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 JUNE 30, 1995
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 : 0-10979
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 13-3038189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1995 AND SEPTEMBER 30, 1994
(UNAUDITED)
ASSETS
June 30 September 30
Operating investment property, at cost:
Land $ 950,000 $950,000
Building and improvements 4,087,560 4,087,560
Less: accumulated depreciation (1,261,595) (1,184,954)
3,775,965 3,852,606
Investments in joint ventures, at equity 3,178,834 3,265,156
Cash and cash equivalents 236,573 216,546
Deferred expenses, net 79,109 94,931
$7,270,481 $7,429,239
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 4,220 $ 4,220
Accrued expenses 49,239 42,471
Mortgage note payable 1,579,258 1,666,815
Partners' capital 5,637,764 5,715,733
$7,270,481 $7,429,239
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
General Limited
Partners Partners
Balance at September 30, 1993 $ (57,821) $5,950,743
Cash distributions (3,167) (313,553)
Net income 533 52,781
BALANCE AT JUNE 30, 1994 $ (60,455) $5,689,971
Balance at September 30, 1994 $ (59,593) $5,775,326
Cash distributions (3,167) (313,553)
Net income 2,388 236,363
BALANCE AT JUNE 30, 1995 $ (60,372) $5,698,136
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 1995 1994
REVENUES:
Rental revenues $119,464 $119,464 $358,392 $358,392
Interest income 4,000 881 10,182 2,853
123,464 120,345 368,574 361,245
EXPENSES:
Interest expense 35,982 38,544 109,916 110,534
Management fees 4,220 4,220 12,660 12,660
Depreciation and
amortization expenses 30,821 30,821 92,463 81,915
General and administrative 170,983 100,787 380,818 332,251
242,006 174,372 595,857 537,360
Operating loss (118,542) (54,027) (227,283) (176,115)
Partnership's share of ventures'
income 110,475 134,222 466,034 229,429
NET INCOME (LOSS) $ (8,067) $ 80,195 $238,751 $53,314
Net income (loss) per Limited
Partnership Unit $(0.37) $3.68 $10.97 $ 2.45
Cash distributions per Limited
Partnership Unit $ 4.85 $4.85 $14.55 $14.55
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 21,550 Units of Limited Partnership Interest outstanding
for each period.
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
1995 1994
Cash flows from operating activities:
Net income $ 238,751 $ 53,314
Adjustments to reconcile net income to
net cash used for operating activities:
Depreciation and amortization 92,463 81,915
Partnership's share of ventures' income (466,034) (229,429)
Changes in assets and liabilities:
Accounts payable - affiliates - (24,276)
Accounts payable and accrued expenses 6,768 12,309
Default interest payable - (77,410)
Total adjustments (366,803) (236,891)
Net cash used for operating activities (128,052) (183,577)
Cash flows from investing activities:
Distributions from joint ventures 553,606 565,581
Additional investment in joint ventures (1,250) -
Net cash provided by investing activities 552,356 565,581
Cash flows from financing activities:
Distributions to partners (316,720) (316,720)
Proceeds from issuance of mortgage note payable - 1,722,000
Payment of loan fees and expenses - (105,479)
Principal payments on mortgage note payable (87,557) (1,712,895)
Net cash used for financing activities (404,277) (413,094)
Net increase (decrease) in cash and
cash equivalents 20,027 (31,090)
Cash and cash equivalents, beginning of period 216,546 159,133
Cash and cash equivalents, end of period $ 236,573 $128,043
Cash paid during the period for interest $ 109,916 $187,944
See accompanying notes.
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 September 30, 1994.
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 adjustments reflected in
the accompanying interim financial statements are of a normal recurring
nature.
2. Real Estate Investments
The Partnership directly owns one operating investment property (Northeast
Plaza) and has investments in three joint venture partnerships which own
operating properties as more fully described in the Partnership's Annual
Report. The joint ventures are accounted for by using the equity method
because the Partnership does not have a voting control interest in the
ventures. Under the equity method, the assets, liabilities, revenues and
expenses of the joint ventures do not appear in the Partnership's financial
statements. Instead, the investments are carried at cost adjusted for the
Partnership's share of the ventures' earnings, losses and distributions.
