UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17147
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
November 30, 1996 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
November 30 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 1,019 973
Interest receivable 85 85
Tax and tenant security deposit escrows 38 71
Prepaid expenses 8 14
Deferred expenses, net 8 9
-------- --------
$ 16,213 $ 16,207
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 18 $ 18
Accounts payable and accrued expenses 55 113
Tenant security deposits 13 13
Partners' capital 16,127 16,063
-------- --------
$ 16,213 $ 16,207
======== ========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the three months ended November 30, 1996 and 1995
(Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1995 $ 10 $15,878
Net income 3 355
Cash distributions (3) (292)
------ -------
Balance at November 30, 1995 $ 10 $15,941
====== =======
Balance at August 31, 1996 $ 11 $16,052
Net income 4 355
Cash distributions (3) (292)
------ -------
Balance at November 30, 1996 $ 12 $16,115
====== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit amounts)
1996 1995
---- ----
Revenues:
Interest from mortgage loans $ 255 $ 255
Land rent 36 33
Interest earned on short-
term investments 12 10
------ ------
303 298
Expenses:
Management fees 21 21
General and administrative 60 68
Amortization of deferred expenses 1 1
------ -------
82 90
------ -------
Operating income 221 208
Income from operations of
investment property held
for sale, net 138 150
------- -------
Net income $ 359 $ 358
======= =======
Net income per Limited
Partnership Unit $9.93 $9.91
===== =====
Cash distributions per Limited
Partnership Unit $8.16 $8.16
===== =====
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 three months ended November 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 359 $ 358
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of deferred expenses 1 1
Changes in assets and liabilities:
Tax and tenant security deposit escrows 33 35
Prepaid expenses 6 4
Accounts payable and accrued expenses (58) (64)
--------- --------
Total adjustments (18) (24)
--------- --------
Net cash provided by operating activities 341 334
Cash flows from financing activities:
Distributions to partners (295) (295)
--------- --------
Net increase in cash and cash equivalents 46 39
Cash and cash equivalents, beginning of period 973 790
--------- --------
Cash and cash equivalents, end of period $ 1,019 $ 829
========= ========
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, 1996. In the
opinion of management, the accompanying financial statements, which have not
been audited, reflect all adjustments necessary to present fairly the results
for the interim period. All of the accounting adjustments reflected in the
accompanying interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of November 30, 1996 and August 31, 1996 and
revenues and expenses for the three months ended November 30, 1996 and 1995.
Actual results could differ from the estimates and assumptions used.
2. Mortgage Loan and Land Investments
----------------------------------
The outstanding first mortgage loans and the cost of the related land to the
Partnership at November 30, 1996 and August 31, 1996 are as follows (in
thousands):
Amount 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 three months ended November 30, 1996 and 1995, additional
rent of $4,000 and $1,000, respectively, was earned from the Woodcroft
Shopping Center investments. The lessees have the option to purchase the land
for specified periods of time, as discussed in the Annual Report, at a price
based on fair market value, as defined, but in no event less than the
original cost to the Partnership. As of November 30, 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.
Subsequent to November 30, 1996, Woodcroft's owner agreed upon sale terms
with a third-party buyer. The sale transaction closed on December 20, 1996.
As part of the transaction, the Partnership received $4,335,000 from the
Woodcroft borrower which represented the full repayment of the first
leasehold mortgage loan secured by the Woodcroft Shopping Center which
matured on December 17, 1996. Simultaneously, the Woodcroft borrower
purchased the Partnership's interest in the underlying land for the amount of
$500,000. In addition, under the terms of the ground lease, the Partnership
was entitled to a share of the property's appreciation. This resulted in a
participation payment to the Partnership of $650,000. In total, the
Partnership received $5,485,000 to close the transactions. As a result of
this transaction, the Partnership will make a special distribution of $153
per original $1,000 investment on January 15, 1997 to unitholders of record
as of December 20, 1996. This special distribution will be paid along with
the regular quarterly distribution for the quarter ended November 30, 1996.
Subsequent to the Woodcroft special distribution, the Partnership's
annualized distribution rate will be adjusted from 6.5% to 5.5% beginning
with the distribution for the quarter ending February 28, 1997, which will be
made on April 15, 1997.
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 reported that it had
secured the necessary financing to complete this transaction. However, 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. The
borrower could force the Partnership to submit to such an arbitration process
during fiscal 1997, although to date it has given no formal indication of an
intent to do so. In addition to the amount to be determined as the
Partnership's share of the property's appreciation under the ground lease,
the terms of the 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 June 1999. If completed, the proceeds of any prepayment
transaction would be distributed to the Limited Partners. However, a
prepayment transaction remains contingent on, among other things, a
resolution of the value issue. Accordingly, there are no assurances that a
transaction will be consummated.
As discussed further above, the Woodcroft loan was repaid 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
approximated their carrying values as of November 30, 1996 since the
estimated fair values of the collateral properties exceeded the principal
balances of the loans.
3. Related Party Transactions
--------------------------
The Adviser earned basic management fees of $21,000 for both of the
three-month periods ended November 30, 1996 and 1995. Accounts payable
affiliates at both November 30, 1996 and August 31, 1996 consists of
management fees of $18,000 payable to the Adviser.
Included in general and administrative expenses for the three months ended
November 30, 1996 and 1995 is $39,000 and $37,000, 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 the three months
ended November 30, 1996 and 1995 is $1,000 and $3,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
4. Investment Properties
---------------------
As discussed in the Annual Report, the Partnership foreclosed under the terms
of the mortgage loan secured by the 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 since
assuming ownership. 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 November 30,
1996 and August 31, 1996.
