UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to ______.
Commission File Number: 0-17146
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
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(Exact name of registrant as specified in its charter)
Delaware 04-2752249
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
BALANCE SHEETS
November 30, 1997 and August 31, 1997 (Unaudited)
(In thousands)
ASSETS
November 30 August 31
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Real estate investments:
Land $ 600 $ 600
Mortgage loans receivable, net 4,275 4,275
Investment in joint venture, at equity 3,007 3,060
Investment property held for sale, net - 7,150
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7,882 15,085
Cash and cash equivalents 7,822 1,555
Tax and insurance escrow - 215
Interest and other receivables 53 96
Prepaid expenses and other assets 16 14
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$15,773 $ 16,965
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LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 53 $ 160
Accounts payable - affiliates 10 10
Accrued real estate taxes - 160
Tenant security deposits and other liabilities - 64
Note payable - 894
Partners' capital 15,710 15,677
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$15,773 $ 16,965
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See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
1997 1996
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Revenues:
Interest from mortgage loans $ 201 $ 306
Land rent 18 29
Other interest income 39 20
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258 355
Expenses:
Management fees 10 10
General and administrative 71 55
Provision for possible uncollectible
amounts 118 123
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199 188
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Operating income 59 167
Partnership's share of venture's income 53 40
Income from operations of
investment property held for sale, net 113 11
Loss on sale of investment property held
for sale (23) -
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Net income $ 202 $ 218
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Net income per Limited
Partnership Unit $ 5.51 $ 6.02
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Cash distributions per Limited
Partnership Unit $ 4.62 $ 4.62
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The above net income and cash distributions per Limited Partnership Unit
are based upon the 36,241 Units of Limited Partnership Interest outstanding
during each period.
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
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Balance at August 31, 1996 $(33) $20,043
Cash distributions (2) (167)
Net income 2 216
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Balance at November 30, 1996 $(33) $20,092
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Balance at August 31, 1997 $(30) $15,707
Cash distributions (2) (167)
Net income 2 200
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Balance at November 30, 1997 $(30) $15,740
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See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
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Cash flows from operating activities:
Net income $ 202 $ 218
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of venture's income (53) (40)
Loss on sale of investment property held for sale 23 -
Changes in assets and liabilities:
Tax and insurance escrow 215 (3)
Interest and other receivables 43 (3)
Prepaid expenses (2) 6
Accrued real estate taxes (160) 19
Accounts payable and accrued expenses (107) (28)
Tenant security deposits (64) (1)
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Total adjustments (105) (50)
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Net cash provided by operating activities 97 168
Cash flows from investing activities:
Distributions from joint venture 106 57
Proceeds from sale of investment property 7,127 -
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Net cash provided by investing activities 7,233 57
Cash flows from financing activities:
Principal payments on note payable (894) (64)
Distributions to partners (169) (169)
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Net cash used in financing activities (1,063) (233)
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Net increase (decrease) in cash and cash
equivalents 6,267 (8)
Cash and cash equivalents, beginning of period 1,555 1,653
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Cash and cash equivalents, end of period $ 7,822 $ 1,645
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Supplemental disclosure:
Cash paid during the period for interest $ 21 $ 27
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See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
Notes to Financial Statements
(Unaudited)
1. General
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The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended August 31, 1997. In the opinion
of management, the accompanying financial statements, which have not been
audited, reflect all adjustments necessary to present fairly the results for the
interim period. All of the accounting adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of November 30, 1997 and August 31, 1997 and revenues and
expenses for the three months ended November 30, 1997 and 1996. Actual results
could differ from the estimates and assumptions used.
2. Mortgage Loan and Land Investments
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The outstanding first mortgage loan and the cost of the related land to
the Partnership at November 30, 1997 and August 31, 1997 are as follows (in
thousands):
Amount
Property of Mortgage Loan Cost of Land
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The Timbers Apartments $ 4,275(1) $ 600
Raleigh, NC
(1) The balance shown is net of an allowance for possible uncollectible
amounts of $3,308 and $3,190, respectively, as of November 30, 1997 and
August 31, 1997 (see discussion below).
