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 MARCH 31, 1998
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
March 31, 1998 and September 30, 1997 (Unaudited)
(In thousands)
ASSETS
March 31 September 30
-------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
-------- ---------
5,038 5,038
Less accumulated depreciation (1,542) (1,491)
-------- ---------
Net operating investment property 3,496 3,547
Investment in joint venture, at equity - 215
Cash and cash equivalents 3,291 973
Deferred expenses, net 21 32
-------- ---------
$ 6,808 $ 4,767
======== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 4
Accrued expenses 29 58
Mortgage note payable 1,203 1,278
Partners' capital 5,575 3,427
-------- ---------
$ 6,808 $ 4,767
======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the three and six months ended March 31, 1998 and 1997
(Unaudited) (In thousands, except per Unit amounts)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues $ 119 $ 119 $ 239 $ 239
Interest and other income 26 14 54 27
------ ------ ------ ------
145 133 293 266
Expenses:
Interest expense 33 36 67 73
Management fees 1 4 2 8
Depreciation expense 25 26 51 51
General and administrative 78 102 128 143
------ ------ ------ ------
137 168 248 275
------ ------ ------ ------
Operating income (loss) 8 (35) 45 (9)
Partnership's share of ventures'
income (losses) (184) 108 (155) 189
Partnership's share of gain on
sale of investment property 2,392 - 2,392 -
------ ------ ------ ------
Net income $2,216 $ 73 $2,282 $ 180
====== ====== ====== ======
Net income per Limited
Partnership Unit $101.80 $ 3.36 $104.83 $ 8.27
======= ====== ======= ======
Cash distributions per Limited
Partnership Unit $ 1.31 $ 4.88 $ 6.19 $ 9.76
======= ====== ======= ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 21,550 Units of Limited Partnership Interest outstanding for each
period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended March 31, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1996 $ - $6,161
Cash distributions (2) (210)
Net income 2 178
------- ------
Balance at March 31, 1997 $ - $6,129
======= ======
Balance at September 30, 1997 $ 33 $3,394
Cash distributions (1) (133)
Net income 23 2,259
------- ------
Balance at March 31, 1998 $ 55 $5,520
======= ======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the six months ended March 31, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 2,282 $ 180
Adjustments to reconcile net income to
net cash provided by operating activities:
Partnership's share of gain on sale of
investment property (2,392) -
Depreciation expense 51 51
Amortization of deferred financing costs 11 11
Partnership's share of ventures' income
(losses) 155 (189)
Changes in assets and liabilities:
Accounts payable - affiliates (29) -
Accounts payable and accrued expenses (3) (32)
------- -------
Total adjustments (2,207) (159)
------- -------
Net cash provided by operating activities 75 21
Cash flows from investing activities:
Distributions from joint ventures 2,452 157
Cash flows from financing activities:
Distributions to partners (134) (212)
Principal payments on mortgage note payable (75) (69)
------- -------
Net cash used in financing activities (209) (281)
------- -------
Net increase (decrease) in cash and cash equivalents 2,318 (103)
Cash and cash equivalents, beginning of period 973 1,000
------- -------
Cash and cash equivalents, end of period $ 3,291 $ 897
======= =======
Cash paid during the period for interest $ 56 $ 62
======= =======
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, 1997. 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 March 31, 1998 and September 30, 1997 and revenues and
expenses for the three- and six-month periods ended March 31, 1998 and 1997.
Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Management fees earned by the Adviser for the six-month periods ended
March 31, 1998 and 1997 totalled $2,000 and $8,000, respectively. Accounts
payable - affiliates at March 31, 1998 and September 30, 1997 consists of $1,000
and $4,000, respectively, of management fees payable to the Adviser.
