UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____to _____ .
Commission File Number: 0-10979
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3038189
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
June 30, 1997 and September 30, 1996 (Unaudited)
(In thousands)
ASSETS
June 30 September 30
------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
--------- --------
5,038 5,038
Less accumulated depreciation (1,466) (1,389)
--------- --------
3,572 3,649
Investments in joint ventures, at equity 2,841 2,844
Cash and cash equivalents 848 1,000
Accounts receivable 99 99
Deferred expenses, net 37 53
Note and interest receivable, net - -
--------- --------
$ 7,397 $ 7,645
========= ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 4 $ 4
Accounts payable and accrued expenses 65 60
Mortgage note payable 1,315 1,420
Partners' capital 6,013 6,161
--------- --------
$ 7,397 $ 7,645
========= ========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended June 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1995 $ (61) $ 5,619
Cash distributions (3) (314)
Net income 62 6,138
-------- -------
Balance at June 30, 1996 $ (2) $11,443
======== =======
Balance at September 30, 1996 $ - $ 6,161
Cash distributions (3) (316)
Net income 2 169
-------- -------
Balance at June 30, 1997 $ (1) $ 6,014
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental revenues $ 119 $ 119 $ 358 $ 358
Interest income 13 17 40 27
------- ------- -------- ------
132 136 398 385
Expenses:
Interest expense 36 39 109 118
Management fees 5 5 13 13
Depreciation expense 26 26 77 77
General and administrative 171 99 314 274
------- ------- -------- ------
238 169 513 482
------- ------- -------- ------
Operating loss (106) (33) (115) (97)
Partnership's share of
ventures' income 97 24 286 263
Partnership's share of gain
on sale of operating
investment property - 6,034 - 6,034
------- ------- -------- ------
Net income (loss) $ (9) $ 6,025 $ 171 $6,200
======= ======= ======== ======
Net income (loss) per Limited
Partnership Unit $(0.41) $276.83 $ 7.86 $284.83
====== ======= ====== =======
Cash distributions per Limited
Partnership Unit $ 4.88 $ 4.85 $14.64 $ 14.55
====== ====== ====== =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 21,550 Units of Limited Partnership Interest outstanding
for each period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 171 $ 6,200
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation expense 77 77
Amortization of deferred financing costs 16 16
Partnership's share of ventures' income (286) (263)
Partnership's share of gain on sale of operating
investment property - (6,034)
Changes in assets and liabilities:
Accounts payable and accrued expenses 5 (10)
-------- ---------
Total adjustments (188) (6,214)
-------- ---------
Net cash used in operating activities (17) (14)
Cash flows from investing activities:
Distributions from joint ventures 289 6,581
Cash flows from financing activities:
Distributions to partners (319) (317)
Principal payments on mortgage note payable (105) (96)
-------- ---------
Net cash used in financing activities (424) (413)
-------- ---------
Net (decrease) increase in cash and cash equivalents (152) 6,154
Cash and cash equivalents, beginning of period 1,000 296
-------- ---------
Cash and cash equivalents, end of period $ 848 $ 6,450
======== =========
Cash paid during the period for interest $ 93 $ 102
======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should
be read in conjunction with the financial statements and footnotes
contained in the Partnership's Annual Report for the year ended September
30, 1996. In the opinion of management, the accompanying financial
statements, which have not been audited, reflect all adjustments necessary
to present fairly the results for the interim period. All of the
adjustments reflected in the accompanying interim financial statements are
of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities as of June 30, 1997 and September 30,
1996 and revenues and expenses for each of the three- and nine-month
periods ended June 30, 1997 and 1996. Actual results could differ from the
estimates and assumptions used.
2. Related Party Transactions
Management fees earned by the Adviser totalled $13,000 for each of the
nine-month periods ended June 30, 1997 and 1996. Accounts payable -
affiliates at June 30, 1997 and September 30, 1996 consists of $4,000 of
management fees payable to the Adviser at both dates.
Included in general and administrative expenses for the nine months
ended June 30, 1997 and 1996 is $50,000 and $55,000, respectively,
representing reimbursements to an affiliate of the General Partner for
providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for the nine
months ended June 30, 1997 and 1996 is $6,000 and $1,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Real Estate Investments
As of June 30, 1997, the Partnership directly owns one operating
investment property (Northeast Plaza) and has investments in two joint
venture partnerships (three at June 30, 1996) as more fully described in
the Partnership's Annual Report. On June 19, 1996, the joint venture which
owned the Camelot Apartments sold the operating investment property to an
unrelated third party for $15,150,000. The Partnership received net sales
proceeds of approximately $5.9 million after deducting closing costs, the
repayment of the outstanding first mortgage loans, the buyout of an
underlying ground lease and the co-venturers' share of the net proceeds.
