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, 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
June 30, 1998 and September 30, 1997 (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 (1,568) (1,491)
-------- ---------
Net operating investment property 3,470 3,547
Investment in joint venture, at equity - 215
Cash and cash equivalents 965 973
Deferred expenses, net 16 32
-------- ---------
$ 4,451 $ 4,767
======== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 4
Accrued expenses 35 58
Mortgage note payable 1,164 1,278
Partners' capital 3,251 3,427
-------- ---------
$ 4,451 $ 4,767
======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Nine Months Ended
June 30, June 30
----------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues $ 119 $ 119 $ 358 $ 358
Interest income 168 13 222 40
------- ------ ------- ------
287 132 580 398
Expenses:
Interest expense 32 36 99 109
Management fees 1 5 3 13
Depreciation expense 26 26 77 77
General and administrative 238 171 366 314
------- ------ ------- ------
297 238 545 513
------- ------ ------- ------
Operating income (loss) (10) (106) 35 (115)
Partnership's share of
ventures' income (losses) - 97 (155) 286
Partnership's share of gain on
sale of investment property - - 2,392 -
------- ------ ------- ------
Net income (loss) $ (10) $ (9) $ 2,272 $ 171
======= ====== ======= ======
Net income (loss) per
Limited Partnership Unit $ (0.46) $(0.41) $104.37 $ 7.86
======= ====== ======= ======
Cash distributions per
Limited Partnership Unit $107.31 $ 4.88 $113.50 $14.64
======= ====== ======= ======
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 CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended June 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1996 $ - $ 6,161
Cash distributions (3) (316)
Net income 2 169
------- -------
Balance at June 30, 1997 $ (1) $ 6,014
======= =======
Balance at September 30, 1997 $ 33 $ 3,394
Cash distributions (2) (2,446)
Net income 23 2,249
------- -------
Balance at June 30, 1998 $ 54 $ 3,197
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 2,272 $ 171
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Partnership's share of gain on sale of
investment property (2,392) -
Depreciation expense 77 77
Amortization of deferred financing costs 16 16
Partnership's share of ventures' income
(losses) 155 (286)
Changes in assets and liabilities:
Accounts payable - affiliates (23) -
Accounts payable and accrued expenses (3) 5
--------- ---------
Total adjustments (2,170) (188)
--------- ---------
Net cash provided by (used in)
operating activities 102 (17)
Cash flows from investing activities:
Distributions from joint ventures 2,452 289
Cash flows from financing activities:
Distributions to partners (2,448) (319)
Principal payments on mortgage note payable (114) (105)
--------- ---------
Net cash used in financing activities (2,562) (424)
--------- ---------
Net decrease in cash and cash equivalents (8) (152)
Cash and cash equivalents, beginning of period 973 1,000
--------- ---------
Cash and cash equivalents, end of period $ 965 $ 848
========= =========
Cash paid during the period for interest $ 83 $ 93
========= =========
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 June 30, 1998 and September 30, 1997 and revenues and
expenses for the three- and nine-month periods ended June 30, 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 nine-month periods ended
June 30, 1998 and 1997 totalled $3,000 and $13,000, respectively. Accounts
payable - affiliates at June 30, 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 nine months June
30, 1998 and 1997 is $53,000 and $50,000, 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, 1998 and 1997 is $3,000 and $6,000, respectively, representing
fees paid to an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
3. Note and Interest Receivable, Net
---------------------------------
Note and interest receivable at June 30, 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 (which owned the
Briarwood and Gatewood apartment properties) 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 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
securing the note, as defined in the note agreement. 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. Until the quarter ended June 30, 1998,
the Partnership had not received any interest payments since the inception of
the note. During the quarter ended June 30, 1998, the Partnership received
$149,000 from the borrower which has been recorded as interest income on the
accompanying statement of operations. Per the terms of the note agreement,
accrued interest receivable as of June 30, 1998 would be approximately
$7,624,000. Since the Partnership's note receivable continues to be subordinated
to other first mortgage debt, there is significant uncertainty as to the
collectibility of both the principal and the remaining accrued interest as of
June 30, 1998. As a result, the portion of the remaining gain to be recognized,
which is represented by the note and the remaining accrued interest, has been
deferred until realized in cash.