Included in general and administrative expenses for the six months March
31, 1998 and 1997 is $35,000 and $33,000, 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 six months
ended March 31, 1998 and 1997 is $1,000 and $5,000, respectively, representing
fees paid to an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
3. Real Estate Investments
-----------------------
As of March 31, 1998, the Partnership directly owns one operating
investment property, the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota, Florida (see Notes 5 and 6). The Partnership
had no joint venture partnership investments at March 31, 1998 (two at March 31,
1997). On March 3, 1998, Boyer Lubbock Associates, a joint venture in which the
Partnership had an interest, sold the Central Plaza Shopping Center to an
unrelated third party for a net price of $8,350,000. The Partnership received
proceeds of approximately $2,199,000 after the assumption of the outstanding
first mortgage loan of $4,122,000, closing costs and proration adjustments of
$232,000, and the co-venture partner's share of the proceeds of $1,797,000. In
addition, the Partnership received $82,000 upon the liquidation of the joint
venture, which represented its share of the net cash flow from operations
through the date of the sale. As a result of this transaction, the Partnership
made a Special Distribution to the Limited Partners of approximately $2,284,000,
or $106 per original $1,000 investment, on April 3, 1998. The Partnership's
share of the gain on the sale of the Central Plaza property totalled $2,392,000
(net of the write-off of unamortized excess basis of $17,000). The Partnership
and its co-venture partner had engaged the services of a nationally affiliated
brokerage firm to market the Central Plaza property for sale during fiscal 1997.
The property was marketed extensively and sales packages were distributed to
national, regional and local prospective purchasers. As a result of these
efforts, three offers were received. After evaluating the offers and the
relative strength of the prospective purchasers, an offer was selected and the
Partnership and the co-venturer negotiated a purchase and sale contract with the
prospective buyer that was executed in January 1998. The net sale price under
the terms of the purchase and sale agreement was $8,350,000, which was net of a
$525,000 credit to the buyer in return for its assumption of the existing first
mortgage loan secured by the property. This loan, which contained a prepayment
penalty amount that was greater than the $525,000 credit to the buyer, carried
an interest rate of 10% per annum. Since this interest rate was higher than
current market rates obtainable by the prospective buyer, the credit was
negotiated. The net proceeds from the sale were greater than if the venture
received a gross sale price of $8,875,000 and paid the prepayment penalty called
for under the loan agreement. The loan was not prepayable without penalty until
February 2002. Both the Partnership and the co-venturer believed the risks
associated with holding this property until the prepayment penalty expired
outweighed the reduction in net proceeds resulting from the interest rate credit
negotiated with the buyer.
<PAGE>
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 made a special capital distribution to the Limited
Partners of approximately $6,147,000, or $285.25 per original $1,000 investment,
on September 15, 1997. The Partnership recognized a gain of $3,565,000 (net of
the write-off of unamortized excess basis of $50,000) in the fourth quarter of
fiscal 1997 in connection with this sale transaction.
The joint ventures were accounted for by using the equity method because
the Partnership did not have a voting control interest in the ventures. Under
the equity method, the assets, liabilities, revenues and expenses of the joint
ventures did not appear in the Partnership's financial statements. Instead, the
investments were carried at cost adjusted for the Partnership's share of the
ventures' earnings, losses and distributions. Summarized operating results of
the Central Plaza joint venture for the period from January 1, 1998 through the
date of sale (March 3, 1998) and for the period from October 1, 1997 through the
date of sale and the Central Plaza and Pine Trail joint ventures for the three
and six months ended March 31, 1997 are as follows:
