U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17146
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
(Exact name of registrant as specified in its charter)
Delaware 04-2752249
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant Part IV
dated July 1, 1982, as supplemented
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-6
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-6
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-21
PART I
Item 1. Business
Paine Webber Qualified Plan Property Fund Two, LP (the "Partnership") is a
limited partnership formed in March 1982 under the Uniform Limited Partnership
Act of the State of Delaware for the purpose of investing in a diversified
portfolio of existing income-producing real properties through land
purchase-leaseback transactions and first mortgage loans. From the sale of
Limited Partnership units (the "Units"), the Partnership raised $36,236,000
(36,236 Units at $1,000 per Unit) from July 1, 1982 to June 30, 1983 pursuant to
a Registration Statement filed on Form S-11 under the Securities Act of 1933
(Registration No. 2-76379). In addition, the Initial Limited Partner contributed
$5,000 for 5 Units of Limited Partnership Interest. Limited Partners will not be
required to make any additional capital contributions.
The Partnership originally owned land and made first mortgage loans secured
by buildings with respect to six operating properties. As discussed below, as of
August 31, 1996 the Partnership's mortgage loan and land lease investments on
two of the original properties were still outstanding, and the Partnership owned
an equity interest in one operating property through a joint venture partnership
which resulted from the settlement of a default under the terms of a first
mortgage loan held by the Partnership. In addition, the Partnership foreclosed
on one operating property under the terms of its first mortgage loan due to a
payment default and now owns that property directly. The Partnership's operating
property, the properties securing its two remaining loan investments and the
property in which the Partnership has a joint venture interest are described
below.
Type of
Property name Property and Type of
and Location Date of Investment Size Ownership (1)
- ------------ ------------------ ----------------------- ---------------------
Mercantile Tower (2) Office Building Building has 213,500 Fee ownership of
Kansas City, MO 4/29/83 rentable sq. ft.; 32,000 land and improvements
sq. ft. of land
Marshall's at East Lake (3) Shopping Center Building has 55,175 net Fee ownership of
Marietta, GA 6/24/83 leasable sq. ft.; 6.7 land and improvements
acres of land (through joint venture)
Eden West Apartments Apartments 215 units; 10.2 acres Fee ownership of land and
Omaha, NE 6/6/84 of land first mortgage lien
on improvements
The Timbers Apartments Apartments 176 units; 18 acres Fee ownership of land and
Raleigh, NC 9/7/84 of land first mortgage lien
on improvements
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2) On April 12, 1993, the Partnership was granted title to the Mercantile Tower
property and assumed ownership as a result of certain defaults by the
borrower under the terms of the Partnership's mortgage loan receivable. The
Partnership is currently operating the property utilizing the services of a
local property management company. See Note 6 to the financial statements
accompanying this Annual Report for a further discussion of this investment.
(3) During the year ended August 31, 1990, the borrower of the mortgage loan
secured by the Marshall's at East Lake Shopping Center failed to make its
required monthly payments of interest in accordance with the terms of the
mortgage loan. On June 12, 1990, the borrower filed for protection under a
Chapter 11 Bankruptcy Petition. During fiscal 1991, the Partnership reached
a settlement agreement which involved the formation of a joint venture
between the Partnership and the borrower to own and operate the property on
a go-forward basis. The formation of the joint venture was approved by the
Bankruptcy Court and became effective on December 11, 1991. See Note 5 to
the financial statements accompanying this Annual Report for a further
discussion of these events.
To date, the Partnership has been prepaid on its investments with respect
to two of the original operating properties. On April 1, 1994, the Partnership
liquidated its mortgage loan and land investments in a Howard Johnson's Motor
Lodge, located in Orlando, Florida. The total net proceeds received by the
Partnership amounted to approximately $5.9 million. In accordance with the third
modification of the mortgage loan agreement, such proceeds included the payment
of $292,000 of deferred debt service and ground rent. The remaining proceeds of
approximately $5,608,000 were less than the combined carrying value of the
mortgage loan and land investments of $6,150,000, resulting in a loss of
approximately $542,000 which was charged against an outstanding general loan
loss reserve. On August 25, 1995, the borrower of the loan secured by Harbour
Bay Plaza, a retail shopping center located in Sewall's Point, Florida, repaid
the Partnership's first leasehold mortgage loan and purchased the underlying
land for total consideration of $3,833,000. Such consideration included the
repayment of the principal balance of the mortgage loan, of $2,850,000, plus
interest accrued through August 25, 1995, of $23,000. The original cost of the
land to the Partnership was $750,000. Pursuant to the ground lease, the
Partnership received $211,000 in excess of the outstanding mortgage loan and
land investments as its share of the appreciation in value of the operating
investment property above a specified base amount.
The Partnership's investment objectives are to:
(1) preserve and protect Limited Partners' capital and related buying power;
(2) provide the Limited Partners with cash distributions from investment
income; and
(3) achieve long-term capital appreciation in the value of the Partnership's
investments.
Through August 31, 1996, the Limited Partners had received cumulative cash
distributions totalling $41,410,000, or $1,171 per original $1,000 investment
for the Partnership's earliest investors. This return includes a distribution of
$155 per original $1,000 investment in May 1994 from the liquidation of the
Howard Johnson's mortgage loan and land investments and $106 per original $1,000
investment in October 1995 from the Harbour Bay Plaza prepayment transaction. As
of August 31, 1996, the Partnership retained an interest in four of the six
properties underlying its original mortgage loan and land investments.
As noted above, to date the Partnership has made distributions of capital
proceeds to the Limited Partners totalling $261 per original $1,000 investment.
The Partnership's success in meeting its capital appreciation objective will
depend upon the proceeds received from the final liquidation of its remaining
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their final liquidation,
which cannot presently be determined. At the present time, real estate values
for commercial office buildings in certain markets remain depressed due to an
oversupply of competing space and the trend toward corporate consolidations and
downsizing which followed the last national recession. The downtown office
market in Kansas City, Missouri, where the Partnership's Mercantile Tower
property is located, remains particularly competitive. As a result, the
Partnership has been unable to lease a significant amount of space which remains
vacant at the property. The estimated fair value of the Mercantile Tower
property declined to $7.5 million as of August 31, 1996, which is substantially
below the Partnership's original cost basis in the Mercantile Tower investments
of $10.5 million. In addition, values for retail shopping centers in certain
markets are being adversely impacted by the effects of overbuilding and
consolidations among retailers which have resulted in an oversupply of space. It
remains to be seen whether the Marshalls at East Lake Shopping Center, in which
the Partnership has a joint venture interest, will be affected by this general
trend.
The Partnership expects to finance or sell its investments and have its
mortgage loans repaid from time to time. It is expected that most sales and
repayments will be made after a period of between seven and fifteen years after
the conclusion of the offering period, although sales and repayments may occur
at earlier or later dates. Due to the combination of relatively low mortgage
interest rates and the increased availability of funds for sales and mortgage
refinancings which has existed over the past three years, the likelihood of the
Partnership's loans being prepaid has increased. In addition to the Harbour Bay
Plaza transaction which closed at the end of the fourth quarter of fiscal 1995,
the Partnership has been approached by another borrower regarding a potential
prepayment transaction. See Item 7 for a further discussion. In determining the
appropriate timing for the sale of any of the Partnership's equity investments,
the Managing General Partner will consider such factors as the amount of
appreciation in value, if any, to be realized, the risks of continued investment
and the anticipated advantages to be gained from continuing to hold the
investment.
The Partnership's operating property, along with the property in which the
Partnership owns an equity interest and the properties securing the
Partnership's mortgage loan investments, are located in real estate markets in
which they face significant competition for the revenues they generate. The
apartment complexes compete with numerous projects of similar type generally on
the basis of price, location and amenities. Apartment properties in all markets
also compete with the local single family home market for prospective tenants.
The availability of low home mortgage interest rates over the past several years
has generally caused this competition to increase in all areas of the country.
The shopping center and the office building also compete for long-term
commercial tenants with numerous projects of similar type generally on the basis
of rental rates, location and tenant improvement allowances.
The Partnership has no real estate investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment. Therefore, a presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an Advisory
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Second
Qualified Properties, Inc. and Properties Associates. Second Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing
General Partner of the Partnership. The Associate General Partner is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of August 31, 1996, the Partnership owned, and had leased back to the
sellers, the land related to the two investments referred to under Item 1 above
to which reference is made for the name, location and description of each
property. Additionally, the Partnership owned one operating property directly
and owned an equity interest in another operating property through a joint
venture partnership as noted in Item 1.
