UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No ____
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
BALANCE SHEETS
February 29, 1996 and August 31, 1995 (Unaudited)
(In thousands)
ASSETS
February 29 August 31
Real estate investments:
Investment property held for sale $ 4,720 $ 4,720
Land 1,150 1,150
Mortgage loans receivable 9,185 9,185
--------- --------
15,055 15,055
Cash and cash equivalents 878 790
Interest receivable 85 85
Tax and tenant security deposit escrows 55 73
Prepaid expenses 7 14
Deferred expenses, net 11 13
---------- ---------
$ 16,091 $ 16,030
========= ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 18 $ 18
Accounts payable and accrued expenses 67 110
Tenant security deposits 14 14
Partners' capital 15,992 15,888
---------- ---------
$ 16,091 $ 16,030
========= ========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended February 29, 1996 and February 28, 1995
(Unaudited)
(In thousands)
General Limited
Partners Partners
Balance at August 31, 1994 $ 8 $17,226
Net income 7 725
Cash distributions (6) (633)
------ -------
Balance at February 28, 1995 $ 9 $17,318
======= =======
Balance at August 31, 1995 $ 10 $15,878
Net income 7 687
Cash distributions (6) (584)
------ -------
Balance at February 29, 1996 $ 11 $15,981
====== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME
For the three and six months ended February 29, 1996 and February 28, 1995
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
February 29/28, February 29/28,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Interest from mortgage loans $ 256 $ 255 $ 511 $ 511
Land rent 48 54 81 89
Interest earned on short-
term investments 11 27 21 50
Other income - 7 - 13
----- ----- ----- ------
315 343 613 663
Expenses:
Management fees 21 22 42 45
General and administrative 104 111 172 180
Amortization of deferred expenses 1 1 2 2
----- ----- ----- ------
126 134 216 227
----- ----- ----- ------
Operating income 189 209 397 436
Income from operations of
investment property held
for sale, net 147 144 297 296
----- ----- ----- ------
Net income $ 336 $ 353 $ 694 $ 732
======= ====== ======== ======
Net income per Limited
Partnership Unit $9.26 $9.77 $19.17 $20.25
===== ===== ====== ======
Cash distributions per Limited
Partnership Unit $8.16 $ 8.84 $16.32 $17.68
===== ======= ====== ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 35,794 Units of Limited Partnership Interest outstanding during
each period.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CASH FLOWS
For the six months ended February 29, 1996 and February 28, 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 694 $ 732
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of deferred expenses 2 2
Changes in assets and liabilities:
Tax and tenant security deposit escrows 18 22
Prepaid expenses 7 12
Accounts payable and accrued expenses (43) (31)
Tenant security deposits - (1)
------- -------
Total adjustments (16) 4
------- -------
Net cash provided by operating activities 678 736
Cash flows from financing activities:
Distributions to partners (590) (639)
------- -------
Net increase in cash and cash equivalents 88 97
Cash and cash equivalents, beginning of period 790 1,854
------- -------
Cash and cash equivalents, end of period $ 878 $ 1,951
========= =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended August 31, 1995.
In the opinion of management, the accompanying financial statements, which
have not been audited, reflect all adjustments necessary to present fairly
the results for the interim period. All of the accounting adjustments
reflected in the accompanying interim financial statements are of a normal
recurring nature.
2. Mortgage Loan and Land Investments
The outstanding first mortgage loans and the cost of the related land to the
Partnership at February 29, 1996 and August 31, 1995 are as follows (in
thousands):
Amount of
Property Mortgage Loan Cost of Land
Appletree Apartments $ 4,850 $ 650
Omaha, NE
Woodcroft Shopping Center
Durham, NC
Phase I 3,100 360
Phase II 1,235 140
-------- ------
$ 9,185 $1,150
======= ======
The interest rates on the mortgage loans range from 11% to 11.25% per annum.
