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 May 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17147
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
(Exact name ofregistrant as specified in its charter)
Delaware 04-2798638
(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 THREE, LP
BALANCE SHEETS
May 31, 1996 and August 31, 1995 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
------ ---------
Real estate investments:
Investment property held for sale $ 4,720 $ 4,720
Land 1,150 1,150
Mortgage loans receivable 9,185 9,185
-------- --------
15,055 15,055
Cash and cash equivalents 930 790
Interest receivable 85 85
Tax and tenant security deposit escrows 73 73
Prepaid expenses 3 14
Deferred expenses, net 10 13
-------- --------
$ 16,156 $ 16,030
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 18 $ 18
Accounts payable and accrued expenses 60 110
Tenant security deposits 14 14
Partners' capital 16,064 15,888
-------- --------
$ 16,156 $ 16,030
======== ========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the nine months ended May 31, 1996 and 1995
(Unaudited)
(In thousands)
General Limited
Partners Partners
------- --------
Balance at August 31, 1994 $ 8 $17,226
Net income 11 1,114
Cash distributions (10) (949)
------- -------
Balance at May 31, 1995 $ 9 $17,391
======= =======
Balance at August 31, 1995 $ 10 $15,878
Net income 11 1,050
Cash distributions (9) (876)
------- -------
Balance at May 31, 1996 $ 12 $16,052
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME
For the three and nine months ended May 31, 1996 and 1995
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
May 31, May 31,
----------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Interest from mortgage loans $ 255 $ 255 $ 766 $ 766
Land rent 36 36 117 125
Interest earned on short-
term investments 11 32 32 82
Other income - 10 - 24
----- ----- ----- ------
302 333 915 997
Expenses:
Management fees 21 23 63 68
General and administrative 51 95 223 276
Amortization of deferred
expenses 1 1 3 3
----- ----- ----- ------
73 119 289 347
----- ----- ----- ------
Operating income 229 214 626 650
Gain on sale of investment
in operating property - 61 - 61
Income from operations of
investment property held
for sale, net 138 118 435 414
----- ----- ----- ------
Net income $ 367 $ 393 $1,061 $1,125
====== ====== ====== ======
Net income per Limited
Partnership Unit $10.17 $10.87 $29.34 $31.12
====== ====== ====== ======
Cash distributions per Limited
Partnership Unit $ 8.16 $ 8.84 $24.48 $26.52
====== ======= ====== ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 35,794 Units of Limited Partnership Interest outstanding during
each period.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 1,061 $ 1,125
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain on sale of investment in operating property - (61)
Amortization of deferred expenses 3 3
Changes in assets and liabilities:
Tax and tenant security deposit escrows - (1)
Prepaid expenses 11 16
Accounts payable and accrued expenses (50) (17)
-------- --------
Total adjustments (36) (60)
-------- --------
Net cash provided by operating activities 1,025 1,065
Cash flows from investing activities:
Proceeds from sale of investment in
operating property - 311
Cash flows from financing activities:
Distributions to partners (885) (959)
-------- --------
Net increase in cash and cash equivalents 140 417
Cash and cash equivalents, beginning of period 790 1,854
-------- --------
Cash and cash equivalents, end of period $ 930 $ 2,271
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, 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, 1995.
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.
2. Mortgage Loan and Land Investments
The outstanding first mortgage loans and the cost of the related land to the
Partnership at May 31, 1996 and August 31, 1995 are as follows (in
thousands):
Amount of
Property Mortgage Loan Cost of Land
-------- ------------- ------------
Appletree Apartments $ 4,850 $ 650
Omaha, NE
Woodcroft Shopping Center
Durham, NC
Phase I 3,100 360
Phase II 1,235 140
------- ------
$ 9,185 $1,150
======= ======
The interest rates on the mortgage loans range from 11% to 11.25% per annum.
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the
gross revenues from the operating properties in excess of a base amount, as
defined. For the nine months ended May 31, 1996 and 1995, additional rent of
$21,000 and $29,000, respectively, was earned from the Woodcroft Shopping
Center investments. The lessees have the option to purchase the land for
specified periods of time, as discussed in the Annual Report, at a price
based on fair market value, as defined, but in no event less than the
original cost to the Partnership. As of May 31, 1996, all of the options to
purchase the land underlying the above properties were exercisable. 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 or exercise of the option to purchase
the land, the Partnership will receive a 33% to 50% share of the appreciation
above a specified base amount.
