UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 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: 0-10979
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 13-3038189
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
December 3, 1980, as supplemented
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
1996 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-5
PART II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-5
PART III
Item 10 Directors and Principal Executive Officers of
the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
SIGNATURES IV-2
INDEX TO EXHIBITS IV-3
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA F-1 to F-32
<PAGE>
PART I
Item 1. Business
Paine Webber Income Properties Three Limited Partnership (the
"Partnership") is a limited partnership formed in June 1980 under the Uniform
Limited Partnership Act of the State of Delaware for the purpose of investing in
a diversified portfolio of existing income-producing properties including
shopping centers and apartment complexes. The Partnership sold $21,550,000 in
Limited Partnership units (the "Units"), representing 21,550 Units at $1,000 per
unit, during the offering period pursuant to a Registration Statement on Form
S-11 filed under the Securities Act of 1933 (Registration No. 2-68360). Limited
Partners will not be required to make any additional contributions.
The Partnership originally invested the net proceeds of the public
offering, either directly or through joint venture partnerships, in six
operating properties. As discussed below, through September 30, 1996 three of
the operating properties had been sold, including one during fiscal 1996. As of
September 30, 1996, the Partnership owned, directly or through joint venture
partnerships, the properties or interests in the properties set forth in the
following table:
<TABLE>
Name of Joint Venture Date of
Name and Type of Property Acquisition of Type of
Location Size Interest Ownership (1)
- ------------------------------------- ---- ---------- -------------
<S> <C> <C> <C>
Boyer Lubbock Associates 151,857 6/30/81 Fee ownership of land
Central Plaza Shopping Center gross and improvements
Lubbock, Texas leasable (through joint venture).
sq. ft.
Northeast Plaza Shopping Center 121,005 9/25/81 Fee ownership of land
Sarasota, Florida gross and improvements subject
leasable to a master lease.
sq. ft.
Pine Trail Partnership 266,042 11/12/81 Fee ownership of
Pine Trail Shopping Center gross improvements and 23
West Palm Beach, Florida leasable acres of land (through
sq. ft. joint venture).Approximately
4 acres of land is subject
to ground leases.
</TABLE>
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the long-term mortgage indebtedness secured by the
Partnership's operating property investments and for a description of the
agreements through which the Partnership has acquired these real estate
investments.
The Partnership previously had investment interests in the Briarwood Joint
Venture, which owned the Briarwood Apartments and Gatewood Apartments in Bucks
County, Pennsylvania, and Camelot Associates, which owned the Camelot Apartments
in Fairfield, Ohio. On December 20, 1984, the Partnership sold its investment in
the Briarwood Joint Venture for cash of $7,490,000 and a note receivable. See
Note 6 to the financial statements of the Partnership accompanying this Annual
Report for a further discussion of this transaction. On June 19, 1996, Camelot
Associates sold Camelot Apartments 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 two outstanding first mortgage loans,
the buyout of an underlying ground lease and the co-venturers' share of the net
proceeds. See Note 5 to the financial statements of the Partnership accompanying
this Annual Report for a further discussion of this transaction.
<PAGE>
The Partnership's investment objectives are to:
(1) provide the Limited Partners with cash distributions which, to some extent,
will not constitute taxable income;
(2) preserve and protect Limited Partners' capital;
(3) achieve long-term appreciation in the value of its properties; and
(4) provide a build up of equity through the reduction of mortgage loans on
its properties.
Through September 30, 1996, the Limited Partners had received cumulative
cash distributions totalling approximately $27,744,000, or approximately $1,314
per original $1,000 investment for the Partnership's earliest investors. Of the
total distributions, approximately $7,623,000, or approximately $354 per
original $1,000 investment, represents proceeds from the sale of the Briarwood
and Gatewood Apartments in fiscal 1985 and approximately $5,517,000, or $256 per
original $1,000 investment, represents proceeds from the sale of the Camelot
Apartments in fiscal 1996. The remaining distributions have been made from the
net operating cash flow of the Partnership. A substantial portion of such
distributions has been sheltered from current taxable income. The Partnership is
currently paying quarterly distributions of excess cash flow at the rate of 3%
per annum on a remaining capital account balance of $390.25 per original $1,000
investment. In addition, the Partnership retains its ownership interest in three
of its six original investment properties. The Partnership's success in meeting
its capital appreciation objective will depend upon the proceeds received from
the final liquidation of its remaining investments. The amount of such proceeds
will ultimately depend upon the value of the underlying investment properties at
the time of their final disposition, which cannot presently be determined. 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
remain high and operations to date do not appear to have been affected by this
general trend.
As discussed further in the notes to the financial statements, 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. Since the time that the contamination was discovered, Mobil has
investigated the problem 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
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. On April 28, 1995, Mobil was successful in
obtaining a Partial Summary Judgment which removed the case from the Federal
Court system. 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 agree on the amount of the damages. 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 sometime in early April 1997.
The Partnership's three remaining operating properties are all retail
shopping centers which are located in real estate markets in which they face
significant competition for the revenues they generate. The shopping centers
compete for long-term retail tenants with numerous projects of similar type
generally on the basis on location, rental rates, tenant mix and tenant
improvement allowances.
The Partnership has no real estate investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment, therefore, presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an Advisory
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The General Partner of the Partnership is Third Income Properties, Inc. (the
"General Partner"), a wholly-owned subsidiary of PaineWebber. Subject to the
General Partner's overall authority, the business of the Partnership is managed
by the Adviser.
The terms of transactions between the Partnership and affiliates of the
General Partner of the Partnership are set forth in Items 11 and 13 below to
which reference is hereby made for a description of such terms and transactions.
Item 2. Properties
As of September 30, 1996, the Partnership owned one property directly and
owned interests in two operating properties through joint venture partnerships.
Such properties are referred to under Item 1 above to which reference is made
for the name, location and description of each property.
Occupancy figures for each fiscal quarter during 1996, along with an average
for the year, are presented below for each property:
Percent Leased At
-------------------------------------------------
Fiscal
1996
12/31/95 3/31/96 6/30/96 9/30/96 Average
-------- ------- ------- ------- -------
Camelot Apartments (1) 91% 89% N/A N/A N/A
Central Plaza 96% 89% 92% 92% 93%
Northeast Plaza Shopping
Center 100% 100% 100% 100% 100%
Pine Trail Shopping Center 95% 96% 97% 97% 96%
(1) Property was sold on June 19, 1996.
Item 3. Legal Proceedings
As further discussed in Item 7, during fiscal 1993 the Partnership filed
suit against Mobil Oil Corporation because of Mobil's failure to compensate the
Partnership under the terms of an indemnification agreement between the parties
related to the soil and ground water contamination affecting the Partnership's
Northeast Plaza Shopping Center investment. 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 ground water 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
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
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. On April 28, 1995, Mobil 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 same claims and
utilizes the substantial discovery and trial preparation work already completed
for the Federal case. 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. 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 agree on the amount of the damages. 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 sometime in
early April 1997. The outcome of these legal proceedings cannot presently be
determined.
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 Income Properties, Inc., which is a
General Partner of the Partnership and an affiliate of PaineWebber. On May 30,
1995, the court certified class action treatment of the claims asserted in the
litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Income Properties
Three Limited Partnership, PaineWebber, Third Income Properties, Inc. failed to
provide adequate disclosure of the risks involved; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs, who purported to be suing on
behalf of all persons who invested in Paine Webber Income Properties Three
Limited Partnership, also alleged that following the sale of the partnership
interests, PaineWebber and Third Income Properties, Inc. misrepresented
financial information about the Partnership's value and performance. The amended
complaint alleged that PaineWebber and Third Income Properties, Inc. 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 June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's 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 Bandrowski action described above 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 a complete
resolution of the 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 Partner
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1996, there were 1,584 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for Units will develop. The General Partner will not redeem
or repurchase Units.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1996.
Item 6. Selected Financial Data
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
(IN THOUSANDS, EXCEPT PER UNIT DATA)
Years Ended September 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 562 $ 492 $ 483 $ 483 $ 491
Operating loss $ (80) $ (246) $ (197) $ (154) $ (229)
Partnership's share
of ventures' income $ 696 $ 510 $ 442 $ 332 $ 351
Partnership's share
of gain on sale of
operating investment
property $ 5,926 - - - -
Net income $ 6,542 $ 264 $ 245 $ 178 $ 122
Per Limited
Partnership Unit:
Net income $300.56 $ 12.14 $ 11.26 $ 8.16 $ 5.61
Cash distributions
from operations $ 19.40 $ 19.40 $ 19.40 $ 19.40 $ 38.80
Cash distributions
from sale
transactions $256.00 - - - -
Total assets $ 7,645 $ 7,151 $ 7,429 $ 8,271 $ 8,537
Mortgage note payable $ 1,420 $ 1,549 $ 1,667 $ 2,245 $ 2,276
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the
21,550 Limited Partnership Units outstanding during each year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership offered limited partnership interests to the public from
December 1980 to December 1981 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $21,550,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
approximately $18,802,000 was originally invested in six operating investment
properties, comprised of three multi-family apartment complexes and three retail
shopping centers. Through September 30, 1996, the three multi-family apartment
properties have been sold, including one during fiscal 1996. Of the three
remaining retail properties, two are owned through joint venture partnerships
and one is owned directly. At the present time, the Partnership does not have
any commitments for additional capital expenditures or investments but may be
called upon to advance funds to its existing investments to pay for its share of
certain required capital improvement expenses.
