UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
-----
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
BALANCE SHEETS
November 30, 1996 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
November 30 August 31
----------- ---------
Real estate investments:
Land $ 1,000 $ 1,000
Mortgage loans receivable, net 7,775 7,775
Investment in joint venture, at equity 3,156 3,173
Investment property held for sale, net 7,500 7,500
-------- -------
19,431 19,448
Cash and cash equivalents 1,645 1,653
Tax and insurance escrow 258 255
Interest and other receivable 132 129
Prepaid expenses 10 16
-------- -------
$ 21,476 $ 21,501
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accrued real estate taxes $ 202 $ 183
Accounts payable and accrued expenses 65 93
Accounts payable - affiliates 10 10
Tenant security deposits and other liabilities 54 55
Note payable 1,086 1,150
Total partners' capital 20,059 20,010
-------- --------
$ 21,476 $ 21,501
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF INCOME
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit amounts)
1996 1995
---- ----
Revenues:
Interest from mortgage loans $ 306 $ 294
Land rent 29 29
Other interest income 20 49
-------- -------
355 372
Expenses:
Management fees 10 12
General and administrative 55 67
Provision for possible uncollectible
amounts 123 56
--------- --------
188 135
--------- --------
Operating income 167 237
Partnership's share of venture's
income 40 43
Income from operations of
investment property held for
sale, net 11 105
--------- ---------
Net income $ 218 $ 385
========= =========
Net income per Limited
Partnership Unit $6.02 $ 10.53
===== ========
Cash distributions per Limited
Partnership Unit $4.62 $111.28
===== =======
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.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1995 $(33) $23,882
Cash distributions (2) (4,033)
Net income 4 381
---- -------
Balance at November 30, 1995 $(31) $20,230
==== =======
Balance at August 31, 1996 $(33) $20,043
Cash distributions (2) (167)
Net income 2 216
----- -------
Balance at November 30, 1996 $ (33) $20,092
===== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 218 $ 385
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of venture's income (40) (43)
Changes in assets and liabilities:
Tax and insurance escrow (3) (48)
Interest and other receivables (3) (35)
Prepaid expenses 6 5
Accrued real estate taxes 19 23
Accounts payable and accrued expenses (28) (66)
Tenant security deposits (1) (3)
------- -------
Total adjustments (50) (167)
------- -------
Net cash provided by operating activities 168 218
------- -------
Cash flows from investing activities:
Distributions from joint venture 57 -
------- -------
Cash flows from financing activities:
Additional borrowings under note payable - 67
Principal payments on note payable (64) (52)
Distributions to partners (169) (4,035)
------- -------
Net cash used in financing activities (233) (4,020)
------- -------
Net decrease in cash and cash equivalents (8) (3,802)
Cash and cash equivalents, beginning of period 1,653 5,379
------- -------
Cash and cash equivalents, end of period $ 1,645 $ 1,577
======= =======
Supplemental disclosure:
Cash paid during the period for interest $ 27 $ 25
====== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
Notes to Financial Statements
(Unaudited)
1. General
------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended August 31, 1996. In the opinion
of management, the accompanying financial statements, which have not been
audited, reflect all adjustments necessary to present fairly the results for the
interim period. All of the accounting adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of November 30, 1996 and August 31, 1996 and revenues and
expenses for the three months ended November 30, 1996 and 1995. Actual results
could differ from the estimates and assumptions used.
2. Related Party Transactions
---------------------------
The Adviser earned basic management fees of $10,000 and $12,000 for the
three-month periods ended November 30, 1996 and 1995, respectively. Accounts
payable - affiliates at both November 30, 1996 and August 31, 1996 consists of
management fees of $10,000 payable to the Adviser.
Included in general and administrative expenses for each of the
three-month periods ended November 30, 1996 and 1995 is $37,000 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, 1996 and 1995 is $2,000 representing fees
earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
3. Mortgage Loan and Land Investments
----------------------------------
The outstanding first mortgage loans and the cost of the related land to
the Partnership at November 30, 1996 and August 31, 1996 are as follows (in
thousands):
Amount
Property of Mortgage Loan Cost of Land
-------- ---------------- ------------
Eden West Apartments $ 3,500 $ 400
Omaha, NE
The Timbers Apartments 4,275 (1) 600
Raleigh, NC -------- -------
$ 7,775 $ 1,000
======== =======
(1) The balance shown is net of an allowance for possible uncollectible amounts
of $2,826 and $2,703, respectively, as of November 30, 1996 and August 31,
1996 (see discussion below).
