-----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, BRbxZAlTbdjiKu+940/RURgLvKOyUYqAhGHTw/saZS7+B2dwlYNGWJINs/doreix IybtPd/wVC28htVji4r5jw== 0000700913-98-000002.txt : 19980414 0000700913-98-000002.hdr.sgml : 19980414 ACCESSION NUMBER: 0000700913-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980413 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: SEC FILE NUMBER: 000-17146 FILM NUMBER: 98592296 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, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______ to ______. Commission File Number: 0-17146 PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP ------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2752249 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 439-8118 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP BALANCE SHEETS February 28, 1998 and August 31, 1997 (Unaudited) (In thousands) ASSETS February 28 August 31 ----------- --------- Real estate investments: Land $ 600 $ 600 Mortgage loans receivable, net 4,275 4,275 Investment in joint venture, at equity 2,971 3,060 Investment property held for sale, net - 7,150 --------- --------- 7,846 15,085 Cash and cash equivalents 1,276 1,555 Tax and insurance escrow - 215 Interest and other receivables 27 96 Prepaid expenses and other assets - 14 --------- --------- $ 9,149 $ 16,965 ========= ========= LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses $ 37 $ 160 Accounts payable - affiliates 7 10 Accrued real estate taxes - 160 Tenant security deposits and other liabilities - 64 Note payable - 894 Partners' capital 9,105 15,677 --------- --------- $ 9,149 $ 16,965 ========= ========= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF INCOME For the three and six months ended February 28, 1998 and 1997 (Unaudited) (In thousands, except per Unit amounts) Three Months Ended Six Months Ended February 28, February 28, ------------------- -------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Interest from mortgage loans $ 213 $ 307 $ 414 $ 613 Land rent 17 29 35 58 Other interest income 35 21 74 41 ------- ------ ------- ------- 265 357 523 712 Expenses: Management fees 5 10 15 20 General and administrative 88 62 159 117 Provision for possible uncollectible amounts 130 124 248 247 ------- ------ ------- ------- 223 196 422 384 ------- ------ ------- ------- Operating income 42 161 101 328 Partnership's share of venture's income 44 48 97 88 Income from operations of investment property held for sale, net - 210 302 221 Loss on sale of investment property - - (23) - ------- ------ ------- ------- Net income $ 86 $ 419 $ 477 $ 637 ======= ====== ======= ======= Net income per Limited Partnership Unit $ 2.39 $ 11.39 $ 13.04 $ 17.41 ======= ======= ======= ======= Cash distributions per Limited Partnership Unit $189.81 $ 4.62 $194.43 $ 9.24 ======= ======= ======= ======= 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, 1998 and 1997 (Unaudited) (In thousands) General Limited Partners Partners -------- -------- Balance at August 31, 1996 $(33) $20,043 Cash distributions (3) (335) Net income 6 631 ---- ------- Balance at February 28, 1997 $(30) $20,339 ==== ======= Balance at August 31, 1997 $(30) $15,707 Cash distributions (3) (7,046) Net income 5 472 ---- ------- Balance at February 28, 1998 $(28) $ 9,133 ==== ======= See accompanying notes. PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP STATEMENTS OF CASH FLOWS For the six months ended February 28, 1998 and 1997 (Unaudited) Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 477 $ 637 Adjustments to reconcile net income to net cash provided by operating activities: Partnership's share of venture's income (97) (88) Loss on sale of investment property 23 - Changes in assets and liabilities: Tax and insurance escrow 215 (91) Interest and other receivables 69 3 Prepaid expenses 14 1 Accrued real estate taxes (160) (143) Accounts payable and accrued expenses (123) (23) Accounts payable affiliates (3) - Tenant security deposits (64) 6 -------- -------- Total adjustments (126) (335) -------- -------- Net cash provided by operating activities 351 302 -------- -------- Cash flows from investing activities: Distributions from joint venture 186 113 Proceeds from sale of investment property 7,127 - -------- -------- Net cash provided by investing activities 7,313 113 -------- -------- Cash flows from financing activities: Principal payments on note payable (894) (128) Distributions to partners (7,049) (338) -------- -------- Net cash used in financing activities (7,943) (466) -------- -------- Net decrease in cash and cash equivalents (279) (51) Cash and cash equivalents, beginning of period 1,555 1,653 -------- -------- Cash and cash equivalents, end of period $ 1,276 $ 1,602 ======== ======== Supplemental disclosure: Cash paid during the period for interest $ 21 $ 52 ======== ======== 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, 1997. In the opinion of management, the accompanying financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim period. All of the accounting adjustments reflected in the accompanying interim financial statements are of a normal recurring nature. The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of February 28, 1998 and August 31, 1997 and revenues and expenses for the three and six months ended February 28, 1998 and 1997. Actual results could differ from the estimates and assumptions used. As discussed further in Note 4, the Partnership