As previously reported, given the current state of the national real
estate market with respect to multi-family apartment properties, management
began to actively market the Camelot Apartments for sale to prospective third
party buyers during the second quarter of fiscal 1996. In addition, the
Partnership had engaged in preliminary discussions with its Camelot co-venture
partners regarding the possible sale of the Partnership's interest in the
Camelot joint venture. In accordance with the terms of the joint venture
agreement, the co-venturers had the right to match any third party offer
obtained to buy the property. After widely marketing the property for sale, 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 two 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. As a result of
the sale of the Camelot property at a substantial gain on the Partnership's
original investment, the return of the capital proceeds to the Limited Partners
and the replenishing of the Partnership's cash reserve balances, management
increased the Partnership's distribution rate for operating cash flow
distributions in future quarters. Effective for the distribution made on
November 15, 1996 for the quarter ended September 30, 1996, the distribution
rate increased from 3% to 5% per annum on the $390.25 remaining portion of a
Limited Partner's original $1,000 investment.
The operations of the Partnership's two joint venture investment
properties are stable and producing excess cash flow as of September 30, 1996.
The occupancy level at Pine Trail Shopping Center in West Palm Beach, Florida,
improved to 97% at fiscal year-end 1996, up from 96% at the end of 1995. In the
first quarter of fiscal year 1996, two tenants left the Center creating
approximately 11,200 square feet of newly available space. Six new tenants took
occupancy during the fiscal year for a total of 12,600 square feet. In addition,
the property's leasing agents were able to extend or renew the leases of three
existing tenants, including the national retailer Marshalls. These tenants
occupy a total of approximately 37,000 square feet, or 13% of the Center's
leasable area, and each committed to a five-year extension/renewal of their
lease. Property improvements completed during the year included resurfacing of
the parking areas in front of the Center's anchor tenants and installing a new
roof on a 12,000 square foot portion of the Center. Additionally, during the
year two tenants, at their own expense, completed extensive renovations to their
spaces, showing continuing commitment to long-term tenancy at the Center.
Subsequent to the end of the fourth quarter, the property's leasing team signed
a lease with a new tenant for 1,100 square feet, leaving only one vacant shop
space at the Center. This 7,400 square foot vacancy continues to attract
interest from potential tenants. However, the leasing plan is to rent the entire
space to a single tenant which would be expected to attract additional shoppers
to the area. The leasing team is continuing its efforts to interest potential
tenants fitting this profile. Five of the Center's smaller tenant leases,
representing a total of 8,645 square feet, are scheduled to expire in fiscal
1997.
At Central Plaza Shopping Center in Lubbock, Texas, the occupancy level
was 92% as of September 30, 1996, unchanged from its level of one year ago.
During the year, two tenants that occupied a total of 12,125 square feet left
the Center. However, the property's leasing agents were successful in signing
three new leases with tenants that now occupy a total of 11,250 square feet. In
addition, the property's leasing team extended the 5,600 square foot lease of an
existing tenant by negotiating an amendment that resulted in a higher effective
rental rate. In the fourth fiscal quarter, the Partnership and its joint venture
partner contracted for the services of a new leasing and management company to
represent the property. It is anticipated that the new firm's contacts and
experience will stimulate new leasing activity for the remaining vacant spaces
at the Center. None of the Center's existing leases expire before January 1999.
Subsequent to the end of the fiscal year, one of the Center's restaurant tenants
completed extensive renovations at its own expense and changed its theme to a
seafood menu from American-style cuisine. The changes are expected to increase
traffic at the Center. Property improvements completed during the fiscal year
included roof replacement above the spaces occupied by the Center's anchor
tenants and the restriping of the parking lot.
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. Since the time
that the contamination was discovered, Mobil has investigated the problem 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 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. On April 28, 1995, Mobil was successful in obtaining a Partial Summary
Judgment which removed the case from the Federal Court system. 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 agree on the amount of
the damages. 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
sometime in 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% occupied as of September 30,
1996. Leases with three tenants occupying 3,300 square feet of space are
scheduled to expire in fiscal 1997.
Each of the Partnership's three remaining properties are retail shopping
centers. 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
remain 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 continues to work to identify potential sources
capable of providing the required financing.
At September 30, 1996, the Partnership had available cash and cash
equivalents of $1,000,000. 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
1996 Compared to 1995
- ---------------------
The Partnership's net income increased by $6,278,000 during fiscal 1996,
when compared to the prior year. The substantial increase in the Partnership's
net income for the current fiscal year is primarily the result of the
Partnership's share of the gain from the sale of the Camelot Apartments, as
discussed above. The gain recognized by the Camelot joint venture totaled
$12,089,000 and the Partnership's share of such gain amounted to $5,926,000, net
of the write-off of the unamortized balance of the Partnership's excess basis in
the Camelot joint venture of $1,506,000. In addition, the Partnership's share of
ventures' operating income increased by $186,000, when compared to the prior
year. The Partnership's share of ventures' operating income increased primarily
due to an increase in the portion of the income allocated to the Partnership
from the Central Plaza joint venture. The joint venture's income allocation
primarily follows the allocation of cash distributions. The Partnership was
allocated 100% of the cash distributions from Central Plaza during fiscal 1996
as compared to approximately 60% of cash distributions during the prior year.
While fiscal 1996 net income increased by only $65,000 at Central Plaza, the
Partnership's share of the venture's income increased by $224,000. Net income at
Central Plaza increased in fiscal 1996 primarily due to an increase in revenues
resulting from higher average rental rates. The increase in the Partnership's
share of venture's income from Central Plaza was partially offset by a decrease
in operating income from the Camelot Apartments due to the sale of the property
on June 19, 1996.
A decrease in the Partnership's operating loss of $166,000 also
contributed to the increase in net income in fiscal 1996. Operating loss
decreased due to an increase in interest income of $70,000 and a decrease in
general and administrative expenses of $85,000. Interest income increased due to
the higher average outstanding cash balances resulting from the temporary
investment of the Camelot sale proceeds pending the special distribution to the
Limited Partners which occurred on August 15, 1996. General and administrative
expenses decreased primarily as a result of incremental expenses incurred in the
prior year relating to an independent valuation of the Partnership's operating
properties.
1995 Compared to 1994
- ---------------------
The Partnership's net income increased by $19,000 during fiscal 1995, when
compared to fiscal 1994, mainly due to an increase in the Partnership's share of
ventures' income of $68,000 which was partially offset by an increase in the
general and administrative expenses of $51,000. General and administrative
expenses increased mainly due to increased legal and appraisal costs resulting
from the continued litigation against Mobil Oil Corporation, as discussed
further above. The Partnership's share of ventures' income increased primarily
due to an increase in net income at the Pine Trail joint venture. Net income at
Pine Trail increased as a result of an increase in rental income due to higher
average occupancy rates when compared to fiscal 1994. The Pine Trails Shopping
Center had an average occupancy level of 96% for fiscal 1995, as compared to 93%
for fiscal 1994. The Partnership's share of ventures' income also increased
because the Partnership was allocated a higher percentage of the net income from
the Camelot joint venture when compared to fiscal 1994. Although net income
decreased slightly at Camelot as a result of an increase in maintenance
expenses, the Partnership was allocated a larger percentage of the net income
due to the method of allocation specified in the joint venture agreement. The
increase in the Partnership's share of income from the Pine Trail and Camelot
joint ventures was partially offset by a decrease in the Partnership's share of
income from Central Plaza. Net income was down at Central Plaza as a result of a
decline in average occupancy compared to fiscal 1994. Occupancy at Central Plaza
declined from 96% for fiscal 1994 to 93% for fiscal 1995 mainly due to a 6,000
square foot tenant that vacated the property in the second quarter of fiscal
1995.
1994 Compared to 1993
- ---------------------
The Partnership's net income increased by $67,000 during fiscal 1994 when
compared to fiscal 1993. The increase was the result of an increase in the
Partnership's share of ventures' income of $111,000 and a decrease in interest
expense of $90,000 as a result of the March 1994 refinancing of the Northeast
Plaza note payable. The Partnership's share of ventures' income increased mainly
due to an increase in net income at the Pine Trail Shopping Center. Net income
at Pine Trail increased as a result of an increase in rental revenues and a
decrease in operating expenses. Rental revenues increased mainly due to an
increase in the average occupancy of the center for fiscal 1994 versus fiscal
1993. Property operating expenses decreased as a result of an improvement
program which took place in fiscal 1993 and resulted in higher than normal
repairs and maintenance expenses in that year. The net operating results of the
Central Plaza joint venture also improved slightly during fiscal 1994 due to a
modest increase in rental revenues. The net operating income of the Camelot
joint venture decreased slightly in fiscal 1994 as revenues remained flat while
certain property operating expenses increased over fiscal 1993. Interest expense
decreased in fiscal 1994 as a result of the accrual of default interest during
fiscal 1993 while the Northeast Plaza refinancing efforts were in process. These
favorable changes in net income were partially offset by an increase in the
Partnership's general and administrative expenses. The higher general and
administrative expenses in fiscal 1994 reflected an increase in legal fees in
connection with the ongoing Mobil litigation referred to above, as well as
certain additional costs related to an independent valuation of the
Partnership's operating properties which was in process in conjunction with
management's ongoing refinancing and portfolio management responsibilities.
Inflation
- ---------
The Partnership completed its fifteenth full year of operations in fiscal
1996 and the effects of inflation and changes in prices on revenues and expenses
to date have not been significant.
