UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17147
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
(Exact name of registrant as specified in its charter)
Delaware 04-2798638
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
October 14, 1983, as supplemented
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-4
Part II
Item 5 Market for the Partnership's Limited Partnership Interests
and Related Security Holder Matters II-1
Item 6 Selected Financial Data
II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure II-5
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-15
<PAGE>
PART I
Item 1. Business
Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is
a limited partnership formed in June 1983 under the Uniform Limited Partnership
Act of the State of Delaware for the purpose of investing in a diversified
portfolio of existing income-producing operating properties through land
purchase-leaseback transactions and first mortgage loans. The Partnership sold
$35,794,000 in Limited Partnership Units (35,794 Units at $1,000 per Unit) from
October 14, 1983 to October 13, 1984 pursuant to a Registration Statement filed
on Form S-11 under the Securities Act of 1933 (Registration No. 2-85347).
Limited Partners will not be required to make any additional capital
contributions.
Originally, the Partnership owned land and made first mortgage loans
secured by buildings with respect to six operating properties. As of August 31,
1996, the Partnership's mortgage loan and land lease investments on two of the
original properties were still outstanding and the Partnership owned one
operating property directly as a result of foreclosing on a mortgage loan
investment. The Partnership's wholly-owned real estate investment and the
security for the Partnership's other investments are described below.
Property Name Type of Property and
and Location Date of Investment Size Type of Ownership (1)
- ------------------ ------------------ ---- ---------------------
Appletree Apartments Apartments 288 units; Fee ownership of
Omaha, NE 5/8/84 16.2 acres land and first
of land mortgage lien on
improvements
Woodcroft Shopping Shopping Center 85,300 Fee ownership of
Center 12/17/84 net land and first
Durham, NC leasable mortgage lien on
Phase I and Phase II sq. ft.; improvements
12 acres
of land
Westside Creek Apartments 142 units; Fee ownership of
Apartments (2) 7/1/85 11.4 acres land and improvements
Little Rock, AR of land
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2) On March 23, 1989, the Partnership foreclosed under the terms of the
mortgage note receivable secured by the Westside Creek Apartments for
non-payment of the required monthly payments of interest in accordance
with the terms of the mortgage loan. The Partnership has been operating
the property utilizing the services of a local management company since
the date of the foreclosure. See Note 5 to the Financial Statements
accompanying this Annual Report for a further discussion of this
investment.
To date, the Partnership has sold or been prepaid on its investments with
respect to three of the original operating properties. On September 25, 1989,
the Partnership liquidated its investments in a Howard Johnson's Hotel, located
in Orlando, Florida. The transaction consisted of a repayment of the
Partnership's mortgage loan receivable for $6,400,000 as well as a sale of the
related land at an amount equal to the Partnership's original cost of
$1,600,000. The repayment resulted in a loss on the mortgage loan investment of
$1,799,750 and $750,000 of bad debt expense for previously accrued but
uncollectible interest income. On July 31, 1992, the Partnership liquidated its
investments in the Exeter Street Theatre Building, when the borrower sold the
operating property to a third party. The transaction consisted of a prepayment
of the mortgage loan receivable at par, for $5,100,000, and a sale of the
related land for $3,000,000 (prior to closing costs). The land had a carrying
value of $500,000, equal to the Partnership's original investment, at the time
of the sale. On February 20, 1990, an affiliate of the Partnership, which held
the mortgage loan and land lease on the Cordova Creek Apartments, foreclosed on
the property due to non-payment of the required interest payments. The affiliate
operated the property, using the services of a local management company, for
more than five years during which time the Partnership received a share of the
net cash flow generated from property operations after capital improvements. On
April 12, 1995, the affiliate of the Partnership sold the Cordova Creek
property. The Partnership, which owned a 3.5% equity interest in the property,
received net proceeds of $311,000 and realized a gain of $61,000 on the sale.
<PAGE>
The Partnership's investment objectives are to:
(1) preserve and protect the Limited Partners' capital and related
buying power;
(2) provide the Limited Partners with cash distributions from
investment income; and
(3) achieve long-term appreciation in the value of the Partnership's
investments.
Through August 31, 1996, the Limited Partners had received cumulative cash
distributions totalling approximately $40,114,000, or $1,142 per original $1,000
investment for the Partnership's earliest investors. This return includes a
distribution of $224 per original $1,000 investment from the liquidation of the
Howard Johnson's mortgage loan and land investment in September of 1989, a
distribution of $232 per original $1,000 investment in October 1992 from the
liquidation of the Exeter Street Theatre Building investment in July 1992, and a
$42 distribution following the sale of the Cordova Creek Apartments in June 1995
($9 from the sale of Cordova Creek and $33 of excess Partnership reserves). At
August 31, 1996, the Partnership retains an interest in three of the six
properties underlying its original mortgage loan and land investments.
As noted above, to date the Partnership has made distributions of capital
proceeds to the Limited Partners totalling $498 per original $1,000 investment.
The Partnership's success in meeting its capital appreciation objective will
depend upon the proceeds received from the final liquidation of its remaining
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their final liquidation,
which cannot presently be determined. The Partnership expects to finance or sell
its investments and have its mortgage loans repaid from time to time. Due to the
combination of relatively low mortgage interest rates and increased availability
of funds for sales and mortgage refinancings which has existed over the past
three years, the likelihood of the Partnership's loans being prepaid has
increased. During fiscal 1996, the borrowers on both of the outstanding loan
investments continued to discuss potential prepayment transactions with the
Partnership. See Item 7 for a further discussion of these potential
transactions. While there are no assurances that these borrowers will be able to
finance prepayment transactions in the near term, if such transactions were to
be completed the Partnership would be positioned for a possible liquidation
pending the sale of the wholly-owned Westside Creek Apartments for which the
Partnership is currently in the process of negotiating a potential sales
contract. In determining the appropriate timing for the sale of any of the
Partnership's investments, the General Partner will consider such factors as the
amount of appreciation in value, if any, to be realized, the risks of continued
investment and the anticipated advantages to be gained from continuing to hold
the investment.