Occupancy figures for each fiscal quarter during 1996, along with an
average for the year, are presented below for each property:
Percent Leased At
------------------------------------------------
Fiscal
1996
11/30/95 2/29/96 5/31/96 8/31/96 Average
-------- ------- ------- ------- -------
Mercantile Tower 62% 61% 58% 58% 60%
Marshall's at East Lake 97% 100% 94% 94% 96%
Eden West Apartments 99% 99% 99% 99% 99%
The Timbers Apartments 94% 92% 86% 89% 90%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Second Qualified Property Fund, Inc. and Properties
Associates ("PA"), which are the General Partners of the Partnership and
affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Qualified Plan
Property Fund Two, LP., PaineWebber, Second Qualified Property Fund, Inc. and PA
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Qualified Plan Property Fund Two, LP, also alleged that following the sale of
the partnership interests, PaineWebber, Second Qualified Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Second Qualified
Properties, Inc. and PA violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation hearings are
scheduled to be held in December 1996. The eventual outcome of this litigation
and the potential impact, if any, on the Partnership's unitholders cannot be
determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At August 31, 1996, there were 5,540 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for Units will develop. The Managing General
Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Qualified Plan Property Fund Two, LP
For the years ended August 31, 1996, 1995, 1994, 1993 and 1992
(In thousands, except per Unit data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 1,422 $ 1,747 $ 1,945 $ 2,588 $ 3,427
Operating income $ 1,040 $ 1,029 $ 1,414 $ 1,395 $ 2,073
Partnership's share of
venture's income $ 198 $ 143 $ 168 $ 201 $ 149
Gain on sale of land - $ 211 - - -
Loss on foreclosure - - - $(1,000) -
Provision for possible
investment loss $ (800) - $ (1,200) - -
Income (loss) from
operations of
investment
property held
for sale $ 265 $ (738) $ (766) $ 163 -
Net income (loss) $ 703 $ 645 $ (384) $ 759 $ 2,221
Per Limited Partnership Unit:
Net income (loss) $ 19.20 $ 17.60 $ (10.49) $ 20.72 $ 60.68
Cash distributions
from operations $ 19.14 $ 19.86 $ 20.25 $ 57.50 $ 70.00
Cash distributions
from sale, refinancing
and other disposition
transactions $ 106.00 - $ 155.00 - -
Total assets $ 21,501 $25,506 $ 25,010 $ 31,091 $32,112
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the 36,241
Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Result of Operations
Liquidity and Capital Resources
The Partnership offered Limited Partnership Interests to the public from
July 1982 to June 1983 pursuant to a Registration Statement filed under the
Securities Act of 1933. Gross proceeds of $36,241,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
$32,575,000 was invested in six operating property investments in the form of
mortgage loans and land purchase-leaseback transactions. Since the time that the
original investments were made, the Partnership has been prepaid on its
investments with respect to two of the operating properties and the nature of
its investments in two other properties has changed. During fiscal 1995, the
Partnership accepted repayment in full on the land and mortgage loan investments
secured by the Harbour Bay Plaza Shopping Center which become fully prepayable
without penalty in January 1994. The Partnership received total net proceeds
from this transaction of approximately $3.8 million. The Partnership's mortgage
loan and land investments had an aggregate cost basis of $3.6 million. Pursuant
to the ground lease, the Partnership received $211,000 in excess of the
outstanding mortgage loan and land investments as its share of the appreciation
in value of the operating investment property above a specified base amount. The
net proceeds from this transaction, in the amount of approximately $3,842,000,
or $106 per original $1,000 investment, were distributed to the Limited Partners
on October 13, 1995. During fiscal 1994, the Partnership was prepaid with
respect to the land and mortgage loan investments secured by the Howard
Johnson's Motor Lodge. Due to the poor performance of the Howard Johnson's
property and its depressed market value at the time of the prepayment, the
Partnership recovered less than the full amount of its investments in the land
and mortgage loan by approximately $542,000. The Partnership retained
approximately $283,000 of the net proceeds from the Howard Johnson's disposition
in order to maintain adequate cash reserve balances. The remainder was paid out
to the Limited Partners through a special distribution of approximately
$5,617,000, or $155 per original $1,000 investment, which was made on May 25,
1994. During fiscal 1993, the Partnership assumed ownership of the Mercantile
Tower Office Building through a deed-in-lieu of foreclosure transaction
resulting from monetary defaults under the terms of the Partnership's mortgage
loan and ground lease. And finally, during fiscal 1992 the Partnership's
mortgage loan and land investments with respect to the Marshall's at East Lake
Shopping Center were converted to an equity interest in the operating property
through a joint venture partnership as a result of the settlement of a default
under the terms of the related loan agreement.
The mortgage loans secured by the Eden West Apartments and The Timbers
Apartments bear interest at annual rates of 11.5% and 11.75%, respectively. The
Eden West loan prohibited prepayment through June 1, 1994 and includes a
prepayment premium for any prepayment between June 1994 and May 1998 at rates
between 5% and 1.25% of the mortgage loan balance. The Timbers loan contains a
prohibition against prepayment until September 1, 1997. With current market
interest rates for first mortgage loans considerably lower than the rates on the
Partnership's mortgage loan investments, and with the continued availability of
credit in the capital markets for real estate transactions, the likelihood of
the Partnership's mortgage loan investments being prepaid in the near term is
high. As previously reported, the Partnership received notice during the fourth
quarter of fiscal 1995 from the Eden West borrower of its intent to prepay the
Partnership's mortgage loan and repurchase the underlying land. However, the
amount to be received by the Partnership as its share of the appreciation of the
Eden West property has not been agreed upon to date. The terms of the
Partnership's ground lease provide for the possible resolution of disputes
between the parties over value issues through an arbitration process. Presently,
the Partnership and the borrower continue to try to resolve their differences
regarding the value of the property. If an agreement cannot be reached, the
borrower could require the Partnership to submit to arbitration during fiscal
1997. In addition to the amount to be determined as the Partnership's share of
the property's appreciation under the ground lease, the terms of the Eden West
mortgage loan require a prepayment penalty which would be equal to 2.5% of the
outstanding principal balance of $3,500,000 through May 1997. Subsequent to May
31, 1997, the prepayment penalty declines to 1.25% for the next twelve months,
after which there would be no prepayment penalty for the remainder of the term
through maturity in June 1999. If completed, the proceeds of any prepayment
transaction would be distributed to the Limited Partners. However, the
transaction remains contingent on, among other things, a resolution of the value
issue and the borrower obtaining sufficient financing to repay its obligations
to the Partnership. Accordingly, there are no assurances that this transaction
will be consummated.
Occupancy at the Marshall's at East Lake Shopping Center as of August 31,
1996 was 94%, down from its level of 97% as of August 31, 1995. The Partnership
received cash flow distributions from the Marshall's joint venture of
approximately $223,000 for the year ended August 31, 1996, which was $25,000
more than the distributions received in fiscal 1995. As of August 31, 1996, the
property's management team continued to negotiate terms with a 7,600 square foot
tenant that had notified management of its intent to exercise an option to
terminate its lease as of December 31, 1996. Subsequently, the tenant had
reconsidered and requested a proposal for a new lease. Subsequent to year-end,
this tenant signed a new lease with a three-year term which includes the option
to terminate the lease obligation as of December 31, 1997. Marshalls is the
Center's anchor tenant, occupying almost 50% of the property's rentable space.
As part of a nationwide program, the parent company of Marshalls has been
closing its under-performing stores around the country. Although a new Marshalls
store in the market was closed last May, the parent company has stated that
there are no current plans to close the store located at the Partnership's
property. There are no assurances, however, that such plans will not change in
the future. No major capital improvements were required at Marshalls at East
Lake during fiscal 1996, and only minor items are budgeted for the upcoming
year. Cash flow to the Partnership from the Marshalls joint venture is expected
to remain stable in fiscal 1997.
The occupancy level at the wholly-owned Mercantile Tower Office Building
had decreased to 58% at August 31, 1996, down from 67% as of August 31, 1995.
This decline is the result of a downsizing by a major tenant and vacancies
caused by several small firms which terminated their operations during fiscal
1996. As previously reported, the pace of the lease-up at Mercantile Tower has
been well below management's expectations. With significant competition in the
downtown Kansas City office market, management is finding it difficult to obtain
economically viable lease terms from the number of tenants which are looking to
lease space in the market. During the fourth quarter of fiscal 1996, lease
renewals were signed for 6,200 square feet, or approximately 3% of the
building's total space. Subsequent to the fiscal year-end, a new tenant leased
approximately 3,000 square feet, bringing the occupancy level to 59%. Property
improvements completed during the fiscal year included a new roof and upgrades
to interior common areas. The installation of a new stairway to replace an
outdoor escalator was in the process of being completed as of August 31, 1996.
During fiscal 1994, the Partnership closed on a $2 million line of credit which
was to be used to pay for the majority of the required tenant improvement and
capital enhancement costs expected to be incurred to achieve a stabilized
occupancy level. This nonrecourse, fully amortizable line of credit is payable
with interest at 1% over prime, and has a 7-year term with interest-only
payments in the first year. Monthly payments due under the borrowing agreement
began to include scheduled principal amortization effective in March 1995. The
line of credit borrowings are collateralized by a first lien against the
Mercantile Tower property, which includes an adjoining parking facility. During
the second quarter of fiscal 1996, the draw period, which originally had a
2-year term, was extended through February 28, 1998. Draw downs under the line
of credit can only be made in connection with costs associated with signed
leases and contracts for capital improvements. As of August 31, 1996, the
Partnership had drawn approximately $1,482,000 under the line of credit. Only
$67,000 was drawn under the line of credit during fiscal 1996 as a result of the
lack of significant leasing activity. With the drop-off in leasing activity
during fiscal 1996, the Partnership found it necessary to obtain the two-year
extension on the draw period on the line of credit in order to continue to try
to achieve its leasing goals. However, even with the extension of the line of
credit draw period, there are no assurances that the Partnership will be able to
successfully secure leases with new tenants which would be necessary to achieve
a stabilized occupancy level at the property. Stabilizing the operations of the
Mercantile Tower property, which represented 32% of the Partnership's original
investment portfolio, remains the primary goal of management. Until a stabilized
occupancy level is achieved, the Partnership's investment in Mercantile Tower is
not expected to generate any significant excess cash flow. Available cash flow,
for the most part, will be reinvested in enhancements aimed at improving the
marketability of the vacant space at the property as well as for leasing costs
for new and renewing tenants above the amounts available under the line of
credit.