Inflation in future periods may increase revenues, as well as operating
expenses, at the Partnership's operating investment properties. The master lease
on the Partnership's wholly-owned retail shopping center requires the lessee to
pay all of the expenses associated with operating the property. Furthermore,
many of the existing leases with tenants at the Partnership's two joint venture
owned retail shopping centers contain rental escalation and/or expense
reimbursement clauses based on increases in tenant sales or property operating
expenses. Such increases in rental income would be expected to at least
partially offset the corresponding increases in Partnership and property
operating expenses caused by future inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of
this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Principal Executive Officers of the Partnership
The General Partner of the Partnership is Third Income Properties, Inc., a
Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The
General Partner has overall authority and responsibility for the Partnership's
operations, however, the day-to-day business of the Partnership is managed by
the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the General Partner of the Partnership are as follows:
Date
elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President
and Chief Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and
Assistant Treasurer 54 6/13/80 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors or
officers of the General Partner of the Partnership. All of the foregoing
directors and executive officers have been elected to serve until the annual
meeting of the General Partner.
(e) All of the directors and officers of the General Partner hold similar
positions in affiliates of the General Partner, which are the corporate general
partners of other real estate limited partnerships sponsored by PWI, and for
which Paine Webber Properties Incorporated serves as the Adviser. The business
experience of each of the directors and principal executive officers of the
General Partner is as follows:
Bruce J. Rubin is President and Director of the General Partner. Mr.
Rubin was named President and Chief Executive Officer of PWPI in August
1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in
November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr.
Rubin was employed by Kidder, Peabody and served as President for KP Realty
Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior
Vice President and Director of Direct Investments at Smith Barney Shearson.
Prior thereto, Mr. Rubin was a First Vice President and a real estate workout
specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman
Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie
Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and
Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher
previously worked for a major law firm in New York City. He has a J.D. from
Harvard Law School, an M.B.A. from Harvard Graduate School of Business
Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the General Partner and Senior Vice President and Chief Financial Officer of the
Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the
acquisition of Rotan Mosle, Inc. where he had been First Vice President and
Controller since 1978, and where he continued until joining the Adviser. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
David F. Brooks is a First Vice President and Assistant Treasurer of the
General Partner and a First Vice President and an Assistant Treasurer of the
Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr.
Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also,
from March 1974 to February 1980, the Assistant Treasurer of Capital for Real
Estate, which provided real estate investment, asset management and consulting
services.
Timothy J. Medlock is a Vice President and Treasurer of the General Partner
and Vice President and Treasurer of the Adviser which he joined in 1986. From
June 1988 to August 1989, Mr. Medlock served as the Controller of the General
Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with
Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983
and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President of the General Partner and a Vice
President and Manager of Financial Reporting of the Adviser which he joined
in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young &
Company. Mr. Boland is a Certified Public Accountant licensed in the state
of Massachusetts. He holds a B.S. in Accounting from Merrimack College and
an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of her or his ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended September 30, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's General Partner receive no
current or proposed remuneration from the Partnership. The Partnership is
required to pay certain fees to the Adviser, and the General Partners are
entitled to receive a share of cash distributions and a share of profits or
losses. These items are described under Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 3% to 6% per annum on remaining invested
capital over the past five years. However, the Partnership's Units of Limited
Partnership Interest are not actively traded on any organized exchange, and no
efficient secondary market exists. Accordingly, no accurate price information is
available for these Units. Therefore, a presentation of historical Unitholder
total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
General Partner, Third Income Properties, Inc. is owned by PaineWebber. No
limited partner is known by the Partnership to own beneficially more than 5% of
the outstanding interests of the Partnership.
(b) Neither officers and directors of the General Partner nor the general
partners of the Associate General Partner, individually, own any Units of
limited partnership interest of the Partnership. No director or officer of the
General Partner, possesses a right to acquire beneficial ownership of Units of
limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partner of the Partnership is Third Income Properties, Inc.
(the "General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc.
("PaineWebber"). Subject to the General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties Incorporated
(the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber. The General Partner, the Adviser and PWI receive fees and
compensation, determined on an agreed-upon basis, in consideration of various
services performed in connection with the sale of the Units, the management of
the Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with investing Partnership Capital, the Adviser received
acquisition fees of 9% of the gross proceeds from the sale of Partnership Units.
In connection with the sale of each property, the Adviser may receive a
disposition fee, payable upon liquidation of the Partnership, in an amount equal
to 3/4% of the selling price of the property, subordinated to the payment of
certain amounts to the Limited Partners.
All distributable cash, as defined, for each fiscal year is distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partner. All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the Partnership
Agreement. In accordance with the Partnership Agreement, the General Partner has
not received any sale or refinancing proceeds to date.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss from operations of the Partnership will be allocated 99% to the Limited
Partners and 1% to the General Partner. Taxable income or tax loss arising from
a sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partner in proportion to the amounts of sale or
refinancing proceeds to which they are entitled provided that the General
Partner will be allocated at least 1% of taxable income arising from a sale or
refinancing. If there are no sale or refinancing proceeds, taxable income or tax
loss from a sale or refinancing will be allocated 99% to the Limited Partners
and 1% to the General Partner. Allocations of the Partnership's operations
between the General Partner and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer the day-to-day operations of the Partnership,
and to report periodically the performance of the Partnership to the General
Partners. The Adviser is paid a basic management fee (4% of Adjusted Cash Flow,
as defined) and an incentive management fee (5% of Adjusted Cash Flow
subordinated to a noncumulative annual return to the Limited Partners equal to
6% based upon their adjusted capital contribution) for services rendered. The
Adviser earned basic management fees of $17,000 for the year ended September 30,
1996. No incentive management fees were earned during the year ended September
30, 1996.
An affiliate of the General Partner performs certain accounting, tax
preparation, securities law compliance and investor communications and relations
services for the Partnership. The total costs incurred by this affiliate in
providing such services allocated among several entities, including the
Partnership. Included in general and administrative expenses for the year ended
September 30, 1996 is $68,000, representing reimbursements to this affiliate for
providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $2,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1996. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this report.
(b) No Current Reports on Form 8-K were filed during the last quarter of
fiscal 1996.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
See (a) (1) and (2) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES
LIMITED PARTNERSHIP
By: Third Income Properties, Inc.
General Partner
By: /s/ Bruce J. Rubin
---------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President
Dated: January 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1997
---------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 13, 1997
---------------------- ----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(3)
PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NUMBER IN THE REPORT
EXHIBIT NO. DESCRIPTION OF DOCUMENT OR OTHER REFERENCE
- ----------- ------------------------ -------------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated December 3, 1980, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended September 30, 1996 has
been sent to the Limited Partners.
An Annual Report will be sent to
the Limited Partners subsequent to
this filing.