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon the
gross revenues from the operating properties in excess of a base amount, as
defined. For the six months ended February 29, 1996, additional rent of
$17,000 was earned from the Woodcroft Shopping Center investment. For the six
months ended February 28, 1995, additional rent of $25,000 was earned from
the Woodcroft Shopping Center investment. The lessees have the option to
purchase the land for specified periods of time, as discussed in the Annual
Report, at a price based on fair market value, as defined, but in no event
less than the original cost to the Partnership. As of February 29, 1996, all
of the options to purchase the land underlying the above properties were
exercisable. The Partnership's investments are structured to share in the
appreciation in value of the underlying real estate. Accordingly, upon either
sale, refinancing, maturity of the mortgage or exercise of the option to
purchase the land, the Partnership will receive a 33% to 50% share of the
appreciation above a specified base amount.
During fiscal 1995, the Partnership received formal notice from the Appletree
borrower of its intent to prepay the Partnership's mortgage loan and
repurchase the underlying land. The 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 Appletree mortgage loan would require a
prepayment penalty which would be equal to 3.75% of the outstanding principal
balance if the transaction were to close prior to May 1996. Subsequent to
April 1996, the prepayment penalty declines to 2.5%. If completed, the
proceeds of this prepayment transaction would be distributed to the Limited
Partners. However, the prepayment transaction remains contingent on, among
other things, a resolution of the value issue and the borrower obtaining
sufficient financing to repay its obligations to the Partnership.
Accordingly, there are no assurances that this transaction will be
consummated.
<PAGE>
3. Investment Properties
As discussed in the Annual Report, the Partnership foreclosed under the terms
of the mortgage loan secured by Westside Creek Apartments on March 23, 1989
due to nonpayment of the required debt service. The Adviser has employed a
local property management company to conduct the day-to-day operations of the
property under the direction of the Managing General Partner. The property
consists of 142 units and is located in Little Rock, Arkansas. The net
carrying value of the Partnership's investment in the Westside Creek
Apartments, of $4,720,000, is classified as investment property held for sale
on the accompanying balance sheets as of February 29, 1996 and August 31,
1995.
The Partnership recognizes income from the operations of investment property
held for sale in the amount of the excess of the property's gross revenues
over the sum of property operating expenses (including capital improvement
costs), taxes and insurance. Summarized operating results of the Westside
Creek investment property for the three and six months ended February 29,
1996 and February 28, 1995 are as follows (in thousands):
Three Months Ended Six Months Ended
February 29/28, February 29/28,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental income $ 246 $ 233 $ 492 $ 471
Other income 7 9 15 17
----- ----- ----- -----
253 242 507 488
Expenses:
Property operating expenses 85 77 168 151
Property taxes and insurance 21 21 42 41
----- ----- ----- -----
106 98 210 192
----- ----- ----- -----
Income from operations, net $ 147 $ 144 $ 297 $ 296
===== ====== ===== ======
As discussed further in the Annual Report, an affiliate of the Partnership,
which held the mortgage and land lease on the Cordova Creek Apartments,
foreclosed on the property in fiscal 1990 due to nonpayment of the required
interest payments. The Partnership had held a 3.5% interest in the mortgage
loan and land investments through an agreement with this affiliate.
Subsequent to foreclosure, the Partnership recorded its investment at the net
combined carrying value of its previous interest in the land and mortgage
loan of $250,000. The Partnership's investment, which consisted of a 3.5%
equity ownership in the operations and eventual sales proceeds of the Cordova
Creek property, was accounted for on the cost method. The affiliate which
held title to the operating property sold the Cordova Creek Apartments to an
unaffiliated third party on April 12, 1995. The Partnership's share of the
net sales proceeds was approximately $311,000, resulting in a $61,000 gain
over the Partnership's cost basis of $250,000, which was recognized in the
third quarter of fiscal 1995. A special distribution of $42 per original
$1,000 investment, or $1,503,000, was made to Limited Partners on June 15,
1995, which represented approximately $9 from Cordova Creek net sale proceeds
and $33 as a distribution from cash reserves which were deemed to be in
excess of the Partnership's expected future requirements.
<PAGE>
4. Related Party Transactions
The Adviser earned basic management fees of $42,000 and $45,000 for the
six-month periods ended February 29, 1996 and February 28, 1995,
respectively. Accounts payable - affiliates at both February 29, 1996 and
August 31, 1995 consists of management fees of $18,000 payable to the
Adviser.