On June 22, 1998, the Partnership initiated a lawsuit in Massachusetts
state court in connection with this note receivable. The suit alleges that the
defendants in this lawsuit, acting as agents for the Partnership, improperly
released six of the ten properties (including the Briarwood and Gatewood
apartment properties) from the mortgage that secured the note receivable, and
that they improperly extended the maturity date of the note by ten years. The
Partnership is seeking equitable relief and monetary damages for breach of
fiduciary duty, misrepresentation and related causes of action. No answer to the
complaint has been filed with the Court yet by the defendants. The eventual
outcome of this litigation cannot be determined at the present time.
4. Real Estate Investments
-----------------------
As of June 30, 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 June 30, 1998 (two at June 30,
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).
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 October 1, 1997 through the
date of sale, March 3, 1998, and the Central Plaza and Pine Trail joint ventures
for the three and nine months ended June 30, 1997 are as follows:
Condensed Combined Summary of Operations
For the three and nine months ended June 30, 1998 and 1997
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Rental revenues and expense
recoveries $ - $ 885 $ 443 $ 2,700
Interest and other income - 9 8 16
------ -------- -------- -------
- 894 451 2,716
Property operating expenses - 268 215 880
Interest expense - 328 171 993
Depreciation and
amortization - 142 224 383
------ -------- -------- -------
- 738 610 2,256
------ -------- -------- -------
Operating income (loss) - 156 (159) 460
Gain on sale of investment
property - - 5,567 -
------ -------- -------- -------
Net income $ - $ 156 $ 5,408 $ 460
====== ======== ======== =======
<PAGE>
Three Months Ended Nine Months Ended
June 30, June 30
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income:
Partnership's share of
net income $ - $ 98 $ 2,254 $ 289
Co-venturers' share of
net income - 58 3,154 171
------ -------- -------- -------
$ - $ 156 $ 5,408 $ 460
====== ======== ======== =======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended June 30, 1998 and 1997 (in thousands)
Three Months Ended Nine Months Ended
June 30, June 30
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of net
income, as shown above $ - $ 98 $ 2,254 $ 289
Amortization of excess basis - (1) (17) (3)
------- ------ -------- ------
Partnership's share of
ventures' net income $ - $ 97 $ 2,237 $ 286
======= ====== ======== ======
The Partnership's share of ventures' net income is presented as follows in
the accompanying statements of operations (in thousands):
T
Three Months Ended Nine Months Ended
June 30, June 30
------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
ventures' income (loss) $ - $ 97 $ (155) $ 286
Partnership's share of gain
on sale of investment
property - - 2,392 -
------- ------- -------- -------
$ - $ 97 $ 2,237 $ 286
======= ======= ======== =======
5. Mortgage Note Payable
---------------------
The mortgage note payable at June 30, 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 June 30, 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. 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 the trial, Mobil
stipulated to the entry of an injunctive order 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's subsequent motion for a new trial was
not granted. A final judgment in favor of Mobil as to the Partnership's damages
claims has been entered with the Court. In addition, a final judgment compelling
Mobil to cleanup the contamination at the Northeast Plaza Shopping Center was
entered with the Court. The Partnership is considering an appeal of the judgment
pertaining to its damages claims. While the Partnership is currently considering
offering the property for sale, the Partnership is concerned that the
contamination may negatively affect the sales price. To the extent that the sale
price is negatively impacted by the contamination, the Partnership reserves all
rights against Mobil for damages under the indemnification contract with Mobil.
No assurance can be given as to whether Mobil will perform its obligations under
the contract or as to the outcome of any litigation against Mobil, should Mobil
fail to perform its obligations. The Partnership is currently negotiating with
Mobil on a potential comprehensive settlement whereby Mobil would agree to a
specific procedure for reimbursing the Partnership in the event of a low sales
price and the Partnership would waive its appellate rights. The eventual outcome
of this situation cannot be determined at the present time.