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all leases, where
applicable. Interest is payable monthly at rates between 11.5% and 11.75% per
annum and the principal is due at maturity. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the gross
revenues in excess of a base amount, as defined. For the three-month periods
ended November 30, 1996 and 1995, no additional rents were received. As
discussed in the Annual Report, the lessees have the option to purchase the land
for specified periods of time at a price based on fair market value, as defined,
but not less than the original cost to the Partnership. As of November 30, 1996,
all of the options to purchase the land were exercisable.
The objectives of the Partnership with respect to its mortgage loan and
land investments are to provide current income from fixed mortgage interest
payments and base land rents, then to provide increases to this current income
through participation in the annual revenues generated by the properties as they
increase above the specified base amounts. In addition, the Partnership's
investments are structured to share in the appreciation in value of the
underlying real estate. Accordingly, upon either sale, refinancing, maturity of
the mortgage loan or exercise of the option to repurchase the land, the terms of
the leases call for the Partnership to receive a 40% to 52% share of the
appreciation above a specified base amount.
As discussed further below, the Eden West loan is open to prepayment as of
November 30, 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 November 30, 1996 are summarized below (in thousands):
Mortgage Loan
-------------
Eden West Apartments $ 3,500
The Timbers Apartments 6,700
-------
$10,200
=======
Eden West Apartments
--------------------
During the last quarter of fiscal 1995, the Partnership received notice
from the Eden West borrower of its intent to prepay the Partnership's mortgage
loan and repurchase the underlying land. The amount to be received by the
Partnership as its share of the appreciation of the Eden West property has not
been agreed upon to date. The terms of the Partnership's ground lease provide
for the possible resolution of disputes between the parties over value issues
through an arbitration process. In addition to the amount to be determined as
the Partnership's share of the property's appreciation under the ground lease,
the terms of the Eden West mortgage loan require a prepayment penalty which
would be equal to 2.5% of the outstanding principal balance of $3,500,000
through May 1997. Subsequent to May 31, 1997, the prepayment penalty declines to
1.25% for the next twelve months, after which there would be no prepayment
penalty for the remainder of the term through maturity in June 1999. If
completed, the proceeds of any prepayment transaction would be distributed to
the Limited Partners. However, the transaction remains contingent on, among
other things, a resolution of the value issue, and the borrower has not pursued
negotiations in recent months. Accordingly, there are no assurances that this
transaction will be consummated.
The Timbers Apartments
----------------------
Under the terms of the Timbers 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, 1996 and August
31, 1996 was $7,101,000 and $6,978,000, respectively. The Partnership has
established an allowance for possible uncollectible amounts for the cumulative
amount of deferred interest owed under the Timbers modification ($2,826,000 at
November 30, 1996 and $2,703,000 at August 31, 1996) due to the uncertainty as
to the collection of the deferred interest from this investment.
Harbour Bay Plaza
-----------------
On August 24, 1995, the borrower of the Harbour Bay Plaza loan repaid the
Partnership's first leasehold mortgage loan secured by Harbour Bay Plaza
Shopping Center and purchased the Partnership's interest in the underlying land
for total consideration of $3,833,000. The principal balance of the mortgage
loan was $2,850,000 plus interest accrued through August 25, 1995 of $23,000.
The Partnership's cost basis in the land was $750,000. Pursuant to the ground
lease, the Partnership received $211,000 in excess of the outstanding mortgage
loan and land investments as its share of the appreciation in value of the
operating investment property above a specified base amount. The net proceeds
from this transaction were distributed to the Limited Partners as a Special
Distribution of approximately $3,842,000, or $106 per original $1,000
investment, on October 13, 1995.
4. 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.
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 Marshalls 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 Marshalls joint venture is accounted for on the
equity method in the Partnership's financial statements because the Partnership
does not have a voting control interest in the venture. Under the equity method,
the investment is carried at cost, adjusted for the Partnership's share of
earnings, losses and distributions.
The estimated fair value of the Partnership's equity interest in the
Marshalls at East Lake joint venture is below the carrying value of the
investment on the accompanying balance sheet as of November 30, 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 November 30, 1996.