The property in which the Partnership has an equity interest and the
properties securing the Partnership's mortgage loan investments are located in
real estate markets in which they face significant competition for the revenues
they generate. The apartment complexes compete with numerous projects of similar
type generally on the basis of price, location and amenities. Apartment
properties in all markets also compete with the local single family home market
for prospective tenants. The availability of low home mortgage interest rates
over the past several years has generally caused this competition to increase in
all areas of the country. The shopping center also competes for long-term
commercial tenants with numerous projects of similar type generally on the basis
of location, rental rates and tenant improvement allowances. The Partnership has
no real estate investments located outside the United States. The Partnership is
engaged solely in the business of real estate investment. Therefore, a
presentation of information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Third
Qualified Properties, Inc. and Properties Associates. Third Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing
General Partner of the Partnership. The Associate General Partner is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of August 31, 1996, the Partnership owns, and has leased back to the
sellers, the land related to the two investments referred to under Item 1 above
to which reference is made for the name, location and description of each
investment. Additionally, the Partnership owns one property directly which was
acquired through foreclosure proceedings as noted in Item 1.
<PAGE>
Occupancy figures for each fiscal quarter during 1996, along with an
average for the year, are presented below for each property:
Percent Occupied At
-----------------------------------------------
Fiscal
1996
11/30/95 2/29/96 5/31/96 8/31/96 Average
-------- ------- ------- ------- -------
Appletree Apartments 96% 97% 99% 98% 98%
Woodcroft Shopping Center
Phase I and Phase II 97% 100% 100% 100% 99%
Westside Creek Apartments 97% 97% 90% 89% 93%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Third Qualified Properties, 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 Three, LP, PaineWebber, Third Qualified Properties, 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 Three, LP, also alleged that following the sale of
the partnership interests, PaineWebber, Third Qualified Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Third Qualified
Properties, Inc. and PA violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation hearings are
currently scheduled to be held in December 1996. The eventual outcome of this
litigation and the potential impact, if any, on the Partnership's unitholders
cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At August 31, 1996, there were 6,055 record holders of Units in the
Partnership. There is currently no public market for the resale of Units, and it
is not anticipated that a public market for Units will develop. The Managing
General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Qualified Plan Property Fund Three, LP
For the years ended August 31, 1996, 1995, 1994, 1993 and 1992
(In thousands, except per Unit data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 1,218 $ 1,315 $1,272 $ 1,296 $ 2,062
Operating income $ 819 $ 831 $ 834 $ 852 $ 1,471
Gain on sale of land $ $ - $ - $ - $ 2,479
Gain on sale of
investment in
operating property $ - $ 61 $ - $ - $ -
Income from
investment property
held for sale $ 536 $ 545 $ 551 $ 568 $ 551
Net income $ 1,355 $ 1,437 $ 1,385 $1,420 $ 4,501
Per Limited Partnership Unit:
Net income $ 37.47 $ 39.73 $ 38.31 $ 39.26 $124.48
Cash distributions
from operations $ 32.64 $ 35.36 $ 35.36 $ 37.94 $ 45.69
Cash distributions
from sale, refinancing
and other disposition
transactions $ - $ 42.00 $ - $232.00 $ -
Total assets $16,207 $16,030 $17,350 $17,269 $25,529
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above net income and cash distributions per Limited Partnership Unit
are based upon the 35,794 Limited Partnership Units outstanding during each
year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered Limited Partnership Interests to the public from
October 1983 to October 1984 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $35,794,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
approximately $31,410,000 was invested in six operating property investments in
the form of mortgage loans and land purchase-leaseback transactions. Since the
time that the original investments were made, the Partnership has liquidated its
Howard Johnson's Hotel mortgage loan and land investments at a loss and has
liquidated its Exeter Street Theatre Building mortgage loan and land investments
and the investment in the Cordova Creek Apartments at gains. In addition, the
Partnership assumed ownership of the Westside Creek Apartments property after
foreclosing under the terms of the first mortgage loan. The Partnership's
investment in the Cordova Creek Apartments had also been converted to an equity
interest in the operating property as a result of foreclosure proceedings
carried out by an affiliated partnership.
Operations of the properties securing the Partnership's two remaining
mortgage loan investments remained strong during fiscal 1996 and continue to
fully support the debt service and land rent payments owed to the Partnership.
During the year ended August 31, 1996, the Partnership received additional rent
of $25,000 under the terms of the Woodcroft Shopping Center ground lease because
cash flow from the property was in excess of certain base amounts specified in
the lease agreement. Leasing levels at the Appletree Apartments and Woodcroft
Shopping Center were 98% and 100%, respectively, as of August 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,
over the past year 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 for which the
Partnership is currently in the process of negotiating a potential sales
contract, as discussed further below.
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 has represented 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. Presently, the Partnership and the
borrower continue to try to resolve their differences regarding the value of the
property. If an agreement cannot be reached, the borrower could force the
Partnership to submit to arbitration during fiscal 1997. In addition to the
amount to be determined as the Partnership's share of the property's
appreciation under the ground lease, the terms of the Appletree mortgage loan
require a prepayment penalty which would be equal to 2.5% of the outstanding
principal balance of $4,850,000 for any prepayment prior to April 30, 1997.
Subsequent to April 1997, the prepayment penalty declines to 1.5% for the next
twelve months, after which there would be no prepayment penalty for the
remainder of the term until maturity in May 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 closing of the borrower's financing transaction.
Accordingly, there are no assurances that this transaction will be consummated.
