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 DECEMBER 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 : 0-10979
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 .
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1996 and September 30, 1996
(Unaudited)
(In thousands)
ASSETS
December 31 September 30
----------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
----------- --------
5,038 5,038
Less accumulated depreciation (1,415) (1,389)
----------- --------
3,623 3,649
Investments in joint ventures, at equity 2,842 2,844
Cash and cash equivalents 987 1,000
Accounts receivable 99 99
Deferred expenses, net 47 53
Note and interest receivable, net - -
----------- ---------
$ 7,598 $ 7,645
=========== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 4 $ 4
Accrued expenses 37 60
Mortgage note payable 1,385 1,420
Partners' capital 6,172 6,161
----------- ---------
$ 7,598 $ 7,645
=========== =========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended December 31, 1995 and 1996
(Unaudited)
(In thousands)
General Limited
Partner Partners
-------- --------
Balance at September 30, 1995 $ (61) $5,619
Cash distributions (1) (105)
Net income 1 82
-------- ------
Balance at December 31, 1995 $ (61) $5,596
======== ======
Balance at September 30, 1996 $ - $6,161
Cash distributions (1) (105)
Net income 1 116
-------- -------
Balance at December 31, 1996 $ - $ 6,172
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the three months ended December 31, 1996 and 1995
(Unaudited)
(In thousands, except per Unit amounts)
1996 1995
---- ----
Revenues:
Rental revenues $ 119 $ 119
Interest income 14 4
------ -----
133 123
Expenses:
Interest expense 37 40
Management fees 4 4
Depreciation expense 26 25
General and administrative 40 88
------ -----
107 157
------ -----
Operating income (loss) 26 (34)
Partnership's share of ventures' income 91 117
------ -----
Net income $ 117 $ 83
====== =====
Net income per Limited Partnership Unit $5.37 $3.80
===== =====
Cash distributions per Limited
Partnership Unit $4.88 $4.88
===== =====
The above net income 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.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 117 $ 83
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation expense 26 25
Amortization of deferred financing costs 6 5
Partnership's share of ventures' income (91) (117)
Changes in assets and liabilities:
Interest and other receivables - -
Accounts payable and accrued expenses (23) (18)
------ -------
Total adjustments (82) (105)
------ -------
Net cash provided by (used in)
operating activities 35 (22)
Cash flows from investing activities:
Distributions from joint ventures 93 280
Cash flows from financing activities:
Distributions to partners (106) (106)
Principal payments on mortgage note payable (35) (31)
-------- --------
Net cash used in financing activities (141) (137)
-------- -------
Net (decrease) increase in cash and cash equivalents (13) 121
Cash and cash equivalents, beginning of period 1,000 296
-------- -------
Cash and cash equivalents, end of period $ 987 $ 417
======== =======
Cash paid during the period for interest $ 31 $ 35
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
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 September 30, 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 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 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 December 31, 1996 and September
30, 1996 and revenues and expenses for the three-month periods ended
December 31, 1996 and 1995. Actual results could differ from the estimates
and assumptions used.
2. Real Estate Investments
The Partnership directly owns one operating investment property (Northeast
Plaza) and has investments in two joint venture partnerships (three at
December 31, 1995) which own operating properties as more fully described
in the Partnership's Annual Report. On June 19, 1996, the joint venture
which owned the Camelot Apartments sold the operating investment property
to an unrelated third party for $15,150,000. The Partnership received net
sales proceeds of approximately $5.9 million after deducting closing costs,
the repayment of the outstanding first mortgage loans, the buyout of an
underlying ground lease and the co-venturers' share of the net proceeds.
The Partnership made a special distribution to the Limited Partners from
the Camelot sale proceeds of approximately $5.5 million, or $256 per
original $1,000 investment, on August 15, 1996. The remaining net proceeds
were added to the Partnership's cash reserves to provide for the potential
capital needs of the Partnership's three remaining investments. 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 two joint ventures for the three months
ended December 31, 1996 and the three joint ventures for the three months
ended December 31, 1995 are as follows:
<PAGE>
Condensed Combined Summary of Operations
For the three months ended December 31, 1996 and 1995
(in thousands)
1996 1995
---- ----
Rental revenues and expense
recoveries $ 949 $1,518
Interest and other income 4 46
-------- ------
953 1,564
Property operating expenses 389 695
Interest expense 333 430
Depreciation and amortization 126 208
------- ------
848 1,333
------- ------
Net income $ 105 $ 231
======= ======
Net income:
Partnership's share of combined
income $ 92 $ 142
Co-venturers' share of combined
income 13 89
------- ------
$ 105 $ 231
======= ======
Reconciliation of Partnership's Share of Operations
For the three months ended December 31, 1996 and 1995 (in thousands)
1996 1995
---- ----
Partnership's share of income,
as shown above $ 92 $ 142
Amortization of excess basis (1) (25)
------- --------
Partnership's share of
ventures' income $ 91 $ 117
======= ========
3. Note and Interest Receivable, Net
Note and interest receivable at December 31, 1996 and September 30, 1996
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 December 31, 1996 would be approximately $6,282,000. 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 December 31, 1996. 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.