Included in general and administrative expenses for the six months ended
February 29, 1996 and February 28, 1995 is $78,000 and $89,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for each of the six
months ended February 29, 1996 and February 28, 1995 is $3,000, representing
fees earned by Mitchell Hutchins Institutional Investors, Inc. for managing
the Partnership's cash assets.
5. Contingencies
The Partnership is involved in certain legal actions. At the present time,
the Managing General Partner is unable to estimate the impact, if any, of
these matters on the Partnership's financial statements, taken as a whole.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Operations of the properties securing the Partnership's two remaining
mortgage loan investments remained strong during the first half of fiscal 1996
and continue to fully support the debt service and land rent payments owed to
the Partnership. Leasing levels at the Appletree Apartments and Woodcroft
Shopping Center were 97% and 100%, respectively, as of February 29, 1996. The
mortgage loans secured by the Appletree Apartments and Woodcroft Shopping Center
bear interest at annual rates of 11.00% and 11.25%, respectively. As previously
reported, since current market interest rates for first mortgage loans are
considerably lower than these rates, and with the continued availability of
credit in the capital markets for real estate transactions, the likelihood of
the Partnership's mortgage loan investments being prepaid has been high since
the time that the terms of such mortgage loans allowed for prepayment. The
Appletree loan became prepayable in April 1994. However, the Appletree loan
includes a prepayment premium for any prepayment between May 1994 and April 1998
at rates between 5% and 1.25% of the mortgage loan balance. The Woodcroft loan
became prepayable without penalty in December 1994. As discussed further below,
the borrowers on both of the outstanding loan investments have approached the
Partnership regarding potential prepayment transactions. While there are no
assurances that these borrowers will be able to finance such transactions in the
near term, if these transactions are completed the Partnership could be
positioned for a possible liquidation pending the disposition of the
wholly-owned Westside Creek Apartments.
During the 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 land investment and $720,000 as the Partnership's
share of the appreciation in value of the underlying property. During the
current quarter, however, the prospective buyer was unable to secure the
necessary financing to close the sale. As a result, the offer to purchase the
Partnership's land and repay the outstanding mortgage loan was withdrawn. It is
uncertain at this time whether the borrower will make another offer to prepay
the mortgage loan and purchase the underlying land during fiscal 1996.
As discussed in the Annual Report, during the last quarter of fiscal 1995,
the Partnership received notice from the Appletree borrower of its intent to
prepay the Partnership's mortgage loan and repurchase the underlying land. The
amount to be received by the Partnership under the terms of the ground lease as
its share of the appreciation of the Appletree property has not been agreed upon
to date. The terms of the ground lease provide for the possible resolution of
disputes between the parties over value issues through an arbitration process.
If an agreement cannot be reached, the borrower could require the Partnership to
submit to arbitration during fiscal 1996. In addition to the amount to be
determined as the Partnership's share of the property's appreciation under the
ground lease, the terms of the Appletree mortgage loan require a prepayment
penalty which would be equal to 3.75% of the outstanding principal balance of
$4,850,000 if the transaction were to close prior to May 1996. Subsequent to
April 1996, the prepayment penalty declines to 2.5%. If completed, the proceeds
of this transaction would be distributed to the Limited Partners. However, the
transaction remains contingent on, among other things, a resolution of the value
issue and the borrower obtaining sufficient financing to repay its obligations
to the Partnership. Accordingly, there are no assurances that this transaction
will be consummated.
At February 29, 1996, the Partnership had available cash and cash equivalents
of approximately $878,000. Such cash and cash equivalents will be used for
working capital requirements and for distributions to the partners. The source
of future liquidity and distributions to the partners is expected to be through
cash generated from the Partnership's real estate investments, repayment of the
mortgage loans receivable and the proceeds from the sales or refinancings of the
underlying land and the investment property. Such sources of liquidity are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis. However, to the extent that the potential loan prepayment and
land sale transactions discussed above are completed and the net proceeds are
returned to the Limited Partners, the Partnership's quarterly distribution rate
on remaining invested capital may have to be adjusted downward to reflect the
reduction in cash flows which would result from such transactions.