During the first quarter of fiscal 1996, the Partnership received notice
from the owner of the Woodcroft Shopping Center of its intent to repay the
Partnership's first mortgage loan and purchase the underlying land in
conjunction with a sale of the operating property to a third party. The proposed
terms of the transaction would have resulted in the full repayment of the
Partnership's mortgage loan of $4,335,000 and the receipt of $1,220,000 as
payment in full for obligations owing under the ground lease, representing the
repayment of the $500,000 ground investment and $720,000 as the Partnership's
share of the appreciation in value of the underlying property. During the
quarter ended February 28, 1996, it was determined that the third-party buyer of
Woodcroft was unable to secure the necessary financing required to purchase the
property. During the quarter ended May 31, 1996, the Partnership again received
notice from the owner of the Woodcroft Shopping Center of its intent to repay
the outstanding first mortgage loan and purchase the underlying land in
conjunction with a sale of the operating property to a third party. As was the
case with the prior proposed transaction, this sale did not close due to
problems with the buyer's financing plans. The owner of the Woodcroft Shopping
Center has been remarketing the property in an effort to complete a sale before
the December 1996 maturity date of the loan. Subsequent to year end, the
Woodcroft owner negotiated a contract for the sale of the property to a third
party at a lower price than the prior proposed transactions. Based on the terms
of the potential sale transaction, the Partnership's share of the property's
appreciation would total $650,000. The terms of the Partnership's ground lease
require that the Partnership agree with the borrower's determination of value
for purposes of calculating the Partnership's share of the appreciation in value
due under the lease before a sale of the land can be completed. At the present
time, market values for retail shopping centers in many markets are being
adversely impacted by overbuilding and consolidations among retailers which have
resulted in an oversupply of space. While the operations of the Woodcroft
Shopping Center do not appear to have been affected to date by this general
trend, such conditions would seem to have impacted the fair market value of the
property, as evidenced by the difficulties that the Woodcroft owner has
encountered in the prior sale efforts. As a result, the Partnership has agreed
to accept the $650,000 premium for its ground lease interest in the event that
this transaction can be completed.
At the Partnership's wholly-owned multi-family residential property,
Westside Creek Apartments in Little Rock, Arkansas, the occupancy level averaged
93% for the year, compared to 95% for the prior year. This decrease was due to
unusually high levels of tenant turnover at Westside Creek in the third and
fourth quarters of fiscal 1996 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. The property management team has recommended that the
Partnership invest funds in capital improvements at the property in order to
stay competitive with these new developments. Property improvements completed
during the year included purchasing a new computer for the leasing office,
adding additional landscaping around the property, exterior painting, and
replacing carpeting and appliances in units on an as-needed basis. Subsequent to
year end, the Partnership received an offer to purchase the Westside Creek
property and entered into negotiations for a potential sales contract. As
previously reported, Westside Creek consists of two separately-owned phases. The
two phases share their amenities with one another and allocate expenses by
agreement through a common management company. The proposed sale transaction
would involve both phases, which management believes would maximize the proceeds
to the Partnership. The Partnership owns Phase I which includes the common
entrance, leasing office and clubhouse, and has negotiated a favorable
allocation of the potential sales price with the owner of Phase II based on
Phase I's physical advantages. In order to capitalize on this potential for a
combined sale of both phases, and in light of the possible near term repayments
of the Woodcroft and Appletree mortgage loans and related land sales, management
believes that pursuing a current sale of the Westside Creek property would be in
the best interests of the Limited Partners.
At August 31, 1996, the Partnership had available cash and cash equivalents
of approximately $973,000. 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
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 may have to be adjusted downward to reflect the
reduction in cash flows which would result from such transactions.
<PAGE>
Results of Operations
1996 Compared to 1995
The Partnership's net income decreased by $82,000 for the year ended August
31, 1996, when compared to the prior year. The primary reason for this decrease
in net income is the gain realized by the Partnership in the prior year from the
sale of the Cordova Creek Apartments on April 12, 1995. As discussed further
above, the Partnership held a 3.5% equity interest in Cordova Creek and realized
a gain of $61,000 from the sale of the property. In addition, a decrease in the
Partnership's operating income of $12,000 contributed to the decline in net
income for the current year. Operating income decreased due to a decline in
revenues of $97,000. The decline in revenues was attributable to decreases in
interest earned on cash equivalents of $51,000, other income of $24,000 and land
rent of $22,000. Interest earned on cash equivalents decreased due to a decrease
in the Partnership's average outstanding cash reserve balances as a result of
the June 1995 distribution to the Limited Partners of reserves that exceeded
expected future requirements totalling $1,181,000. 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. Land
rent decreased due to a decline in the additional rent in excess of a specified
base amount received from the Woodcroft Shopping Center pursuant to the terms of
the ground lease. In addition, the Partnership realized a small decrease in
income from investment property held for sale of $9,000 mainly due to an
increase in capital improvement expenses incurred at Westside Creek in the
current year. Due to the Partnership's policy of accounting for its assets held
for sale, capital improvement costs are expensed as incurred. A reduction in
general and administrative expenses of $79,000 partially offset the decreases in
revenues and income from investment property held for sale. The reduction in
general and administrative expenses is mainly attributable to a decline in
professional fees of $89,000. Professional fees decreased primarily due to the
legal costs incurred in conjunction with the proposed sale of the Westside Creek
Apartments in fiscal 1995.
1995 Compared to 1994
The Partnership's net income increased by $52,000 for the year ended August
31, 1995, when compared to the prior year. The primary reason for the increase
in net income was the gain realized by the Partnership from the sale of the
Cordova Creek Apartments on April 12, 1995. As discussed further above, the
Partnership held a 3.5% equity interest in Cordova Creek and realized a gain of
$61,000 from the sale of the property. The gain from the sale of Cordova Creek
was partially offset by a decrease in the income from the operations of the
Westside Creek Apartments of $6,000 and a decrease in the Partnership's
operating income of $3,000. Income from the operations of the Westside Creek
Apartments decreased primarily due to an increase in capital improvement
expenses over the prior year. Capital improvement expenses increased in
connection with preparing the property for a possible sale, as discussed further
above. Rental revenues at Westside Creek were up slightly compared to fiscal
1994. The Partnership's operating income decreased slightly, despite an increase
in revenues of $43,000, due to an increase in professional fees. Professional
fees increased mainly as a result of legal expenses incurred in connection with
the proposed Westside Creek sale transaction which failed to close during fiscal
1995.