(22) List of Subsidiaries Included in Item 1 of Part I of this
Report Page I-1, to which reference
is hereby made.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial
Statement Schedule required by
Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(A) (1) AND (2) AND 14(D)
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REFERENCE
---------
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP:
Report of independent auditors - Ernst & Young LLP F-2
Report of independent accountants - Coopers & Lybrand L.L.P. F-3
Balance sheets at September 30, 1996 and 1995 F-4
Statements of income for the years ended September 30, 1996,
1995 and 1994 F-5
Statements of changes in partners' capital (deficit) for the
years ended September 30, 1996, 1995 and 1994 F-6
Statements of cash flows for the years ended September 30,
1996, 1995 and 1994 F-7
Notes to financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-20
COMBINED JOINT VENTURES OF PAINEWEBBER INCOME PROPERTIES THREE LIMITED
PARTNERSHIP
Report of independent auditors - Ernst & Young LLP F-21
Report of independent accountants - Coopers & Lybrand L.L.P. F-22
Combined balance sheets as of September 30, 1996 and 1995 F-23
Combined statements of income and changes in venturers'
capital for the years ended September 30, 1996, 1995 and 1994 F-24
Combined statements of cash flows for the years ended
September 30, 1996, 1995 and 1994 F-25
Notes to combined financial statements F-26
Schedule III - Real Estate and Accumulated Depreciation F-32
Other schedules have been omitted since the required information is not
applicable, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Three Limited Partnership:
We have audited the accompanying balance sheets of Paine Webber Income
Properties Three Limited Partnership as of September 30, 1996 and 1995, and the
related statements of income, changes in partners' capital (deficit), and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits. The financial
statements of Camelot Associates (a partnership in which the Partnership had a
50% interest), have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the financial statements relates to
data included for Camelot Associates, it is based solely on their report. In the
financial statements, the Partnership's investment in Camelot Associates is
stated at $103,000 at September 30, 1995, the Partnership's share of the
venture's income of Camelot Associates is stated at $190,000, $292,000 and
$273,000 for the years ended September 30, 1996, 1995 and 1994, respectively,
and the Partnership's share of gain on sale of operating investment property is
stated at $7,432,000 for the year ended September 30, 1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Paine Webber Income Properties Three Limited
Partnership at September 30, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
January 10, 1997
<PAGE>
Report of Independent Accountants
To the Venturers of
Camelot Associates:
We have audited the accompanying balance sheets of Camelot Associates (an
Ohio Partnership) as of June 19, 1996 and September 30, 1995, and the related
statements of income, venturers' deficit and cash flows for the period October
1, 1995 to June 19, 1996 and for each of the two years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Camelot Associates (an Ohio
Partnership) as of June 19, 1996 and September 30, 1995, and the results of its
operations and its cash flows for the period October 1, 1995 to June 19, 1996
and for each of the two years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
As described in Note 1, the partnership sold its operating properties in
1996.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 10, 1997
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1996 and 1995
(In thousands, except per Unit amounts)
ASSETS
1996 1995
---- ----
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
-------- ---------
5,038 5,038
Less accumulated depreciation (1,389) (1,287)
------- ---------
Net operating investment property 3,649 3,751
Investments in joint ventures, at equity 2,844 3,030
Cash and cash equivalents 1,000 296
Accounts receivable 99 -
Deferred expenses, net of accumulated amortization
of $53 ($32 in 1995) 53 74
Note and interest receivable, net - -
-------- ---------
$ 7,645 $ 7,151
======== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 4 $ 4
Accrued expenses 60 40
Mortgage note payable 1,420 1,549
--------- ---------
Total liabilities 1,484 1,593
Partners' capital:
General Partner:
Capital contribution 1 1
Cumulative net income 146 81
Cumulative cash distributions (147) (143)
Limited Partners ($1,000 per Unit; 21,550 Units issued):
Capital contributions, net of offering costs 19,397 19,397
Cumulative net income 14,508 8,031
Cumulative cash distributions (27,744) (21,809)
-------- --------
Total partners' capital 6,161 5,558
-------- -------
$ 7,645 $ 7,151
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the years ended September 30, 1996, 1995 and 1994
(In thousands, except per Unit amounts)
1996 1995 1994
---- ---- ----
REVENUES:
Rental revenues $ 478 $ 478 $ 478
Interest income 84 14 5
------- --------- --------
562 492 483
EXPENSES:
Interest expense 155 166 159
Management fees 17 17 17
Depreciation expense 102 102 102
General and administrative 368 453 402
-------- ---------- ---------
642 738 680
-------- ---------- ---------
Operating loss (80) (246) (197)
Partnership's share of ventures' income 696 510 442
Partnership's share of gain on sale
of operating investment property
(net of write-off of unamoritized excess
basis of $1,506) 5,926 - -
-------- ---------- ----------
NET INCOME $ 6,542 $ 264 $ 245
======== ========= ==========
Net income per Limited Partnership Unit $300.56 $12.14 $ 11.26
======= ====== =======
Cash distributions per Limited
Partnership Unit $275.40 $19.40 $ 19.40
======= ====== =======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 21,550 Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
General Limited
Partner Partners Total
------- -------- -----
Balance at September 30, 1993 $ (57) $5,950 $5,893
Cash distributions (4) (418) (422)
Net income 2 243 245
------ ------ ------
BALANCE AT SEPTEMBER 30, 1994 (59) 5,775 5,716
Cash distributions (4) (418) (422)
Net income 2 262 264
------ ------ ------
BALANCE AT SEPTEMBER 30, 1995 (61) 5,619 5,558
Cash distributions (4) (5,935) (5,939)
Net income 65 6,477 6,542
------ ------- -------
BALANCE AT SEPTEMBER 30, 1996 $ - $6,161 $6,161
====== ====== ======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 6,542 $ 264 $ 245
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 102 102 102
Amortization of deferred financing
costs 21 21 11
Partnership's share of ventures' income (696) (510) (442)
Partnership's share of gain on sale
of operating investment property (5,926) - -
Changes in assets and liabilities:
Accounts payable - affiliates - - (25)
Accrued expenses 20 (2) 15
Default interest payable - - (77)
-------- ------- -------
Total adjustments (6,479) (389) (416)
-------- ------- -------
Net cash provided by (used in)
operating activities 63 (125) (171)
Cash flows from investing activities:
Distributions from joint ventures 6,709 745 775
Cash flows from financing activities:
Distributions to partners (5,939) (422) (422)
Proceeds from issuance of mortgage
note payable - - 1,722
Principal payments on mortgage note
payable (129) (118) (1,741)
Payment of loan fees and expenses - - (106)
-------- ------- -------
Net cash used in financing
activities (6,068) (540) (547)
-------- ------- -------
Net increase in cash and cash equivalents 704 80 57
Cash and cash equivalents, beginning
of year 296 216 159
-------- ------- ------
Cash and cash equivalents, end of year $ 1,000 $ 296 $ 216
======== ========= ========
Cash paid during the year for interest $ 134 $ 145 $ 226
======== ========= ========
See accompanying notes.
<PAGE>
PAINEWEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Paine Webber Income Properties Three Limited Partnership (the
"Partnership") is a limited partnership organized pursuant to the laws of
the State of Delaware in June 1980 for the purpose of investing in a
diversified portfolio of income-producing properties. The Partnership
authorized the issuance of units (the "Units") of partnership interests (at
$1,000 per Unit) of which 21,550 Units were subscribed and issued between
December 3, 1980 and December 10, 1981.
The Partnership originally invested the net proceeds of the public
offering, either directly or through joint venture partnerships, in six
operating properties, comprised of three multi-family apartment complexes
and three retail shopping centers. Through September 30, 1996, the three
multi-family apartment properties have been sold, including one during
fiscal 1996 (see Note 5). Of the three remaining retail properties, two are
owned through joint venture partnerships and one is owned directly. See
Notes 4 and 5 for a further discussion of the Partnership's remaining real
estate investments.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which 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 September 30, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended
September 30, 1996. Actual results could differ from the estimates and
assumptions used.
The accompanying financial statements include the Partnership's
investments in certain joint venture partnerships which own operating
properties. The Partnership accounts for its investments in joint venture
partnerships using the equity method because the Partnership does not have
a voting control interest in the ventures. Under the equity method the
investment in a joint venture is carried at cost adjusted for the
Partnership's share of the venture's earnings or losses and distributions.
See Note 5 for a description of the joint venture partnerships.
The Partnership deferred a portion of the gain on the sale of the
Briarwood Joint Venture property in fiscal 1985 using the cost recovery
method. The portion of the remaining gain to be recognized is represented
by a note and accrued interest receivable. The note and accrued interest
receivable have been netted against the deferred gain on the accompanying
balance sheet. The gain would be recognized if the note and interest
receivable are paid (see Note 6).
The Partnership carries its operating investment property at the lower
of cost, reduced by accumulated depreciation, or net realizable value. The
net realizable value of a property held for long-term investment purposes
is measured by the recoverability of the Partnership's investment through
expected future cash flows on an undiscounted basis, which may exceed the
property's market value. The net realizable value of a property held for
sale approximates its current market value. The Partnership's operating
investment property is considered to be held for long-term investment
purposes as of September 30, 1996 and 1995. Depreciation on the operating
investment property has been provided on the straight-line method based
upon an estimated useful life of 40 years for the building and
improvements.
The Partnership has reviewed FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of," which is effective for financial statements for years beginning after
December 15, 1995, and believes this new pronouncement will not have a
material effect on the Partnership's financial statements.
The Partnership's wholly-owned operating investment property is leased
under a master lease agreement which covers 100% of the rentable space of
the shopping center. The master lease is accounted for as an operating
lease in the Partnership's financial statements. Rental income under the
master lease is recorded on the accrual basis as earned.
For purposes of reporting cash flows, the Partnership considers all
highly liquid investments with original maturities of 90 days or less to be
cash equivalents.
The cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses appearing on the accompanying balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
The carrying amount of these assets and liabilities approximates their fair
value as of September 30, 1996 due to the short-term maturities of these
instruments. The mortgage note payable is also a financial instrument for
purposes of FAS 107. The fair value of the mortgage note payable is
estimated using discounted cash flow analysis based on the current market
rate for a similar type of borrowing arrangement. Information regarding the
fair value of the Partnership's mortgage note payable is provided in Note 7.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
The General Partner of the Partnership is Third Income Properties, Inc.
(the "General Partner"), a wholly-owned subsidiary of PaineWebber Group,
Inc. ("PaineWebber"). Subject to the General Partner's overall authority,
the business of the Partnership is managed by PaineWebber Properties
Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser
is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber. The General Partner, the Adviser
and PWI receive fees and compensation, determined on an agreed-upon basis,
in consideration of various services performed in connection with the sale
of the Units, the management of the Partnership and the acquisition,
management, financing and disposition of Partnership investments.
In connection with investing Partnership Capital, the Adviser received
acquisition fees of 9% of the gross proceeds from the sale of Partnership
Units. In connection with the sale of each property, the Adviser may
receive a disposition fee, payable upon liquidation of the Partnership, in
an amount equal to 3/4% of the selling price of the property, subordinated
to the payment of certain amounts to the Limited Partners.
All distributable cash, as defined, for each fiscal year is distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partner. All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the
Partnership Agreement. In accordance with the Partnership Agreement, the
General Partner has not received any sale or refinancing proceeds to date.
Pursuant to the terms of the Partnership Agreement, taxable income or
tax loss from operations of the Partnership will be allocated 99% to the
Limited Partners and 1% to the General Partner. Taxable income or tax loss
arising from a sale or refinancing of investment properties will be
allocated to the Limited Partners and the General Partner in proportion to
the amounts of sale or refinancing proceeds to which they are entitled
provided that the General Partner will be allocated at least 1% of taxable
income arising from a sale or refinancing. If there are no sale or
refinancing proceeds, taxable income or tax loss from a sale or refinancing
will be allocated 99% to the Limited Partners and 1% to the General
Partner. Allocations of the Partnership's operations between the General
Partner and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer the day-to-day operations of the
Partnership, and to report periodically the performance of the Partnership
to the General Partners. The Adviser earns a basic management fee (4% of
Adjusted Cash Flow, as defined) and an incentive management fee (5% of
Adjusted Cash Flow subordinated to a noncumulative annual return to the
Limited Partners equal to 6% based upon their adjusted capital
contribution) for services rendered. The Adviser earned basic management
fees of $17,000 for each of the three years ended September 30, 1996, 1995
and 1994. No incentive management fees were earned during the three-year
period ended September 30, 1996. Accounts payable - affiliates at both
September 30, 1996 and 1995 consists of management fees payable to the
Adviser of $4,000.