At August 31, 1996, the Partnership had available cash and cash equivalents
of $1,653,000. Such cash and cash equivalents will be used for the Partnership's
working capital requirements and for distributions to the partners. The source
of future liquidity and distributions to the partners is expected to be through
cash generated from the operations of the Partnership's real estate and mortgage
loan investments, repayment of the Partnership's mortgage loans receivable and
the proceeds from the sales or refinancings of the underlying land, the
operating investment property and the joint venture investment property. Such
sources of liquidity are expected to be adequate to meet the Partnership's needs
on both a short-term and long-term basis. However, to the extent that the
potential Eden West loan prepayment and land sale transaction discussed above is
completed and the net proceeds are returned to the Limited Partners, the
Partnership's quarterly distribution rate on remaining invested capital may have
to be adjusted downward to reflect the reduction in cash flows which would
result from such a transaction.
Results of Operations
1996 Compared to 1995
For the year ended August 31, 1996, the Partnership reported net income of
$703,000 as compared to net income of $645,000 recognized in fiscal 1995. This
increase in net income was primarily due to a change in the net operating
results of the wholly-owned Mercantile Tower property. The major portion of this
change resulted from a decline of $806,000 in capital enhancement costs, tenant
improvements and leasing commissions due to the drop in leasing activity at the
Mercantile Tower property discussed further above. As discussed further in the
notes to the accompanying financial statements, all costs associated with
holding this investment property acquired through foreclosure are expensed as
incurred. In addition, revenues from Mercantile Tower were higher by $162,000
for fiscal 1996 when compared to fiscal 1995, largely due to additional
percentage rent collected from the parking facility during the current year. The
$448,000 balance of a general loan loss reserve was reversed during fiscal 1996
as well. The Partnership's two remaining mortgage loans are secured by
residential apartment properties. As a result of the continued improvement in
the operating performances of these two properties and in the market for
residential apartment properties in general, management determined that this
reserve account was no longer required as of August 31, 1996. The recovery of
$448,000 is netted with the provision for possible uncollectible amounts on the
fiscal 1996 statement of operations. An increase of $55,000 in the Partnership's
share of the net income of the Marshalls at East Lake joint venture also
contributed to the increase in the Partnership's net income during fiscal 1996.
The increase in the venture's net income resulted mainly from an improvement in
rental revenues due to a higher average occupancy level in the current year.
The favorable changes in the Partnership's net income were partially
offset by a decrease in mortgage interest and land rent revenues of $368,000 and
a provision for possible investment loss of $800,000 recognized in fiscal 1996,
as well as the effect of a $211,000 gain on the sale of the Harbour Bay Plaza
land recorded in fiscal 1995. In addition, the provision for possible
uncollectible amounts, prior to the recovery referred to above, increased by
$173,000 in fiscal 1996. The decrease in mortgage interest and land rent
revenues resulted from the prepayment and sale transactions involving the
Harbour Bay Plaza mortgage loan and land investments during the fourth quarter
of fiscal 1995. The $800,000 provision for possible investment loss recognized
in fiscal 1996 resulted from a decline in the estimated fair value of the
Mercantile Tower property in the current year. As discussed further above, the
leasing progress which had been made at Mercantile Tower during fiscal 1995
stalled during fiscal 1996, as occupancy actually declined during the year. Due
to these circumstances and the extremely competitive conditions which continue
to face the operating property, management revised downward its estimate of the
fair value of the Mercantile Tower property as of August 31, 1996. In accordance
with the Partnership's accounting policy for foreclosed assets, such properties
are carried at the lower of cost or estimated fair value (net of selling
expenses). The provision for possible uncollectible amounts in both years
reflects the accrued but unpaid interest due under the modified terms of The
Timbers mortgage loan. In fiscal 1995, the Partnership collected an additional
$124,000 from the owner of The Timbers property which was offset against the
provision in fiscal 1995. Additional payments of only $54,000 were collected
during fiscal 1996, which, combined with the compounding effect of the interest
owed under the terms of the modification agreement, accounted for the increase
in the provision.
1995 Compared to 1994
For the year ended August 31, 1995, the Partnership reported net income of
$645,000 as compared to a net loss of $384,000 recognized in fiscal 1994. This
change in the Partnership's net operating results was primarily due to a
provision for possible investment loss of $1,200,000 recognized in fiscal 1994
due to a decline in management's estimate of the fair value of the Mercantile
Tower property. The gain of $211,000 recognized in fiscal 1995 on the sale of
the Harbour Bay Plaza land offset a decline of $214,000 in mortgage interest
income and land rent compared to fiscal 1994. The fiscal 1994 revenues include
income from the Howard Johnson's investments through April 1, 1994, the date of
the sale. A decline in the provision for possible uncollectible amounts of
$135,000 also contributed to the favorable change in the Partnership's net
operating results for fiscal 1995. In both years, the provision reflects the
accrued but unpaid interest due under the modified terms of The Timbers mortgage
loan. In fiscal 1995, the Partnership collected an additional $178,000 from the
owner of The Timbers which was offset against the fiscal 1995 provision. A
recovery of bad debt of $292,000 recorded in fiscal 1994 partly offset the
favorable changes in net operating results. This recovery related to the Howard
Johnson's prepayment transaction, in which the Partnership recovered an amount
of previously reserved mortgage interest and land rent receivable.
A decline of $28,000 in the net loss recognized from the operations of the
wholly-owned Mercantile Tower property offset a decline of $25,000 in the net
income from the Marshall's at East Lake joint venture in fiscal 1995. Revenues
from Mercantile Tower were higher for the twelve months ended August 31, 1995 as
a result of the occupancy gains achieved during fiscal 1995. The net operating
results of the Mercantile Tower Office Building in fiscal 1995 and 1994 include
the costs of the improvements and leasing costs incurred at the property. As a
result of the Partnership's accounting policy with regard to its investment
properties held for sale, all costs associated with holding the asset are
expensed as incurred. The Partnership's share of venture's income decreased in
fiscal 1995 due to lower rental revenues at the Marshall's at East Lake Shopping
Center as a result of a decline in effective rental rates experienced during
fiscal 1995 and 1994 as well as a decrease in cost recoveries.
1994 Compared to 1993
For the year ended August 31, 1994, the Partnership reported a net loss of
$384,000 as compared to net income of $759,000 recognized in fiscal 1993. This
unfavorable change in the Partnership's net operating results was primarily due
to a decline in mortgage interest income and land rent, along with an increase
in property operating expenses at the Mercantile Tower property which is
reflected in the income (loss) from investment property held for sale. The
decrease in mortgage interest income and land rent resulted primarily from the
foreclosure of the Mercantile Tower Office Building on April 12, 1993. This
resulted in a combined reduction in interest income and land rent of $426,000
for the year ended August 31, 1994. Also contributing to the decrease in
mortgage interest and ground rent was the sale of the Howard Johnson's Motor
Lodge effective April 1, 1994. The Partnership recorded only seven months of
mortgage interest and ground rent from the Howard Johnson's investments in
fiscal 1994, as compared to twelve months in fiscal 1993. The net operating
results of the Mercantile Tower Office Building in fiscal 1994 included the
costs of the improvements implemented by the management company prior to
obtaining the line of credit referred to above, as well as certain leasing costs
incurred in the fourth quarter subsequent to obtaining the credit line. As noted
above, as a result of the Partnership's accounting policy with regard to its
investment properties acquired through foreclosures, all costs associated with
holding the asset are expensed as incurred. The Partnership also recognized a
provision for possible investment loss of $1,200,000 in fiscal 1994 due to a
decline in management's estimate of the fair value of the Mercantile Tower
property. Such provision exceeded the $1 million loss recorded in fiscal 1993 to
write down the carrying value of the property as of the date of foreclosure. In
addition, the Partnership's share of venture's income decreased by $32,000 in
fiscal 1994 due to a decline in rental revenues at Marshall's at East Lake as a
result of a decline in occupancy and effective rental rates.
The unfavorable changes in the Partnership's net operating results were
partially offset by the receipt of accrued interest owed on the Howard Johnson's
mortgage loan in the amount of approximately $292,000 at the time of the
repayment in fiscal 1994. The accrued interest had been fully reserved for in
fiscal 1993, and accordingly, was recorded as a recovery of bad debt in fiscal
1994. Excluding the recovery of the Howard Johnson's accrued interest
receivable, the provision for possible uncollectible amounts decreased by
$253,000 in fiscal 1994 due to the foreclosure of the Mercantile Tower Office
Building and the sale of the Howard Johnson's Motor Lodge. During fiscal 1993,
the Partnership was reflecting interest income and a corresponding reserve due
to the default status of the mortgage loans secured by these investments. Also
offsetting the adverse change in net operating results were declines in
management fees and general and administrative expenses during fiscal 1994.
General and administrative expenses decreased by $59,000 mainly due to a decline
in legal fees. Legal fees were higher in fiscal 1993 due to costs incurred in
connection with the borrower defaults on the Mercantile Tower and Howard
Johnson's investments.