1994 Compared to 1993
The Partnership's net income decreased by $35,000 for the year ended August
31, 1994, when compared to the prior year. The decrease in net income was mainly
the result of a decrease in interest earned on invested cash equivalents and a
decrease in income from operations of the investment property held for sale.
Interest earned on invested cash equivalents decreased by $21,000 during fiscal
1994 as a result of a substantial decrease in the average outstanding balance of
cash held by the Partnership. During the quarter ended November 30, 1992, the
Partnership held the proceeds from the sale of the Exeter Street Theatre
Building investment. These proceeds, of over $8 million, were invested in
short-term interest bearing instruments prior to being distributed to the
Limited Partners in October 1992. Income from investment property held for sale
represents the net operating income of the Westside Creek Apartments property
reduced by capital improvement expenses. Net income from the operations of
Westside Creek decreased by $17,000, mainly due to an increase in administrative
and capital improvement expenses. The increases in administrative and capital
improvement expenses were partially offset by a slight increase in rental and
other income at Westside Creek. A decline in Partnership general and
administrative expenses of $6,000 partially offset the reduction in interest
income and income from Westside Creek during fiscal 1994.
<PAGE>
Inflation
The Partnership completed its twelfth full year of operations in fiscal 1996
and the effects of inflation and changes in prices on revenues and expenses to
date have not been significant.
The impact of inflation in future periods may be offset, in part, by an
increase in revenues because the Partnership's land leases provide for
additional rent based upon increases in the revenues of the related operating
properties, which would tend to rise with inflation. In addition, the
Partnership's wholly-owned apartment complex has leases which are short-term;
generally 6 to 12 months. Rental rates on such leases could be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases turn
over. Such increases in revenues would be expected to at least partially offset
the increases in Partnership and property operating expenses resulting from
inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of
this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Third Qualified
Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operations, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and Assistant
Treasurer 54 6/1/83 *
Timothy J. Medlock Vice President and Treasurer 35 8/4/89
Thomas W. Boland Vice President 34 12/1/91
Dorothy F. Haughey Secretary 70 6/1/83 *
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and executive officers have been elected to serve until
the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated ("PWPI") serves as the
Adviser. The business experience of each of the directors and principal
executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General Partner.
Mr. Rubin was named President and Chief Executive Officer of PWPI in August
1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November
1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was
employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc.
Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and
Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr.
Rubin was a First Vice President and a real estate workout specialist at
Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr.
Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr.
Rubin is a graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a
result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible
for the origination and execution of all of PaineWebber's REIT transactions,
advisory assignments for real estate clients and certain of the firm's real
estate debt and principal activities. He joined Kidder, Peabody in 1985 and,
beginning in 1989, was one of the senior executives responsible for building
Kidder, Peabody's real estate department. Mr. Fancher previously worked for a
major law firm in New York City. He has a J.D. from Harvard Law School, an
M.B.A. from Harvard Graduate School of Business Administration and an A.B. from
Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974, the Assistant Treasurer of Capital for Real Estate, which
provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and a Vice President and Treasurer of the Adviser which he
joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the
Controller of the Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner
and a Vice President and Manager of Financial Reporting of the Adviser which
he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner,
Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended August 31, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the
General Partners are entitled to receive a share of cash distributions and a
share of profits and losses. These items are described in Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 5.75% to 6.5% per annum on remaining
invested capital over the past five years. However, the Partnership's Units of
Limited Partnership Interest are not actively traded on any organized exchange,
and no efficient secondary market exists. Accordingly, no accurate price
information is available for these Units. Therefore, a presentation of
historical Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Third Qualified Properties, Inc., is owned by
PaineWebber. Properties Associates, the Associate General Partner, is a
Massachusetts general partnership, the general partners of which are also
officers of the Adviser and the Managing General Partner. Properties Associates
was the Initial Limited Partner of the Partnership. No limited partner is known
by the Partnership to own beneficially more than 5% of the outstanding interests
of the Partnership.
(b) Neither the directors and officers of the Managing General Partner nor
the general partners of the Associate General Partner individually own any Units
of Limited Partnership Interest of the Partnership. No director or officer of
the Managing General Partner nor the general partners of the Associate General
Partner possess a right to acquire beneficial ownership of Units of Limited
Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The Managing General Partner of the Partnership is Third Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner. Subject to the
Managing General Partner's overall authority, the business of the Partnership is
managed by the Adviser pursuant to an advisory contract. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed, generally, 85% to the Limited
Partners, 11.99% to the Adviser as an asset management fee and 3.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 10%-12%,
depending upon their date of admission into the Partnership, as defined in the
Amended Partnership Agreement.
In connection with investing Partnership capital, the Adviser earned
acquisition fees, paid by both the borrowers and sellers and the Partnership,
aggregating not more than 3% of the gross proceeds of the offering. The Adviser
received total acquisition fees of approximately $1,074,000, of which $306,000
was paid by the Partnership. The Adviser may receive a commission, in an amount
not yet determinable, upon the disposition of certain Partnership investments.
Under the advisory contract, the Adviser has specific management
responsibilities to administer day-to-day operations of the Partnership and to
report periodically the performance of the Partnership to the General Partners.
The Adviser is paid a basic management fee (6% of adjusted cash flow distributed
to the partners) and an incentive management fee (2% of adjusted cash flow
distributed to the partners, subordinated to a non-cumulative annual return to
the Limited Partners equal to 9% based upon their adjusted capital
contribution), in addition to the asset management fee described above for
services rendered. Basic and asset management fees of $83,000 were earned for
the year ended August 31, 1996. No incentive management fees have been earned to
date.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of residual
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or refinancing. If
there are no residual proceeds, tax loss or taxable income from a sale or
refinancing will be allocated 98.989899% to the Limited Partners and 1.010101%
to the General Partners. Allocations of the Partnership's operations between the
General Partners and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended August 31, 1996 is $144,000, representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $5,000 (included in general and administrative expenses) during fiscal 1996
for managing the Partnership's cash assets. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
Financial statements for the properties securing the Partnership's
mortgage loans have not been included since the Partnership has no
contractual right to the information and cannot otherwise
practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page
IV-3 are filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and Financial
Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN
PROPERTY FUND THREE, LP
By: Third Qualified Properties, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: November 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Partnership in the capacity and on the dates indicated.
