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 . ----- 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. 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. 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. 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. 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. 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. 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. 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 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