The Partnership made a special distribution to the Limited Partners from
the Camelot sale proceeds of approximately $5.5 million, or $256 per
original $1,000 investment, on August 15, 1996. The remaining net proceeds
were added to the Partnership's cash reserves to provide for the potential
capital needs of the Partnership's remaining investments. Subsequent to
quarter ended June 30,1997, on August 1, 1997, the Partnership sold its
interest in the Pine Trail Shopping Center to its joint venture partner for
a net price of $6,150,000. As a result of this transaction, the Partnership
will make a special capital distribution to the Limited Partners of $285.25
per original $1,000 investment on September 15, 1997. The Partnership no
longer holds an interest in this property.
The joint ventures are accounted for by using the equity method
because the Partnership does not have a voting control interest in the
ventures. Under the equity method, the assets, liabilities, revenues and
expenses of the joint ventures do not appear in the Partnership's financial
statements. Instead, the investments are carried at cost adjusted for the
Partnership's share of the ventures' earnings, losses and distributions.
<PAGE>
Summarized operating results of the joint ventures for the three and
nine months ended June 30, 1997 and 1996 are as follows:
Condensed Combined Summary of Operations
For the three and nine months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Rental revenues and expense
recoveries $ 885 $ 1,499 $ 2,700 $ 4,492
Interest and other income 9 2 16 128
------- ------- -------- -------
894 1,501 2,716 4,620
Property operating expenses 268 789 880 2,192
Interest expense 328 440 993 1,310
Depreciation and
amortization 142 204 383 608
------- ------- -------- -------
738 1,433 2,256 4,110
------- ------- -------- -------
Operating income 156 68 460 510
Gain on sale of operating
investment property - 11,996 - 11,996
------- ------- -------- -------
Net income $ 156 $ 12,064 $ 460 $12,506
======= ======== ======== =======
Net income:
Partnership's share of
combined net income $ 98 $ 7,520 $ 289 $ 7,809
Co-venturers' share of
combined net income 58 4,544 171 4,697
------- -------- -------- -------
$ 156 $ 12,064 $ 460 $12,506
======= ======== ======== =======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
net income, as shown
above $ 98 $ 7,520 $ 289 $ 7,809
Amortization of excess
basis (1) (1,462) (3) (1,512)
------- ------- -------- --------
Partnership's share of
ventures' net income $ 97 $ 6,058 $ 286 $ 6,297
======= ======= ======== ========
<PAGE>
The Partnership's share of ventures' net income is presented as follows
in the accompanying statements of operations (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
ventures' income $ 97 $ 24 $ 286 $ 263
Partnership's share of
gain on sale of
operating investment
property - 6,034 - 6,034
------ ------ ------- ------
$ 97 $ 6,058 $ 286 $6,297
====== ======= ======== ======
4. Note and Interest Receivable, Net
Note and interest receivable at June 30, 1997 and September 30, 1996
consists of a $3,445,336 note received in connection with the Partnership's
sale of its joint venture interest in the Briarwood joint venture in
December of 1984. The note has been netted against deferred gain on the
sale of a like amount on the Partnership's balance sheet. The note bears
interest at 9% annually, matures on January 1, 2000 and is subordinated to
a first mortgage loan. Interest and principal payments on the note are
payable only to the extent of net cash flow from the properties sold, as
defined in the sale documents. Any interest not received will accrue
additional interest of 9% per annum. The Partnership's policy has been to
defer recognition of all interest income on the note until collected, due
to the uncertainty of its collectibility. To date, the Partnership has not
received any interest payments. Per the terms of the note agreement,
accrued interest receivable as of June 30, 1997 would be approximately
$6,710,000. Since the properties securing the note continue to generate
operating deficits and the Partnership's note receivable is subordinated to
other first mortgage debt, there is significant uncertainty as to the
collectibility of both the principal and accrued interest as of June 30,
1997. 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.
5. Mortgage Note Payable and Contingencies
The mortgage note payable at June 30, 1997 and September 30, 1996 is
secured by the Partnership's wholly-owned Northeast Plaza Shopping Center.