Included in general and administrative expenses for the years ended
September 30, 1996, 1995 and 1994 is $68,000, $72,000 and $81,000,
respectively, representing reimbursements to an affiliate of the General
Partner for providing certain financial, accounting and investor
communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell
Hutchins earned fees of $2,000, $2,000 and $1,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996, 1995 and 1994, respectively.
4. Operating Investment Property
The Partnership has one wholly-owned operating investment property. On
September 25, 1981, the Partnership purchased Northeast Plaza, a 67,000
square foot existing shopping center in Sarasota, Florida. The shopping
center was expanded to its current size of 121,005 square feet by September
30, 1986. The aggregate cash invested by the Partnership was approximately
$2,888,000 (including an acquisition fee of $268,000 paid to the Adviser).
The property was acquired subject to a nonrecourse wrap-around mortgage
loan of approximately $2,480,000. On March 29, 1994, the Partnership
refinanced the existing wraparound mortgage note secured by the Northeast
Plaza Shopping Center, which had been in default for over two years, with a
new non-recourse loan issued by the prior underlying first mortgage lender
(see Note 7). 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 $661,000, against the outstanding balance
of the wraparound mortgage. Rental payments to the Partnership were
reinstated beginning in April 1994.
At the time of the original purchase of the shopping center, the
Partnership entered into a lease agreement with the seller of the property
for the operation and management of the property. The lease has an initial
term of 30 years and two 5-year renewal options. This master lease
agreement has been classified as an operating lease and, therefore, rental
income is reported when earned. Under the terms of the agreement, the
Partnership receives annual basic rent of $435,000. The Partnership also
receives contingent rent equal to the greater of (a) approximately 47.5% of
annual increases to gross rental income over a specified base amount or (b)
$43,000 annually. The agreement provides specifically that the manager pay
all costs of operating the shopping center and all annual taxes, insurance
and administrative expenses. The manager is further required to pay for all
costs of repair and replacement required in connection with the shopping
center. Minimum lease payments under the initial term of the lease
agreement, including the minimum amount of contingent rent, will amount to
$478,000 in each year.
Under the amended terms of the master lease, upon the sale or
refinancing of the project, any remaining proceeds, after repayment of the
outstanding balance on the mortgage loan, payment of certain priority items
to the Partnership, repayment of the Partnership's original investment and
the reimbursement to the Lessee of certain capital improvement
expenditures, will be allocated equally to the Partnership and to the
manager of the property as a return on the leasehold interest.
<PAGE>
5. Joint Venture Partnerships
As of September 30, 1996, the Partnership had investments in two joint
ventures (three as of September 30, 1995). As discussed further below, on
June 19, 1996 Camelot Associates, in which the Partnership had a joint
venture interest, sold its operating investment property to an unrelated
third party and distributed the net proceeds to the venture partners. The
joint ventures are accounted for using the equity method in the
Partnership's financial statements. Condensed combined financial statements
of these joint ventures follow.
CONDENSED COMBINED BALANCE SHEETS
September 30, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 935 $ 1,377
Operating investment property, net 14,682 17,510
Other assets, net 247 263
------- -------
$15,864 $19,150
======= =======
Liabilities and Capital
Current liabilities $ 803 $ 3,828
Other liabilities 23 111
Long-term mortgage debt 11,324 13,456
Partnership's share of combined capital
accounts 2,686 1,251
Co-venturers' share of combined capital
accounts 1,028 504
------- -------
$15,864 $19,150
======= =======
Reconciliation of Partnership's Investment
1996 1995
---- ----
Partnership's share of capital, as shown above $ 2,686 $ 1,251
Partnership's share of current
liabilities and long-term debt 64 173
Excess basis due to investment in ventures, net (1) 94 1,606
------- -------
Investments in joint ventures, at equity $ 2,844 $ 3,030
======= =======
(1)At September 30, 1996 and 1995, the Partnership's investment exceeds its
share of the joint venture partnerships' capital accounts by $94,000 and
$1,606,000, respectively. This amount, which relates to certain expenses
incurred by the Partnership in connection with acquiring its joint venture
investments, is being amortized over the estimated useful life of the
investment properties.
<PAGE>
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the years ended September 30, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 5,632 $ 6,186 $ 6,030
Interest income 20 63 27
------- ------- -------
5,652 6,249 6,057
Expenses:
Property operating expenses 2,473 2,729 2,524
Depreciation and amortization 726 822 908
Interest expense 1,644 1,737 1,705
-------- ------- -------
4,843 5,288 5,137
-------- ------- -------
Operating income 809 961 920
Gain on sale of operating investment
property 12,089 - -
-------- -------- -------
Net income $ 12,898 $ 961 $ 920
======== ======== =======
Net income:
Partnership's share of combined income $ 8,134 $ 610 $ 542
Co-venturers' share of combined income 4,764 351 378
-------- -------- --------
$ 12,898 $ 961 $ 920
======== ======== ========
Reconciliation of Partnership's Share of Income
1996 1995 1994
---- ---- ----
Partnership's share of income,
as shown above $ 8,134 $ 610 $ 542
Amortization of excess basis (1,512) (100) (100)
-------- --------- --------
Partnership's share of ventures' income $ 6,622 $ 510 $ 442
======== ========= ========
The Partnership's share of ventures' net income is presented as follows
in the statements of operations (in thousands):
1996 1995 1994
---- ---- ----
Partnership share of ventures' income $ 696 $ 510 $ 442
Partnership's share of gain on sale
of operating investment property 5,926 - -
------ ------ ------
$6,622 $ 510 $ 442
====== ===== ======
Investments in joint ventures, at equity, is the Partnership's net
investment in the joint venture partnerships. These joint ventures are
subject to partnership agreements which determine the distribution of
available funds, the disposition of the ventures' assets and the rights of
the partners, regardless of the Partnership's percentage ownership interest
in the venture. Substantially all of the Partnership's investments in these
joint ventures are restricted as to distributions.
<PAGE>
Investments in joint ventures, at equity, on the accompanying balance
sheets at September 30, 1996 and 1995 is comprised of the following joint
venture investments:
1996 1995
---- ----
Camelot Associates $ - $ 103
Boyer Lubbock Associates 186 33
Pine Trail Partnership 2,658 2,894
------- -------
Investments in joint ventures, at equity $2,844 $ 3,030
====== =======
The Partnership received cash distributions from the joint ventures as
set forth below:
1996 1995 1994
---- ---- ----
Camelot Associates $6,078 $ 274 $ 284
Boyer Lubbock Associates 231 111 181
Pine Trail Partnership 400 360 310
------ ------- -------
Total $6,709 $ 745 $ 775
====== ======= =======
A description of the joint ventures' properties and the terms of the
joint venture agreements are summarized below.
a) Camelot Associates
-----------------
On June 29, 1981, the Partnership acquired an interest in Camelot
Associates ("Camelot") an Ohio limited partnership which owns and operates
Camelot Apartments, a 492-unit apartment complex in Fairfield, Ohio. The
aggregate cash investment by the Partnership for its 50% interest was
approximately $2,790,000 (including an acquisition fee of $300,000 paid to
the Adviser). The Partnership was a general partner in the joint venture. The
Partnership's co-venturers were Chelsea Moore Corporation and certain
individuals.
Management began to actively market the Camelot Apartments for sale to
prospective third party buyers during the second quarter of fiscal 1996. In
addition, the Partnership had engaged in preliminary discussions with its
co-venture partners regarding the possible sale of the Partnership's interest
in the Camelot joint venture. In accordance with the terms of the joint
venture agreement, the co-venturers had the right to match any third party
offer obtained to buy the property. 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 gain recognized by the
Camelot joint venture totaled $12,089,000 and the Partnership's share of such
gain amounted to $5,926,000, net of the write-off of the unamortized balance
of the Partnership's excess basis in the Camelot joint venture of $1,506,000.
Taxable income and tax loss from operations in each year were allocated to
the Partnership and the co-venturers generally in accordance with cash
distributions except that all depreciation attributable to a step-up in basis
pursuant to an election under Section 754 of the Internal Revenue Code as a
result of the investment by the Partnership was allocated to the Partnership.
Allocations of the venture's operations among the Partnership and the
co-venturers for financial accounting purposes have been made in conformity
with the allocations of taxable income or tax loss.
<PAGE>
The joint venture had entered into a property management contract with an
affiliate of the co-venturers. Fees due under the terms of the management
contract amounted to 4% of collected rents. For the period October 1, 1995 to
June 19, 1996 and the years ended September 30, 1995 and 1994, the management
company earned fees of $76,000, $103,000 and $98,000, respectively.
b) Boyer Lubbock Associates
-------------------------
On June 30, 1981, the Partnership acquired an interest in Boyer Lubbock
Associates, a Texas general partnership organized to purchase and operate
Central Plaza, a 151,857 square foot shopping center in Lubbock, Texas. The
Partnership is a general partner in the joint venture. The Partnership's
co-venturer is an affiliate of The Boyer Company. Revenue from a major tenant
of Central Plaza accounted for 26% of the venture's total revenues for fiscal
1996.