Summarized operating results of the venture for the three-month periods
ended November 30, 1996 and 1995 are as follows (in thousands):
1996 1995
---- ----
Revenues:
Rental revenues and
expense reimbursements $ 129 $ 124
Expenses:
Property operating expenses 31 36
Real estate taxes 21 9
Depreciation and amortization 37 36
------ ------
89 81
------ ------
Net income $ 40 $ 43
====== ======
Net income:
Partnership's share of net income $ 40 $ 43
Co-venturer's share of net income - -
------- -------
$ 40 $ 43
======= =======
5. Investment Property Held for Sale
--------------------------------
Mercantile Tower Office Building
--------------------------------
As discussed in the Annual Report, the Partnership assumed ownership of
the Mercantile Tower Office Building, in Kansas City, Missouri, through a
deed-in-lieu of foreclosure action on April 12, 1993 as a result of certain
defaults on the Partnership's mortgage loan receivable. The Partnership complies
with the guidelines set forth in the Statement of Position entitled "Accounting
for Foreclosed Assets," issued by the American Institute of Certified Public
Accountants, to account for its investment properties acquired through
foreclosures. Under the Statement of Position, a foreclosed asset is recorded at
the lower of cost or estimated fair value, reduced by the estimated costs to
sell the asset. Cost is defined as the fair value of the asset at the date of
the foreclosure. Adjustments to the carrying value of the assets subsequent to
foreclosure are recorded through the use of a valuation allowance. The combined
balance of the land and the mortgage loan investment at the time title was
transferred was $10,500,000. The estimated fair value of the operating property
at the date of foreclosure, net of selling expenses, was $9,500,000.
Accordingly, a write-down of $1,000,000 was recorded as a loss on foreclosure in
fiscal 1993. Since the date of the foreclosure, the Partnership has recorded
provisions for possible investment loss totalling $2,000,000 to reflect
additional declines in management's estimate of the fair value of the investment
property. The net carrying value of the Mercantile Tower investment property as
of November 30, 1996 and August 31, 1996, of $7,500,000, is classified as an
investment property held for sale on the accompanying balance sheets.
The Partnership records income from the investment property held for sale
in the amount of the difference between the property's gross revenues and
property operating expenses (including leasing costs and improvement expenses),
taxes and insurance. Summarized operating results for Mercantile Tower for the
three-month periods ended November 30, 1996 and 1995 are as follows (in
thousands):
1996 1995
---- ----
Revenues:
Rental revenues and expense
recoveries $ 417 $ 412
Interest and other income 4 2
------ -----
421 414
Expenses:
Property operating expenses 322 219
Interest expense 27 25
Property taxes and insurance 61 65
------ -----
410 309
------ -----
Income from operations of investment
property held for sale, net $ 11 $ 105
====== =====
The above property operating expenses for the three months ended November 30,
1996 includes capital improvements and leasing costs of $54,000.
6. Note payable
------------
Note payable as of November 30, 1996 and August 31, 1996 consists of the
following secured indebtedness (in thousands):
November 30 August 31
----------- ---------
Line of credit borrowings secured
by the Mercantile Tower property
(see Note 5). Draws under the line,
up to a maximum of $2,000,000, can
be made through February 28, 1998,
only to fund approved leasing and
capital improvement costs related
to the Mercantile Tower property.
The outstanding borrowings bear
interest at the prime rate (8.25%
at November 30, 1996) plus 1% per
annum. Interest-only payments were
due on a monthly basis through
February 1995. Thereafter, monthly
principal and interest payments are
due through maturity on February
10, 2001. The fair value of the
note approximated its carrying
amount as of November 30, 1996. $1,086 $ 1,150
======= =======
7. Contingencies
--------------
As discussed in more detail in the Annual Report, the Partnership is
involved in certain legal actions. At the present time, the Managing General
Partner is unable to estimate the impact, if any, of these matters on the
Partnership's financial statements, taken as a whole.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND TWO, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As discussed in the Annual Report, the mortgage loans secured by the Eden
West Apartments and The Timbers Apartments bear interest at annual rates of
11.5% and 11.75%, respectively. 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. The Partnership received notice during
the fourth quarter of fiscal 1995 from the Eden West borrower of its intent to
prepay the Partnership's mortgage loan and repurchase the underlying land.
However, the amount to be received by the Partnership as its share of the
appreciation of the Eden West property has not been agreed upon to date. The
terms of the Partnership's ground lease provide for the possible resolution of
disputes between the parties over value issues through an arbitration process.
The borrower could require the Partnership to submit to such an arbitration
process during fiscal 1997, although to date its has given no formal indication
of an intent to do so. In addition to the amount to be determined as the
Partnership's share of the property's appreciation under the ground lease, the
terms of the Eden West mortgage loan require a prepayment penalty which would be
equal to 2.5% of the outstanding principal balance of $3,500,000 through May
1997. Subsequent to May 31, 1997, the prepayment penalty declines to 1.25% for
the next twelve months, after which there would be no prepayment penalty for the
remainder of the term through maturity in June 1999. If completed, the proceeds
of any prepayment transaction would be distributed to the Limited Partners.