Condensed Combined Summary of Operations
For the three and six months ended March 31, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Rental revenues and expense
recoveries $ 155 $ 866 $ 443 $ 1,815
Interest and other income 3 3 8 7
------- ------- ------- -------
158 869 451 1,822
Property operating expenses 130 251 215 612
Interest expense 61 332 171 665
Depreciation and amortization 202 115 224 241
------- ------- ------- -------
393 698 610 1,518
------- ------- ------- -------
Operating income (loss) (235) 171 (159) 304
Gain on sale of investment
property 5,567 - 5,567 -
------- ------- ------- -------
Net income $ 5,332 $ 171 $ 5,408 $ 304
======= ======= ======= =======
Net income:
Partnership's share of
net income $ 2,225 $ 109 $ 2,254 $ 191
Co-venturers' share of
net income 3,107 62 3,154 113
------- ------- ------- -------
$ 5,332 $ 105 $ 5,408 $ 304
======= ======= ======= =======
Reconciliation of Partnership's Share of Operations
For the three and six months ended March 31, 1998 and 1997 (in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of net
income, as shown above $ 2,225 $ 109 $ 2,254 $ 191
Amortization of excess basis (17) (1) (17) (2)
------- ------- ------- -------
Partnership's share of
ventures' net income $ 2,208 $ 108 $ 2,237 $ 189
======= ======= ======= =======
<PAGE>
The Partnership's share of ventures' net income is presented as follows in
the accompanying statements of operations (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
ventures' income (loss) $ (184) $ 108 $ (155) $ 189
Partnership's share of
gain on sale of
investment property 2,392 - 2,392 -
------- ------- ------- ------
$ 2,208 $ 108 $ 2,237 $ 189
======= ======= ======= ======
4. Note and Interest Receivable, Net
---------------------------------
Note and interest receivable at March 31, 1998 and September 30, 1997
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 accrues 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 March 31, 1998 would be
approximately $7,391,000. 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 March 31,
1998. 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
---------------------
The mortgage note payable at March 31, 1998 and September 30, 1997 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 March 31, 1998 and September 30,
1997.
6. 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
groundwater in the vicinity of the station. Since the time that the
contamination was discovered, Mobil Oil Corporation ("Mobil") has investigated
the problem and is progressing with efforts to remedy the soil and groundwater
contamination under the supervision of the Florida Department of Environmental
Protection, 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. Subsequent to the discovery of the contamination, the Partnership
experienced difficulty in refinancing the mortgages on the property that matured
in 1991. The existence of contamination on the property impacted the
Partnership's ability to obtain standard market financing. Ultimately, the
Partnership was able to refinance its first mortgage at a substantially reduced
loan-to-value ratio. In addition, the Partnership was unable to sell the
property at an uncontaminated market price. The Partnership also retained
outside counsel and environmental consultants to review Mobil's remediation
efforts and has incurred significant out-of-pocket expenses in connection with
this situation. 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 its 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 utilized the substantial discovery
and trial preparation work already completed for the Federal case. During
November 1996, the Partnership and Mobil attempted to settle the action through
mediation. A settlement was not achieved. Mobil's proposal to settle the case,
which included a proposed purchase of the contaminated portion of the Northeast
Plaza property from the Partnership, failed due to Mobil's inability to obtain a
zoning variance which was necessary to make such a transaction possible. A jury
trial against Mobil Oil Corporation took place during the two-week period ended
April 17, 1998, in state court in Sarasota, Florida. The Partnership sought an
injunctive order to force Mobil to clean up the contamination and sought to
recover damages suffered by the Partnership as a result of the contamination.