The aggregate cash investment by the Partnership for its 50% interest was
approximately $2,076,000 (including an acquisition fee of $225,000 paid to
the Adviser). The Partnership's interest was acquired subject to an
institutional nonrecourse first mortgage with a balance of approximately
$4,790,000 at the time of closing. The venture's debt was originally
scheduled to mature on December 1, 1994. During the first quarter of fiscal
1995, the venture obtained an extension of the maturity date from the lender
to January 1, 1995. During the second quarter of fiscal 1995, 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. The loan has a balance of $4,162,000 at
September 30, 1996.
The joint venture agreement between the Partnership and the co-venturer
provides that from available cash flow the Partnership will receive an annual
preference, payable monthly, of $171,000, and the co-venturer will receive
the remaining distributable cash up to a maximum of $120,000. Additional cash
flow will be distributed equally to the Partnership and the co-venturer.
Taxable income and tax loss before depreciation are generally allocated in
accordance with cash distributions, after equal allocation of profits in the
amount required to be transferred to the capital cash reserve accounts and to
amortize the indebtedness of the joint venture. Depreciation expense is
allocated in accordance with the tax basis of the capital contributions of
the Partnership and the co-venturer, after adjustment for liabilities and
capital improvements. In the event of no available cash flow, 100% of
remaining profit or loss is allocated to the Partnership. Allocations of the
venture's operations between the Partnership and the co-venturer for
financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
Upon sale or refinancing, the Partnership will receive $2,000,000, plus
certain closing costs, as a first priority in distributions of sale or
refinancing proceeds after the repayment of the remaining balance on the
first mortgage. The next $1,625,000 will be distributed to the co-venturer.
Any remaining proceeds will be distributed equally to the Partnership and the
co-venturer.
The Central Plaza property is co-managed by an affiliate of the co-venturer
and an unrelated third party. For the years ended September 30, 1996, 1995
and 1994, the affiliate of the co-venturer earned fees of $41,000, $37,000
and $38,000, respectively. In addition, during the year ended September 30,
1995 lease commissions aggregating $7,000 were also paid to the affiliate of
the co-venturer. No lease commissions were paid to affiliates for the years
ended September 30, 1996 and 1994.
<PAGE>
c) Pine Trail Partnership
----------------------
On November 12, 1981, the Partnership acquired an interest in Pine Trail
Partnership, a Florida general partnership organized to own and operate Pine
Trail Center, a 266,042 square foot shopping center in West Palm Beach,
Florida. The Partnership is a general partner in the joint venture. The
Partnership's co-venturer is a partnership comprised of certain individuals.
The Partnership invested approximately $6,236,000 (including an acquisition
fee of $645,600 paid to the Adviser) for its 50% interest. The co-venturer
contributed its interest in the property to the joint venture. The joint
venture is subject to an institutional nonrecourse first mortgage which had a
balance of approximately $8,140,000 at the time of the closing. The mortgage
loan has a scheduled maturity date of January 1, 2001. The Pine Trail
Shopping Center has five out-parcels on the site, covering approximately 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 fiscal 1995, the joint venture completed the acquisition of
one of these out-parcels, containing 60,248 square feet, for the purchase
price of $350,000. 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.
The joint venture agreement provides that the Partnership will receive a
noncumulative annual cash distribution, payable quarterly, from net cash
flow. The first $515,000 of net cash flow shall be distributed to the
Partnership, and the next $235,788 of net cash flow shall be distributed to
the co-venturer. Any excess cash flow shall be allocated equally between the
Partners. During fiscal 1996, 1995 and 1994 the property did not generate
sufficient cash flow for the Partnership to receive its minimum preferred
distribution of $515,000.
Upon sale or refinancing of the encumbered property, the Partnership will
receive $6,150,000 as a first priority in distributions of net sale or
refinancing proceeds. The next $4,156,000 of such proceeds will be
distributed to the co-venturer. Thereafter, any remaining proceeds will be
distributed 50% to the Partnership and 50% to the co-venturer. The
co-venturer's distributable share of sale or refinancing proceeds is subject
to reduction if certain specified percentage rental revenue objectives are
not achieved. Upon refinancing of the unencumbered property, the distribution
will be shared equally.
Taxable income and tax loss from operations in each year shall be allocated
to the Partnership and the co-venturer in the same proportions as cash
distribution entitlements, subject to adjustments in the case of tax loss for
an allocation of a minimum to the co-venturer. Allocations of the venture's
operations between the Partnership and the co-venturer for financial
accounting purposes have been made in conformity with the allocations of
taxable income or tax loss.
The joint venture entered into a property management contract with an
affiliate of the co-venturer cancellable at the option of the Partnership
upon the occurrence of certain events. The contract provides for a management
fee equal to 4% of gross rents collected. For the years ended September 30,
1996, 1995 and 1994, the property manager earned fees of $74,000, $76,000 and
$71,000, respectively. In addition, the property manager is entitled to
leasing commissions at prevailing market rates. Leasing commissions earned by
the property manager were $23,000, $41,000 and $40,000 for the years ended
September 30, 1996, 1995 and 1994, respectively.
<PAGE>
6. Note and Interest Receivable, Net
On September 15, 1981, the Partnership acquired a 35% interest in Briarwood
Joint Venture, an existing Pennsylvania general partnership which owned a
686-unit apartment complex in Bucks County, Pennsylvania. The Partnership
originally invested approximately $4,815,000 (including an acquisition fee of
$500,000 paid to the Adviser) for its interest. The Partnership's interest
was acquired subject to two institutional nonrecourse first mortgages with
balances totalling approximately $8,925,000 at the time of the closing.
On December 20, 1984, the joint venture partners sold their ownership
interests in the Briarwood Joint Venture for $33,152,000. After the payment
of mortgage obligations and closing costs, the Partnership's allocable share
of the proceeds was $10,935,000, represented by cash of $7,490,000 and a note
receivable of $3,445,000. For financial accounting purposes, a gain of
$7,255,000 resulted from the transaction of which $3,810,000 was recognized
at the time of the sale and the remainder was deferred under the cost
recovery method. For income tax purposes, a gain of $4,829,000 was recognized
upon sale and the remainder deferred utilizing the installment method. The
difference in the amount of gain recognized for financial accounting and tax
purposes results from accounting differences related to the carrying value of
the Partnership's investment.
The principal amount of the note receivable of $3,445,000 bears interest at
9% annually, matures on January 1, 2000 and is subordinated to a first
mortgage. 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 September 30, 1996 and 1995 would be approximately $6,068,000 and
$5,283,000, respectively. Since the properties 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 September 30, 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.
7. Mortgage Note Payable
The mortgage note payable at September 30, 1996 and 1995 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 $22,000 are due through maturity on April 1, 1999.
The loan may be prepaid at anytime without penalty. The fair value of this
mortgage note payable approximated its carrying value as of September 30,
1996.
Previously, the mortgage secured by Northeast Plaza had consisted of a
9.3% nonrecourse wraparound mortgage note. The mortgage note was to be
payable in monthly installments of principal and interest aggregating
$241,000 per year. This note wrapped around an underlying first mortgage
loan. The entire principal balance, together with outstanding accrued
interest, was originally due and payable on September 30, 1991. Due to the
default on the wrap mortgage, beginning October 1, 1991 interest began to
accrue on the outstanding balance of the wraparound mortgage at a default
rate of 11% under the terms of the original loan agreement. Such default
interest amounted to $19,000 for fiscal 1994. Due to differences between the
Partnership and the mortgagee in the methods used to apply the withheld
rental payments against the outstanding mortgage obligation, the final
pay-off amount on the wraparound mortgage loan was less than the carrying
balance of the loan plus accrued interest, net of the rent receivable, on
the Partnership's books. As a result, the difference of $51,000 was
recognized as a reduction of interest expense in fiscal 1994.
Scheduled maturities of long-term debt for each of the next three fiscal
years are as follows (in thousands):
1997 $ 142
1998 154
1999 1,124
-------
$ 1,420
=======
<PAGE>
8. Legal Proceedings and Related Contingencies
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 ground water 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 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 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 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 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. On April 28, 1995, Mobil was successful in obtaining a
Partial Summary Judgment which removed the case from the Federal Court
system. 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. 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 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 agree on the amount of the damages. 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 sometime in 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.
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 Income Properties, Inc. which is the General
Partner 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 Income
Properties Three Limited Partnership, PaineWebber and Third Income
Properties, Inc. (1) failed to provide adequate disclosure of the risks
involved; (2) made false and misleading representations about the safety of
the investments and the Partnership's anticipated performance; and (3)
marketed the Partnership to investors for whom such investments were not
suitable. The plaintiffs, who purported to be suing on behalf of all persons
who invested in Paine Webber Income Properties Three Limited Partnership,
also alleged that following the sale of the partnership interests,
PaineWebber and Third Income Properties, Inc. misrepresented financial
information about the Partnership's value and performance. The amended
complaint alleged that PaineWebber and Third Income Properties, Inc.
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 June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court
against PaineWebber Incorporated and various affiliated entities concerning
the plaintiff's 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 Bandrowski action described above 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 a
complete resolution of the 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. At the present time, the General Partner 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.