The loan is secured by a first mortgage on the property, the owner's
leasehold interest in the land and an assignment of all leases, where
applicable. Interest on the Timbers loan is payable monthly at rate of 11.75%
per annum, and the principal on the loan is due at maturity. Among the
provisions of the lease agreement, the Partnership is entitled to additional
rent based upon the gross revenues in excess of a base amount, as defined. For
the three-month periods ended November 30, 1997 and 1996, no additional rents
were received. As discussed in the Annual Report, the lessee has the option to
purchase the land for a specified period of time at a price based on fair market
value, as defined, but not less than the original cost to the Partnership. As of
November 30, 1997, the option to purchase the land was exercisable. In addition,
the Partnership's investment is structured to share in the appreciation in value
of the underlying real estate. Accordingly, upon either sale, refinancing,
maturity of the mortgage loan or exercise of the option to repurchase the land,
the terms of the lease call for the Partnership to receive a 40% share of the
appreciation above a specified base amount.
As discussed further below, the loan secured by The Timbers became
prepayable without penalty as of September 1, 1997. Management believes the
potential for a near-term prepayment of the Timbers Apartments loan is high. As
a result of these circumstances, the mortgage loan instrument has been valued,
based on an expected short-term maturity, at the lesser of face value (prior to
any allowance for possible uncollectible amounts) or the estimated fair value of
the collateral property, net of selling expenses. The estimated fair value of
the Partnership's remaining mortgage loan investment as of November 30, 1997 and
August 31, 1997 was $6,300,000.
Under the terms of the Timbers loan modification executed in fiscal 1989,
the amount payable to the Partnership is equal to the cash flow of the property
available after the payment of operating expenses, not to exceed 11.75% of the
note balance, but in no event less than 7.75% of the note balance. The amount
deferred each year will accrue interest at the original rate of 11.75% beginning
at the end of that year and the total deferred amount plus accrued interest will
be payable upon maturity of the note in September of 1998. The total balance of
the principal and deferred interest receivable at November 30, 1997 and August
31, 1997 was $7,583,000 and $7,465,000, respectively. The Partnership has
established an allowance for possible uncollectible amounts for the cumulative
amount of deferred interest owed under the Timbers modification ($3,308,000 at
November 30, 1997 and $3,190,000 at August 31, 1997) due to the Partnership's
policy of reserving for deferred interest until collected.
3. Investment in Joint Venture
---------------------------
As discussed in the Annual Report, on June 12, 1990 the borrower of the
mortgage loan secured by the Marshalls at East Lake Shopping Center,
Oxford/Concord Associates, filed a Chapter 11 petition with the United States
Bankruptcy Court for the Northern District of Georgia. On November 14, 1990, the
Bankruptcy Court ordered that both the Partnership and the borrower submit plans
for the restructuring of the mortgage loan and ground lease agreements. During
fiscal 1991, the Partnership and the borrower reached a settlement agreement
which involved the formation of a joint venture to own and operate the property
on a go-forward basis. The formation of the joint venture was approved by the
Bankruptcy Court and became effective in December of 1991. The Partnership
contributed its rights and interests under its mortgage loan to the joint
venture and the loan was extinguished. In addition, the Partnership contributed
the land underlying the operating property to the joint venture and the related
ground lease was terminated. Oxford/Concord Associates contributed all of its
rights, title and interest in and to the improvements, subject to the
Partnership's loan, to the joint venture. Subsequent to the restructuring, the
Partnership has accounted for its investment in the Marshalls joint venture on
the equity method because the Partnership does not have a voting control
interest in the venture. Under the equity method, the investment is carried at
cost, adjusted for the Partnership's share of earnings, losses and
distributions.