Inflation
The Partnership completed its fourteenth full year of operations in fiscal
1996, and the effects of inflation and changes in prices on revenues and
expenses to date have not been significant.
The impact of inflation in future periods may be offset, in part, by an
increase in revenues because the Partnership's land leases provide for
additional rent based upon increases in the revenues of the related operating
properties which would be expected to rise with inflation. Revenues from the
Mercantile Tower Office Building and Marshall's at East Lake Shopping Center
would also be expected to rise with inflation due to the tenant leases which
contain rental escalation and/or expense reimbursement clauses based on
increases in tenant sales and property operating expenses. Such increases in
revenues would be expected to at least partially offset the increases in
Partnership and property operating expenses resulting from inflation. As noted
above, the wholly-owned Mercantile Tower Office Building currently has a
significant amount of unleased space. During a period of significant inflation,
increased operating expenses attributable to space which remained unleased at
such time would not be recoverable and would adversely affect the Partnership's
net cash flow.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Second Qualified
Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operations, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and executive officers of
the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
---- ------ --- ----------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and Assistant
Treasurer 54 2/2/82 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 34 12/1/91
Dorothy F. Haughey Secretary 70 2/2/82 *
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors and
executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and executive officers have been elected to serve until
the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which Paine Webber Properties Incorporated serves as the
Adviser. The business experience of each of the directors and executive officers
of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer at
PaineWebber Properties in August 1996. Mr. Rubin joined PaineWebber Real
Estate Investment Banking in November 1995 as a Senior Vice President. Prior
to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served
as President for KP Realty Advisers, Inc. Prior to his association with
Kidder, Mr. Rubin was a Senior Vice President and Director of Direct
Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First
Vice President and a real estate workout specialist at Shearson Lehman
Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin
practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr.
Rubin is a graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher
previously worked for a major law firm in New York City. He has a J.D. from
Harvard Law School, an M.B.A. from Harvard Graduate School of Business
Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General
Partner and a Vice President and Treasurer of the Adviser which he joined in
1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the
Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and
a Vice President and Manager of Financial Reporting of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in
the state of Massachusetts. He holds a B.S. in Accounting from Merrimack
College and an M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner,
Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended August 31, 1996 all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed renumeration from the Partnership.
The Partnership is required to pay certain fees to the Adviser and the
General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described in
Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 2% to 7% per annum on remaining invested
capital over the past five years. However, the Partnership's Units of Limited
Partnership Interest are not actively traded on any organized exchange, and no
efficient secondary market exists. Accordingly, no accurate price information is
available for these Units. Therefore, a presentation of historical Unitholder
total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Second Qualified Properties, Inc., is owned by
PaineWebber. Properties Associates, the Associate General Partner, is a
Massachusetts general partnership, general partners of which are also officers
of the Adviser and the Managing General Partner. Properties Associates is the
Initial Limited Partner of the Partnership and owns 5 Units of Limited
Partnership Interest in the Partnership. No Limited Partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) Neither the directors and officers of the Managing General Partner nor
the general partners of the Associate General Partner, individually own any
Units of limited partnership interest of the Partnership. No director or officer
of the Managing General Partner nor the general partner of the Associate General
Partner possesses a right to acquire beneficial ownership of Units of Limited
Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The Managing General Partner of the Partnership is Second Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Managing General Partner and PaineWebber Properties
Incorporated. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties Incorporated
(the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with investing Partnership capital, the Adviser received
acquisition fees paid by the borrowers and sellers aggregating approximately 3%
of the gross proceeds of the offering. The Adviser may receive a real estate
brokerage commission, in an amount not yet determinable, upon the disposition of
certain Partnership investments.
All distributable cash, as defined, for each fiscal year will be distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partners. Residual proceeds resulting from disposition of Partnership
investments will be distributed, generally, 85% to the Limited Partners and 15%
to the General Partners, after the prior receipt by the Limited Partners of
their original capital contributions and a cumulative annual return based upon a
formula related to U.S. Treasury Bill interest rates, as defined in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, any taxable income or
tax loss of the Partnership will be allocated 99% to the Limited Partners and 1%
to the General Partners. Allocations of the Partnership's net income or loss for
financial accounting purposes have been made in conformity with the allocations
of taxable income or loss. Taxable income or tax loss arising from disposition
of Partnership investments will be allocated to the Limited and General Partners
generally as residual proceeds are distributed.
Under the advisory contract, the Adviser has specific management
responsibilities; to administer the day-to-day operations of the Partnership,
and to report periodically the performance of the Partnership to the General
Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow)
and an incentive management fee (3% of adjusted cash flow subordinated to a
non-cumulative annual return to the Limited Partners equal to 10% based upon
their adjusted capital contribution) for services rendered. The Adviser earned
basic management fees of $41,000 for the year ended August 31, 1996.
No incentive management fees have been earned to date.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended August 31, 1996 is $144,000, representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $8,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended August 31, 1996. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
Financial statements for the properties securing the
Partnership's mortgage loans have not been included since the
Partnership has no contractual right to the information and
cannot otherwise practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this Report.
(b) No reports on Form 8-K were filed during the fourth quarter of fiscal
1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN
PROPERTY FUND TWO, LP
By: Second Qualified Properties, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: November 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By: /s/ Bruce J. Rubin Date: November 27, 1996
---------------------- -----------------
Bruce J. Rubin
Director
By: /s/ Terrence E. Fancher Date: November 27, 1996
------------------------ -----------------
Terrence E. Fancher
Director
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ----------------------- ------------------
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated July 1, 1982, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended August 31, 1996 has been
sent to the Limited Partners. An
Annual Report will be sent to the
Limited Partners subsequent to
this filing.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial
Statement Schedule required by
Item 14.
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and 14(d)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Two, LP:
Report of independent auditors F-2
Independent auditors' report relating to Marshall's at East
Lake Partnership F-3
Balance sheets as of August 31, 1996 and 1995 F-4
Statements of operations for the years ended August 31,
1996, 1995 and 1994 F-5
Statements of changes in partners' capital (deficit) for the years
ended August 31, 1996, 1995 and 1994 F-6
Statements of cash flows for the years ended August 31, 1996,
1995 and 1994 F-7
Notes to financial statements F-8
Financial statement schedules:
Schedule III - Real Estate Owned F-20
Schedule IV - Investments in Mortgage Loans on Real Estate F-21
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Qualified Plan Property Fund Two, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified
Plan Property Fund Two, LP as of August 31, 1996 and 1995, and the related
statements of operations, changes in partners' capital (deficit) and cash flows
for each of the three years in the period ended August 31, 1996. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
financial statements of Marshall's at East Lake Partnership (an unconsolidated
venture). The Partnership's equity investment in Marshall's at East Lake
Partnership totalled $3,173,000 and $3,198,000 as of August 31, 1996 and 1995,
respectively, and the Partnership's share of the net income of Marshall's at
East Lake Partnership totalled $198,000, $143,000 and $168,000 for the years
ended August 31, 1996, 1995 and 1994, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Marshall's at East Lake
Partnership, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Paine Webber Qualified Plan Property Fund Two, LP at
August 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
November 27, 1996
SMITH & RADIGAN
Certified Public Accountants
Suite 675 Ashford Perimeter
4151 Ashford-Dunwoody Road, N.E.
Atlanta, Georgia 30319-1462
INDEPENDENT AUDITORS' REPORT
To the Partners
Marshall's at East Lake Partnership
We have audited the balance sheets of Marshall's at East Lake Partnership as
of August 31, 1996 and 1995, and the related statements of income, partners'
capital and cash flows for each of the three years in the period ended August
31, 1996 (not presented herein). These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not presented
herein) present fairly, in all material respects, the financial position of
Marshall's at East Lake Partnership as of August 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended August 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Smith & Radigan
SMITH & RADIGAN
Atlanta, Georgia
September 20, 1996
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
BALANCE SHEETS
August 31, 1996 and 1995
(In thousands, except per Unit data)
ASSETS
1996 1995
---- ----
Real estate investments:
Land $ 1,000 $ 1,000
Mortgage loans receivable, net of allowance
for possible uncollectible amounts of
$2,703 ($2,743 in 1995) 7,775 7,327
Investment in joint venture, at equity 3,173 3,198
Investment property held for sale,
net of allowance for possible
investment loss of $2,000 ($1,200 in 1995) 7,500 8,300
------- -------
19,448 19,825
Cash and cash equivalents 1,653 5,379
Tax and insurance escrow 255 197
Interest and other receivables 129 90
Prepaid expenses 16 15
------- -------
$21,501 $25,506
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Accrued real estate taxes $ 183 $ 183
Accounts payable and accrued expenses 93 95
Accounts payable - affiliates 10 12
Tenant security deposits and other liabilities 55 56
Note payable 1,150 1,311
------- -------
Total liabilities 1,491 1,657
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 289 282
Cumulative cash distributions (323) (316)
Limited Partners ($1,000 per Unit,
36,241 Units issued):
Capital contributions, net of offering costs 32,906 32,906
Cumulative net income 28,547 27,851
Cumulative cash distributions (41,410) (36,875)
------- -------
Total partners' capital 20,010 23,849
------- -------
$21,501 $25,506
======= =======
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF OPERATIONS
For the years ended August 31, 1996, 1995 and 1994
(In thousands, except per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Interest from mortgage loans $ 1,195 $ 1,477 $1,612
Land rent 117 203 282
Interest and other income 110 67 51
------- ------- ------
1,422 1,747 1,945
Expenses:
Management fees 41 45 42
General and administrative 381 438 411
(Recovery of) provision for possible
uncollectible amounts (40) 235 78
------- ------- ------
382 718 531
------- ------- ------
Operating income 1,040 1,029 1,414
Partnership's share of venture's income 198 143 168
Gain on sale of land - 211 -
Investment property held for sale:
Provision for possible investment loss (800) - (1,200)
Income (loss) from operations, net 265 (738) (766)
------- ------- ------
(535) (738) (1,966)
------- ------- ------
Net income (loss) $ 703 $ 645 $ (384)
======= ======= ======
Net income (loss) per
Limited Partnership Unit $ 19.20 $17.60 $(10.49)
======= ====== ========
Cash distributions per
Limited Partnership Unit $125.14 $19.86 $175.25
======= ====== =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon 36,241 Units of Limited Partnership Interest outstanding
during each year.