By: /s/ Bruce J. Rubin Date: November 22, 1996
--------------------- -----------------
Bruce J. Rubin
Director
By: /s/ Terrence E. Fancher Date: November 22, 1996
------------------------ -----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ----------------------- --------------------------
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated October 14, 1983, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or
amendments thereto of the registrant 15(d) of the Securities
together with all such contracts filed Exchange Act of 1934 and
as exhibits of previously filed Forms incorporated herein by
8-K and Forms 10-K are hereby reference.
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the
year ended August 31, 1996
has been sent to the
Limited Partners. Annual
Report will be sent to the
Limited Partners
subsequent to this filing.
(27) Financial Data Schedule Filed as last page of
EDGAR submission following
the Financial Statements
and Financial Statement
Schedule required by
Item 14.
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and 14(d)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Three, LP:
Report of independent auditors F-2
Balance sheets as of August 31, 1996 and 1995 F-3
Statements of income for the years ended August 31, 1996,
1995 and 1994 F-4
Statements of changes in partners' capital for the years
ended August 31, 1996, 1995 and 1994 F-5
Statements of cash flows for the years ended August 31, 1996,
1995 and 1994 F-6
Notes to financial statements F-7
Financial Statement Schedules:
Schedule - III Real Estate Owned F-14
Schedule - IV Investments in Mortgage Loans on Real Estate F-15
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Qualified Plan Property Fund Three, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified
Plan Property Fund Three, LP as of August 31, 1996 and 1995, and the related
statements of income, changes in partners' capital and cash flows for each of
the three years in the period ended August 31, 1996. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paine Webber Qualified Plan
Property Fund Three, LP at August 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
November 15, 1996
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
BALANCE SHEETS
August 31, 1996 and 1995
(In thousands, except per Unit data)
ASSETS
1996 1995
---- ----
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 973 790
Interest receivable 85 85
Tax and tenant security deposit escrows 71 73
Prepaid expenses 14 14
Deferred expenses, net of accumulated
amortization of $433 ($429 in 1995) 9 13
-------- --------
$ 16,207 $ 16,030
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 18 $ 18
Accounts payable and accrued expenses 113 110
Tenant security deposits 13 14
-------- --------
Total liabilities 144 142
Partners' capital
General Partners:
Capital contributions 1 1
Cumulative net income 339 326
Cumulative cash distributions (329) (317)
Limited Partners ($1,000 per Unit, 35,794
Units issued):
Capital contributions, net of offering costs 32,130 32,130
Cumulative net income 24,036 22,694
Cumulative cash distributions (40,114) (38,946)
-------- --------
Total partners' capital 16,063 15,888
-------- --------
$ 16,207 $ 16,030
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME
For the years ended August 31, 1996, 1995 and 1994
(In thousands, except per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Interest from mortgage loans $ 1,021 $ 1,021 $1,021
Land rent 153 175 161
Interest earned on cash equivalents 44 95 65
Other income - 24 25
-------- -------- ------
1,218 1,315 1,272
Expenses:
Management fees 83 89 90
General and administrative 312 391 344
Amortization of deferred expenses 4 4 4
--------- -------- ------
399 484 438
--------- -------- ------
Operating income 819 831 834
Gain on sale of investment
in operating property - 61 -
Income from investment
property held for sale, net 536 545 551
-------- -------- -------
Net income $ 1,355 $ 1,437 $ 1,385
======== ======= =======
Net income per Limited
Partnership Unit $ 37.47 $ 39.73 $ 38.31
======= ======== ========
Cash distributions per
Limited Partnership Unit $ 32.64 $ 77.36 $ 35.36
======= ======== ========
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 year.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the years ended August 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at August 31, 1993 $ 7 $17,121 $17,128
Net income 14 1,371 1,385
Cash distributions (13) (1,266) (1,279)
----- -------- -------
Balance at August 31, 1994 8 17,226 17,234
Net income 15 1,422 1,437
Cash distributions (13) (2,770) (2,783)
------ -------- --------
Balance at August 31, 1995 10 15,878 15,888
Net income 13 1,342 1,355
Cash distributions (12) (1,168) (1,180)
------ ------- --------
Balance at August 31, 1996 $ 11 $16,052 $16,063
====== ======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 1,355 $ 1,437 $ 1,385
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 4 4 4
Changes in assets and liabilities:
Prepaid expenses - 4 (5)
Tax and tenant security deposit escrows 2 (2) 5
Accounts payable - affiliates - (1) (29)
Accounts payable and accrued expenses 3 27 3
Tenant security deposits (1) - -
------- ------- ------
Total adjustments 8 (29) (22)
------- ------- ------
Net cash provided by
operating activities 1,363 1,408 1,363
Cash flows from investing activities:
Net proceeds from sale of investment
in operating property - 311 -
Cash flows from financing activities:
Distributions to partners (1,180) (2,783) (1,279)
-------- ------- -------
Net increase (decrease) in
cash and cash equivalents 183 (1,064) 84
Cash and cash equivalents,
beginning of period 790 1,854 1,770
-------- ------- -------
Cash and cash equivalents, end of period $ 973 $ 790 $ 1,854
======== ======= =======
See accompanying notes.