Summarized operating results of the three joint ventures for the three and
nine months ended June 30, 1995 and 1994 are as follows:
Condensed Combined Summary of Operations
For the three and nine months ended June 30, 1995 and 1994
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 1995 1994
Rental revenues and expense
recoveries $1,484,000 $1,451,000 $4,593,000 $4,363,000
Interest and other income 40,000 37,000 115,000 97,000
1,524,000 1,488,000 4,708,000 4,460,000
Property operating expenses 665,000 576,000 1,923,000 1,978,000
Interest expense 427,000 427,000 1,276,000 1,286,000
Depreciation and
amortization 212,000 223,000 637,000 667,000
1,304,000 1,226,000 3,836,000 3,931,000
NET INCOME $ 220,000 $ 262,000 $ 872,000 $ 529,000
Net income:
Partnership's share of
combined income $ 135,000 $ 159,000 $ 541,000 $ 304,000
Co-venturers' share of
combined income 85,000 103,000 331,000 225,000
$ 220,000 $ 262,000 $ 872,000 $ 529,000
Reconciliation of Partnership's Share of Operations
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 1995 1994
Partnership's share
of income,
as shown above $ 135,000 $159,000 $ 541,000 $304,000
Amortization of
excess basis (25,000) (25,000) (75,000) (75,000)
Partnership's share of
ventures' income $ 110,000 $134,000 $ 466,000 $229,000
3. Note and Interest Receivable, Net
Note and interest receivable at June 30, 1995 and September 30, 1994
consists of a $3,445,336 note received in connection with the Partnership's
sale of its joint venture interest in the Briarwood joint venture in
December of 1984. The note has been netted against deferred gain on the
sale of a like amount on the Partnership's balance sheet. The note bears
interest at 9% annually, matures on January 1, 2000 and is subordinated to a
first mortgage loan. Interest and principal payments on the note are
payable only to the extent of net cash flow from the properties sold, as
defined in the sale documents. Any interest not received will accrue
additional interest of 9% per annum. The Partnership's policy has been to
defer recognition of all interest income on the note until collected, due to
the uncertainty of its collectibility. To date, the Partnership has not
received any interest payments. Per the terms of the note agreement,
accrued interest receivable as of June 30, 1995 would be approximately
$5,103,000. Since the properties securing the note continue to generate
operating deficits and the Partnership's note receivable is subordinated to
other first mortgage debt, there is significant uncertainty as to the
collectibility of both the principal and accrued interest as of June 30,
1995. As a result, the portion of the remaining gain to be recognized,
which is represented by the note and accrued interest, has been deferred
until realized in cash.
4. Related Party Transactions
Management fees earned by the Adviser totalled $12,660 for each of the nine-
month periods ended June 30, 1995 and 1994. Accounts payable - affiliates
at June 30, 1995 and September 30, 1994 consists of $4,220 of management
fees payable to the Adviser at both dates.
Included in general and administrative expenses for the nine months ended
June 30, 1995 and 1994 is $55,015 and $64,206, respectively, representing
reimbursements to an affiliate of the General Partner for providing certain
financial, accounting and investor communication services to the
Partnership.
5. Mortgage Note Payable and Contingencies
The mortgage note payable at June 30, 1995 and September 30, 1994 is secured
by the Partnership's wholly-owned Northeast Plaza Shopping Center. On March
29, 1994, the Partnership refinanced the existing wraparound mortgage note
secured by Northeast Plaza, which had been in default for over two years,
with a new loan issued by the prior underlying first mortgage lender. The
new loan, in the initial principal amount of $1,722,000, has a term of five
years and bears interest at a fixed rate of 9% per annum. Monthly principal
and interest payments of approximately $21,900 are due until maturity in May
1999. The loan may be prepaid at anytime without penalty. Closing costs of
approximately $106,000 were paid out of the proceeds of the refinancing.