On March 29, 1994, the Partnership refinanced the existing wraparound
mortgage note secured by Northeast Plaza, which had been in default for
over two years, with a new loan issued by the prior underlying first
mortgage lender. The new loan, in the initial principal amount of
$1,722,000, has a term of five years and bears interest at a fixed rate of
9% per annum. Monthly principal and interest payments of approximately
$21,900 are due until maturity in May 1999. The loan may be prepaid at
anytime without penalty. The fair value of this mortgage note payable
approximated its carrying value as of June 30, 1997 and September 30, 1996.
Management believes that the Partnership's efforts to sell or
refinance the Northeast Plaza property have been impeded by potential buyer
and lender concerns of an environmental nature with respect to the
property. During 1990, it was discovered that certain underground storage
tanks at a Mobil service station located adjacent to the shopping center
had leaked and contaminated the groundwater in the vicinity of the station.
Mobil investigated the leak and is progressing with efforts to remedy the
soil and groundwater contamination under the supervision of the Florida
Department of Environmental Regulation, which has approved Mobil's remedial
action plan. During fiscal 1990, the Partnership had obtained an
indemnification agreement from Mobil Oil Corporation in which Mobil agreed
to bear the cost of all damages and required clean-up expenses.
Furthermore, Mobil indemnified the Partnership against its inability to
sell, transfer, or obtain financing on the property because of the
contamination. As a result of the contamination of the groundwater at
Northeast Plaza, the Partnership has incurred certain damages, primarily
related to the inability to sell the property and to delays in the process
of refinancing the property's mortgage indebtedness. The Partnership has
incurred significant out-of-pocket and legal expenses in connection with
such sale and refinancing efforts. Despite repeated requests by the
Partnership for compensation under the terms of the indemnification
agreement, to date Mobil has disagreed as to the extent of the
indemnification and has refused to compensate the Partnership for any of
these damages.
During the first quarter of fiscal 1993, the Partnership filed suit in
Federal Court against Mobil for breach of indemnity and property damage. On
April 28, 1995, Mobil was successful in dismissing the action from the
Federal Court system on jurisdictional grounds. Subsequently, the
Partnership filed an action in the Florida State Court system. 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 due to trespass and nuisance. By obtaining a summary judgment
of liability and recently defeating Mobil's appeal of the summary judgment,
the Partnership has firmly established Mobil Oil Corporation's liability
for the trespass and nuisance caused by the contamination. The trial on
these counts will focus directly on the damages suffered by the
Partnership. In addition, the trial court has found a reasonable
evidentiary basis for the Partnership to amend its complaint to seek
punitive damages against Mobil for certain intentional or grossly negligent
conduct which caused the contamination of the Center. The jury will
determine the Partnership's entitlement to compensatory and/or punitive
damages, if any. Finally, the trial court granted the Partnership leave to
seek an injunction against Mobil to force them to complete the cleanup of
the Center on an expedited basis. If the Partnership is successful at
trial, the injunction will likely advance the completion of the cleanup by
several years. A trial date is expected to be set shortly by the Court. The
Partnership continues to be concerned about the impact of this
contamination on the Partnership's ability to sell this investment on
favorable terms in the future. 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 the
recoveries, if any, which could result from this litigation have been
recorded.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Subsequent to the end of the third quarter, on August 1, 1997, the
Partnership sold its interest in the Pine Trail Shopping Center to its joint
venture partner for a net price of $6,150,000. Funds to complete this
transaction were provided from a refinancing of the first mortgage debt secured
by the Pine Trail property. As a result of this transaction, the Partnership
will make a special capital distribution to the Limited Partners of $285.25 per
original $1,000 investment on September 15, 1997. The Partnership no longer
holds an interest in this property. The net price of $6,150,000 is the amount
the Partnership would have received from a third-party sale at any sale price
between $13,800,000 and $18,500,000. Under the terms of the Pine Trail joint
venture agreement, the Partnership was entitled to the first $6,150,000 as a
first priority from the net sale proceeds after the payment of closing costs and
adjustments as well as the mortgage indebtedness of approximately $7,700,000.