<PAGE>
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
Notes to Financial Statements
1. Organization and Nature of Operations
Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of Delaware in
June 1983 for the purpose of investing in a diversified portfolio of existing
income-producing real properties through land purchase-leaseback transactions
and first mortgage loans. The Partnership authorized the issuance of units (the
"Units") of Partnership interests, of which 35,794 (at $1,000 per Unit) were
subscribed and issued between October 14, 1983 and October 13, 1984.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to six operating investment properties. To
date, the Partnership has sold or been prepaid on its investments with respect
to three of the original operating properties. As of August 31, 1996, the
Partnership's mortgage loan and land lease investments on two of the original
properties were still outstanding and the Partnership owned one operating
property directly as a result of foreclosing on a mortgage loan. As discussed
further in Notes 4 and 5, during fiscal 1996 the borrowers on both of the
remaining loan investments continued discussions with the Partnership regarding
potential prepayment transactions. While there are no assurances that these
borrowers will be able to finance prepayment transactions in the near term, if
such transactions were to be completed the Partnership would be positioned for a
possible liquidation pending the disposition of the wholly-owned Westside Creek
Apartments for which the Partnership is currently in the process of negotiating
a potential sales contract.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1996 and 1995 and revenues and expenses for
each of the three years in the period ended August 31, 1996. Actual results
could differ from the estimates and assumptions used.
Investment property held for sale represents an asset acquired by the
Partnership through foreclosure proceedings on a first mortgage loan. The
Partnership's policy is to carry this asset at the lower of cost or estimated
fair value (net of selling expenses). The Partnership's cost basis is equal to
the fair value of the asset at the date of foreclosure. Declines in the
estimated fair value of the asset subsequent to foreclosure would be recorded
through the use of a valuation allowance. Subsequent increases in the estimated
fair value of the asset would result in a reduction of the valuation allowance,
but not below zero. All costs incurred to hold the asset are charged to expense
and no depreciation expense is recorded.
The Partnership's investments in land subject to ground leases are carried
at the lower of cost or net realizable value. The net realizable value of a real
estate investment held for long-term investment purposes is measured by the
recoverability of the investment through expected future cash flows on an
undiscounted basis, which may exceed the property's current market value. The
net realizable value of a property held for sale approximates its current market
value. None of the Partnership's land investments were held for sale as of
August 31, 1996 or 1995. The Partnership has reviewed FAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of", which is effective for financial statements for years beginning after
December 15, 1995, and believes this new pronouncement will not have a material
effect on the Partnership's financial statements.
Mortgage loans receivable are carried at the lower of cost or fair value.
The Partnership's policy is to provide for any valuation allowances for its
mortgage loan investments on a specific identification basis, principally by
evaluating the market value of the underlying collateral since the loans are
collateral dependent.
Deferred expenses consist of acquisition fees paid to PaineWebber
Properties Incorporated (the "Adviser") as compensation for analyzing,
structuring and negotiating the Partnership's real estate investments. These
expenses are being amortized using the straight-line method over twelve- to
fifteen-year periods.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
The mortgage loans receivable, cash and cash equivalents, interest
receivable, escrow deposits, accounts payable - affiliates and accounts payable
and accrued expenses appearing on the accompanying balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments." With
the exception of mortgage loans receivable, the carrying amount of these assets
and liabilities approximates their fair value as of August 31, 1996 due to the
short-term maturities of these instruments. Information regarding the fair value
of the Partnership's mortgage loans receivable is provided in Note 4. Due to the
likelihood of near term prepayment, the mortgage loans receivable have been
valued at the lesser of face value or the estimated fair value of the collateral
property, as determined by an independent appraisal. Such appraisals make use of
a combination of certain generally accepted valuation techniques, including
direct capitalization, discounted cash flows and comparable sales analysis (see
Note 4 for a further discussion).
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
The Managing General Partner of the Partnership is Third Qualified
Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber"). The Associate General Partner is Properties Associates, a
Massachusetts general partnership, certain general partners of which are also
officers of the Adviser and the Managing General Partner. Subject to the
Managing General Partner's overall authority, the business of the Partnership is
managed by the Adviser pursuant to an advisory contract. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed, generally, 85% to the Limited
Partners, 11.99% to the Adviser as an asset management fee and 3.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 10%-12%,
depending upon their date of admission into the Partnership, as defined in the
Amended Partnership Agreement.
In connection with investing Partnership capital, the Adviser earned
acquisition fees, paid by both the borrowers and sellers and the Partnership,
aggregating not more than 3% of the gross proceeds of the offering. The Adviser
received total acquisition fees of approximately $1,074,000, of which $306,000
was paid by the Partnership. The Adviser may receive a commission, in an amount
not yet determinable, upon the disposition of certain Partnership investments.
Under the advisory contract, the Adviser has specific management
responsibilities to administer day-to-day operations of the Partnership and to
report periodically the performance of the Partnership to the General Partners.
The Adviser is paid a basic management fee (6% of adjusted cash flow distributed
to the partners) and an incentive management fee (2% of adjusted cash flow
distributed to the partners, subordinated to a non-cumulative annual return to
the Limited Partners equal to 9% based upon their adjusted capital
contribution), in addition to the asset management fee described above for
services rendered. Basic and asset management fees of $83,000, $89,000 and
$90,000 were earned for the years ended August 31, 1996, 1995 and 1994,
respectively. No incentive management fees have been earned to date. Accounts
payable - affiliates at both August 31, 1996 and 1995 consists of management
fees of $18,000 payable to the Adviser.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% to the General Partners. Taxable income or tax loss arising from a
sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partners in proportion to the amounts of residual
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or refinancing. If
there are no residual proceeds, tax loss or taxable income from a sale or
refinancing will be allocated 98.989899% to the Limited Partners and 1.010101%
to the General Partners. Allocations of the Partnership's operations between the
General Partners and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended August
31, 1996, 1995 and 1994 is $144,000, $178,000 and $159,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $5,000, $4,000, and $5,000 (included in general and administrative expenses)
during fiscal 1996, 1995 and 1994, respectively, for managing the Partnership's
cash assets.