<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, 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 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 June 30, 1998. Over the next
twelve months, leases with six tenants occupying 38,500 square feet will expire.
All six tenants are expected to renew their leases. During the third quarter,
one of these tenants, whose lease was scheduled to expire in September 1998,
signed a new five-year lease at an increased rental rate. This tenant leases an
out-parcel where they operate a cleaning business. A second expiration is with
one of the center's two anchor tenants which has a 25,600 square foot lease that
expires in January of 1999. This tenant is expected to exercise one of its two
five-year options and renew its lease with a 10% increase in the rental rate. A
third 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 remaining three expirations consist of a 1,200 square
foot bookstore, a 1,600 square foot hair salon and a 2,400 square foot
restaurant. 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. 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 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's subsequent motion for a new trial was
not granted. A final judgment in favor of Mobil as to the Partnership's damages
claims has been entered with the Court. In addition, a final judgment compelling
Mobil to cleanup the contamination at the Northeast Plaza Shopping Center was
entered with the Court. The Partnership is considering an appeal of the judgment
pertaining to its damages claims. While the Partnership is currently considering
offering the property for sale, the Partnership is concerned that the
contamination may negatively affect the sales price. To the extent that the sale
price is negatively impacted by the contamination, the Partnership reserves all
rights against Mobil for damages under the indemnification contract with Mobil.
No assurance can be given as to whether Mobil will perform its obligations under
the contract or as to the outcome of any litigation against Mobil, should Mobil
fail to perform its obligations. The Partnership is currently negotiating with
Mobil on a comprehensive settlement whereby Mobil would agree to a specific
procedure for reimbursing the Partnership in the event of a low sales price and
the Partnership would waive its appellate rights. The eventual outcome of this
situation cannot be determined at the present time.
At June 30, 1998, the Partnership had available cash and cash equivalents
of $965,000. 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 (which owed the Briarwood and Gatewood apartments properties) 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 of net cash
flow from the properties securing the note, as defined in the note agreement.
Until the quarter ended June 30, 1998, the Partnership had not received any
interest payments since the inception of the note. During the quarter ended June
30, 1998, the Partnership received $149,000 from the borrower which has been
recorded as interest income on the accompanying statement of operations. Since
the Partnership's note receivable continues to be subordinated to other first
mortgage debt, there is significant uncertainty as to the collectibility of both
the principal and the remaining accrued interest. On June 22, 1998, the
Partnership initiated a lawsuit in Massachusetts state court in connection with
this note receivable. The suit alleges that the defendants in this lawsuit,
acting as agents for the Partnership, improperly released six of the ten
properties (including the Briarwood and Gatewood apartment properties) from the
mortgage that secured the note receivable, and that they improperly extended the
maturity date of the note by ten years. The Partnership is seeking equitable
relief and monetary damages for breach of fiduciary duty, misrepresentation and
related causes of action. No answer to the complaint has been filed with the
Court yet by the defendants. The eventual outcome of this litigation cannot be
determined at the present time.
Results of Operations
Three Months Ended June 30, 1998
- --------------------------------
The Partnership reported a net loss of $10,000 for the three months ended
June 30, 1998, as compared to a net loss of $9,000 for the same period in the
prior year. A decrease of $97,000 in the Partnership's share of ventures' income
was offset by a decrease of $96,000 in the Partnership's operating loss. The
Partnership reported income of $97,000 from its share of the operations of the
Pine Trail and Central Plaza joint ventures for the quarter ended June 30, 1997.