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended August 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at August 31, 1993 $ (21) $ 30,695 $ 30,674
Cash distributions (7) (6,352) (6,359)
Net loss (4) (380) (384)
------ --------- ---------
Balance at August 31, 1994 (32) 23,963 23,931
Cash distributions (7) (720) (727)
Net income 6 639 645
------ -------- --------
Balance at August 31, 1995 (33) 23,882 23,849
Cash distributions (7) (4,535) (4,542)
Net income 7 696 703
------- -------- --------
Balance at August 31, 1996 $ (33) $ 20,043 $ 20,010
======= ======== ========
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 703 $ 645 $ (384)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Recovery of allowance for
possible uncollectible amounts (448) - -
Gain on sale of land - (211) -
Partnership's share of venture's income (198) (143) (168)
Provision for possible investment loss 800 - 1,200
Changes in assets and liabilities:
Tax and insurance escrow (58) (9) 111
Interest and other receivables (39) 196 (100)
Prepaid expenses (1) (1) (1)
Accrued real estate taxes - 13 (94)
Accounts payable and accrued expenses (2) (151) 169
Accounts payable - affiliates (2) 1 (44)
Tenant security deposits and
other liabilities (1) 8 27
------- ------ ------
Total adjustments 51 (297) 1,100
------- ------ ------
Net cash provided by
operating activities 754 348 716
------- ------ ------
Cash flows from investment activities:
Proceeds received from repayment of
mortgage loan and sale of land - 3,811 5,608
Distributions from joint venture 223 198 255
------ ------ ------
Net cash provided by
investing activities 223 4,009 5,863
------- ------ ------
Cash flows from financing activities:
Proceeds received from issuance of
note payable 67 811 604
Principal payments on note payable (228) (104) -
Distributions to partners (4,542) (727) (6,359)
------- ------- ------
Net cash used in
financing activities (4,703) (20) (5,755)
------- ------- -------
Net (decrease) increase in cash and
cash equivalents (3,726) 4,337 824
Cash and cash equivalents,
beginning of year 5,379 1,042 218
------- ------- -------
Cash and cash equivalents, end of year $ 1,653 $ 5,379 $ 1,042
======= ======= =======
Cash paid during the year for interest $ 115 $ 105 $ 4
======= ======= =======
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Paine Webber Qualified Plan Property Fund Two, LP (the "Partnership")
is a limited partnership organized pursuant to the laws of the State of
Delaware in March 1982 for the purpose of investing in a diversified
portfolio of existing income-producing real properties through land
purchase-leaseback transactions and first mortgage loans. The Partnership
authorized the issuance of units (the "Units") of Partnership interests, of
which 36,241 (at $1,000 per Unit) were subscribed and issued between July 1,
1982 and June 30, 1983.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to six operating investment properties. To
date, the Partnership has been prepaid on its investments with respect to
two of the original operating properties. As of August 31, 1996, the
Partnership's mortgage loans and land lease investments on two of the
original properties were still outstanding, and the Partnership owned an
equity interest in one operating property through a joint venture
partnership which resulted from the settlement of a default under the terms
of a first mortgage loan held by the Partnership. In addition, the
Partnership owns one operating property directly as a result of foreclosing
under the terms of its mortgage loan receivable. See Notes 4, 5 and 6 for a
further discussion of the Partnership's outstanding real estate investments.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of August 31, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended August
31, 1996. Actual results could differ from the estimates and assumptions
used.
The Partnership's investments in land subject to ground leases are
carried at the lower of cost or net realizable value. The net realizable
value of a real estate investment held for long-term investment purposes is
measured by the recoverability of the investment through expected future
cash flows on an undiscounted basis, which may exceed the property's current
market value. The net realizable value of a property held for sale
approximates its current market value. None of the Partnership's land
investments were held for sale as of August 31, 1996 or 1995. The
Partnership has reviewed FAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" which is
effective for financial statements for years beginning after December 15,
1995, and believes this new pronouncement will not have a material effect on
the Partnership's financial statements.
Mortgage loans receivable are carried at the lower of cost or fair
value. Amounts representing deferred interest and land rent receivable
resulting from loan and ground lease modifications are fully reserved until
collected. The Partnership's policy is to provide for any valuation
allowances on its mortgage loan investments on a specific identification
basis, principally by evaluating the market value of the underlying
collateral since the loans are collateral dependent. In addition, a general
loan loss reserve was recorded in fiscal 1990 in an amount equal to
$990,000, reflecting management's assessment of the general credit risk
applicable to the Partnership's portfolio of mortgage loan investments taken
as a whole. During fiscal 1994, $542,000 of this loan loss reserve was
applied against the loss incurred in conjunction with the repayment of the
Howard Johnson's mortgage loan. In fiscal 1996, the remainder of this loan
loss reserve, of $448,000, was reversed as a result of continued
improvements in the operating performances of the underlying collateral
properties and in real estate market conditions in general (see Note 4).
The accompanying financial statements include the Partnership's
investment in a joint venture partnership which owns one operating property.
The Partnership accounts for its investment in the joint venture using the
equity method because the Partnership does not have a voting control
interest in the venture. Under the equity method the venture is carried at
cost adjusted for the Partnership's share of the venture's earnings or
losses and distributions. See Note 5 for a description of the joint venture
partnership.
Investment property held for sale represents an asset acquired by the
Partnership through foreclosure proceedings on a first mortgage loan. The
Partnership's policy is to carry this asset at the lower of cost or
estimated fair value (net of selling expenses). The Partnership's cost basis
is equal to the fair value of the asset at the date of foreclosure. Declines
in the estimated fair value of the asset subsequent to foreclosure are
recorded through the use of a valuation allowance. Subsequent increases in
the estimated fair value of the asset result in reductions in the valuation
allowance, but not below zero. All costs incurred to hold the asset are
charged to expense and no depreciation expense is recorded.
For purposes of reporting cash flows, the Partnership considers all
highly liquid investments with original maturities of 90 days or less to be
cash equivalents.
The mortgage loans receivable, cash and cash equivalents, tax and
insurance escrow, interest and other receivables, accounts payable
affiliates, accounts payable and accrued liabilities and note payable
appearing on the accompanying balance sheets represent financial instruments
for purposes of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." With the exception
of mortgage loans receivable and note payable, the carrying amount of these
assets and liabilities approximates their fair value as of August 31, 1996
due to the short-term maturities of these instruments. Information regarding
the fair value of the Partnership's mortgage loans receivable is provided in
Note 4. Due to the likelihood of near term prepayment, the mortgage loans
receivable have been valued at the lesser of face value or the estimated
fair value of the collateral property, as determined by an independent
appraisal. Such appraisals make use of a combination of certain generally
accepted valuation techniques, including direct capitalization, discounted
cash flows and comparable sales analysis (see Note 4 for a further
discussion). The fair value of the note payable is estimated using
discounted cash flow analysis, based on the current market rates for similar
types of borrowing arrangements (see Note 7).
Certain prior year amounts have been reclassified to conform to the
current year presentation.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
The Managing General Partner of the Partnership is Second Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are
also officers of the Managing General Partner and PaineWebber Properties
Incorporated. Subject to the Managing General Partner's overall authority,
the business of the Partnership is managed by PaineWebber Properties
Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser
is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with investing Partnership capital, the Adviser received
acquisition fees paid by the borrowers and sellers aggregating approximately
3% of the gross proceeds of the offering. The Adviser may receive a real
estate brokerage commission, in an amount not yet determinable, upon the
disposition of certain Partnership investments.
All distributable cash, as defined, for each fiscal year will be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to
the General Partners. Residual proceeds resulting from disposition of
Partnership investments will be distributed, generally, 85% to the Limited
Partners and 15% to the General Partners, after the prior receipt by the
Limited Partners of their original capital contributions and a cumulative
annual return based upon a formula related to U.S. Treasury Bill interest
rates, as defined in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, any taxable income
or tax loss of the Partnership will be allocated 99% to the Limited Partners
and 1% to the General Partners. Allocations of the Partnership's net income
or loss for financial accounting purposes have been made in conformity with
the allocations of taxable income or loss. Taxable income or tax loss
arising from disposition of Partnership investments will be allocated to the
Limited and General Partners generally as residual proceeds are distributed.