9. Subsequent Event
On November 15, 1996, the Partnership distributed $105,000 to the Limited
Partners and $1,000 to the General Partner for the quarter ended September
30, 1996.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Schedule of Real Estate and Accumulated Depreciation
September 30, 1996
(In thousands)
<CAPTION>
Life on Which
Initial Cost to Costs Gross Amount at Which Carried at Depreciation
Partnership Capitalized Close of period in Latest
Buildings (Removed) Buildings Income
and Subsequent to and Accumulated Date of Date Statement
Description Encumbrances Land Improvements Acquisition Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ ----------- ---- ----------- ------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
Sarasota,
Florida $ 1,420 $950 $1,930 $2,158 $950 $4,088 $5,038 $1,389 1964 - 1978 9/25/81 40 years
======= ==== ====== ====== ==== ====== ====== ======
Notes:
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $5,038,000.
(B) See Notes 4 and 7 to Financial Statements.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 5,038 $ 5,038 $ 5,038
Improvements - - -
------- ------- -------
Balance at end of year $ 5,038 $ 5,038 $ 5,038
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 1,287 $ 1,185 $ 1,083
Depreciation expense 102 102 102
------- ------- -------
Balance at end of year $ 1,389 $ 1,287 $ 1,185
======= ======= =======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Three Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Three Limited Partnership as of
September 30, 1996 and 1995, and the related combined statements of income and
changes in venturers' capital, and cash flows for each of the three years in the
period ended September 30, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements and
schedule of Camelot Associates, which statements reflect 15% of the combined
assets of the Combined Joint Ventures of Paine Webber Income Properties Three
Limited Partnership as of September 30, 1995, 36%, 44% and 43% of the combined
revenues of the Combined Joint Ventures of Paine Webber Income Properties Three
Limited Partnership for the years ended September 30, 1996, 1995 and 1994,
respectively, and 100% of the gain on sale of operating investment property for
the year ended September 30, 1996. Those statements and schedule were audited by
other auditors, whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Camelot Associates, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Partnership's management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the Combined Joint Ventures of
Paine Webber Income Properties Three Limited Partnership at September 30, 1996
and 1995, and the combined results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
January 10, 1997
<PAGE>
Report of Independent Accountants
To the Venturers of
Camelot Associates:
We have audited the accompanying balance sheets of Camelot Associates (an
Ohio Partnership) as of June 19, 1996 and September 30, 1995, and the related
statements of income, venturers' deficit and cash flows for the period October
1, 1995 to June 19, 1996 and for each of the two years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Camelot Associates (an Ohio
Partnership) as of June 19, 1996 and September 30, 1995, and the results of its
operations and its cash flows for the period October 1, 1995 to June 19, 1996
and for each of the two years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
As described in Note 1, the partnership sold its operating properties in
1996.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 10, 1997
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
September 30, 1996 and 1995
(In thousands)
Assets
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 198 $ 800
Escrowed funds, principally for
payment of real estate taxes 490 451
Accounts receivable 129 91
Note receivable 80 -
Prepaid expenses 36 35
Capital improvement reserve 2 -
--------- --------
Total current assets 935 1,377
Operating investment properties:
Land 3,893 4,392
Buildings, improvements and equipment 20,411 27,400
--------- --------
24,304 31,792
Less accumulated depreciation (9,622) (14,282)
--------- --------
Net operating investment properties 14,682 17,510
Deferred expenses, net of accumulated amortization
of $201 ($185 in 1995) 247 263
--------- --------
$ 15,864 $ 19,150
========= ========
Liabilities and Venturers' Capital
Current liabilities:
Accounts payable $ 64 $ 178
Distributions payable to venturers 50 436
Accrued interest 125 158
Accrued real estate taxes 333 458
Other accrued liabilities 26 28
Prepaid rent - 18
Long-term debt - current portion 205 2,552
--------- --------
Total current liabilities 803 3,828
Notes payable 14 14
Tenant security deposits 9 97
Long-term debt 11,324 13,456
Commitments (Note 6)
Venturers' capital 3,714 1,755
--------- --------
$ 15,864 $ 19,150
========= ========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL
For the years ended Setember 30, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
REVENUES:
Rental income $ 4,892 $ 5,479 $ 5,306
Reimbursement from tenants 740 707 724
Interest income and other 20 63 27
------- ------- -------
5,652 6,249 6,057
EXPENSES:
Interest expense 1,644 1,737 1,705
Depreciation expense 710 806 891
Real estate taxes 553 632 586
Management fees 190 215 206
Ground rent 126 147 154
Repairs and maintenance 623 674 569
Insurance 73 89 72
Utilities 229 257 266
General and administrative 360 266 291
Other 319 449 380
Amortization expense 16 16 17
------- ------- -------
4,843 5,288 5,137
------- ------- -------
Operating income 809 961 920
Gain on sale of operating investment
property 12,089 - -
-------- ------- -------
NET INCOME 12,898 961 920
Distributions to venturers (10,939) (1,177) (1,083)
Contributions from venturers - - 75
Venturers' capital, beginning of year 1,755 1,971 2,059
------- ------- -------
Venturers' capital, end of year $ 3,714 $ 1,755 $ 1,971
======= ======= =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 12,898 $ 961 $ 920
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 726 822 908
Amortization of deferred financing costs 26 29 -
Gain on sale of operating investment
property (12,089) - -
Changes in assets and liabilities:
Escrowed funds (39) (119) (45)
Accounts receivable (38) 49 (40)
Note receivable (80) - -
Prepaid expenses (1) (1) (1)
Capital improvement reserve (2) 10 (10)
Deferred expenses (59) (198) (22)
Other assets - - 3
Accounts payable (114) 95 (34)
Accrued interest (33) 3 (4)
Accrued real estate taxes (125) 34 11
Other accrued liabilities (2) (4) 14
Prepaid rent (18) (1) 9
Tenant security deposits (88) (3) (6)
--------- -------- --------
Total adjustments (11,936) 716 783
--------- -------- --------
Net cash provided by
operating activities 962 1,677 1,703
Cash flows from investing activities:
Additions to operating investment
properties (230) (544) (342)
Proceeds from sale of operating
investment property 14,470 - -
--------- --------- -------
Net cash provided by (used in)
investing activities 14,240 (544) (342)
Cash flows from financing activities:
Capital contributions - - 15
Principal payments on long-term debt (4,479) (4,321) (488)
Distributions to partners (11,325) (1,011) (946)
Proceeds from refinancing of debt - 4,200 -
Proceeds of long-term debt - 350 -
--------- -------- --------
Net cash used in financing
activities (15,804) (782) (1,419)
--------- -------- --------
Net (decrease) increase in cash and
cash equivalents (602) 351 (58)
Cash and cash equivalents,
beginning of year 800 449 507
--------- -------- -------
Cash and cash equivalents, end of year $ 198 $ 800 $ 449
========= ======= =======
Cash paid during the year for interest $ 1,652 $ 1,734 $ 1,709
========= ======= =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
The accompanying financial statements of the Combined Joint Ventures of
Paine Webber Income Properties Three Limited Partnership (Combined Joint
Ventures) include the accounts of Camelot Associates, an Ohio limited
partnership; Boyer Lubbock Associates, a Utah limited partnership and Pine Trail
Partnership, a Florida general partnership. The financial statements of the
Combined Joint Ventures are presented in combined form, rather than
individually, due to the nature of the relationship between the co-venturers and
Paine Webber Income Properties Three Limited Partnership (PWIP3), which owns a
substantial financial interest but does not have voting control in each joint
venture.
The dates of PWIP3's acquisition of interests in the joint ventures are as
follows:
Date of Acquisition
Joint Venture of Interest
------------- -----------
Camelot Associates 6/29/81
Boyer Lubbock Associates 6/30/81
Pine Trail Partnership 11/12/81
During fiscal 1996, Camelot Associates sold its operating investment
property and distributed the net proceeds to the venture partners. See Note 3
for a further discussion of this transaction.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which 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 September 30, 1996 and 1995 and revenues and expenses for
each of the three years in the period ended September 30, 1996. Actual results
could differ from the estimates and assumptions used.
Basis of presentation
---------------------
Generally, the records of the combined joint ventures are maintained on the
income tax basis of accounting and adjusted to generally accepted accounting
principles for financial reporting purposes, principally for depreciation.
Operating investment properties
-------------------------------
Management of PWIP3 has reviewed FAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is
effective for financial statements for years beginning after December 15, 1995,
and believes this new pronouncement will not have a material effect on the
financial statements of the Combined Joint Ventures.
The operating investment properties are recorded at cost less accumulated
depreciation. Acquisition fees have been capitalized and are included in the
cost of the operating investment property. Depreciation expense is computed on a
straight-line basis over the estimated useful lives of the buildings,
improvements and equipment, generally five to forty years.
<PAGE>
Deferred expenses
-----------------
Deferred expenses consist primarily of loan fees and leasing commissions
which are being amortized over the lives of the related loans and related leases
on the straight-line method. Amortization of deferred loan fees is included in
interest expense on the accompanying income statements.
Income tax matters
------------------
The Combined Joint Ventures are comprised of entities which are not taxable
and accordingly, the results of their operations are included on the tax returns
of the various partners. Accordingly no income tax provision is reflected in the
accompanying combined financial statements.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and cash equivalents, escrowed funds,
receivables, reserved cash, accounts payable and accrued liabilities approximate
their fair values as of September 30, 1996 due to the short-term maturities of
these instruments. Information regarding the fair value of long-term debt is
provided in Note 5. The fair value of long-term debt is estimated using
discounted cash flow analyses, based on the current market rate for similar
types of borrowing arrangements.