Summarized operating results of the venture for the three-month periods
ended November 30, 1997 and 1996 are as follows (in thousands):
1997 1996
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Revenues:
Rental revenues and expense
reimbursements $ 130 $ 129
Expenses:
Property operating expenses 30 31
Real estate taxes 10 21
Depreciation and amortization 37 37
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77 89
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Net income $ 53 $ 40
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Net income:
Partnership's share of net income $ 53 $ 40
Co-venturer's share of net income - -
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$ 53 $ 40
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4. Investment Property Held for Sale
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Mercantile Tower Office Building
--------------------------------
As discussed in the Annual Report, the Partnership assumed ownership of
the Mercantile Tower Office Building, in Kansas City, Missouri, through a
deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain
uncured defaults on the Partnership's mortgage loan receivable. The combined
balance of the land and the mortgage loan investment at the time title was
transferred was $10,500,000. The estimated fair value of the operating property
at the date of foreclosure, net of selling expenses, was $9,500,000.
Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in
fiscal 1993. Subsequent to the date of the foreclosure, the Partnership recorded
provisions for possible investment loss totalling $2,350,000 to reflect
additional declines in management's estimate of the fair value of the investment
property. The net carrying value of the Mercantile Tower investment property as
of August 31, 1997 was $7,150,000, which comprises the balance of investment
property held for sale on the accompanying balance sheet at that date.
On November 10, 1997, the Mercantile Tower property was sold for
$7,283,000. The Partnership received net proceeds of $5,963,000 after closing
costs, closing prorations, certain credits to the buyer and the repayment of the
outstanding first mortgage note of $858,000. The sale price, net of closing
costs, was lower than the net carrying value of the investment property by
$23,000, which is reflected as a loss on the sale on the accompanying income
statement for the quarter ended November 30, 1997. The net proceeds from the
sale of Mercantile Tower, along with an amount of excess cash reserves, were
distributed to the Limited Partners in the form of a special distribution in the
amount of approximately $6,741,000, or $186 per original $1,000 investment,
which was paid on December 15, 1997. While the net proceeds received from the
sale of Mercantile Tower were substantially less then the Partnership's original
investment in the property, of $10.5 million, management believes that the sale
price was reflective of the property's current fair market value, which is
supported by the most recent independent appraisal. Furthermore, management did
not foresee the potential for any significant near-term appreciation in the
property's market value. Accordingly, a current sale was deemed to be in the
best interests of the Limited Partners. A sale of the property at its current
leasing level yielded less proceeds than the sale of the property at a
stabilized level, but management concluded that the capital, time, and risk
associated with the substantial leasing activity required to achieve stabilized
operations outweighed the possibility of receiving a higher net sale price.
The Partnership records income from the investment property held for sale
in the amount of the difference between the property's gross revenues and
property operating expenses (including leasing costs and improvement expenses),
taxes and insurance. Summarized operating results for Mercantile Tower for the
period September 1, 1997 through the date of sale, November 10, 1997, and for
the three-month period ended November 30, 1996 are as follows (in thousands):
1997 1996
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Revenues:
Rental revenues and expense recoveries $ 399 $ 417
Interest and other income 14 4
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413 421
Expenses:
Property operating expenses 240 322
Interest expense 21 27
Property taxes and insurance 38 61
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299 410
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Income from operations of investment
property held for sale, net $ 114 $ 11
======= =======
The above property operating expenses for the three months ended November
30, 1996 include capital improvements and leasing costs of $54,000.
5. Related Party Transactions
--------------------------
The Adviser earned basic management fees of $10,000 for each of the
three-month periods ended November 30, 1997 and 1996. Accounts payable
affiliates at both November 30, 1997 and August 31, 1997 consists of management
fees of $10,000 payable to the Adviser.
Included in general and administrative expenses for the three-month
periods ended November 30, 1997 and 1996 is $36,000 and $37,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
Also included in general and administrative expenses for each of the
three-month periods ended November 30, 1997 and 1996 is $1,000 and $2,000,
respectively, representing fees earned by an affiliate, Mitchell Hutchins
Institutional Investors, Inc., for managing the Partnership's
cash assets.
6. Note payable
------------
Note payable as of August 31, 1997 consisted of the following secured
indebtedness (in thousands):
August 31
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Line of credit borrowings secured
by the Mercantile Tower property. Draws
under the line, up to a maximum of
$2,000,000, could be made through
February 28, 1998, only to fund approved
leasing and capital improvement costs
related to the Mercantile Tower
property. The outstanding borrowings
bore interest at the prime rate (8.25%
at August 31, 1997) plus 1% per annum.