Under the advisory contract, the Adviser has specific management
responsibilities; to administer the day-to-day operations of the
Partnership, and to report periodically the performance of the Partnership
to the General Partners. The Adviser is paid a basic management fee (6% of
adjusted cash flow) and an incentive management fee (3% of adjusted cash
flow subordinated to a non-cumulative annual return to the Limited Partners
equal to 10% based upon their adjusted capital contribution) for services
rendered. The Adviser earned basic management fees of $41,000, $45,000 and
$42,000 for the years ended August 31, 1996, 1995 and 1994, respectively. No
incentive management fees have been earned to date. Accounts payable -
affiliates at August 31, 1996 and 1995 consists of management fees payable
to the Adviser of $10,000 and $12,000, respectively.
Included in general and administrative expenses for the years ended
August 31, 1996, 1995 and 1994 is $144,000, $176,000 and $161,000,
respectively, representing reimbursements to an affiliate of the Managing
General Partner for providing certain financial, accounting and investor
communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins
earned fees of $8,000, $2,000 and $1,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996, 1995 and 1994, respectively.
4. Mortgage Loan and Land Investments
The following first mortgage loans were outstanding at August 31, 1996
and 1995 (in thousands):
Date
of Loan
Amount of Loan and
Property 1996 1995 Interest Rate Maturity
-------- ---- ---- ------------- --------
Eden West Apts. $ 3,500 $ 3,500 Years 1 to 3 - 11% 6/6/84
Omaha, NE Years 4 to 6 - 11.25% 6/6/99
Thereafter - 11.50%
The Timbers 6,978 6,570 11.75% 9/7/84
Apartments (1) (2,703) (2,295) 9/1/98
-------- -------
Raleigh, NC 4,275 4,275
-------- -------
Subtotal 7,775 7,775
Less: General
loan reserve (2) - (448)
-------- -------
$ 7,775 $ 7,327
======== =======
(1) See discussion below regarding interest pay rate modifications for the
Timbers mortgage loan. Deferred interest is added to the principal
balance of the mortgage loan receivable. The Partnership's policy is to
reserve for deferred interest until collected.
(2) The Partnership recorded a general loan loss reserve of $990,000 in
1990 (see Note 2). During fiscal 1994, $542,000 of this loan loss
reserve was applied against the loss incurred in connection with the
repayment of the Howard Johnson's mortgage loan (see discussion below).
As a result of the continued improvement in the operating performances
of the two remaining properties securing the Partnership's mortgage
loans receivable and in light of the favorable market conditions which
continue to exist for most residential apartment properties in general,
the Partnership reversed the remainder of this loan loss reserve in
fiscal 1996. The recovery of $448,000 is netted with the provision for
possible uncollectible amounts on the accompanying statement of
operations.
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all tenant leases, where
applicable. Interest is payable monthly and the principal is due at
maturity.
In relation to the above-mentioned mortgage loans, the following land
purchase-leaseback transactions had also been entered into as of August 31,
1996 and 1995 (in thousands):
Cost of Land
to the Partnership
Property 1996 1995 Annual Base Rent
-------- ---- ---- ------------------
Eden West Apartments $ 400 $ 400 Years 1 to 3 - $44,000
Years 4 to 6 - $45,000
Thereafter - $46,000
The Timbers Apartments 600 600 $ 70,500
------- ------
$ 1,000 $1,000
======== ======
The land leases have terms of 40 years. Among the provisions of the
lease agreements, the Partnership is entitled to additional rent based upon
the gross revenues in excess of a base amount, as defined. No additional
rent was received during fiscal 1996, 1995 or 1994. The lessees have the
option to purchase the land for specified periods of time at a price based
on the fair market value, as defined, but not less than the original cost to
the Partnership. As of August 31, 1996, both options to purchase the land
were exercisable.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current
income through participation in the annual revenues generated by the
properties as they increase above specified base amounts. In addition, the
Partnership's investments are structured to share in the appreciation in
value of the underlying real estate. Accordingly, upon either sale,
refinancing, maturity of the mortgage loans or exercise of the options to
repurchase the land, the Partnership will receive a 40% share of the
appreciation above a specified base amount.
As discussed further below, the Eden West loan is open to prepayment as
of August 31, 1996, and the loan secured by The Timbers becomes prepayable
without penalty as of September 1, 1997. Management believes the potential
for a near term prepayment of both loans is high. As a result of these
circumstances, the mortgage loan instruments have been valued, based on an
expected short-term maturity, at the lesser of face value or the estimated
fair value of the collateral property. Estimated fair values for the
Partnership's mortgage loan investments as of August 31, 1996 are summarized
below (in thousands):
Mortgage Loan
-------------
Eden West Apartments $ 3,500
The Timbers Apartments 6,700
-------
$10,200
=======
The Timbers Apartments
----------------------
During fiscal 1987, the Partnership agreed to modify the payment terms
of the loan secured by The Timbers Apartments. Under the terms of The
Timbers modification, which was effective on October 1, 1986, for a period
of approximately thirty months, a portion of the interest payable was
deferred and added to the principal balance. During fiscal 1989, the debt
modification expired and a new modification was negotiated. The terms
included an extension of the deferral period and the loan maturity to
September of 1998. The amount due to the Partnership will continue to be
equal to the cash flow of the property available after the payment of
operating expenses not to exceed 11.75% of the note balance, but in no event
less than 7.75% of the note balance. The amount deferred each year will
accrue interest at the original rate of 11.75% beginning at the end of that
year and the total deferred amount plus accrued interest will be payable
upon maturity of the note in September of 1998. The loan may be prepaid
without penalty at any time after September 1, 1997.
During fiscal 1994, the Partnership received the minimum payments due
under the note of $331,000. During fiscal 1996 and 1995, the Partnership
received payments totalling $385,000 and $509,000 respectively, toward the
interest owed on the loan secured by The Timbers. Due to the Partnership's
policy of reserving for deferred interest until collected, such cash
payments reflect the interest income recognized in the Partnership's
statements of operations for such years (net of the provision for possible
uncollectible amounts). Gross interest income at the original rate of 11.75%
per annum would have accrued for each of the three years ended August 31,
1996, 1995 and 1994 in the amount of $502,000 had the modifications referred
to above not been necessary. The Partnership has established an allowance
for possible uncollectible amounts for the cumulative amount of deferred
interest owed under the Timbers modification ($2,703,000 and $2,295,000 at
August 31, 1996 and 1995, respectively) due to the uncertainty as to the
collection of the deferred interest from this investment.
Eden West Apartments
--------------------
During the last quarter of fiscal 1995, the Partnership received notice
from the Eden West borrower of its intent to prepay the Partnership's
mortgage loan and repurchase the underlying land. The amount to be received
by the Partnership as its share of the appreciation of the Eden West
property has not been agreed upon to date. The terms of the Partnership's
ground lease provide for the possible resolution of disputes between the
parties over value issues through an arbitration process. In addition to the
amount to be determined as the Partnership's share of the property's
appreciation under the ground lease, the terms of the Eden West mortgage
loan require a prepayment penalty which would be equal to 2.5% of the
outstanding principal balance of $3,500,000 through May 1997. Subsequent to
May 31, 1997, the prepayment penalty declines to 1.25% for the next twelve
months, after which there would be no prepayment penalty for the remainder
of the term through maturity in June 1999. If completed, the proceeds of any
prepayment transaction would be distributed to the Limited Partners.
However, the transaction remains contingent on, among other things, a
resolution of the value issue and the borrower obtaining sufficient
financing to repay its obligations to the Partnership. Accordingly, there
are no assurances that this transaction will be consummated.
Harbour Bay Plaza
-----------------
Effective August 25, 1995, the borrower of the Harbour Bay Plaza loan
repaid the Partnership's first leasehold mortgage loan secured by Harbour
Bay Plaza Shopping Center and purchased the Partnership's interest in the
underlying land for total consideration of $3,833,000. Such consideration
included the repayment of the principal balance of the mortgage loan, of
$2,850,000, plus interest accrued through August 25, 1995, of $23,000. The
Partnership's cost basis in the land was $750,000. Pursuant to the ground
lease, the Partnership received $211,000 in excess of the outstanding
mortgage loan and land investments as its share of the appreciation in value
of the operating investment property above a specified base amount. The net
proceeds from this transaction were distributed to the Limited Partners as a
Special Distribution of $106 per original $1,000 investment on October 13,
1995.
Howard Johnson's Motor Lodge
----------------------------
An agreement for a third modification of the Howard Johnson's mortgage
loan was reached between the borrower and the Partnership during fiscal
1993. As part of the workout agreement, the borrower had until June 30,
1994 to market the property for sale. Under the agreement, the Partnership
earned a blended rate of 7% per annum on the unpaid principal balance of
the loan ($5,050,000) and the cost basis of the land ($1,100,000). In the
event that the borrower failed to comply with the terms of this
modification, the deed to the property, which was placed in escrow, was to
have been released to the Partnership, resulting in a foreclosure pursuant
to the terms of the first mortgage loan and a termination of the ground
lease. The borrower was also required to personally guarantee payment of
the mortgage interest and land rent until the property was sold or deeded
back to the Partnership. The agreement further provided that if there had
been no default, as defined, and the property was sold, all proceeds up to
$5.2 million would be paid to the Partnership. Additional proceeds would go
to the Partnership until delinquent debt service through April 30, 1993, as
defined, was paid in full. Thereafter, any additional proceeds would be
paid 25% to the Partnership and 75% to the borrower.