sold its wholly-owned Mercantile Tower Office Building in November 1997. Subsequent to this transaction, the Partnership has two remaining real estate investments, one in the form of a first mortgage loan receivable and land investment secured by The Timbers Apartments and the other in the form of a joint venture interest in the Marshalls at East Lake Shopping Center (see Notes 2 and 3). The owner of The Timbers Apartments has been marketing the property for sale and expects to close on a sale transaction in the third quarter of fiscal 1998. If the closing of The Timbers sale occurs as expected, the Managing General Partner plans to market and sell the Marshalls at East Lake Shopping Center during the second half of calendar 1998 and complete a liquidation of the Partnership by December 31, 1998. There are no assurances, however, that the sale of the remaining assets and the liquidation of the Partnership will be completed within this time frame. 2. Mortgage Loan and Land Investments ---------------------------------- The outstanding first mortgage loan and the cost of the related land to the Partnership at February 28, 1998 and August 31, 1997 are as follows (in thousands): Amount Property of Mortgage Loan Cost of Land -------- ---------------- ------------ The Timbers Apartments $ 4,275(1) $ 600 Raleigh, NC (1) The balance shown is net of an allowance for possible uncollectible amounts of $3,438 and $3,190, respectively, as of February 28, 1998 and August 31, 1997 (see discussion below). The loan is secured by a first mortgage on the property, the owner's leasehold interest in the land and an assignment of all leases, where applicable. Interest on the Timbers loan is payable monthly at rate of 11.75% per annum (see discussion of modification below), and the principal on the loan is due at maturity. Among the provisions of the lease agreement, 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, 1998 and 1997, no additional rents were received. As discussed in the Annual Report, the lessee has the option to purchase the land for a specified period of time at a price based on fair market value, as defined, but not less than the original cost to the Partnership. As of February 28, 1998, the option to purchase the land was exercisable. In addition, the Partnership's investment is structured to share in the appreciation in value of the underlying real estate. Accordingly, upon either sale, refinancing, maturity of the mortgage loan or exercise of the option to repurchase the land, the terms of the lease call for the Partnership to receive a 40% share of the appreciation above a specified base amount. Under the terms of the Timbers loan modification executed in fiscal 1989, the amount payable to the Partnership 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 loan secured by The Timbers became prepayable without penalty as of September 1, 1997. The total balance of the principal and deferred interest receivable at February 28, 1998 and August 31, 1997 was $7,713,000 and $7,465,000, respectively. The Partnership has established an allowance for possible uncollectible amounts for the cumulative amount of deferred interest owed under the Timbers modification ($3,438,000 at February 28, 1998 and $3,190,000 at August 31, 1997) 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. Summarized operating results of the venture for the three- and six-month periods ended February 28, 1998 and 1997 are as follows (in thousands): Three Months Ended Six Months Ended February 28, February 28, ------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Rental revenues and expense reimbursements $ 126 $ 134 $ 256 $ 263 Expenses: Property operating expenses 31 33 61 64 Real estate taxes 14 16 24 37 Depreciation and amortization 37 37 74 74 ------ ------ ------- ------- 82 86 159 175 ------ ------ ------- ------- Net income $ 44 $ 48 $ 97 $ 88 ====== ====== ======= ======= Net income: Partnership's share of net income $ 44 $ 48 $ 97 $ 88 Co-venturer's share of net income - - - - ------ ------ ------- ------- $ 44 $ 48 $ 97 $ 88 ====== ====== ======= ======= 4. Investment Property Held for Sale --------------------------------- Mercantile Tower Office Building -------------------------------- As discussed in the Annual Report, the Partnership assumed ownership of the Mercantile Tower Office Building, in Kansas City, Missouri, through a deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain uncured defaults on the Partnership's mortgage loan receivable. The combined balance of the land and the mortgage loan investment at the time title was transferred was $10,500,000. The estimated fair value of the operating property at the date of foreclosure, net of selling expenses, was $9,500,000. Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in fiscal 1993. Subsequent to the date of the foreclosure, the Partnership recorded provisions for possible investment loss totalling $2,350,000 to reflect additional declines in management's estimate of the fair value of the investment property. The net carrying value of the Mercantile Tower investment property as of August 31, 1997 was $7,150,000, which comprises the balance of investment property held for sale on the accompanying balance sheet at that date. On November 10, 1997, the Mercantile Tower property was sold for $7,283,000. The Partnership received net proceeds of $5,963,000 after closing costs, closing prorations, certain credits to the buyer and the repayment of the outstanding first mortgage note of $858,000. The sale price, net of closing costs, was lower than the net carrying value of the investment property by $23,000, which is reflected as a loss on the sale on the accompanying income statement for the six months ended February 28, 1998. The net proceeds from the sale of Mercantile Tower, along with an amount of excess cash reserves, were distributed to the Limited Partners in the form of a special distribution in the amount of approximately $6,741,000, or $186 per original $1,000 investment, which was paid on December 15, 1997. While the net proceeds received from the sale of Mercantile Tower were substantially less then the Partnership's original investment in the property, of $10.5 million, management believes that the sale price was reflective of the property's current fair market value, which was supported by the most recent independent appraisal. Furthermore, management did not foresee the potential for any significant near-term appreciation in the property's market value. Accordingly, a current sale was deemed to be in the best interests of the Limited Partners. A sale of the property at its current leasing level yielded less proceeds than the sale of the property at a stabilized level, but management concluded that the capital, time, and risk associated with the substantial leasing activity required to achieve stabilized operations outweighed the possibility of receiving a higher net sale price. 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 period September 1, 1997 through the date of sale, November 10, 1997, and for the three- and six-month periods ended February 28, 1997 are as follows (in thousands): Three Months Ended Six Months Ended February 28, February 28, ------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues: Rental revenues and expense recoveries $ - $ 596 $ 591 $ 1,013 Interest and other income - 6 14 10 ------ ------- ------- ------- - 602 605 1,023 Expenses: Property operating expenses - 335 244 657 Interest expense - 25 21 52 Property taxes and insurance - 32 38 93 ------ ------- ------- ------- - 392 303 802 ------ ------- ------- ------- Income from operations of investment property held for sale, net $ - $ 210 $ 302 $ 221 ====== ======= ======= ======= 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 $15,000 and $20,000 for the six-month periods ended February 28, 1998 and 1997, respectively. Accounts payable - affiliates at February 28, 1998 and August 31, 1997 consist of management fees payable to the Adviser of $7,000 and $10,000, respectively. Included in general and administrative expenses for the six-month periods ended February 28, 1998 and 1997 is $72,000 and $75,000, 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, 1998 and 1997 is $1,000 and $2,000, respectively, representing fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the Partnership's cash assets. 6. Note payable ------------ Note payable as of August 31, 1997 consisted of the following secured indebtedness (in thousands): August 31 --------- Line of credit borrowings secured by the Mercantile Tower property. Draws under the line, up to a maximum of $2,000,000, could be made through February 28, 1998, only to fund approved leasing and capital improvement costs related to the Mercantile Tower property. The outstanding borrowings bore interest at the prime rate (8.25% at August 31, 1997) plus 1% per annum. Interest-only payments were due on a monthly basis through February 1995. Thereafter, monthly principal and interest payments were due through maturity on February 10, 2001. The fair value of the note approximated its carrying amount as of August 31, 1997. The note was repaid in full on November 10, 1997 upon the sale of the Mercantile Tower property (see Note 4). $ 894 ===== PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- As discussed further below, the Partnership sold its wholly-owned Mercantile Tower Office Building in November 1997. Subsequent to this transaction, the Partnership has two remaining real estate investments, one in the form of a first mortgage loan receivable and land investment secured by The Timbers Apartments and the other in the form of a joint venture interest in the Marshalls at East Lake Shopping Center. As discussed further below, the owner of The Timbers Apartments has been marketing the property for sale and expects to close on a sale transaction in the third quarter of fiscal 1998. If the closing of The Timbers sale occurs as expected, the Managing General Partner plans to market and sell the Marshalls at East Lake Shopping Center during the second half of calendar 1998 and complete a liquidation of the Partnership by December 31, 1998. There are no assurances, however, that the sale of the remaining assets and the liquidation of the Partnership will be completed within this time frame. The net proceeds from any future sales and financing transactions will be distributed to the Limited Partners along with the remaining Partnership cash reserves after the payment of all liquidation-related expenses. On November 10, 1997, the Mercantile Tower property was sold for $7,283,000. The Partnership received net proceeds of $5,963,000 after closing costs, closing prorations, certain credits to the buyer and the repayment of the outstanding first mortgage note of $858,000. The net proceeds from the sale of Mercantile Tower, along with an amount of excess cash reserves, were