As discussed further above, the Partnership sold its interest in Pine Trail in
August of 1997 and completed the sale of the Central Plaza property on March 3,
1998. Therefore, there was no income or loss from joint venture operations for
the quarter ended June 30, 1998. The Partnership reported an operating loss of
$10,000 during the current three-month period as compared to an operating loss
of $106,000 during the same period in the prior year. The favorable change in
operating loss was primarily the result of an increase of $155,000 in interest
income. Interest income increased mainly due to the receipt of $149,000 in the
current period in connection with the Briarwood note receivable, as discussed
further above. The increase in interest income was partially offset by an
increase in general and administrative expenses of $67,000 for the current
three-month period. General and administrative expenses increased mainly due to
an increase in certain required professional services during the current period.
Nine Months Ended June 30, 1998
- -------------------------------
The Partnership reported net income of $2,272,000 for the nine months
ended June 30, 1998, as compared to net income of $171,000 for the same period
in the prior year. This $2,101,000 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 $35,000 during the current nine-month period as compared to an
operating loss of $115,000 during the same period in the prior year. The
favorable change in operating income (loss) was the result of an increase of
$182,000 in interest income which was partially offset by an increase of $32,000
in operating expenses. Interest income increased partly due to an increase in
the Partnership's average outstanding cash balances during the current
nine-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. In addition, the Partnership received $149,000 of interest income in
the current period in connection with the Briarwood note receivable, as
discussed further above. Operating expenses increased mainly due to an increase
in general and administrative expenses of $52,000 for the current nine-month
period. General and administrative expenses increased mainly due to an increase
in certain required professional services during the current period.
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 nine-month period. The Partnership reported a loss from
its share of ventures' operations of $155,000 during the current nine-month
period as compared to income of $286,000 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 and completed the sale of the Central Plaza property on May 3,
1998. 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 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's subsequent motion for a new trial was not granted. A final
judgment in favor of Mobil as to the Partnership's damages claims has been
entered with the Court. In addition, a final judgment compelling Mobil to
cleanup the contamination at the Northeast Plaza Shopping Center was entered
with the Court. The Partnership is considering an appeal of the judgment
pertaining to its damages claims. While the Partnership is currently considering
offering the property for sale, the Partnership is concerned that the
contamination may negatively affect the sales price. To the extent that the sale
price is negatively impacted by the contamination, the Partnership reserves all
rights against Mobil for damages under the indemnification contract with Mobil.
No assurance can be given as to whether Mobil will perform its obligations under
the contract or as to the outcome of any litigation against Mobil, should Mobil
fail to perform its obligations. The Partnership is currently negotiating with
Mobil on a potential comprehensive settlement whereby Mobil would agree to a
specific procedure for reimbursing the Partnership in the event of a low sales
price and the Partnership would waive its appellate rights. The eventual outcome
of this situation cannot be determined at the present time.
On June 22, 1998, the Partnership initiated a lawsuit in Massachusetts
state court in connection with the note receivable obtained by the Partnership
in connection with the 1984 sale of its interest in the Briarwood joint venture
(which owned the Briarwood and Gatewood properties). The suit alleges that the
defendants in this lawsuit, acting as agents for the Partnership, improperly
released six of the ten properties (including the Briarwood and Gatewood
apartment properties) from the mortgage that secured the note receivable, and
that they improperly extended the maturity date of the note by ten years. The
Partnership is seeking equitable relief and monetary damages for breach of
fiduciary duty, misrepresentation and related causes of action. No answer to the
complaint has been filed with the Court yet by the defendants. The eventual
outcome of this litigation cannot be determined at the present time.
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 6, 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 June 30, 1998
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-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 965
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 965
<PP&E> 5,038
<DEPRECIATION> 1,568
<TOTAL-ASSETS> 4,451
<CURRENT-LIABILITIES> 36
<BONDS> 1,164
0
0
<COMMON> 0
<OTHER-SE> 3,251
<TOTAL-LIABILITY-AND-EQUITY> 4,451
<SALES> 0
<TOTAL-REVENUES> 2,972
<CGS> 0
<TOTAL-COSTS> 446
<OTHER-EXPENSES> 155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99
<INCOME-PRETAX> 2,272
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,272
<EPS-PRIMARY> 104.37
<EPS-DILUTED> 104.37
</TABLE>