Effective April 1, 1994, the borrower sold the Howard Johnson's Motor
Lodge and repaid the Partnership's land and loan investments in accordance
with the terms of the third modification agreement. The total net proceeds
received by the Partnership amounted to approximately $5.9 million. In
accordance with the third modification agreement, such proceeds included
the payment of $292,000 of deferred debt service and ground rent, which had
previously been fully reserved for. The remaining proceeds of approximately
$5,608,000 were less than the combined carrying value of the mortgage loan
and land investments of $6,150,000. The resulting deficiency, of
approximately $542,000, was charged against the outstanding general loan
loss reserve. Accordingly, the aforementioned transaction did not result in
the recognition of a loss for financial reporting purposes in fiscal 1994.
The Partnership retained approximately $283,000 of the net proceeds from
the Howard Johnson's disposition in order to maintain adequate cash reserve
balances. The remainder was paid out to the Limited Partners through a
special distribution of approximately $5,617,000, or $155 per original
$1,000 investment, which was made on May 25, 1994.
5. Investment in Joint Venture
On June 12, 1990, the borrower of the mortgage loan secured by the
Marshall's at East Lake Shopping Center, Oxford/Concord Associates, filed a
Chapter 11 petition with the United States Bankruptcy Court for the Northern
District of Georgia. On November 14, 1990, the Bankruptcy Court ordered that
both the Partnership and the borrower submit plans for the restructuring of
the mortgage loan and ground lease agreements. During fiscal 1991, the
Partnership and the borrower reached a settlement agreement which involved
the formation of a joint venture to own and operate the property on a
go-forward basis. The formation of the joint venture was approved by the
Bankruptcy Court and became effective in December of 1991. The Partnership
contributed its rights and interests under its mortgage loan to the joint
venture and the loan was extinguished. In addition, the Partnership
contributed the land underlying the operating property to the joint venture
and the related ground lease was terminated. Oxford/Concord Associates
contributed all of its rights, title and interest in and to the improvements,
subject to the Partnership's loan, to the joint venture.
Since the Partnership received an equity interest in full satisfaction of
its outstanding mortgage loan receivable, the transaction was accounted for
as a troubled debt restructuring in accordance with Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". Accordingly, the Partnership would have
recognized a loss to the extent that the face amount of the mortgage loan and
the carrying value of the land exceeded the fair value of the equity interest
acquired. However, management estimated that the fair value of the equity
interest acquired was approximately equal to the face amount of the loan and
the investment in land. Therefore, no loss was recorded at the time of the
restructuring. The carrying value of the mortgage loan receivable and land
comprising the Partnership's investment in Marshall's at East Lake, which
totalled $3,500,000, was reclassified to investment in joint venture
effective December 11, 1991. Subsequent to the restructuring, the Partnership
has accounted for its equity investment as if it had acquired the interest
for cash, in accordance with SFAS No. 15. Based upon the provisions of the
joint venture agreement, the Partnership's investment in the Marshall's joint
venture is accounted for on the equity method in the Partnership's financial
statements. Under the equity method, the investment is carried at cost,
adjusted for the Partnership's share of earnings, losses and distributions.
The estimated fair value of the Partnership's equity interest in the
Marshalls at East Lake joint venture is below the carrying value of the
investment on the accompanying balance sheet as of August 31, 1996 by
approximately $450,000. However, based on management's estimates of future
cash flows, the carrying value is expected to be recovered. Accordingly, no
impairment writedown has been recognized. If management's estimates of future
cash flows or expected holding period prove to be inaccurate, the Partnership
may be unable to recover the carrying value of the joint venture investment
as of August 31, 1996.
Condensed financial statements of this joint venture follow.
Condensed Balance Sheet
August 31, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 115 $ 16
Operating investment property, net 3,034 3,162
Other assets 73 74
--------- ---------
$ 3,222 $ 3,252
========= =========
Liabilities and Partners' Capital
Current liabilities $ 30 $ 37
Other liabilities 19 17
Partnership's share of capital 3,173 3,198
---------- ----------
$ 3,222 $ 3,252
========== ==========
Condensed Summary of Operations
For the years ended August 31, 1996, 1995, 1994
(in thousands)
1996 1995 1994
---- ---- ----
Rental income and
expense reimbursements $ 506 $ 444 $ 468
Interest and other income 2 2 1
------- ------ -------
508 446 469
Interest expense - - 2
Property operating expenses 163 161 167
Depreciation and amortization 147 142 132
-------- ------ -------
310 303 301
-------- ------ -------
Net income $ 198 $ 143 $ 168
======== ====== =======
Net income:
Partnership's share of net income $ 198 $ 143 $ 168
Co-venturer's share of net income - - -
-------- ------ --------
$ 198 $ 143 $ 168
======== ====== ========
This joint venture is subject to a partnership agreement which determines
the distribution of available funds, the disposition of the venture's assets and
the rights of the partners, regardless of the Partnership's percentage ownership
interest in the venture. Substantially all of the Partnership's investment in
this joint venture is restricted as to distributions.
A description of the operating property owned by the joint venture and
the terms of the joint venture agreement are summarized below:
Marshall's at East Lake Partnership
-----------------------------------
Marshall's at East Lake Partnership, a Delaware general partnership ("the
joint venture") was organized on December 11, 1991 by the Partnership and
Oxford/Concord Associates ("Oxford"), a Georgia joint venture, to acquire,
own and operate Marshall's at East Lake Shopping Center. The property, which
was 94% leased as of August 31, 1996, is a 55,175 square foot shopping
center on approximately 6.7 acres of land in suburban Atlanta, Georgia.
The joint venture agreement provides that all taxable income for any fiscal
year will, in general, be allocated to the Partnership until it has received
income allocations equal to a cumulative 9% return upon its defined invested
capital ($4,250,000 at August 31, 1996). Thereafter, taxable income will be
allocated 80% to the Partnership and 20% to Oxford. In general, all tax
losses will be allocated to the Partnership.
The joint venture agreement also provides that cash flow, as defined, be
distributed monthly to the Partnership until it has received cumulative
distributions equal to a 9% return upon its defined invested capital.
Thereafter, cash flow will be distributed 80% to the Partnership and 20% to
Oxford. The Partnership received distributions from the joint venture
totalling $223,000, $198,000 and $255,000 during the years ended August 31,
1996, 1995 and 1994, respectively. The Partnership would need to receive
additional distributions of $598,000 to reach a cumulative non-compounded
return of nine percent on its defined investment capital as of August 31,
1996. Proceeds from any capital transaction, as defined, shall be
distributed first to the Partnership until it has received aggregate
distributions equal to a 9% return upon its defined invested capital;
second, to the Partnership until it has received an amount equal to its
defined invested capital; and the balance, if any, will be distributed 80%
to the Partnership and 20% to Oxford. The Partnership entered into a
property management contract with New Market Management Company (the
"Manager"), an affiliate of Oxford, for the management of the property. As
compensation for management services provided to the joint venture, the
Manager receives a management fee equal to 5% of gross cash receipts, as
defined, subject to a monthly minimum of $2,000. Such fees amounted to
$25,000, $25,000 and $23,000 for the years ended August 31, 1996, 1995 and
1994, respectively. The Partnership and Oxford must make all decisions
unanimously relating to the business and affairs of the joint venture.
However, the Partnership can unilaterally, without the approval of Oxford,
terminate upon thirty days' written notice the current management company.
6. Investment Property Held for Sale
Mercantile Tower Office Building
--------------------------------
The Partnership assumed ownership of the Mercantile Tower office
building, in Kansas City, Missouri, on April 12, 1993 through a deed-in-lieu
of foreclosure action following a default under the terms of a first mortgage
loan held by the Partnership. The Partnership complies with the guidelines
set forth in the Statement of Position entitled "Accounting for Foreclosed
Assets", issued by the American Institute of Certified Public Accountants, to
account for its investment properties acquired through foreclosures. Under
the Statement of Position, a foreclosed asset is recorded at the lower of
cost or estimated fair value, reduced by the estimated costs to sell the
asset. Cost is defined as the fair value of the asset at the date of the
foreclosure. Declines in the estimated fair value of the asset subsequent to
foreclosure are recorded through the use of a valuation allowance. Subsequent
increases in the estimated fair value of the asset result in reductions in
the valuation allowance, but not below zero. The combined balance of the land
and the mortgage loan investment at the time title was transferred was
$10,500,000. The estimated fair value of the operating property at the date
of foreclosure, net of selling expenses, was $9,500,000. Accordingly, a
write-down of $1,000,000 was recorded as a loss on foreclosure in the
statement of operations for fiscal 1993. In fiscal 1996 and 1994, the
Partnership recorded provisions for possible investment loss in the amounts
of $300,000 and $1,200,000, respectively, to reflect declines in management's
estimate of the fair value of the investment property. The net carrying value
of the Mercantile Tower investment property at August 31, 1996 and 1995, of
$8,000,000 and $8,300,000, respectively, is classified as investment property
held for sale on the Partnership's balance sheets.
The Partnership records income from the investment property held for
sale in the amount of the difference between the property's gross revenues
and property operating expenses (including leasing costs and improvement
expenses), taxes and insurance. Summarized operating results for Mercantile
Tower for the years ended August 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Rental revenues and expense recoveries $1,811 $1,654 $1,574
Other income 5 - 2
------- ------ -------
1,816 1,654 1,576
Property operating expenses (1) 1,193 1,993 2,044
Property taxes and insurance 244 287 294
Interest expense 114 112 4
------- ------ -------
1,551 2,392 2,342
------- ------ -------
Income (loss) from investment property
held for sale, net $ 265 $ (738) $ (766)
======= ====== =======
(1) As discussed in Note 2, in accordance with the Partnership's accounting
policy for assets held for sale, capital improvement costs are expensed as
incurred. Included in property operating expenses for the years ended August
31, 1996, 1995 and 1994 is capital improvement costs of $159,000, $965,000
and $1,141,000, respectively.