distributed to the Limited Partners in the form of a special distribution in the amount of approximately $6,741,000, or $186 per original $1,000 investment, which was paid on December 15, 1997. While the net proceeds received from the sale of Mercantile Tower were substantially less then the Partnership's original investment in the property, of $10.5 million, management believes that the sale price was reflective of the property's current fair market value, which was supported by the most recent independent appraisal. Furthermore, management did not foresee the potential for any significant near-term appreciation in the property's market value. Accordingly, a current sale was deemed to be in the best interests of the Limited Partners. While a sale of the property at its November 1997 leasing level of below 70% yielded less proceeds than the sale of the property at a stabilized level, management concluded that the capital, time, and risk associated with the substantial leasing activity required to achieve stabilized operations outweighed the possibility of receiving a higher net sale price. As previously reported, all of the operating cash flow at the Mercantile Tower property had been used to help pay for ongoing leasing costs and capital improvements at the building. As a result of the sale of the property and the payment of the December 15, 1997 special capital distribution, the Partnership's earnings can support an increase in the distribution rate paid on the remaining invested capital. Accordingly, the annualized distribution rate has been increased from 2.5% to 3% effective with the distribution for the quarter ended February 28, 1998, which will be paid on April 15, 1998. The 3% annualized rate will be paid on a Limited Partner's remaining capital account of $424 per original $1,000 investment. The mortgage loan secured by The Timbers Apartments contained a prohibition against prepayment until September 1, 1997 and matures on September 1, 1998. 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. Under the Partnership's accounting policy for interest income, all deferred interest is fully reserved until collected in cash. The balance of principal and deferred interest owed to the Partnership on the Timbers first mortgage loan totalled $7,713,000 as of February 28, 1998. In addition, the Partnership has a $600,000 investment in the underlying land. As reported in the first quarter report, the Timbers' borrower has initiated discussions with the Partnership concerning a potential sale of the property. In mid-January 1998 the property owner began marketing the property for sale on a joint basis with a local brokerage firm. Since then, the property has been widely marketed and the owner received seven offers from qualified third-party buyers to acquire the property. After completing an evaluation of the best and final offers, one was selected subsequent to quarter end. The property owner is currently negotiating a purchase and sale agreement with this prospective buyer. Once the agreement is signed, the prospective buyer will have a customary period to complete its due diligence review work. Based on the proposed sale price and an expected closing date of late April or early May 1998, the proposed sale could result in the repayment of a substantial portion of the outstanding obligations owed to the Partnership. Because a completed sale is contingent upon a signed purchase and sale agreement as well as satisfactory results from the prospective buyer's due diligence review, there can be no assurances that this sale will actually close. If the Partnership's investments secured by The Timbers Apartments are repaid in the third quarter as expected, the Marshalls at East Lake Shopping Center would be the Partnership's only remaining investment. As a result of these circumstances, the Partnership is analyzing near-term sale strategies for this asset which could result in a sale of the property in 1998. Occupancy at the Marshalls at East Lake Shopping Center increased from 94% at November 30, 1997 to 98% at February 28, 1998. A new lease was signed with a regional shoe store for 4,500 square feet during the current quarter. The lease is for a 5-year term, and the tenant opened for business on February 17, 1998. Because the tenant has a strong presence in the Atlanta area, it is a good addition to the Center's tenant roster and is expected to increase the number of shoppers at the property. In order to accommodate this new tenant, it was necessary to terminate the lease of an existing tenant. Also during the second quarter, a tenant occupying 1,200 square feet moved from the Center. Over the next 12 months only one lease expires, and the property's leasing team expects this tenant to sign an early renewal and relocate into the 1,200 square foot store just vacated during the second quarter. During the quarter, an aluminum coating of the entire roofing system was completed. Other improvements planned in conjunction with preparing the property for sale in the near term include the painting of the Center and a new pylon sign. At February 28, 1998, the Partnership had available cash and cash equivalents of $1,276,000. 