Then the co-venture partner was entitled to the next $4,156,000, with any
remaining net sale proceeds split 50%/50%. Under these terms, the Partnership
would not receive any amount above $6,150,000 until the sale price of the
property exceeded $18,500,000. If a sale price of over $18,500,000 were
achieved, the Partnership and the co-venturer would share equally in any excess
over $18,500,000. Management believed that a sale price of $18,500,000 was
unlikely to be achieved for several years, which was supported by the most
recent independent appraisal of Pine Trail which valued the property at
$16,250,000. The net operating income from the Pine Trail Shopping Center is not
expected to improve significantly for the next five years because of the
long-term leases and fixed rental rates on the anchor and out-parcel leases,
which comprise 73% of the property's total base rental income and nearly 82% of
the total net leasable area. One anchor's lease term expires in January 2002,
two other anchor leases expire in November 2006, and the fourth anchor lease
expires in January 2012. As a result of these circumstances, management believed
that accepting the net sale price of $6,150,000 was in the Partnership's best
interests.
At Central Plaza Shopping Center in Lubbock, Texas, the occupancy level
remained at 92% as of June 30, 1997, unchanged from the prior quarter. Despite
intensive efforts by the property's local leasing team, the remaining 11,500
square feet of vacant space at the Center has not been leased. The leasing team
has contacted over 30 retailers. However, after pursuing the most promising
responses to these initial contacts, they were unable to find a fit between the
retailers' needs and the space available at the Center. To broaden the search
for tenants, a Dallas leasing firm has been engaged to focus on retailers in the
Dallas area that might be interested in entering the Lubbock market.
As previously reported, the Partnership and its co-venture partner have
been exploring potential opportunities to sell Central Plaza. During the
quarter, it was agreed that management would market the Center for sale rather
than wait to complete a lease-up of the remaining vacant space. Several regional
and national real estate brokerage firms were interviewed as candidates for this
assignment, and a Dallas-based real estate broker with a specialty in retail
properties was selected to market the Central Plaza Shopping Center for sale.
The marketing process has begun, and sale packages are being distributed to
prospective buyers. However, there are no assurances that a sale transaction
will be completed in the near term.
The sale of the Partnership's interest in Pine Trail and the plans to
market Central Plaza for sale position the Partnership for a possible
liquidation within the next 2-to-3 years pending the resolution of the issues
affecting the Partnership's Northeast Plaza investment. 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 at a Mobil service station
located adjacent to the shopping center had leaked and contaminated the ground
water in the vicinity of the station. Mobil investigated the leak and is
progressing with efforts to remedy the soil and ground water contamination under
the supervision of the Florida Department of Environmental Regulation, which has
approved Mobil's remedial action plan. During fiscal 1990, the Partnership had
obtained a formal indemnification agreement from Mobil Oil Corporation in which
Mobil agreed to bear the cost of all damages and required clean-up expenses.
Furthermore, Mobil indemnified the Partnership against its inability to sell,
transfer or obtain financing on the property because of the contamination. As a
result of the contamination of the ground water at Northeast Plaza, the
Partnership has incurred certain damages, primarily related to the inability to
sell the property and to delays in the process of refinancing the property's
mortgage indebtedness. The Partnership has incurred significant out-of-pocket
and legal expenses in connection with such sale and refinancing efforts. Despite
repeated requests by the Partnership for compensation under the terms of the
indemnification agreement, to date Mobil has disagreed as to the extent of the
indemnification and has refused to compensate the Partnership for any of these
damages.
During the first quarter of fiscal 1993, the Partnership filed suit in
Federal Court against Mobil for breach of indemnity and property damage. On
April 28, 1995, Mobil was successful in dismissing the action from the Federal
Court system on jurisdictional grounds. Subsequently, the Partnership filed an
action in the Florida State Court system. 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 due to trespass and
nuisance. By obtaining a summary judgment of liability and recently defeating
Mobil's appeal of the summary judgment, the Partnership has firmly established
Mobil Oil Corporation's liability for the trespass and nuisance caused by the
contamination. The trial on these counts will focus directly on the damages
suffered by the Partnership. In addition, the trial court has found a reasonable
evidentiary basis for the Partnership to amend its complaint to seek punitive
damages against Mobil for certain intentional or grossly negligent conduct which
caused the contamination of the Center. The jury will determine the
Partnership's entitlement to compensatory and/or punitive damages, if any.