<PAGE>
4. Related Party Transactions
Management fees earned by the Adviser totalled $4,000 for each of the
three-month periods ended December 31, 1996 and 1995. Accounts payable
affiliates at December 31, 1996 and September 30, 1996 consists of $4,000 of
management fees payable to the Adviser at both dates.
Included in general and administrative expenses for the three months ended
December 31, 1996 and 1995 is $16,000 and $18,000, 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 December 31, 1996 and September 30, 1996 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. The fair value of this mortgage note payable approximated its
carrying value as of December 31, 1996.
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. Mobil
investigated the leak 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 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 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 disagreed as to the extent of the indemnification and has refused to
compensate the Partnership for any of these damages. During the first
quarter of fiscal 1993, the Partnership filed suit in Federal Court 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. On April 28, 1995, Mobil was successful
in dismissing the action from the Federal Court system on jurisdictional
grounds. Subsequently, the Partnership filed an action in the Florida State
Court system. This action is for substantially all of the same claims and
utilizes the substantial discovery and trial preparation work already
completed for the Federal case. On November 14, 1996, the state court
granted the Partnership's Motion for Partial Summary Judgment as to
liability with regard to the Partnership's claims for damages. During fiscal
1996, the Partnership agreed to a mediation session with Mobil, which took
place on November 25, 1996, in an attempt to settle the case. A settlement
was not reached at the mediation, but discussions are continuing. If a
settlement is not reached, a jury trial is expected to commence by early
April 1997. The outcome of these legal proceedings cannot presently be
determined. Accordingly, the out-of-pocket costs, legal fees and related
expenses related to this situation have been expensed as incurred on the
Partnership's income statements and no estimate of any recoveries which
could result from this litigation have been recorded.
As discussed in more detail in the Annual Report for the year ended
September 30, 1996, the Partnership is involved in certain other legal
actions. At the present time, the General Partner is unable to determine
what impact, if any, the resolution of these matters may have on the
Partnership's financial statements, taken as a whole.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The operations of the Partnership's two joint venture investment
properties are stable and producing excess cash flow as of December 31, 1996.
The occupancy level at Pine Trail Shopping Center in West Palm Beach, Florida,
was 97% at the end of the quarter, unchanged from the previous quarter. Although
one 1,100 square foot tenant moved into the Center during the quarter, this
space represents less than one-half of one percent of the leasable area of the
Center. The property's leasing team had sought to lease the remaining 7,400
square foot vacant space at the Center to a single retailer, but could not
identify an appropriate tenant. As a result, the leasing team signed two new
leases during the quarter with smaller tenants that are expected to take
occupancy in part of this space in March 1997. One of these tenants, an
apartment rental service, signed a three-year lease for 926 square feet. The
other new lease is for 1,890 square feet with a financial services tenant that
has signed a ten-year lease. The property management team has initiated the
design and construction work necessary to prepare the space for these new
tenants. Additionally, the property's leasing staff is negotiating with another
prospective tenant that would add a restaurant to the Center.
At Central Plaza Shopping Center in Lubbock, Texas, the occupancy level
remained at 92% for the quarter. The property's leasing team is continuing its
efforts to lease the remaining vacant space in the Center. The city's occupancy
levels have improved during the last four years, and continued gradual
improvement in market conditions is expected to allow the leasing team to secure
tenants for the available space at Central Plaza. As previously reported, one of
the Center's restaurant tenants changed its theme from a traditional steak and
chicken American-style cuisine to a seafood menu and renovated its space at its
own expense. Since this change, the property's management team reports a
significant increase in the number of restaurant customers.
As previously reported, management believes that the Partnership's efforts
to sell or refinance the Northeast Plaza property have been impeded by potential
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 ground water in the vicinity of the station. Mobil investigated
the leak and is progressing with efforts to remedy the soil and ground water
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 ground water 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 disagreed as to the
extent of the indemnification and has refused to compensate the Partnership for
any of these damages. During the first quarter of fiscal 1993, the Partnership
filed suit in Federal Court against Mobil for breach of indemnity and property
damage. On April 28, 1995, Mobil was successful in dismissing the action from
the Federal Court system on jurisdictional grounds. Subsequently, the
Partnership filed an action in the Florida State Court system. This action is
for substantially all of the same claims and utilizes the substantial discovery
and trial preparation work already completed for the Federal case. On November
14, 1996, the state court granted the Partnership's Motion for Partial Summary
Judgment as to liability with regard to the Partnership's claims for
Partnership's damages. During fiscal 1996, the Partnership agreed to a mediation
session with Mobil, which took place on November 25, 1996, in an attempt to
settle the case. A settlement was not reached at the mediation, but discussions
are continuing. If a settlement is not reached, a jury trial is expected to
commence by early April 1997. The outcome of these legal proceedings cannot
presently be determined.