During fiscal 1995, the Partnership received formal notice from the Appletree
borrower of its intent to prepay the Partnership's mortgage loan and
repurchase the underlying land. The borrower reports that it has secured the
necessary financing to complete this transaction. The final issue to be
resolved is the amount to be received by the Partnership as its share of the
appreciation of the Appletree property in accordance with the terms of the
ground lease. The terms of the Appletree mortgage loan also require a
prepayment penalty which would be equal to 2.5% of the outstanding principal
balance. If completed, the proceeds of this prepayment transaction would be
distributed to the Limited Partners. However, the prepayment transaction
remains contingent on, among other things, a resolution of the value issue.
Accordingly, there are no assurances that this transaction will be
consummated.
During the quarter ended May 31, 1996, the owner of the Woodcroft Shopping
Center gave notice to the Partnership of its intent to repay the outstanding
first mortgage loans and purchase the underlying land in conjunction with a
sale of the operating property to a third party. A similar transaction which
the owner proposed during the quarter ended November 30, 1995 could not be
completed. The current transaction, if completed could result in the return
of the Partnership's investments in the Woodcroft land and mortgage loans
plus an additional $720,000 as the Partnership's share of the appreciation in
value of the underlying property. If completed, the proceeds of this
transaction would be distributed to the Limited Partners. As with the prior
transaction, the prepayment of the Partnership's mortgage loans and the
purchase of the underlying land remain contingent upon the owner's ability to
complete the proposed sale transaction with the third party. Accordingly,
there are no assurances that this transaction will be consummated.
3. Related Party Transactions
The Adviser earned basic management fees of $63,000 and $68,000 for the
nine-month periods ended May 31, 1996 and 1995, respectively. Accounts
payable - affiliates at both May 31, 1996 and August 31, 1995 consists of
management fees of $18,000 payable to the Adviser.
Included in general and administrative expenses for the nine months ended May
31, 1996 and 1995 is $118,000 and $134,000, 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 nine
months ended May 31, 1996 and 1995 is $4,000 and $3,000, respectively,
representing fees earned by Mitchell Hutchins Institutional Investors, Inc.
for managing the Partnership's cash assets.
4. Investment Properties
As discussed in the Annual Report, the Partnership foreclosed under the terms
of the mortgage loan secured by Westside Creek Apartments on March 23, 1989
due to nonpayment of the required debt service. The Adviser has employed a
local property management company to conduct the day-to-day operations of the
property under the direction of the Managing General Partner. The property
consists of 142 units and is located in Little Rock, Arkansas. The net
carrying value of the Partnership's investment in the Westside Creek
Apartments, of $4,720,000, is classified as investment property held for sale
on the accompanying balance sheets as of May 31, 1996 and August 31, 1995.
The Partnership recognizes income from the operations of investment property
held for sale in the amount of the excess of the property's gross revenues
over the sum of property operating expenses (including capital improvement
costs), taxes and insurance. Summarized operating results of the Westside
Creek investment property for the three and nine months ended May 31, 1996
and 1995 are as follows (in thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1996 1995 1996 1995
---- ----- ---- ----
Revenues:
Rental income $ 240 $ 219 $ 731 $ 691
Other income 8 8 23 25
------ ------ ------ -----
248 227 754 716
Expenses:
Property operating expenses 89 84 256 236
Property taxes and insurance 21 25 63 66
------ ------ ------ -----
110 109 319 302
------ ------ ------ -----
Income from operations, net $ 138 $ 118 $ 435 $ 414
====== ======= ====== =====
As discussed further in the Annual Report, an affiliate of the Partnership,
which held the mortgage and land lease on the Cordova Creek Apartments,
foreclosed on the property in fiscal 1990 due to nonpayment of the required
interest payments. The Partnership had held a 3.5% interest in the mortgage
loan and land investments through an agreement with this affiliate.
Subsequent to foreclosure, the Partnership recorded its investment at the net
combined carrying value of its previous interest in the land and mortgage
loan of $250,000. The Partnership's investment, which consisted of a 3.5%
equity ownership in the operations and eventual sales proceeds of the Cordova
Creek property, was accounted for on the cost method. The affiliate which
held title to the operating property sold the Cordova Creek Apartments to an
unaffiliated third party on April 12, 1995. The Partnership's share of the
net sales proceeds was approximately $311,000, resulting in a $61,000 gain
over the Partnership's cost basis of $250,000, which was recognized in the
third quarter of fiscal 1995. A special distribution of $42 per original
$1,000 investment, or $1,503,000, was made to Limited Partners on June 15,
1995, which represented approximately $9 from Cordova Creek net sale proceeds
and $33 as a distribution from cash reserves which were deemed to be in
excess of the Partnership's expected future requirements.