7. Note payable
Note payable as of August 31, 1996 and 1995 consists of the following
secured indebtedness (in thousands):
1996 1995
---- ----
Line-of-credit borrowings secured
by the Mercantile Tower property
(see Note 6). Draws under the
line, up to a maximum of
$2,000,000, can be made through
February 28, 1998, only to fund
approved leasing and capital
improvements costs related to the
Mercantile Tower property. The
outstanding borrowings bear
interest at the prime rate plus
1% per annum. Interest-only
payments were due on a monthly
basis through February 1995.
Thereafter, monthly principal and
interest payments are due through
maturity on February 10, 2001.
The fair value of the note
payable approximated its carrying
amount as of August 31, 1996. $ 1,150 $ 1,311
======= =======
Scheduled maturities of the outstanding debt for the next six years are as
follows (in thousands):
1997 $ 256
1998 256
1999 255
2000 255
2001 128
-------
$ 1,150
=======
8. Leases
The Partnership leases office space at the Mercantile Tower office
building under operating leases which provide for fixed minimum rents and
reimbursements of certain operating costs. Rental revenues are recognized
on a straight-line basis over the life of the related lease. Minimum future
rental revenues to be received by the Partnership under noncancellable
operating leases for the next five years and thereafter are as follows (in
thousands):
1997 $ 1,554
1998 1,261
1999 982
2000 840
2001 766
Thereafter 1,936
---------
$ 7,339
=========
9. Contingencies
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court
for the Southern District of New York concerning PaineWebber Incorporated's
sale and sponsorship of various limited partnership investments, including
those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together
"PaineWebber"), among others, by allegedly dissatisfied partnership
investors. In March 1995, after the actions were consolidated under the
title In re PaineWebber Limited Partnership Litigation, the plaintiffs
amended their complaint to assert claims against a variety of other
defendants, including Second Qualified Property Fund, Inc. and Properties
Associates ("PA"), which are the General Partners of the Partnership and
affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interests in Paine Webber
Qualified Plan Property Fund Two, LP., PaineWebber, Second Qualified
Property Fund, Inc. and PA (1) failed to provide adequate disclosure of the
risks involved; (2) made false and misleading representations about the
safety of the investments and the Partnership's anticipated performance; and
(3) marketed the Partnership to investors for whom such investments were not
suitable. The plaintiffs, who purported to be suing on behalf of all persons
who invested in Paine Webber Qualified Plan Property Fund Two, LP, also
alleged that following the sale of the partnership interests, PaineWebber,
Second Qualified Properties, Inc. and PA misrepresented financial
information about the Partnership's value and performance. The amended
complaint alleged that PaineWebber, Second Qualified Properties, Inc. and PA
violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and
the federal securities laws. The plaintiffs sought unspecified damages,
including reimbursement for all sums invested by them in the partnerships,
as well as disgorgement of all fees and other income derived by PaineWebber
from the limited partnerships. In addition, the plaintiffs also sought
treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the New York Limited Partnership Actions outlining the
terms under which the parties have agreed to settle the case. Pursuant to
that memorandum of understanding, PaineWebber irrevocably deposited $125
million into an escrow fund under the supervision of the United States
District Court for the Southern District of New York to be used to resolve
the litigation in accordance with a definitive settlement agreement and plan
of allocation. On July 17, 1996, PaineWebber and the class plaintiffs
submitted a definitive settlement agreement which has been preliminarily
approved by the court and provides for the complete resolution of the class
action litigation, including releases in favor of the Partnership and the
General Partners, and the allocation of the $125 million settlement fund
among investors in the various partnerships at issue in the case. As part of
the settlement, PaineWebber also agreed to provide class members with
certain financial guarantees relating to some of the partnerships. The
details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of
the proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including
those offered by the Partnership. The complaint alleges, among other things,
that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating
the risks and failing to state material facts concerning the investments.
The complaint seeks compensatory damages of $15 million plus punitive
damages against PaineWebber. In September 1996, the court dismissed many of
the plaintiffs' claims as barred by applicable securities arbitration
regulations. Mediation hearings are scheduled to be held in December 31,
1996. The eventual outcome of this litigation and the potential impact, if
any, on the Partnership's unitholders cannot be determined at the present
time.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber affiliates could be
entitled to indemnification for expenses and liabilities in connection with
the litigation described above. However, PaineWebber has agreed not to seek
indemnification for any amounts it is required to pay in connection with the
settlement of the New York Limited Partnership Actions. At the present time,
the General Partners cannot estimate the impact, if any, of the potential
indemnification claims on the Partnership's financial statements, taken as a
whole. Accordingly, no provision for any liability which could result from
the eventual outcome of these matters has been made in the accompanying
financial statements.
10. Subsequent Events
On October 15, 1996, the Partnership distributed $167,000 to the Limited
Partners and $2,000 to the General Partners for the quarter ended August 31,
1996.
Schedule III - Real Estate Owned
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
August 31, 1996
(In thousands)
Cost Basis of Gross Amount at Date of
Investment to Which Carried Original Size
Description Encumbrances Partnership (A) at Close of Period (A) Investment of Investment
- ----------- ------------ --------------- ---------------------- ---------- -------------
Office Building $ 1,150 $10,500 $ 9,500 4/29/83 13,500 net
Kansas City, MO (1) rentable sq. ft.
on 32,000 sq. ft.
of land
Land underlying - 400 400 6/6/84 10.2 acres
Apartment Complex (B)
Omaha, NE
Land underlying - 600 600 9/7/84 18 acres
Apartment Complex (B)
Raleigh, NC ------- ------- -------
$ 1,150 $11,500 $10,500
======= ======= =======
Notes:
(A) These amounts represent the original cost of each investment and the
gross amount at which these investments are carried on the balance
sheet at August 31, 1996. The aggregate cost for federal income tax
purposes at August 31, 1996 is approximately $8,327,000.
(B) All senior mortgages on the land investments are held by Paine Webber
Qualified Plan Property Fund Two, LP. See Schedule IV.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 10,500 $11,250 $12,350
Acquisitions - - -
Dispositions (2) - (750) (1,100)
-------- ------- -------
Balance at end of year $ 10,500 $10,500 $11,250
======== ======= =======
(1) The Partnership assumed ownership of the Mercantile Tower Office
Building located in Kansas City, Missouri, on April 12, 1993 as a
result of foreclosure proceedings. The balance of the mortgage note at
the time title was transferred was $9,500,000 and the land had a cost
basis to the Partnership of $1,000,000. The Partnership recorded a
$1,000,000 write-down to reflect the estimate of the property's fair
value at the time of foreclosure, net of selling expenses. In fiscal
1996 and 1994, the Partnership recorded provisions for possible
investment loss in the amounts of $800,000 and $1,200,000,
respectively, to reflect declines in management's estimate of the fair
value of the investment property. Accordingly, the net carrying value
of the investment on the Partnership's balance sheet at August 31, 1996
amounted to $7,500,000. See Note 6 to the financial statements
accompanying this Annual Report for a further discussion of these
events.
(2) See Note 4 to the financial statements for a discussion of the sale of
the land underlying the Howard Johnson's Motor Lodge during fiscal 1994
and the sale of the land underlying the Harbour Bay Plaza Shopping
Center during fiscal 1995.
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
August 31, 1996
(In thousands)
Principal
amount of
loans subject
Carrying to delinquent
Final maturity Periodic Face amount of amount of principal
Description Interest rate Date payment terms mortgage mortgage or interest
----------- ------------- ----------------- ------------- -------- -------- -----------
First Mortgage Loans:
Apartment Complex 11.5% June 6, 1999 Interest monthly, $ 3,500 $ 3,500 -
Omaha, NE principal at maturity
Apartment Complex 11.75% (1) September 1, 1998 Interest monthly, 6,978 6,978 -
Raleigh, NC principal at maturity (2,703) (1)
--------
4,275
-------- --------
TOTALS $ 10,478 $ 7,775
======== ========
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 7,327 $10,177 $14,685
Additions during the period:
Interest deferrals, net (1) 408 235 370
Dispositions during the period:
Repayment of mortgage loans receivable (2) - (2,850) (4,508)
Recovery of (provision for) possible
uncollectible amounts (1) 40 (235) (370)
------- ------- -------
Balance at end of period $ 7,775 $ 7,327 $10,177
======= ======= =======
(1) See Note 4 to the financial statements for information regarding certain
valuation accounts and modifications to the payment terms associated with
The Timbers (Raleigh) mortgage loan. Deferred interest is added to the
principal balance of the mortgage loan receivable. The Partnership's policy
is to reserve for deferred interest until collected.
(2) During fiscal 1994, the Howard Johnson's Motor Lodge was sold and the
Partnership's land and loan investments were repaid in accordance with the
terms of the third modification agreement. During fiscal 1995, the Harbour
Bay Plaza mortgage loan was repaid. See Note 4 to the Financial Statements
accompanying this Annual Report for a further discussion of these events.