Finally, the trial court granted the Partnership leave to seek an injunction
against Mobil to force them to complete the cleanup of the Center on an
expedited basis. If the Partnership is successful at trial, the injunction will
likely advance the completion of the cleanup by several years. A trial date is
expected to be set shortly by the Court. The Partnership continues to be
concerned about the impact of this contamination on the Partnership's ability to
sell this investment on favorable terms in the future. The outcome of these
legal proceedings cannot presently be determined.
The Northeast Plaza property, which the Partnership master leases to a
local manager/operator, was 100% leased and 92% occupied as of June 30, 1997. As
reported last quarter, a 10,000 square foot tenant moved out of the Center.
However, a new five-year lease for this space was signed with an automobile
supply store. The automobile supply store is completing its build-out and is
expected to move in by September 30, 1997. Two tenants signed lease renewals
during the quarter. Both tenants, one whose 900 square foot lease was scheduled
to expire in April, and the other, whose 1,890 square foot lease was not
scheduled to expire until 1998, signed new five-year leases.
At June 30, 1997, the Partnership had available cash and cash equivalents
of $848,000. 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.
<PAGE>
Results of Operations
Three Months Ended June 30, 1997
- --------------------------------
The Partnership reported a net loss of $9,000 for the three months ended
June 30, 1997, as compared to net income of $6,025,000 for the same period in
the prior year. The unfavorable change in the Partnership's net operating
results for the current three-month period is primarily the result of the
Partnership's share of the gain from the June 1996 sale of the Camelot
Apartments recognized in the prior three-month period. The gain recognized by
the Camelot joint venture totalled $11,996,000 and the Partnership's share of
such gain amounted to $6,034,000, net of the write-off of the unamortized
balance of the Partnership's excess basis in the Camelot joint venture of
$1,437,000. In addition, a $73,000 increase in the Partnership's operating loss
contributed to the unfavorable change in net operating results. The
Partnership's operating loss increased due to a $69,000 increase in the
Partnership's operating expenses and a $4,000 decrease in interest income. The
Partnership's operating expenses increased mainly due to a $72,000 increase in
general and administrative expenses. General and administrative expenses
increased due to a $79,000 increase in legal fees incurred during the current
three-month period as a result of the continued litigation against Mobil Oil
Corporation, as discussed further above. The increase in legal fees was
partially offset by a decline in certain other required professional services
during the current period. The increase in general and administrative expenses
was partially offset by a $3,000 decrease in interest expense. Interest expense
decreased due to a reduction in the outstanding balance of the mortgage note
payable secured by the Partnership's wholly-owned Northeast Plaza Shopping
Center due to the required monthly principal payments. Interest income decreased
due to a decrease in the Partnership's average outstanding cash balances during
the current three-month period resulting from the receipt of the Camelot sale
proceeds in June 1996 and the temporary investment prior to the special
distribution to the Limited Partners on August 15, 1996.
The gain on the Camelot sale in the prior period and the increase in the
Partnership's operating loss were partially offset by a $73,000 increase in the
Partnership's share of ventures' income for the current three-month period. The
Partnership's share of ventures' income increased mainly due to a $56,000 loss
recognized in the prior year from the Camelot joint venture through the date of
the sale on June 19, 1996, and a $23,000 increase in net income at the Pine
Trail joint venture when compared to the same period in the prior year. Net
income increased at Pine Trail mainly due to a $17,000 increase in rental
revenues and an $8,000 decrease in interest expense. Rental revenues increased
as a result of increases in rental rates when compared to the same period in the
prior year. Interest expense decreased due to a reduction in the outstanding
balance of the mortgage note payable due to the required monthly principal
payments.
Nine Months Ended June 30, 1997
- -------------------------------
The Partnership reported net income of $171,000 for the nine months ended
June 30, 1997, as compared to net income of $6,200,000 for the same period in
the prior year. The substantial decrease in the Partnership's net income for the
current nine-month period is primarily the result of the Partnership's share of
the gain from the June 1996 sale of the Camelot Apartments recognized in the
prior nine-month period, as discussed above. In addition, an $18,000 increase in
the Partnership's operating loss contributed to the decline in net income. The
Partnership's operating loss increased due to a $31,000 increase in the
Partnership's operating expenses, which was partially offset by a $13,000
increase in interest income. The Partnership's operating expenses increased
mainly due to a $40,000 increase in general and administrative expenses. General
and administrative expenses increased due to a $107,000 increase in legal fees
incurred during the current nine-month period as a result of the continued
litigation against Mobil Oil Corporation, as discussed further above. The
increase in legal fees was partially offset by a decline in certain other
required professional services during the current period. The increase in
general and administrative expenses was partially offset by a $9,000 decrease in
interest expense. Interest expense decreased due to a reduction in the
outstanding balance of the mortgage note payable secured by the Partnership's
wholly-owned Northeast Plaza Shopping Center due to the required monthly
principal payments. Interest income increased due to an increase in the
Partnership's average outstanding cash balances during the current nine-month
period resulting from the retention of a portion of the Camelot sale proceeds
subsequent to the June 1996 sale transaction.