The refinancing was negotiated in conjunction with a restructuring of the
master lease that covers the Partnership's interest in Northeast Plaza. The
master lessee was also the holder of the wraparound mortgage. As part of
the refinancing, the wrap note holder applied withheld rental payments,
which totalled approximately $661,000, against the outstanding balance of
the wraparound mortgage.
Management believes that the Partnership's efforts to sell or refinance the
Northeast Plaza property have been impeded by potential buyer and lender
concerns of an environmental nature with respect to the property. During
1990, it was discovered that certain underground storage tanks of a Mobil
service station located adjacent to the shopping center had leaked and
contaminated the groundwater in the vicinity of the station. Since the time
that the contamination was discovered, Mobil Oil Corporation (Mobil) has
investigated the problem and is progressing with efforts to remedy the soil
and groundwater contamination under the supervision of the Florida
Department of Environmental Regulation, which has approved Mobil's remedial
action plan. During fiscal 1990, the Partnership had obtained an
indemnification agreement from Mobil in which Mobil agreed to bear the cost
of all damages and required clean-up expenses. Furthermore, Mobil
indemnified the Partnership against its inability to sell, transfer, or
obtain financing on the property because of the contamination.
As a result of the contamination of the groundwater at Northeast Plaza, the
Partnership has incurred certain damages, primarily related to the inability
to sell the property and to delays in the process of refinancing the
property's mortgage indebtedness. The Partnership has incurred significant
out-of-pocket and legal expenses in connection with such sale and
refinancing efforts. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil
has refused to compensate the Partnership for any of these damages. During
the first quarter of fiscal 1993, the Partnership filed suit against Mobil
for breach of indemnity and property damage. The Partnership is seeking
judgment against Mobil which would award the Partnership compensatory
damages, out-of-pocket costs, attorneys' fees and such other relief as the
court may deem proper. The discovery phase of the lawsuit is currently in
progress. On April 28, 1995, Mobil Oil Corporation was successful in
obtaining a Partial Summary Judgment which removed the case from the Federal
Court system. Subsequently, the Partnership has filed an action in the
Florida State Court system. This action is for substantially all of the
claims and utilizes the substantial discovery and trial preparation work
already completed for the Federal case. The outcome of these legal
proceedings cannot presently be determined.
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As discussed further in the Annual Report, management believes that the
Partnership's efforts to sell or refinance the Northeast Plaza property have
been impeded by potential buyer and lender concerns of an environmental nature
with respect to the property. During 1990, it was discovered that certain
underground storage tanks of a Mobil service station located adjacent to the
shopping center had leaked and contaminated the groundwater in the vicinity of
the station. Since the time that the contamination was discovered, Mobil has
investigated the problem and is progressing with efforts to remedy the soil and
groundwater contamination under the supervision of the Florida Department of
Environmental Regulation, which has approved Mobil's remedial action plan.
During fiscal 1990, the Partnership had obtained a formal indemnification
agreement from Mobil Oil Corporation in which Mobil agreed to bear the cost of
all damages and required clean-up expenses. Furthermore, Mobil indemnified the
Partnership against its inability to sell, transfer or obtain financing on the
property because of the contamination. As a result of the contamination of the
groundwater at Northeast Plaza, the Partnership has incurred certain damages,
primarily related to the inability to sell the property and to delays in the
process of refinancing the property's mortgage indebtedness. The wraparound
mortgage loan secured by the operating investment property was refinanced in
March 1994; almost 2 1/2 years after its originally scheduled maturity date of
September 1991. The Partnership has incurred significant out-of-pocket and
legal expenses in connection with such sale and refinancing efforts. Despite
repeated requests by the Partnership for compensation under the terms of the
indemnification agreement, Mobil has refused to compensate the Partnership for
its damages. During the first quarter of fiscal 1993, the Partnership filed
suit against Mobil for breach of indemnity and property damage. The Partnership
is seeking judgment against Mobil which would award the Partnership compensatory
damages, costs, attorneys' fees and such other relief as the Court may deem
proper. The discovery phase of the lawsuit is currently in progress. On April
28, 1995, Mobil Oil Corporation was successful in obtaining a Partial Summary
Judgment which removed the case from the Federal Court system. Subsequently,
the Partnership has filed an action in the Florida State Court system. This
action is for substantially all of the claims and utilizes the substantial
discovery and trial preparation work already completed for the Federal case.