Cash and cash equivalents
-------------------------
For purposes of the statement of cash flows, cash and cash equivalents
include all highly liquid investments with maturities of 90 days or less.
Capital improvement reserve
---------------------------
In accordance with the joint venture agreement of Boyer Lubbock Associates,
a capital improvement reserve account was established to insure that adequate
funds are available to pay for future capital improvements to the venture's
operating investment property. At the end of each month, 1% of the gross minimum
base rents and percentage rents collected from tenants during the month is to be
deposited into this account. These deposits have not been made on a monthly
basis but have been made periodically throughout the year in the aggregate
required amounts.
3. Joint Ventures
See Note 5 to the financial statements of PWIP3 included in this Annual
Report for a more detailed description of the joint ventures. Descriptions of
the ventures' properties are summarized below:
a. Camelot Associates
------------------
The joint venture owned and operated Camelot East and the Villas of Camelot
Apartments, a 492-unit apartment complex, located in Fairfield, Ohio. On June
19, 1996, the joint venture sold the operating investment property to an
unrelated third party for $15,150,000. PWIP3 received net sales proceeds of
approximately $5.9 million after deducting closing costs, the repayment of the
two outstanding first mortgage loans, the buyout of an underlying ground lease
and the co-venturers' share of the net proceeds.
<PAGE>
b. Boyer Lubbock Associates
-------------------------
The joint venture owns and operates Central Plaza Shopping Center, a
151,857 square foot shopping center, located in Lubbock, Texas.
c. Pine Trail Partnership
----------------------
The joint venture owns and operates Pine Trail Shopping Center, a 266,042
square foot shopping center, located in West Palm Beach, Florida.
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
----------------------------------
The joint venture agreements generally provide that taxable income and tax
loss from operations are allocated between PWIP3 and the co-venturers in the
same proportion as net cash flow distributed to each partner for such year,
except for certain items which are specifically allocated to the partners, as
defined in the joint venture agreements. Allocations of income and loss for
financial reporting purposes have been made in accordance with the allocations
of taxable income and loss.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.
Distributions
-------------
The joint venture agreements generally provide that distributions will be
paid first to PWIP3 from net cash flow monthly or quarterly, equivalent to
$171,000 annually in the case of Boyer Lubbock Associates and $515,000 annually
for Pine Trail Partnership. After payment of certain amounts to the
co-venturers, any remaining net cash flow is to be allocated between the
partners in accordance with their respective ownership percentages.
Distribution of net proceeds resulting from the sale or refinancing of the
properties shall be made in accordance with formulas provided in the joint
venture agreements.
4. Related party transactions
The Combined Joint Ventures have entered into property management
agreements with affiliates of the co-venturers, cancellable at the joint
ventures' option upon the occurrence of certain events. The management fees
generally are equal to 4% of gross receipts, as defined in the agreements.
Management fees totalling $190,000, $215,000 and $206,000 were paid to
affiliates of the co-venturers for the years ended September 30, 1996, 1995 and
1994, respectively.
Certain of the joint ventures pay leasing commissions to affiliates of the
co-venturers. Leasing commissions paid to affiliates amounted to $23,000,
$48,000 and $4,000 in fiscal 1996, 1995 and 1994, respectively.
<PAGE>
5. Long-term debt
Long-term debt at September 30, 1996 and 1995 consists of the following (in
thousands):
1996 1995
---- ----
10% nonrecourse mortgage loan
secured by Central Plaza Shopping
Center, payable in monthly
installments of $37, including
interest, with a final payment of
$4,010 due January 2, 2002. The
fair value of this mortgage note
payable approximated its carrying
value as of September 30, 1996. $ 4,162 $ 4,187
9.25% mortgage note, due July 1,
1997 with monthly payments of
principal and interest of $21
secured by the Camelot Apartments
property. - 2,000
9.0% mortgage note, due January 1,
1996 with monthly payments of
principal and interest of $30
secured by the Camelot Apartments
property. See discussion below. - 2,298
12.25% mortgage note, payable $85
per month including interest with a
payment of $5,874 due January 1,
2001, secured by the Pine Trail
Shopping Center. The fair value of
this mortgage note payable
approximated $7,476 as of September
30, 1996. 7,023 7,175
Mortgage note bearing interest at
prime plus 1% (9.25% at September
30, 1996), payable $3 per month,
including interest, with a payment
of $329 due in 2000, secured by 1.4
acres of land and the operating
investment thereon owned by the
Pine Trail joint venture. The fair
value of this mortgage note payable
approximated its carrying value as
of September 30, 1996. See
discussion below. 344 348
------- -------
11,529 16,008
Less amounts due within one year (205) (2,552)
------- -------
$11,324 $13,456
======= =======
<PAGE>
Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows (in thousands):
1997 $ 205
1998 231
1999 254
2000 627
2001 323
Thereafter 9,889
-------
$ 11,529
========
One of the first mortgage loans secured by the Camelot Apartments, with a
balance of $2,298,000 as of September 30, 1995, was scheduled to mature on
January 1, 1996. During the current year, the venture obtained an extension of
the maturity date from the lender to July 1, 1996 in return for an extension fee
of $5,600. 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. PWIP3 received net sales proceeds of approximately $5.9 million
after deducting closing costs, the repayment of the two outstanding first
mortgage loans, the buyout of an underlying ground lease and the co-venturers'
share of the net proceeds.
The Pine Trail Shopping Center has five out-parcels on the site, covering
approximately 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 fiscal 1995, the joint venture completed the acquisition
of one of these out-parcels, containing 60,248 square feet, for the purchase
price of $350,000. 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.
In accordance with the mortgage note agreement of the Pine Trail
Partnership, the joint venture is required to escrow certain insurance premiums
and real estate taxes totalling $228,000 and $216,000 at September 30, 1996 and
1995, respectively.
6. Leases
The Combined Joint Ventures derive a portion of their revenues from
noncancellable shopping center operating leases. The initial terms of such
leases range from five to twenty-five years with the majority of the leases
containing renewal options. Revenue from a major tenant of the property owned by
Boyer Lubbock Associates accounted for 26% of the venture's total revenues for
the year ended September 30, 1996.
Minimum future rentals due to be received on existing noncancellable
operating leases by the Pine Trail Partnership and Boyer Lubbock Associates for
the years ending September 30 and thereafter are as follows (in thousands):
1997 $ 2,662
1998 2,536
1999 2,403
2000 2,280
2001 1,804
Thereafter 9,656
--------
Total $ 21,341
========
The above amounts do not include contingent rentals based on cost of living
increases and rentals which may be received under certain leases on the basis of
a percentage of sales in excess of stipulated minimums.
The operating investment property of the Pine Trail Partnership is subject
to ground leases on the acreage not encumbered by long-term debt (Note 5) or
owned in fee. The leases contain various provisions with stipulations for cost
of living increases and contingent payments based on sales and purchase options.
The lease terms range from 35 to 99 years with certain renewal options.
Minimum future rentals payable on existing noncancellable ground leases are
as follows (in thousands):
1997 $ 113
1998 113
1999 113
2000 113
2001 113
Thereafter 5,746
--------
Total $ 6,311
========
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Schedule of Real Estate and Accumulated Depreciation
September 30, 1996
(In thousands)
<CAPTION>
Life on Which
Initial Cost to Gross Amount at Which Carried at Depreciation
Partnership Costs End of Year in Latest
Buildings Capitalized Buildings Income
and Subsequent to and Accumulated Date of Date Statement
Description Encumbrances(B) Land Improvements Acquisition Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- --------------- ---- ------------ ----------- ---- ------------- ----- ----------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Shopping Center $ 4,162 $ 966 $ 4,573 $1,014 $ 966 $ 5,587 $ 6,553 $3,992 1978-80 6/30/81 15-31.5 yrs.
Lubbock, TX
Shopping Center
West Palm
Beach, FL 7,367 2,561 13,306 1,885 2,927 14,824 17,751 5,630 1980-82 11/12/81 3-31.5 yrs
------- ------ ------- ------ ------ ------- ------- ------
$11,529 $3,527 $17,879 $2,899 $3,893 $20,411 $24,304 $9,622
======= ====== ======= ====== ====== ======= ======= ======
Notes:
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $20,884.
(B) See Note 5 to Combined Financial Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $31,792 $31,248 $30,906
Increase due to additions 230 544 342
Write-off due to dispositions (7,718) - -
------- ------- -------
Balance at end of year $24,304 $31,792 $31,248
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $14,282 $13,476 $12,585
Depreciation expense 710 806 891
Decreases due to dispositions (5,370) - -
------- ------- -------
Balance at end of year $ 9,622 $14,282 $13,476
======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended September 30, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 99
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,099
<PP&E> 7,882
<DEPRECIATION> 1,389
<TOTAL-ASSETS> 7,645
<CURRENT-LIABILITIES> 64
<BONDS> 1,420
0
0
<COMMON> 0
<OTHER-SE> 6,161
<TOTAL-LIABILITY-AND-EQUITY> 7,645
<SALES> 0
<TOTAL-REVENUES> 7,184
<CGS> 0
<TOTAL-COSTS> 487
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155
<INCOME-PRETAX> 6,542
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,542
<EPS-PRIMARY> 300.56
<EPS-DILUTED> 300.56
</TABLE>
