired through foreclosure, all capital improvement costs are expensed as incurred. Rental revenues increased mainly due to an increase in the building's average occupancy level as compared to the same period in the prior year. The decrease in the Partnership's operating income is mainly attributable to an increase in the provision for possible uncollectible amounts of $94,000 and a $26,000 decline in other interest income which were partially offset by a $39,000 decrease in general and administrative expenses and a $40,000 increase in interest from mortgage loans. The provision for possible uncollectible amounts increased by $94,000 mainly due to lower payments received from the borrower of the Timbers mortgage loan toward deferred interest receivable when compared to the same nine-month period in the prior year. The compounding effect of the deferred interest income on the Timbers mortgage loan also contributed to the increase in the provision for possible uncollectible amounts. Other interest income decreased by $26,000 during the current nine-month period mainly due to the decrease in average outstanding cash balances as a result of the temporary investment of the Harbour Bay Plaza repayment proceeds during the prior period prior to the special distribution to the Limited Partners in October 1995. General and administrative expenses decreased primarily due to a reduction in certain required professional services during the current nine-month period. Interest from mortgage loans increased by $40,000 in the current period as a result of the ongoing compounding of interest on the Timbers mortgage loan. The $2,000 decrease in the Partnership's share of venture's income is attributable to a $31,000 increase in expenses which was offset by a $29,000 increase in rental revenues at Marshalls at East Lake. Rental revenues increased largely due to an increase in reimbursement income during the current nine-month period while expenses increased mainly due to higher real estate taxes resulting from an increase in the property tax assessment in the current period. PART II Other Information Item 1. Legal Proceedings As previously reported, the Partnership's General Partners were named as defendants in a class action lawsuit against PaineWebber Incorporated ("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of 70 direct investment offerings of interests in various limited partnership investments and REIT stocks, including those offered by the Partnership. In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the class action outlining the terms under which the parties have agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the settlement was held in December 1996, and in March 1997 the court issued a final approval of the settlement. The release of the $125 million of settlement proceeds has not occurred to date pending the resolution of an appeal of the settlement agreement by two of the plaintiff class members. As part of the settlement agreement, PaineWebber has agreed not to seek indemnification from the related partnerships and real estate investment trusts at issue in the litigation (including the Partnership) for any amounts that it is required to pay under the settlement. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleged, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint sought compensatory damages of $15 million plus punitive damages against PaineWebber. In September 1996, the court dismissed many of the plaintiffs' claims as barred by applicable securities arbitration regulations. Mediation with respect to the Abbate action was held in December 1996. As a result of such mediation, a settlement between PaineWebber and the plaintiffs was reached which provided for the complete resolution of such action. Final releases and dismissals with regard to this action were received during the quarter ended May 31, 1997. Based on the settlement agreements discussed above covering all of the outstanding unitholder litigation, and notwithstanding the appeal of the class action settlement referred to above, management does not expect that the resolution of these matters will have a material impact on the Partnership's financial statements, taken as a whole. Item 2. through 5. NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: NONE (b) Reports on Form 8-K: No reports on Form 8-K have been filed by the registrant during the quarter for which this report is filed. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP By: SECOND QUALIFIED PROPERTIES, INC. --------------------------------- Managing General Partner By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer Dated: July 14, 1997 EX-27 2 ARTICLE 5 FDS FOR THE NINE MONTHS ENDED 5/31/97
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the quarter ended May 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS AUG-31-1997 MAY-31-1997 1,774 0 10,965 3,081 0 2,095 11,551 0 21,421 269 958 0 0 0 20,194 21,421 0 1,300 0 231 0 378 0 691 0 691 0 0 0 691 18.87 18.87
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