The outcome of these legal proceedings cannot presently be determined.
The operations of the Partnership's three joint venture investment properties
are stable and producing excess cash flow as of June 30, 1995. At the Pine
Trail Shopping Center, the national restaurant chain which renovated a building
on an out-parcel at the property and opened for business during the first
quarter of fiscal 1995 is generating increased shopper traffic and new business
for the Center's other tenants. Road construction near the center has been
completed, and the traffic flow to Pine Trail has improved as a result. Pine
Trail maintained a 96% occupancy level as of June 30, 1995. The Pine Trail
Shopping Center has five out-parcels on the site, covering six acres, which have
been leased by the Pine Trail Partnership from third parties under five separate
ground leases since the inception of the joint venture. During the third
quarter of fiscal 1995, the joint venture completed its acquisition of one of
these out-parcels, containing 60,248 square feet, for the purchase price of
$350,000. This purchase price is significantly lower than the assessed value of
the out-parcel and comparable land sales in the area . This purchase was 100%
financed with a non-recourse first mortgage loan secured by the lease of the
free-standing restaurant located on the out-parcel. The loan bears interest at
the prime rate plus one-percent and requires monthly principal and interest
payments over a 5-year term. Management may seek to acquire the other out-
parcels at the Pine Trails property if favorable terms for such acquisitions can
be negotiated. Comprehensive ownership of all of the land underlying the
shopping center, if accomplished, should enhance the marketability of the
property under a sale scenario.
Occupancy at Camelot Apartments remained at 97% during the quarter ended June
30, 1995. The capital improvement program implemented at the property in 1994,
which included the continuation of a roof replacement process, has enabled the
property to increase occupancy levels and rental rates over the past year.
Given the current strength of the national real estate market with respect to
multi-family apartment properties, management plans to begin to actively market
this property for sale during the fourth quarter of fiscal 1995. The decision
as to whether to accept any offers which may result from these planned marketing
efforts will be based on an evaluation of the attractiveness of the offers
themselves and an assessment of the national and local market factors affecting
the appreciation potential of the property in the relatively near term.
Accordingly, there can be no assurances that a sale transaction will be
consummated in the near term. A portion of the property's cash flow will
continue to be reinvested in capital improvements for the property during the
remainder of fiscal 1995 in order to enhance the marketing efforts and maximize
the potential offer prices. A substantial portion of the venture's mortgage
debt is scheduled to mature in January 1996. Based on the strong operating
results that the Camelot property has consistently generated, management would
not expect to have any difficulty in refinancing the venture's debt obligation
prior to this scheduled maturity date. However, a sale of the property prior to
the loan maturity date, if completed, would save the venture the expenses
associated with a refinancing transaction.
As previously reported, the mortgage debt secured by Central Plaza was
scheduled to mature on December 1, 1994. During the first quarter, the venture
obtained an extension of the maturity date from the lender to January 1, 1995.
During the second quarter, the venture obtained a mortgage loan from a new
lender which enabled the venture to repay, in full, this maturing obligation.
The new loan, in the initial principal amount of $4,200,000, bears interest at a
rate of 10% per annum. Monthly payments of principal and interest of
approximately $37,000 are due until maturity in January 2002.