The gain on the Camelot sale and the increase in the Partnership's
operating loss was partially offset by a $23,000 increase in the Partnership's
share of ventures' income for the current nine-month period. The Partnership's
share of ventures' income increased due to increases in net income at the
Central Plaza and Pine Trail joint ventures of $52,000 and $49,000,
respectively. Net income increased at Central Plaza primarily due to decreases
in maintenance costs and real estate tax expense. Net income increased at Pine
Trail mainly due to an increase in rental revenues resulting from increases in
rental rates when compared to the same period in the prior year. The increases
in net income at the Central Plaza and Pine Trail joint ventures was partially
offset by the inclusion of the operating results of the Camelot Apartments in
the prior year's figure. The Partnership's share of operating income from the
Camelot joint venture through the date of the sale in the prior year, net of the
amortization of excess basis, was $51,000.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously reported, the Partnership's General Partners were named as
defendants in a class action lawsuit against PaineWebber Incorporated
("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of
70 direct investment offerings of interests in various limited partnership
investments and REIT stocks, including those offered by the Partnership. In
January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and
the class plaintiffs submitted a definitive settlement agreement which 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 settlement was held in December 1996, and in March 1997 the
court issued a final approval of the settlement. The release of the $125 million
of settlement proceeds has not occurred to date pending the resolution of an
appeal of the settlement agreement by two of the plaintiff class members. As
part of the settlement agreement, PaineWebber has agreed not to seek
indemnification from the related partnerships and real estate investment trusts
at issue in the litigation (including the Partnership) for any amounts that it
is required to pay under the settlement.
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
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $3.4 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation with respect to the
Bandrowski action was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which provided for
the complete resolution of such action. Final releases and dismissals with
regard to this action were received during the quarter ended June 30, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
With regard to the Partnership's litigation against Mobil Oil Corporation
related to the groundwater contamination at the Northeast Plaza Shopping Center,
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 due to trespass and nuisance. By obtaining a summary judgment of
liability and recently defeating Mobil's appeal of the summary judgment, the
Partnership has firmly established Mobil Oil Corporation's liability for the
trespass and nuisance caused by the contamination. The trial on these counts
will focus directly on the damages suffered by the Partnership. In addition, the
trial court has found a reasonable evidentiary basis for the Partnership to
amend its complaint to seek punitive damages against Mobil for certain
intentional or grossly negligent conduct which caused the contamination of the
Center. The jury will determine the Partnership's entitlement to compensatory
and/or punitive damages, if any. Finally, the trial court granted the
Partnership leave to seek an injunction against Mobil to force them to complete
the cleanup of the Center on an expedited basis. If the Partnership is
successful at trial, the injunction will likely advance the completion of the
cleanup by several years. A trial date is expected to be set shortly by the
Court. The Partnership continues to be concerned about the impact of this
contamination on the Partnership's ability to sell this investment on favorable
terms in the future. The outcome of these legal proceedings cannot presently be
determined.
<PAGE>
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
By: THIRD INCOME PROPERTIES, INC.
General Partner
By:/s/ Walter V. Arnold
---------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: August 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended June 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 848
<SECURITIES> 0
<RECEIVABLES> 99
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 947
<PP&E> 7,879
<DEPRECIATION> 1,466
<TOTAL-ASSETS> 7,397
<CURRENT-LIABILITIES> 69
<BONDS> 1,315
0
0
<COMMON> 0
<OTHER-SE> 6,013
<TOTAL-LIABILITY-AND-EQUITY> 7,397
<SALES> 0
<TOTAL-REVENUES> 684
<CGS> 0
<TOTAL-COSTS> 404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 171
<INCOME-TAX> 0
<INCOME-CONTINUING> 171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 171
<EPS-PRIMARY> 7.86
<EPS-DILUTED> 7.86
</TABLE>