5. Contingencies
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 THREE, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Operations of the properties securing the Partnership's two remaining
mortgage loan investments remained strong during the first three quarters of
fiscal 1996 and continue to fully support the debt service and land rent
payments owed to the Partnership. Leasing levels at the Appletree Apartments and
Woodcroft Shopping Center were 99% and 100%, respectively, as of May 31, 1996.
The mortgage loans secured by the Appletree Apartments and Woodcroft Shopping
Center bear interest at annual rates of 11.00% and 11.25%, respectively. As
previously reported, since current market interest rates for first mortgage
loans are considerably lower than these rates, 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 has been
high since the time that the terms of such mortgage loans allowed for
prepayment. The Appletree loan became prepayable in April 1994. However, the
Appletree loan includes a prepayment premium for any prepayment between May 1994
and April 1998 at rates between 5% and 1.25% of the mortgage loan balance. The
Woodcroft loan became prepayable without penalty in December 1994. As discussed
further below, the borrowers on both of the outstanding loan investments have
approached the Partnership regarding potential prepayment transactions. While
there are no assurances that these borrowers will be able to finance such
transactions in the near term, if these transactions are completed the
Partnership could be positioned for a possible liquidation pending the
disposition of the wholly-owned Westside Creek Apartments.
During the quarter ended May 31, 1996, the owner of the Woodcroft Shopping
Center - Phase I and II gave notice to the Partnership of its intent to repay
the Partnership's first mortgage loans and purchase the underlying land in
conjunction with a sale of the operating property to a third party. A similar
transaction with the owner proposed during the quarter ended November 30, 1995
could not be completed. The current transaction, if completed, would result in
the return of the Partnership's investments in the Woodcroft land and mortgage
loans, totalling $4,835,000, plus an additional $720,000 as the Partnership's
share of the appreciation in value of the underlying property. If completed, the
proceeds of this transaction would be distributed to the Limited Partners. As
with the prior transaction, the prepayment of the Partnership's mortgage loans
and the purchase of the underlying land remain contingent upon the owner's
ability to complete the proposed sale transaction with the third party.
Accordingly, there are no assurances that this transaction will be consummated.
As discussed in the Annual Report, during the last quarter of fiscal 1995,
the Partnership received notice from the Appletree borrower of its intent to
prepay the Partnership's mortgage loan and repurchase the underlying land. The
borrower reports that it has received the necessary financing to complete this
transaction. The final issue to be resolved is the amount to be received by the
Partnership under the terms of the ground lease as its share of the appreciation
of the Appletree property in accordance with the terms of the ground lease. The
terms of the ground lease provide for the possible resolution of disputes
between the parties over value issues through an arbitration process. If an
agreement cannot be reached, the borrower could require the Partnership to
submit to arbitration during fiscal 1996. 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 Appletree mortgage loan require a prepayment
penalty which would be equal to 2.5% of the outstanding principal balance of
$4,850,000. If completed, the proceeds of this transaction would be distributed
to the Limited Partners. However, the transaction remains contingent on, among
other things, a resolution of the value issue. Accordingly, there are no
assurances that this transaction will be consummated.
At the Partnership's wholly-owned residential property, Westside Creek
Apartments in Little Rock, Arkansas, the occupancy level averaged 90% for the
quarter, compared to 97% in the prior quarter. This decrease was due to
unusually high levels of tenant turnover at Westside Creek caused by the opening
of a nearby apartment property and by several tenants leaving to purchase
single-family homes. The construction of this nearby apartment community with
225 units is not expected to have a significant impact on occupancy levels at
Westside Creek over the long term; however it is expected to limit the property
management team's ability to raise rental rates in the near term. There are two
more new properties under construction in the West Little Rock market and one
may directly compete with Westside Creek Apartments. The property management
team is increasing its leasing efforts in order to stay competitive with these
new developments. Property improvements completed during the quarter included
purchasing a new computer for the leasing office, adding additional landscaping
around the property and replacing carpeting in units on an as-needed basis.
Improvements planned for next quarter include exterior painting and kitchen
cabinet replacements. If the potential prepayment transactions discussed above
with respect to the Woodcroft and Appletree investments were to occur, Westside
Creek would be the Partnership's only remaining real estate asset. Under such
circumstances, the Westside Creek Apartments would be actively marketed for
sale, which, if successfully completed, would be followed by an orderly
liquidation of the Partnership.