At June 30, 1995, the Partnership had available cash and cash equivalents of
approximately $237,000. Such cash and cash equivalents will be used for working
capital requirements and distributions to the partners. The source of future
liquidity and distributions to the partners is expected to be through cash
generated from the operations of the Partnership's income-producing investment
properties and proceeds received from the sale or refinancing of such properties
or sales of the Partnership's interests in such properties. Such sources of
liquidity are expected to be sufficient to meet the Partnership's needs on both
a short-term and long-term basis. In addition, the Partnership has a note
receivable that it received as a portion of the proceeds from the sale of its
interest in the Briarwood joint venture in fiscal 1985. The note and related
accrued interest receivable have been netted against a deferred gain of a like
amount on the accompanying balance sheet. The interest owed on the note
receivable is currently payable only to the extent that the related properties
generate excess net cash flow. To date, no payments have been received on the
note, which matures on January 1, 2000, and none are expected in the near
future. Since the operating properties continue to generate net cash flow
deficits and the Partnership's note receivable is subordinated to the existing
first mortgage debt, there is significant uncertainty as to the collectibility
of the principal and accrued interest. Proceeds, if any, received on the note
would represent a source of additional liquidity for the Partnership.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1995
The Partnership reported a net loss of approximately $8,000 for the three
months ended June 30, 1995 as compared to net income of approximately $80,000
for the same period in the prior year. This unfavorable change in net operating
results for the third quarter of fiscal 1995 is due to an increase in the
Partnership's operating loss of approximately $65,000 and a decrease in the
Partnership's share of ventures' income of approximately $24,000. Operating
loss increased as a result of an increase in general and administrative expenses
of approximately $70,000. General and administrative expenses increased mainly
due to additional expenditures incurred related to an independent valuation of
the Partnership's operating properties which was commissioned during fiscal 1994
in conjunction with management's ongoing refinancing efforts and portfolio
management responsibilities. In addition, legal expenses increased in the
current period as a result of the continued litigation against Mobil Oil
Corporation. The Partnership's share of ventures' income decreased as a result
of a decrease in net income at the Camelot Apartments. This decrease in net
income was due to a significant increase in repairs and maintenance expenses as
part of the joint venture's capital improvement program which began in the prior
year.
For the Nine Months Ended June 30, 1995
The Partnership's net income increased by approximately $185,000 for the nine
months ended June 30, 1995, when compared to the same period in the prior year,
due to an increase in the Partnership's share of ventures' income of
approximately $237,000. The Partnership's share of ventures' income increased
as a result of increases in rental income at all three of the Partnership's
joint ventures, with the largest increase of $133,000 at the Camelot Apartments.
Increases in average occupancy levels at the Central Plaza and Pine Trail
shopping centers and higher occupancy and rental rates at the Camelot Apartments
contributed to the improved joint venture operating results for the current
nine-month period. In addition, property operating expenses decreased at all
three properties primarily due to a decrease in general and administrative
expenses at the Camelot Apartments and a decrease in repairs and maintenance
expenses at the Pine Trail Shopping Center due to the completion of a major
capital improvement program in the prior year. The increase in the
Partnership's share of ventures' income was partially offset by an increase in
the Partnership's operating loss of approximately $51,000. Operating loss
increased due to an increase in general and administrative expenses of
approximately $49,000. General and administrative expenses increased mainly due
to the additional expenditures incurred related to the independent valuation of
the Partnership's operating properties and higher legal expenses resulting from
the continued litigation against Mobil Oil Corporation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in the Partnership's quarterly report on Form 10-Q for the
period ended March 31, 1995, 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. On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.
Refer to the description of the claims in the prior quarterly report for further
information. The General Partner continues to believe that the action will be
resolved without material adverse effect on the Partnership's financial
statements, taken as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
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 INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
By: THIRD INCOME PROPERTIES, INC.
General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: August 11, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's interim financial statements for the nine months ended June 30,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 236,573
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 236,573
<PP&E> 8,216,394
<DEPRECIATION> (1,261,595)
<TOTAL-ASSETS> 7,270,481
<CURRENT-LIABILITIES> 53,459
<BONDS> 1,579,258
<COMMON> 0
0
0
<OTHER-SE> 5,637,764
<TOTAL-LIABILITY-AND-EQUITY> 7,270,481
<SALES> 0
<TOTAL-REVENUES> 834,608
<CGS> 0
<TOTAL-COSTS> 485,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,916
<INCOME-PRETAX> 238,751
<INCOME-TAX> 0
<INCOME-CONTINUING> 238,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,751
<EPS-PRIMARY> 10.97
<EPS-DILUTED> 10.97
</TABLE>