4. Mortgage Loan and Land Investments
The following first mortgage loans were outstanding at August 31, 1996 and
1995 (in thousands):
Date of
Amount of Loan Loan and
Property 1996 1995 Interest Rate Maturity
-------- ---- ---- ------------- --------
Appletree Apartments $ 4,850 $ 4,850 11.00% 5/8/84
Omaha, NE 6/1/99
Woodcroft Shopping
Center
Durham, NC:
Phase I 3,100 3,100 11.25% 12/17/84
12/17/96
Phase II 1,235 1,235 11.25% 11/29/85
12/17/96
------- -------
$ 9,185 $ 9,185
======= =======
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all tenant leases, where
applicable. Interest is payable monthly and the principal is due at maturity.
In relation to the above-mentioned mortgage loans, the following land
purchase-leaseback transactions had also been entered into as of August 31, 1996
and 1995 (in thousands):
Cost of Land
to the Partnership Annual
Property 1996 1995 Base Rent
-------- ---- ---- ---------
Appletree Apartments $ 650 $ 650 $ 72
Woodcroft Shopping Center 500 500 $ 56
------ ------
$1,150 $1,150
====== ======
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the gross
revenues in excess of a base amount, as defined. For the years ended August 31,
1996, 1995 and 1994, additional rents of $25,000, $47,000 and $33,000,
respectively, were earned from the Woodcroft Shopping Center investment. The
lessees have the option to purchase the land for specified periods of time at a
price based on the fair market value, as defined, but not less than the original
cost to the Partnership.
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 property as they
increase above a specified base amount. 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 or exercise of the option to repurchase the land, generally, the
Partnership will receive a 33% to 50% share of the appreciation above a
specified base amount.
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
secured the necessary financing to complete this transaction. The amount to be
received by the Partnership as its share of the appreciation of the Appletree
property has not been agreed upon to date. The terms of the Partnership's ground
lease provide for the possible resolution of disputes between the parties over
value issues through an arbitration process. Presently, the Partnership and the
borrower continue to try to resolve their differences regarding the value of the
property. If an agreement cannot be reached, the borrower could force the
Partnership to submit to arbitration during fiscal 1997. In addition to the
amount to be determined as the Partnership's share of the property's
appreciation under the ground lease, the terms of the Appletree mortgage loan
require a prepayment penalty which would be equal to 2.5% of the outstanding
principal balance of $4,850,000 for any prepayment prior to April 30, 1997.
Subsequent to April 30, 1997, the prepayment penalty declines to 1.5% for the
next twelve months after which there would be no prepayment penalty for the
remainder of the term through maturity in May 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. Accordingly, there are no assurances that this transaction
will be consummated.
During the first quarter of fiscal 1996, the Partnership received notice
from the owner of the Woodcroft Shopping Center of its intent to repay the
Partnership's first mortgage loan and purchase the underlying land in
conjunction with a sale of the operating property to a third party. The proposed
terms of the transaction would have resulted in the full repayment of the
Partnership's mortgage loan of $4,335,000 and the receipt of $1,220,000 as
payment in full for obligations owing under the ground lease, representing the
repayment of the $500,000 ground investment and $720,000 as the Partnership's
share of the appreciation in value of the underlying property. During the
quarter ended February 28, 1996, it was determined that the third-party buyer of
Woodcroft was unable to secure the necessary financing required to purchase the
property. During the quarter ended May 31, 1996, the Partnership again received
notice from the owner of the Woodcroft Shopping Center of its intent to repay
the outstanding first mortgage loan and purchase the underlying land in
conjunction with a sale of the operating property to a third party. As was the
case with the prior proposed transaction, this sale did not close due to
problems with the buyer's financing plans. The owner of the Woodcroft Shopping
Center has been remarketing the property in an effort to complete a sale before
the December 1996 maturity date of the loan. Subsequent to year end, the
Woodcroft owner negotiated a contract for the sale of the property to a third
party at a lower price than the prior proposed transactions. Based on the terms
of the potential sale transaction, the Partnership's share of the property's
appreciation would total $650,000. The terms of the Partnership's ground lease
require that the Partnership agree with the borrower's determination of value
for purposes of calculating the Partnership's share of the appreciation in value
due under the lease before a sale of the land can be completed. At the present
time, market values for retail shopping centers in many markets are being
adversely impacted by overbuilding and consolidations among retailers which have
resulted in an oversupply of space. While the operations of the Woodcroft
Shopping Center do not appear to have been affected to date by this general
trend, such conditions would seem to have impacted the fair market value of the
property, as evidenced by the difficulties that the Woodcroft owner has
encountered in the prior sale efforts. As a result, the Partnership has agreed
to accept the $650,000 premium for its ground lease interest in the event that
this transaction can be completed.
As discussed further above, the maturity date of the Woodcroft loan is in
December 1996, and the potential for a near term prepayment of the Appletree
loan is high. As a result of these circumstances, based on an expected
short-term maturity, the estimated fair values of the Partnership's mortgage
loan instruments approximate their carrying values as of August 31, 1996 since
the estimated fair values of the collateral properties exceed the principal
balances of the loans.
5. Investment Property Held for Sale
On March 23, 1989, the Partnership foreclosed under the terms of the
mortgage loan secured by Westside Creek Apartments due to nonpayment of the
required debt service. The Adviser has employed a local management company to
operate the property, which is a 142-unit apartment complex located in Little
Rock, Arkansas, on the Partnership's behalf.
The Partnership complies with the guidelines set forth in the Statement of
Position entitled "Accounting for Foreclosed Assets," issued by the American
Institute of Certified Public Accountants, to account for its investment
properties acquired through foreclosures. Under the Statement of Position, a
foreclosed asset is recorded at the lower of cost or estimated fair value,
reduced by the estimated costs to sell the asset. Cost is defined as the fair
value of the asset at the date of the foreclosure. Declines in the estimated
fair value of the asset subsequent to foreclosure are recorded through the use
of a valuation allowance. Subsequent increases in the estimated fair value of
the asset result in a reduction in the valuation allowance, but not below zero.