Interest-only payments were due on a
monthly basis through February 1995.
Thereafter, monthly principal and
interest payments were due through
maturity on February 10, 2001. The fair
value of the note approximated its
carrying amount as of August 31, 1997.
The note was repaid in full on November
10, 1997 upon the sale of the Mercantile
Tower property (see Note 4). $ 894
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PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
On November 10, 1997, the Mercantile Tower property was sold for
$7,283,000. The Partnership received net proceeds of $5,963,000 after closing
costs, closing prorations, certain credits to the buyer and the repayment of the
outstanding first mortgage note of $858,000. The net proceeds from the sale of
Mercantile Tower, along with an amount of excess cash reserves, were distributed
to the Limited Partners in the form of a special distribution in the amount of
approximately $6,741,000, or $186 per original $1,000 investment, which was paid
on December 15, 1997. While the net proceeds received from the sale of
Mercantile Tower were substantially less then the Partnership's original
investment in the property, of $10.5 million, management believes that the sale
price was reflective of the property's current fair market value, which is
supported by the most recent independent appraisal. Furthermore, management did
not foresee the potential for any significant near-term appreciation in the
property's market value. Accordingly, a current sale was deemed to be in the
best interests of the Limited Partners. A sale of the property at its current
leasing level of below 70% yielded less proceeds than the sale of the property
at a stabilized level, but management concluded that the capital, time, and risk
associated with the substantial leasing activity required to achieve stabilized
operations outweighed the possibility of receiving a higher net sale price. As
previously reported, all of the operating cash flow at the Mercantile Tower
property had been used to help pay for ongoing leasing costs and capital
improvements at the building. As a result of the sale of the property and the
payment of the December 15, 1997 special capital distribution, the Partnership's
earnings can support an increase in the distribution rate paid on the remaining
invested capital. Accordingly, the annualized distribution rate will be
increased from 2.5% to 3%. The adjustment will be effective with the
distribution for the quarter ending February 28, 1998, which will be paid on
April 15, 1998. The 3% annualized rate will be paid on a Limited Partner's
remaining capital account of $424 per original $1,000 investment.
The mortgage loan secured by The Timbers Apartments contained a
prohibition against prepayment until September 1, 1997 and matures on September
1, 1998. There is a reasonable likelihood that this first mortgage loan
investment may be prepaid in the near term given the continued availability of
credit in the capital markets for real estate transactions at current interest
rates which are considerably lower than the 11.75% currently being earned on the
Partnership's first mortgage loan investment. As discussed further in the notes
to the accompanying financial statements, while interest is accruing on the
Timbers loan at a rate of 11.75%, interest is being paid currently to the extent
of net operating cash flow generated by the property, but not less than a rate
of 7.75% per annum on the original note balance of $4,275,000, under the terms
of a modification agreement reached in fiscal 1989. Deferred interest under the
modification agreement is added to the principal balance of the mortgage note on
an annual basis. Under the Partnership's accounting policy for interest income,
all deferred interest is fully reserved until collected in cash. The balance of
principal and deferred interest owed to the Partnership on the Timbers first
mortgage loan totalled $7,583,000 as of November 30, 1997. In addition, the
Partnership has a $600,000 investment in the underlying land. Management's
current estimate of the fair market value of The Timbers Apartments is below the
amount of this aggregate loan and land investment by approximately $1.3 million.
Accordingly, it is unlikely that the Partnership will be able to fully collect
these amounts. The Timbers borrower has recently initiated preliminary
discussions with the Partnership concerning a potential sale of the property
which could result in a repayment of a substantial portion of the outstanding
obligations. There are no assurances, however, that a sale of the property will
be completed.
If the Partnership's investments secured by The Timbers Apartments are
repaid by the September 1, 1998 loan maturity date as expected, Marshalls at
East Lake Shopping Center would be the Partnership's only remaining investment.