At May 31, 1996, the Partnership had available cash and cash equivalents of
approximately $930,000. Such cash and cash equivalents will be used for 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 Partnership's real estate investments, repayment of the
mortgage loans receivable and the proceeds from the sales or refinancings of the
underlying land and the investment property. Such sources of liquidity are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis. However, to the extent that the potential loan prepayment and
land sale transactions discussed above are completed and the net proceeds are
returned to the Limited Partners, the Partnership's quarterly distribution rate
on remaining invested capital, pending the sale of the Westside Creek
Apartments, may have to be adjusted downward to reflect the reduction in cash
flows which would result from such transactions.
Results of Operations
Three Months Ended May 31, 1996
The Partnership's net income decreased by $26,000 for the three-month period
ended May 31, 1996 when compared to the same period in the prior year. The
decrease in net income was primarily attributable to the gain of $61,000
realized from the sale of the Cordova Creek Apartments on April 12, 1995. The
decrease in income from the prior year gain was partially offset by an increase
in income from the operations of the Westside Creek Apartments. Net income from
Westside Creek increased by $20,000 for the third quarter of fiscal 1996 due to
an increase in rental income. A slight increase in average rental rates at
Westside Creek versus the same period in the prior year resulted in the improved
income. Average occupancy was 90% at Westside Creek for both the third quarter
of fiscal 1995 and the current quarter. In addition, the Partnership's operating
income increased by $15,000 for the third quarter of fiscal 1996 due to a
decrease in general and administrative expenses of $44,000. General and
administrative expenses decreased as a result of a decrease in certain required
professional fees. The decrease in general and administrative expenses was
partially offset by a decrease in interest earned on short-term investments of
$21,000. Interest earned on short term investments decreased due to a decline in
the Partnership's average outstanding cash reserve balances as a result of the
distribution to the Limited Partners of Partnership cash reserves that exceeded
future portfolio requirements during the fourth quarter of fiscal 1995. This
distribution was included with the distribution of the proceeds from the sale of
the Cordova Creek Apartments.
Nine Months Ended May 31, 1996
The Partnership's net income decreased by $64,000 for the nine-month period
ended May 31, 1996 when compared to the same period in the prior year. The
decrease in net income was primarily attributable to the gain of $61,000
realized from the sale of the Cordova Creek Apartments. In addition, the
Partnership's operating income decreased by $24,000. The decrease in operating
income was mainly attributable to decreases in interest earned on short term
investments and other income. Interest earned on short term investments
decreased by $50,000 due to a decrease in the Partnership's average outstanding
cash reserve balances as a result of the distribution of excess reserves
referred to above. Other income of $24,000 in the prior year represented cash
flow distributions from the Partnership's interest in the Cordova Creek
Apartments prior to the sale transaction. The decreases in gain on sale of
investment, interest income on short-term investments and other income were
partially offset by a decrease in general and administrative expenses and an
increase in income from the operations of the wholly-owned Westside Creek
property for the current nine-month period. General and administrative expenses
decreased by $53,000 partly due to certain legal expenses which were incurred
during fiscal 1995 in conjunction with a proposed sale of the Westside Creek
Apartments. Income from investment property held for sale increased by $21,000
due to an increase in rental income at the Westside Creek Apartments for the
current nine-month period.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, Third Qualified Properties, Inc. and Properties
Associates, the General Partners of the Partnership, were named as defendants in
a class action lawsuit against PaineWebber Incorporated ("PaineWebber") and a
number of its affiliates relating to PaineWebber's sale of 70 direct investment
offerings, including the offering of interests in the Partnership. In January
1996, PaineWebber signed a memorandum of understanding with the plaintiffs in
the class action 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 a plan of allocation which the parties expect to submit to the
court for its consideration and approval within the next several months. Until a
definitive settlement and plan of allocation is approved by the court, there can
be no assurance what, if any, payment or non-monetary benefits will be made
available to unitholders in PaineWebber Qualified Plan Property Fund Three, LP.
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. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the General Partners cannot estimate the impact, if any, of
these potential indemnification claims on the Partnership's financial
statements, taken as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, 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 THREE, LP
By: THIRD QUALIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: July 9, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the nine months ended May 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 930
<SECURITIES> 0
<RECEIVABLES> 9270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1091
<PP&E> 5870
<DEPRECIATION> 0
<TOTAL-ASSETS> 16156
<CURRENT-LIABILITIES> 92
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16064
<TOTAL-LIABILITY-AND-EQUITY> 16156
<SALES> 0
<TOTAL-REVENUES> 1350
<CGS> 0
<TOTAL-COSTS> 289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1061
<INCOME-TAX> 0
<INCOME-CONTINUING> 1061
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1061
<EPS-PRIMARY> 29.34
<EPS-DILUTED> 29.34
</TABLE>