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 months ended November 30, 1996 and
1995 are as follows (in thousands):
1996 1995
---- ----
Revenues:
Rental income $ 234 $ 246
Other income 7 9
------- -------
241 255
Expenses:
Property operating expenses 82 84
Property taxes and insurance 21 21
------- -------
103 105
------- -------
Income from operations, net $ 138 $ 150
======= =======
5. Contingencies
-------------
As discussed in more detail in the Annual Report, the Partnership is involved
in certain legal actions. At the present time, the Managing General Partner
is unable to estimate the impact, if any, of these matters on the
Partnership's financial statements, taken as a whole.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Subsequent to November 30, 1996, the owner of the Woodcroft Shopping
Center agreed upon sale terms with a third-party buyer. The sale transaction
closed on December 20, 1996. As part of the transaction, the Partnership
received $4,335,000 from the Woodcroft borrower which represented the full
repayment of the first leasehold mortgage loan secured by the Woodcroft Shopping
Center which matured on December 17, 1996. Simultaneously, the Woodcroft
borrower purchased the Partnership's interest in the underlying land for the
amount of $500,000. In addition, under the terms of the ground lease, the
Partnership was entitled to a share of the property's appreciation. This
resulted in a participation payment to the Partnership of $650,000. In total,
the Partnership received $5,485,000 to close the transactions. As a result of
this transaction, the Partnership will make a special distribution of $153 per
original $1,000 investment on January 15, 1997 to unitholders of record as of
December 20, 1996. This special distribution will be paid along with the regular
quarterly distribution for the quarter ended November 30, 1996. Subsequent to
the Woodcroft special distribution, the Partnership's annualized distribution
rate will be adjusted from 6.5% to 5.5% beginning with the distribution for the
quarter ending February 28, 1997, which will be made on April 15, 1997.
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 had represented that it had
received the necessary financing to complete this transaction. However, the
amount to be received by the Partnership as its share of the appreciation in 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. The borrower could force the
Partnership to submit to such an arbitration process during fiscal 1997,
although to date it has given no formal indication of an intent to do so. In
addition to the amount to be determined as the Partnership's share of the
property's appreciation under the ground lease, the terms of the 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 June 1999. If completed, the proceeds of
any prepayment transaction would be distributed to the Limited Partners.
However, a prepayment transaction remains contingent on, among other things, a
resolution of the value issue, and the borrower has not pursued negotiation
efforts in recent months. Accordingly, there are no assurances that a
transaction will be consummated.
At the Partnership's wholly-owned multi-family residential property, Westside
Creek Apartments in Little Rock, Arkansas, the occupancy level averaged 86% for
the quarter, compared to 89% for the prior quarter. There have been unusually
high levels of tenant turnover at Westside Creek in recent quarters which can be
attributed to the opening of a nearby newly constructed 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. During the current quarter, 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 repayment of the Appletree
mortgage loan and related land sale, management believes that pursuing a current
sale of the Westside Creek property would be in the best interests of the
Limited Partners. A sale of Westside Creek and the disposition of the Appletree
investments would be followed by a liquidation of the Partnership. The
Partnership is in the process of finalizing a purchase and sale agreement with
the prospective buyer for Westside Creek and could close a sale transaction
during the third quarter of fiscal 1997. As with any negotiation, there can be
no assurance that a sale transaction will be completed.
At November 30, 1996, the Partnership had available cash and cash equivalents
of approximately $1,019,000. 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.
Results of Operations
Three Months Ended November 30, 1996
- ------------------------------------
The Partnership's net income increased by $1,000 for the three-month period
ended November 30, 1996 when compared to the same period in the prior year. The
change in net income is attributable to an increase in operating income of
$13,000 which was partially offset by a decrease in income from operations of
investment property held for sale of $12,000. Operating income increased due to
an increase in land rent income and a decrease in general and administrative
expenses. Land rent increased by $3,000 due to an increase in the additional
rent in excess of a specified base amount received from the Woodcroft Shopping
Center investment during the current quarter pursuant to the terms of the ground
lease. General and administrative expenses decreased by $8,000 mainly due to a
decrease in certain required professional fees.
The decrease in income from investment property held for sale of $12,000 is
primarily attributable to a decrease in rental income at the Westside Creek
Apartments. Rental income decreased due to a decrease in the property's average
occupancy level when compared to the same period in the prior year as a result
of the competitive conditions discussed further above.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
- -------------------------
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including 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 PaineWebber Qualified Plan
Property Fund Three, LP., PaineWebber, Third Qualified Properties, Inc. and
Properties Associates (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
PaineWebber Qualified Plan Property Fund Three, LP., also alleged that following
the sale of the partnership interests, PaineWebber, Third Qualified Properties,
Inc. and Properties Associates misrepresented financial information about the
Partnership's value and performance. The amended complaint alleged that
PaineWebber, Third Qualified Properties, Inc. and Properties Associates violated
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, 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 sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
Mediation with respect to the Abbate action was held in December 1996. As a
result of such mediation, a tentative settlement between PaineWebber and the
plaintiffs was reached which would provide for complete resolution of such
action. PaineWebber anticipates that releases and dismissals with regard to this
action will be received by February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
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: January 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended November 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 1,019
<SECURITIES> 0
<RECEIVABLES> 9,270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,150
<PP&E> 5,870
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,213
<CURRENT-LIABILITIES> 86
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,127
<TOTAL-LIABILITY-AND-EQUITY> 16,213
<SALES> 0
<TOTAL-REVENUES> 441
<CGS> 0
<TOTAL-COSTS> 82
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 359
<INCOME-TAX> 0
<INCOME-CONTINUING> 359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359
<EPS-PRIMARY> 9.93
<EPS-DILUTED> 9.93
</TABLE>