As a result of these circumstances, the Partnership is analyzing near-term sale
strategies for this asset which could result in a sale of the property in 1998.
As a result, it is possible that a liquidation of the Partnership cold be
completed in calendar year 1998. There are no assurances, however, that the
disposition of the remaining real estate assets and the liquidation of the
Partnership will be completed within this time frame. Occupancy at the Marshalls
at East Lake Shopping Center was 94% as of November 30, 1997, unchanged from the
preceding quarter. Despite the unchanged occupancy level, several lease
transactions were finalized during the first quarter which will increase the
Center's occupancy level to 98%. The largest transaction was a five-year lease
with a new tenant for 4,500 square feet. This new tenant is an established
regional shoe store. The construction work to prepare this space for the new
tenant is currently underway, and it is anticipated that this new store location
will be ready to open in March of 1998. Other lease transactions completed
during the first quarter included terminations of two leases for a total of
2,400 square feet. One lease termination became effective on December 1, 1997
and was needed to accommodate the space requirements of the new shoe store. A
second lease was terminated as part of an effort to enhance the Center's tenant
mix. In addition, an existing lease with a 1,600 square foot tenant was extended
for two years through February 2001 at escalating rental rates. There were no
property improvements completed in the first quarter, but several projects are
planned for the current fiscal year which include new signage, exterior painting
and roof work.
At November 30, 1997, the Partnership had available cash and cash
equivalents of $7,822,000. Such cash and cash equivalents will be used for the
Partnership's working capital requirements and for distributions to the
partners, including the capital distribution of $6.7 million, which was made in
December 1997, as discussed further above. The source of future liquidity and
distributions to the partners is expected to be through cash generated from the
operations of the Partnership's real estate and mortgage loan investments,
repayment of the Partnership's mortgage loans receivable and the proceeds from
the sales or refinancings of the underlying land, the operating investment
property and the joint venture investment property. Such sources of liquidity
are expected to be adequate to meet the Partnership's needs on both a short-term
and long-term basis.
Results of Operations
Three Months Ended November 30, 1997
- ------------------------------------
The Partnership reported net income of $202,000 for the three months ended
November 30, 1997 compared to $218,000 for the same period in the prior year.
This $16,000 decrease in net income resulted from a $108,000 decrease in
operating income and the loss of $23,000 on the sale of the Mercantile Tower
property which were offset by an increase in income from operations of
investment property held for sale and an increase in the Partnership's share of
venture's income. The decrease in operating income was primarily due to a
$97,000 decrease in revenues mainly caused by the sale of the Eden West
Apartments on July 15, 1997 which resulted in the repayment of the Partnership's
first mortgage loan and the repurchase of the underlying land. Primarily due to
the sale of the Eden West Apartments, the Partnership's interest from mortgage
loans and land rent decreased by $105,000 and $11,000, respectively. These
decreases were partially offset by an increase of $19,000 in interest income
from invested cash reserves. Interest income increased due to the increase in
the average outstanding cash reserve balances which resulted mainly from the
temporary investment of the net proceeds from the sale of Mercantile Tower on
November 10, 1997 prior to the special distribution which was paid subsequent to
the quarter-end. The Partnership's net income also decreased as a result of the
loss from the sale of Mercantile Tower. The loss from the sale of Mercantile
Tower was the result of the excess of the property's carrying value, net of
prior provisions for possible investment loss, over the sale price, net of
closing costs.
The increase in the Partnership's income from operations of the investment
property held for sale was primarily due to a decrease in property operating
expenses which resulted from a drop off in leasing activity prior to the sale of
the Mercantile Tower property. The increase in the Partnership's share of
venture's income is primarily attributable to a $13,000 decrease in total
expenses at the Marshalls at East Lake Shopping Center. Total expenses decreased
mainly due to a reduction in the property's tax assessment and a decline in
repairs and maintenance expense.
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated November 10, 1997 was filed by the
registrant during the first quarter of fiscal 1998 to report the sale of the
wholly-owned Mercantile Tower Office Building and is hereby incorporated by
reference.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY
FUND TWO, LP
By: SECOND QUALIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: January 9, 1998