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 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, 1998 - ------------------------------------ The Partnership reported net income of $86,000 for the three months ended February 28, 1998, as compared to $419,000 for the same period in the prior year. This decrease in net income is attributable to declines in the Partnership's operating income of $119,000, income from operations of investment property held for sale of $210,000, and the Partnership's share of venture's income of $4,000. The Partnership's operating income declined mainly due to the reduction in interest from mortgage loans and land rent stemming from the repayment of the Eden West first mortgage loan and the repurchase of the underlying land on July 15, 1997. The reduction in interest from mortgage loans and land rent attributable to the Eden West repayment/repurchase amounted to $101,000 and $11,000, respectively. This decrease in interest from mortgage loans and land rent was partially offset by an increase in interest income from invested cash reserves of $14,000. Interest income on money-market investments increased largely due to an increase in the average outstanding cash reserve balances, which resulted mainly from the temporary investment of the net proceeds from the sale of Mercantile Tower on November 10, 1997 prior to the special distribution to the Limited Partners made on December 15, 1997. The decrease in the net income from operations of the investment property held for sale for the three months ended February 28, 1998 resulted from the sale of Mercantile Tower on November 10, 1997. The $210,000 decrease represents the income from operations of the Mercantile Tower property for the three months ended February 28, 1997. The decrease in the Partnership's share of venture's income is largely due to additional revenues recognized at the Marshalls at East Lake Shopping Center during the three months ended February 28, 1997 as a result of short term leases signed with two tenants to temporarily occupy vacant space at the shopping center during the Christmas season of calendar 1996. Six Months Ended February 28, 1998 - ---------------------------------- The Partnership reported net income of $477,000 for the six months ended February 28, 1998, as compared to $637,000 for the same period in the prior year. This decrease in net income is the result of a decrease in operating income of $227,000 and a loss on the sale of the Mercantile Tower property of $23,000 which were partially offset by an increase in income from operations of investment property held for sale of $81,000 and an increase in the Partnership's share of venture's income of $9,000. The Partnership's operating income declined mainly due to the reduction in interest from mortgage loans and land rent stemming from the repayment of the Eden West first mortgage loan and the repurchase of the underlying land on July 15, 1997. The reduction in interest from mortgage loans and land rent attributable to the Eden West repayment/repurchase amounted to $201,000 and $23,000, respectively. These decreases were partially offset by an increase in interest income from invested cash reserves of $33,000. Interest income on money-market investments increased due to an increase in the average outstanding cash reserve balances, which resulted mainly from the temporary investment of the net proceeds from the sale of Mercantile Tower on November 10, 1997 prior to the special distribution to the Limited Partners made on December 15, 1997. The Partnership's net income also decreased as a result of the $23,000 loss from the sale of Mercantile Tower. The loss from the sale of Mercantile Tower was the result of the excess of the property's carrying value, net of prior provisions for possible investment loss, over the sale price, net of closing costs. The increase in the net income from operations of the investment property held for sale is mainly due to a substantial decrease in property operating expenses at Mercantile Tower prior to its sale in November 1997. The lower operating expenses resulted mainly from a decline in leasing activity prior to the sale of the Mercantile Tower property as well as additional expense recoveries which resulted from a final billing of recoverable expenses through the date of the sale. The increase in the Partnership's share of venture's income is primarily attributable to a $16,000 decrease in total expenses which was partially offset by a $7,000 decrease in rental revenues and expense reimbursements at the Marshalls at East Lake Shopping Center. Total expenses decreased mainly due to a reduction in the property's tax assessment and a decline in repairs and maintenance expense. Rental revenues and expense reimbursements declined mainly due to additional revenues recognized at the Marshalls at East Lake Shopping Center in the prior year as a result of short term leases signed with two tenants to temporarily occupy vacant space at the shopping center during the Christmas season of calendar 1996. PART II Other Information Item 1. Legal Proceedings NONE Item 2. through 5. NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: NONE (b) Reports on Form 8-K: 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 13, 1998 EX-27 2 ARTICLE 5 FDS FOR THE SIX MONTHS ENDED 2/28/98
5 This schedule contains summary financial information extracted from the Partnership's unaudited financial statements for the quarter ended February 28, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS AUG-31-1998 FEB-28-1998 1,276 0 7,740 3,438 0 5,578 3,571 0 9,149 44 0 0 0 0 9,105 9,149 0 922 0 174 0 271 0 477 0 477 0 0 0 477 13.04 13.04
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