Results of Operations
Three Months Ended February 29, 1996
The Partnership's net income decreased by $17,000 for the three month
period ended February 29, 1996 when compared to the same period in the prior
year. The decrease in net income resulted from a decrease in the Partnership's
operating income of $20,000. Operating income decreased due to decreases in
interest earned on short-term investments and other income. Interest earned on
short-term investments decreased by $16,000 due to a decrease in the
Partnership's average outstanding cash reserve balances as a result of the
distribution to the Limited Partners of Partnership cash reserves that exceeded
future portfolio requirements during the fourth quarter of fiscal 1995. This
distribution was included with the distribution of the proceeds from the sale of
the Cordova Creek Apartments. Other income of $7,000 in the prior year
represented cash flow distributions from the Partnership's interest in the
Cordova Creek Apartments. No such amounts were received in the current quarter
as a result of the sale of the Cordova Creek Apartments in April 1995. In
addition, additional land rent revenue from the Woodcroft Shopping Center
decreased by $6,000 when compared to the same period in the prior year. The
decrease in the Partnership's operating income was partially offset by an
increase in the net income from the operations of the Westside Creek Apartments
of $3,000 mainly due to an increase in rental income.
Six Months Ended February 29, 1996
The Partnership's net income decreased by $38,000 for the six month period
ended February 29, 1996 when compared to the same period in the prior year. The
decrease in net income resulted from a decrease in the Partnership's operating
income of $39,000. Operating income decreased due to decreases in interest
earned on short-term investments and other income. Interest earned on short-term
investments decreased by $29,000 due to a decrease in the Partnership's average
outstanding cash reserve balances as a result of the distribution to the Limited
Partners of Partnership cash reserves that exceeded future portfolio
requirements during the fourth quarter of fiscal 1995. This distribution was
included with the distribution of the proceeds from the sale of the Cordova
Creek Apartments. Other income of $13,000 in the prior year represented cash
flow distributions from the Partnership's interest in the Cordova Creek
Apartments. No such amounts were received in the current six-month period as a
result of the sale of the Cordova Creek Apartments in April 1995. In addition,
additional land rent revenue from the Woodcroft Shopping Center decreased by
$8,000 when compared to the same period in the prior year. The decrease in the
Partnership's operating income for the current six-month period was partially
offset by an increase in the net income from the operations of the Westside
Creek Apartments of $1,000 mainly due to an increase in rental income.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, Third Qualified Properties, Inc. and Properties
Associates, the General Partners of the Partnership, were named as defendants in
a class action lawsuit against PaineWebber Incorporated ("PaineWebber") and a
number of its affiliates relating to PaineWebber's sale of 70 direct investment
offerings, including the offering of interests in the Partnership. In January
1996, PaineWebber signed a memorandum of understanding with the plaintiffs in
the class action outlining the terms under which the parties have agreed to
settle the case. Pursuant to that memorandum of understanding, PaineWebber
irrevocably deposited $125 million into an escrow fund under the supervision of
the United States District Court for the Southern District of New York to be
used to resolve the litigation in accordance with a definitive settlement
agreement and a plan of allocation which the parties expect to submit to the
court for its consideration and approval within the next several months. Until a
definitive settlement and plan of allocation is approved by the court, there can
be no assurance what, if any, payment or non-monetary benefits will be made
available to unitholders in PaineWebber Qualified Plan Property Fund Three, LP.
Under certain limited circumstances, pursuant to the Partnership Agreement and
other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the General Partners cannot estimate the impact, if any, of
this matter on the Partnership's financial statements, taken as a whole.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
By: THIRD QUALIFIED PROPERTIES, INC.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: April 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's interim financial statements for the quarter ended February 29,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 878
<SECURITIES> 0
<RECEIVABLES> 9270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1025
<PP&E> 5870
<DEPRECIATION> 0
<TOTAL-ASSETS> 16091
<CURRENT-LIABILITIES> 99
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15992
<TOTAL-LIABILITY-AND-EQUITY> 16091
<SALES> 0
<TOTAL-REVENUES> 910
<CGS> 0
<TOTAL-COSTS> 216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 694
<INCOME-TAX> 0
<INCOME-CONTINUING> 694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 694
<EPS-PRIMARY> 19.17
<EPS-DILUTED> 19.17
</TABLE>