However, a prepayment transaction remains contingent on, among other things, a
resolution of the value issue, and the borrower has not pursued negotiations in
recent months. Accordingly, there are no assurances that a transaction will be
consummated.
Occupancy at the Marshalls at East Lake Shopping Center as of November 30,
1996 was 94%. During the quarter ended November 30, 1996, the property's
management team completed negotiations with a 7,600 square foot tenant for a new
lease with a three-year term which includes the option to terminate the lease
obligation as of December 31, 1997. The leasing team continues to seek one or
more long-term users for the property's remaining vacancy of 3,300 square feet.
The only property improvements planned for Marshalls at East Lake for fiscal
1997 are to the parking area at the rear of the center.
The occupancy level at the wholly-owned Mercantile Tower Office Building
declined to 57% as of November 30, 1996, from 58% as of August 31, 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. Recent leasing activity at Mercantile Tower has
included one new lease for approximately 3,000 square feet and the signing of
two new leases subsequent to the quarter end that will increase the building's
occupancy by approximately 3%. In addition, two lease amendments for
approximately 7,400 square feet of expansion space have been sent to the tenants
for signature. The installation of a new exterior stairway to replace an outdoor
escalator is now nearing completion. Stabilizing the operations of the
Mercantile Tower property, which represented 32% of the Partnership's original
investment portfolio, remains the primary goal of management. Until a stabilized
occupancy level is achieved, the Partnership's investment in Mercantile Tower is
not expected to generate any significant excess cash flow. Available cash flow,
for the most part, will be reinvested in enhancements aimed at improving the
marketability of the vacant space at the property as well as for leasing costs
for new and renewing tenants above the amounts available under the $2 million
line of credit obtained in fiscal 1994.
At November 30, 1996, the Partnership had available cash and cash
equivalents of $1,645,000. 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.
<PAGE>
Results of Operations
Three Months Ended November 30, 1996
- ------------------------------------
The Partnership reported net income of $218,000 for the three months ended
November 30, 1996 compared to $385,000 for the same period in the prior year.
This decrease in the Partnership's net income resulted from a $94,000 decrease
in income from operations of investment property held for sale, a $70,000
decrease in the Partnership's operating income and a $3,000 decrease in the
Partnership's share of venture's income. The Partnership's income from the
operations of the Mercantile Tower property decreased by $94,000 primarily due
to increases in repairs and maintenance and capital improvement expenses which
were partially offset by an increase in parking garage income. The Partnership's
operating income decreased primarily due to an increase in the provision for
possible uncollectible amounts and a decrease in other interest income which
were partially offset by an increase in interest from mortgage loans and a
decrease in general and administrative expenses. The provision for possible
uncollectible amounts increased by $67,000 in the current period due to lower
payments received from the borrower of the Timbers mortgage loan toward deferred
interest receivable when compared to the same three-month period in the prior
year. Interest earned on invested cash reserves decreased by $29,000 in the
current period due to a decrease in average outstanding cash balances. Interest
from mortgage loans increased by $12,000 in the current period as a result of
the ongoing compounding of interest on the Timbers mortgage loan balance.
General and administrative expenses decreased by $12,000 largely due to
additional professional fees incurred in the three month period ended November
30, 1995. The slight decrease in the Partnership's share of venture's income was
mainly due to an increase in real estate taxes at the Marshalls at East Lake
property in the current period.
<PAGE>
PART II
Other Information
Item 1. 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 was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
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 with respect to the
Abbate action was held in December 1996. As a result of such mediation, a
tentative settlement between PaineWebber and the plaintiffs was reached which
would provide for complete resolution of such action. PaineWebber anticipates
that releases and dismissals with regard to this action will be received by
February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
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.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
None
<PAGE>
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 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the three months ended
November 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 1,645
<SECURITIES> 0
<RECEIVABLES> 10,733
<ALLOWANCES> 2,826
<INVENTORY> 0
<CURRENT-ASSETS> 2,045
<PP&E> 11,656
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,476
<CURRENT-LIABILITIES> 331
<BONDS> 1,086
0
0
<COMMON> 0
<OTHER-SE> 20,059
<TOTAL-LIABILITY-AND-EQUITY> 21,476
<SALES> 0
<TOTAL-REVENUES> 406
<CGS> 0
<TOTAL-COSTS> 65
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 218
<INCOME-TAX> 0
<INCOME-CONTINUING> 218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218
<EPS-PRIMARY> 6.02
<EPS-DILUTED> 6.02
</TABLE>