During trial, Mobil stipulated to the entry of an injunctive order, to be
documented by both sides' experts, compelling Mobil to continue the cleanup
until state water quality standards are achieved. The experts currently predict
that the cleanup will be completed in approximately one to three years. As
previously reported, the Partnership had obtained a summary judgment as to
liability on its claims for trespass and nuisance. The issues of damages on
these two counts, as well as the Partnership's breach of contract claim, were
submitted to the jury. On April 17, 1998, the jury returned a verdict in favor
of the defendant, Mobil. The Partnership has filed a motion for a new trial and
is considering an appeal if a new trial is not granted. The final outcome of
these legal proceedings cannot presently be determined.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended September 30, 1997 under the heading "Certain Factors Affecting
Future Operating Results", which could cause actual results to differ materially
from historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
On March 3, 1998, Boyer Lubbock Associates, a joint venture in which the
Partnership had an interest, sold the Central Plaza Shopping Center to an
unrelated third party for a net price of $8,350,000. The Partnership received
proceeds of approximately $2,199,000 after the assumption of the outstanding
first mortgage loan of $4,122,000, closing costs and proration adjustments of
$232,000, and the co-venture partner's share of the proceeds of $1,797,000. In
addition, the Partnership received $82,000 upon the liquidation of the joint
venture, which represented its share of the net cash flow from operations
through the date of the sale. As a result of this transaction, the Partnership
made a Special Distribution to the Limited Partners of approximately $2,284,000,
or $106 per original $1,000 investment, subsequent to the quarter-end on April
3, 1998. The Partnership and its co-venture partner had engaged the services of
a nationally affiliated brokerage firm to market the Central Plaza property for
sale during fiscal 1997. The property was marketed extensively and sales
packages were distributed to national, regional and local prospective
purchasers. As a result of these efforts, three offers were received. After
evaluating the offers and the relative strength of the prospective purchasers,
an offer was selected and the Partnership and the co-venturer negotiated a
purchase and sale contract with the prospective buyer that was executed in
January 1998. The net sale price under the terms of the purchase and sale
agreement was $8,350,000, which was net of a $525,000 credit to the buyer in
return for its assumption of the existing first mortgage loan secured by the
property. This loan, which contained a prepayment penalty amount that was
greater than the $525,000 credit to the buyer, carried an interest rate of 10%
per annum. Since this interest rate was higher than current market rates
obtainable by the prospective buyer, the credit was negotiated. The net proceeds
from the sale were greater than if the venture received a gross sale price of
$8,875,000 and paid the prepayment penalty called for under the loan agreement.
The loan was not prepayable without penalty until February 2002. Both the
Partnership and the co-venturer believed the risks associated with holding this
property until the prepayment penalty expired outweighed the reduction in net
proceeds resulting from the interest rate credit negotiated with the buyer.
With the fiscal 1998 sale of the Central Plaza Shopping Center and fiscal
1997 sale of the Partnership's interest in the Pine Trail Shopping Center, the
Partnership's remaining assets consist of the wholly-owned Northeast Plaza
Shopping Center and the subordinated mortgage note receivable position related
to the Briarwood and Gatewood properties which were sold in 1984. The
Partnership expects to re-market the Northeast Plaza property for sale once the
lawsuit against Mobil Oil Corporation, which is discussed further below, is
fully resolved. The sale of the Partnership's remaining assets would be followed
by a liquidation of the Partnership. It is currently contemplated that
dispositions of the Partnership's remaining assets could be completed within the
next 1 to 2 years. There are no assurances, however, that the sales of the
remaining assets and the liquidation of the Partnership will be completed within
this time frame.
The occupancy level at the Northeast Plaza Shopping Center in Sarasota,
Florida, remained at 100% for the quarter ended March 31, 1998. Over the next
twelve months, leases with four tenants occupying 34,500 square feet will
expire. All four tenants are expected to renew their leases. The first of these
tenants, one of the center's two anchor tenants, has a 25,600 square foot lease
that expires in January of 1999 and is expected to exercise one of its two five
year options and renew its lease with a 10% increase in the rental rate. The
second tenant, which operates a 6,500 square foot discount retail store, is
expected to exercise an option and renew its lease for five years at a slightly
increased rental rate. The third tenant leases an outparcel where they operate a
cleaning business, and the other operates a bookstore. 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. Since the time that the contamination was
discovered, Mobil has 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 Protection, 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. Subsequent to the
discovery of the contamination, the Partnership experienced difficulty in
refinancing the mortgages on the property that matured in 1991. The existence of
contamination on the property impacted the Partnership's ability to obtain
standard market financing. Ultimately, the Partnership was able to refinance its
first mortgage at a substantially reduced loan-to-value ratio. In addition, the
Partnership was unable to sell the property at an uncontaminated market price.
The Partnership also retained outside counsel and environmental consultants to
review Mobil's remediation efforts and has incurred significant out-of-pocket
expenses in connection with this situation. 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 its damages.