The Northeast Plaza property, which the Partnership master leases to a
local manager/operator, was 100% leased as of December 31, 1996. In November, a
10,000 square foot tenant moved, although its lease obligation continues until
April 1998. The property's leasing team has negotiated a new lease with a
replacement tenant which will occupy this 10,000 square foot space. This new
five-year lease is nearly finalized and the tenant is expected to move into the
space as soon as an acceptable termination agreement is reached with the
previous tenant.
<PAGE>
Each of the Partnership's three remaining properties are retail shopping
centers. The Partnership is likely to explore the potential for selling its
remaining investment properties during fiscal 1997. At the present time, real
estate values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. Currently, occupancy at all three of
the Partnership's retail shopping centers remains high and operations to date do
not appear to have been affected by this general trend. It remains unclear at
this time what impact, if any, this general trend will have on the future
operations and/or market values of the Partnership's retail properties. It is
possible that the current market conditions for retail properties in general
will affect the timing of the dispositions of the remaining investments. If
favorable sales opportunities are not available in the near term, the
Partnership may continue to hold the investments and, where necessary, obtain
assumable mortgage financing which would allow the Partnership the greatest
flexibility to pursue future sales opportunities when such market conditions
improve. The mortgage debt secured by the Pine Trail Shopping Center, which
bears interest at 12% per annum, contained a prohibition on prepayment until
November 1, 1996. This mortgage note is not scheduled to mature until January
2001. Nonetheless, management has been investigating whether a refinancing
transaction can be accomplished which would provide a more favorable interest
rate along with the desired assumability. At the present time, management of the
Partnership continues to work with the co-venture partner to identify potential
sources capable of providing the required financing.
At December 31, 1996, the Partnership had available cash and cash
equivalents of $987,000. 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
Three Months Ended December 31,1996
- -----------------------------------
The Partnership reported net income of $117,000 for the three months ended
December 31, 1996, as compared to net income of $83,000 for the same period in
the prior year. This $34,000 increase in net income is primarily attributable to
a $50,000 decrease in the Partnership's operating expenses and a $10,000
increase in interest income. Operating expenses declined mainly due to a
decrease in general and administrative expenses of $48,000. General and
administrative expenses decreased mainly as a result of a decline in certain
required professional services during the current three-month period. Interest
income increased due to an increase in the Partnership's average outstanding
cash balances during the current three-month period resulting from the retention
of a portion of the Camelot sale proceeds.
The Partnership's share of ventures' income decreased by $26,000 for the
three months ended December 31, 1996, partially offsetting the decrease in
general and administrative expenses and the increase in interest income. The
Partnership's share of ventures' income decreased mainly due to the inclusion of
the operating results of the Camelot Apartments, which was sold in June 1996, in
the prior year 's income. The Partnership's share of income from the Camelot
joint venture in the prior year was $88,000. Partially offsetting the inclusion
of the Camelot joint venture's operating results in the prior year's income was
an increase in the portion of the income allocated to the Partnership from the
Central Plaza joint venture. While net income increased by only $1,000 at
Central Plaza when compared to the same period in the prior year, the
Partnership's share increased by $28,000 as a result of the method of allocation
set forth in the joint venture agreement.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
The status of the litigation involving the Partnership and Mobil Oil
Corporation, as well as the litigation involving the Partnership's General
Partner and its affiliates, remains unchanged from what was reported in the
Annual Report on Form 10-K for the year ended September 30, 1996.
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 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: February 12, 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 December 31,
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> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 987
<SECURITIES> 0
<RECEIVABLES> 99
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,086
<PP&E> 7,880
<DEPRECIATION> 1,415
<TOTAL-ASSETS> 7,598
<CURRENT-LIABILITIES> 41
<BONDS> 1,385
0
0
<COMMON> 0
<OTHER-SE> 6,172
<TOTAL-LIABILITY-AND-EQUITY> 7,598
<SALES> 0
<TOTAL-REVENUES> 224
<CGS> 0
<TOTAL-COSTS> 70
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 117
<INCOME-TAX> 0
<INCOME-CONTINUING> 117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117
<EPS-PRIMARY> 5.37
<EPS-DILUTED> 5.37
</TABLE>