The Westside Creek investment was originally made by the Partnership on July 1,
1985 and was structured as a ground lease and first leasehold mortgage. The
total investment by the Partnership was comprised of the land, purchased for
$215,000, and a $4,635,000 mortgage loan secured by the improvements for a total
investment of $4,850,000. At the date of the foreclosure in fiscal 1989,
management estimated the fair value of the property at $4,720,000 and recorded a
loss on foreclosure of $130,000.
<PAGE>
The Partnership recognizes income from the investment property held for
sale in the amount of the excess of the property's gross revenues over property
operating expenses (including capital improvement costs), taxes and insurance.
Summarized operating results for the years ended August 31, 1996, 1995 and 1994
are as follows (in thousands):
1996 1995 1994
---- ---- ----
Rental income $ 970 $ 937 $ 924
Other income 33 33 34
------ ----- -----
1,003 970 958
Property operating expenses 381 338 324
Property taxes and insurance 86 87 83
------ ------ -----
467 425 407
------ ------ -----
Income from investment
property held for sale, net $ 536 $ 545 $ 551
====== ====== =====
6. Investment in Operating Property
On February 20, 1990, an affiliate of the Partnership, which held the
mortgage and land lease on the Cordova Creek Apartments, located in Memphis,
Tennessee, foreclosed on the property 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. Accordingly, distributions which were received
from the operations of Cordova Creek were recorded as income when received, to
the extent that they represented current earnings. The Partnership received
distributions from the current earnings of the Cordova Creek property totalling
$24,000 and $25,000 in fiscal 1995 and 1994, respectively. Such amounts have
been recorded as other income on the Partnership's statements of income.
The affiliate which held the majority ownership interest in 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 $311,000,
resulting in a $61,000 gain over the Partnership's cost basis of $250,000. 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 $9 from Cordova
Creek net sales proceeds and $33 as a distribution from cash reserves which were
deemed to be in excess of the Partnership's expected future requirements.
7. Contingencies
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Third Qualified Properties, 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 Three, LP, PaineWebber, Third Qualified Properties, 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 Three, LP, also alleged that following the sale of
the partnership interests, PaineWebber, Third Qualified Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Third Qualified
Properties, Inc. and PA violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation hearings are
currently scheduled to be held in December 1996. The eventual outcome of this
litigation and the potential impact, if any, on the Partnership's unitholders
cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements.
8. Subsequent Events
On October 15, 1996, the Partnership distributed $292,000 to the Limited
Partners, $3,000 to the General Partners and $3,000 to the Adviser as an asset
management fee for the quarter ended August 31, 1996.
<PAGE>
Schedule III - Real Estate Owned
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
August 31, 1996
(In thousands)
Gross Amount at
Cost of Which Carried Date of
Investment to at Close of Original Size of
Description Partnership (A) Period (A) Investment Investment
- ----------- --------------- ----------- ---------- ----------
Land underlying $ 650 $ 650 5/8/84 16.2 acres
Apartment Complex (B)
Omaha, NE
Land underlying 500 500 12/17/84 12 acres
Shopping Center (B)
Durham, NC
Apartment Complex 4,850 4,720 (1) 7/1/85 11.4 acres
Little Rock, AR of land;
142 units
------ ------
$6,000 $5,870
====== ======
Notes:
(A)These amounts represent the cost of each investment and the gross amount
at which the investment is carried on the balance sheet at August 31,
1996. The aggregate cost for federal income tax purposes at August 31,
1996 is approximately $6,205,000.
(B)Senior mortgages on the properties related to the land investments listed
above are held by Paine Webber Qualified Plan Property Fund Three, LP. See
Schedule IV.
(C) Reconciliation of real estate owned (in thousands):
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 5,870 $6,120 $6,120
Acquisitions - - -
Sale of investment in
operating property (2) - (250) -
------- ------- ------
Balance at end of year $ 5,870 $5,870 $6,120
======= ====== ======
(1)The Partnership foreclosed on the mortgage loan secured by the property on
March 23, 1989. A loss of $130,000 related to the foreclosure was recorded in
fiscal 1989. The cost of the land and the face amount of the related mortgage
loan were adjusted for the loss on foreclosure and were reclassified to
investment property held for sale. See discussion in Note 5 to the financial
statements.
(2)See discussion in Note 6 to the accompanying financial statements regarding
the sale in 1995 of the Cordova Creek Apartment complex.
<PAGE>
<TABLE>
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
August 31, 1996
(In thousands)
<CAPTION>
Principal
amount of
loans subject
Face Carrying to delinquent
Final maturity Periodic amount of amount of principal
Description Interest rate Date payment terms mortgage mortgage or interest
- ----------- ------------- -------------- ------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Loans:
Apartments 11% May 8, 1999 Interest $ 4,850 $ 4,850 -
Omaha, Nebraska monthly,
principal
at maturity
Shopping Center 11.25% December 17, 1996 Interest $ 3,100 $ 3,100 -
Durham, North Carolina monthly,
Phase I principal
at maturity
Phase II 11.25% December 17, 1996 Interest $ 1,235 $ 1,235 -
monthly,
principal
at maturity ------- -------
$ 9,185 $ 9,185 -
======= =======
1996 1995 1994
---- ---- ----
Balance at beginning of year $9,185 $ 9,185 $ 9,185
Reductions during year:
Repayments - - -
------ ------- -------
Balance at close of year $9,185 $ 9,185 $ 9,185
====== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended August 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<CASH> 973
<SECURITIES> 0
<RECEIVABLES> 9,270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,143
<PP&E> 5,870
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,207
<CURRENT-LIABILITIES> 144
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,063
<TOTAL-LIABILITY-AND-EQUITY> 16,207
<SALES> 0
<TOTAL-REVENUES> 1,754
<CGS> 0
<TOTAL-COSTS> 399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,355
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,355
<EPS-PRIMARY> 37.47
<EPS-DILUTED> 37.47
</TABLE>