During the first quarter of fiscal 1993, the Partnership filed suit in
Federal Court against Mobil for breach of indemnity and property damage. On
April 28, 1995, Mobil was successful in dismissing the action from the Federal
Court system on jurisdictional grounds. Subsequently, the Partnership filed an
action in the Florida State Court system. This action is for substantially all
of the same claims and utilized the substantial discovery and trial preparation
work already completed for the Federal case. During November 1996, the
Partnership and Mobil attempted to settle the action through mediation. A
settlement was not achieved. Mobil's proposal to settle the case, which included
a proposed purchase of the contaminated portion of the Northeast Plaza property
from the Partnership, failed due to Mobil's inability to obtain a zoning
variance which was necessary to make such a transaction possible. A jury trial
against Mobil Oil Corporation took place during the two-week period ended April
17, 1998, in state court in Sarasota, Florida. The Partnership sought an
injunctive order to force Mobil to clean up the contamination and sought to
recover damages suffered by the Partnership as a result of the contamination.
During trial, Mobil stipulated to the entry of an injunctive order, to be
documented by both sides' experts, compelling Mobil to continue the cleanup
until state water quality standards are achieved. The experts currently predict
that the cleanup will be completed in approximately one to three years. As
previously reported, the Partnership had obtained a summary judgment as to
liability on its claims for trespass and nuisance. The issues of damages on
these two counts, as well as the Partnership's breach of contract claim, were
submitted to the jury. On April 17, 1998, the jury returned a verdict in favor
of the defendant, Mobil. The Partnership has filed a motion for a new trial and
is considering an appeal if a new trial is not granted. The final outcome of
these legal proceedings cannot presently be determined.
At March 31, 1998, the Partnership had available cash and cash equivalents
of $3,291,000. As noted above, such cash and cash equivalents includes the $2.3
million of net proceeds received from the sale of the Central Plaza property
which was distributed to the Limited Partners subsequent to the quarter-end. The
remainder of such cash and cash equivalents will be used for the working capital
requirements of the Partnership and for distributions to the partners. The
source of future liquidity and distributions to the partners is expected to be
through cash generated from the operations of the Partnership's remaining
income-producing investment property and proceeds received from the sale or
refinancing of such property. 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 1984. 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, and it is uncertain whether any will be
received in the near future. Since the operating properties continue to generate
net cash flow deficits and the Partnership's note receivable is subordinated to
the existing first mortgage debt, there is significant uncertainty as to the
collectibility of the principal and accrued interest. Proceeds, if any, received
on the note would represent a source of additional liquidity for the
Partnership.
Results of Operations
Three Months Ended March 31, 1998
- ---------------------------------
The Partnership reported net income of $2,216,000 for the three months
ended March 31, 1998, as compared to net income of $73,000 for the same period
in the prior year. This $2,143,000 increase in net income is primarily
attributable to the $2,392,000 gain realized on the March 1998 sale of the
Central Plaza Shopping Center, as discussed further above. In addition, the
Partnership reported operating income of $8,000 during the current three-month
period as compared to an operating loss of $35,000 during the same period in the
prior year. The favorable change in operating income (loss) was the result of a
decrease of $31,000 in operating expenses and an increase of $12,000 in interest
income. Operating expenses declined mainly due to a decrease in general and
administrative expenses of $24,000 for the current three-month period. General
and administrative expenses decreased mainly due to a decline in certain
required professional services during the current period. Interest income
increased due to an increase in the Partnership's average outstanding cash
balances during the current three-month period as a result of the receipt and
temporary investment of the Central Plaza sale proceeds prior to the
distribution to the Limited Partners in April 1998.
The gain realized on the sale of the Central Plaza Shopping Center and the
favorable change in the Partnership's operating income (loss) were partially
offset by an unfavorable change in the Partnership's share of ventures' income
(losses) for the current three-month period. The Partnership reported a loss
from its share of ventures' operations of $184,000 during the current
three-month period as compared to income of $108,000 during the same period in
the prior year. This unfavorable change is mainly due to the inclusion of the
operating results of the Pine Trail joint venture in the prior year's results.
As discussed further above, the Partnership sold its interest in Pine Trail in
August of 1997. As a result, the current period results reflect only the net
operating losses of the Central Plaza joint venture prior to the sale of the
property on March 3, 1998.
Six Months Ended March 31, 1998
- -------------------------------
The Partnership reported net income of $2,282,000 for the six months ended
March 31, 1998, as compared to net income of $180,000 for the same period in the
prior year. This $2,102,000 increase in net income is primarily attributable to
the $2,392,000 gain realized on the March 1998 sale of the Central Plaza
Shopping Center. In addition, the Partnership reported operating income of
$45,000 during the current six-month period as compared to an operating loss of
$9,000 during the same period in the prior year. The favorable change in
operating income (loss) was the result of a decrease of $27,000 in operating
expenses and an increase of $27,000 in interest and other income. Operating
expenses declined mainly due to a decrease in general and administrative
expenses of $15,000 for the current six-month period. General and administrative
expenses decreased mainly due to a decline in certain required professional
services during the current period. Interest income increased due to an increase
in the Partnership's average outstanding cash balances during the current
six-month period as a result of the receipt and temporary investment of the
Central Plaza sale proceeds prior to the distribution to the Limited Partners in
April 1998.
The gain realized on the sale of the Central Plaza Shopping Center and the
favorable change in the Partnership's operating income (loss) were partially
offset by an unfavorable change in the Partnership's share of ventures' income
(losses) for the current six-month period. The Partnership reported a loss from
its share of ventures' operations of $155,000 during the current six-month
period as compared to income of $189,000 during the same period in the prior
year. This unfavorable change is mainly due to the inclusion of the operating
results of the Pine Trail joint venture in the prior year's results. As
discussed further above, the Partnership sold its interest in Pine Trail in
August of 1997. As a result, the current period results reflect only the net
operating losses of the Central Plaza joint venture prior to the sale of the
property on March 3, 1998.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As discussed further in the Partnership's Annual Report on Form 10-K for
the year ended September 30, 1997, the Partnership had filed suit against Mobil
Oil Corporation during fiscal 1993 for breach of indemnity and property damage
related to the contamination of the soil and groundwater at the Partnership's
Northeast Plaza Shopping Center. A jury trial against Mobil Oil Corporation took
place during the two-week period ended April 17, 1998, in state court in
Sarasota, Florida. The Partnership sought an injunctive order to force Mobil to
clean up the contamination and sought to recover damages suffered by the
Partnership as a result of the contamination. During trial, Mobil stipulated to
the entry of an injunctive order, to be documented by both sides' experts,
compelling Mobil to continue the cleanup until state water quality standards are
achieved. The experts currently predict that the cleanup will be completed in
approximately one to three years. As previously reported, the Partnership had
obtained a summary judgment as to liability on its claims for trespass and
nuisance. The issues of damages on these two counts, as well as the
Partnership's breach of contract claim, were submitted to the jury. On April 17,
1998, the jury returned a verdict in favor of the defendant, Mobil. The
Partnership has filed a motion for a new trial and is considering an appeal if a
new trial is not granted. The final outcome of these legal proceedings cannot
presently be determined.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated March 3, 1998, reporting the sale of
the Central Plaza Shopping Center was filed by the registrant during the second
quarter of fiscal 1998 and is hereby incorporated herein by reference.
<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: May 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,291
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,291
<PP&E> 5,038
<DEPRECIATION> 1,542
<TOTAL-ASSETS> 6,808
<CURRENT-LIABILITIES> 30
<BONDS> 1,203
0
0
<COMMON> 0
<OTHER-SE> 5,575
<TOTAL-LIABILITY-AND-EQUITY> 6,808
<SALES> 0
<TOTAL-REVENUES> 2,685
<CGS> 0
<TOTAL-COSTS> 181
<OTHER-EXPENSES> 155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 2,282
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,282
<EPS-PRIMARY> 104.83
<EPS-DILUTED> 104.83
</TABLE>
