UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
December 31, 1997 and September 30, 1997 (Unaudited)
(In thousands)
ASSETS
December 31 September 30
----------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
---------- ---------
5,038 5,038
Less accumulated depreciation (1,517) (1,491)
---------- --------
Net operating investment property 3,521 3,547
Investments in joint ventures, at equity 139 215
Cash and cash equivalents 978 973
Deferred expenses, net 26 32
---------- ---------
$ 4,664 $ 4,767
========== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 4
Accrued expenses 35 58
Mortgage note payable 1,241 1,278
Partners' capital 3,387 3,427
---------- ---------
$ 4,664 $ 4,767
========== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the three months ended December 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1996 $ - $ 6,161
Cash distributions (1) (105)
Net income 1 116
------- --------
Balance at December 31, 1996 $ - $ 6,172
======= ========
Balance at September 30, 1997 $ 33 $ 3,394
Cash distributions (1) (105)
Net income 1 65
------- --------
Balance at December 31, 1997 $ 33 $ 3,354
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the three months ended December 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
1997 1996
---- ----
Revenues:
Rental revenues $ 119 $ 119
Interest and other income 29 14
------ ------
148 133
Expenses:
Interest expense 34 37
Management fees 1 4
Depreciation expense 26 26
General and administrative 50 40
------ ------
111 107
------ ------
Operating income 37 26
Partnership's share of ventures' income 29 91
------ ------
Net income $ 66 $ 117
====== ======
Net income per Limited Partnership Unit $ 3.03 $ 5.37
====== ======
Cash distributions per Limited
Partnership Unit $ 4.88 $4.88
======= =====
The above net income and cash distributions per Limited Partnership Unit are
based upon the 21,550 Units of Limited Partnership Interest outstanding for each
period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 66 $ 117
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 26 26
Amortization of deferred financing costs 6 6
Partnership's share of ventures' income (29) (91)
Changes in assets and liabilities:
Accounts payable - affiliates (3) -
Accounts payable and accrued expenses (23) (23)
------- -------
Total adjustments (23) (82)
------- -------
Net cash provided by operating activities 43 35
Cash flows from investing activities:
Distributions from joint ventures 105 93
------- -------
Cash flows from financing activities:
Distributions to partners (106) (106)
Principal payments on mortgage note payable (37) (35)
------- -------
Net cash used in financing activities (143) (141)
------- -------
Net increase (decrease) in cash and cash equivalents 5 (13)
Cash and cash equivalents, beginning of period 973 1,000
------- -------
Cash and cash equivalents, end of period $ 978 $ 987
======= =======
Cash paid during the period for interest $ 28 $ 31
======= =======
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 December 31, 1997 and September 30, 1997 and revenues and
expenses for the three-month periods ended December 31, 1997 and 1996. Actual
results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Management fees earned by the Adviser for the three-month periods ended
December 31, 1997 and 1996 totalled $1,000 and $4,000, respectively. Accounts
payable - affiliates at December 31, 1997 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 three months ended
December 31, 1997 and 1996 is $18,000 and $16,000, 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 three months
ended December 31, 1997 and 1996 is $125 and $4,632, 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 December 31, 1997, the Partnership directly owns one operating
investment property (Northeast Plaza) and has an investment in one joint venture
partnership (two at December 31, 1996) which owns an operating property as more
fully described in the Partnership's Annual Report. 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 $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 amount of the gain represents the difference between the net proceeds
received and the equity method carrying value of the Partnership's investment in
the Pine Trail joint venture as of the date of the sale. The Partnership's
remaining joint venture investment is an interest in Central Plaza, a 151,857
square foot shopping center in Lubbock, Texas. As discussed further in the
Annual Report, the Partnership and its co-venture partner 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 would be $8,350,000, which is 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 contains a prepayment penalty amount that is greater
than the $525,000 credit to the buyer, carries an interest rate of 10% per
annum. Since this interest rate is higher than current market rates obtainable
by the prospective buyer, the credit was negotiated. The net proceeds from the
sale under the proposed terms are greater than if the venture received the gross
sale price of $8,875,000 and paid the prepayment penalty called for under the
loan agreement. The loan is not prepayable without penalty until February 2002.
Both the Partnership and the co-venturer believe the risks associated with
holding this property until the prepayment penalty expires outweigh the
reduction in net proceeds resulting from the interest rate credit negotiated
with the prospective buyer as part of the current sale contract. The sale is
scheduled to close in the second quarter of fiscal 1998. However, since the sale
remains subject to certain due diligence contingencies and the lender's approval
of the loan assumption, there are no assurances that a sale transaction will be
completed. If this sale transaction is completed, the Partnership would expect
to receive net proceeds of approximately $2.2 million, which would be
distributed to the Limited Partners within approximately 30 days of the closing
date.
The joint ventures are accounted for by using the equity method because
the Partnership does not have a voting control interest in the ventures. Under
the equity method, the assets, liabilities, revenues and expenses of the joint
ventures do not appear in the Partnership's financial statements. Instead, the
investments are carried at cost adjusted for the Partnership's share of the
ventures' earnings, losses and distributions. Summarized operating results of
the Central Plaza joint venture for the three months ended December 31, 1997 and
the Central Plaza and Pine Trail joint ventures for the three months ended
December 31, 1996 are as follows:
Condensed Combined Summary of Operations
For the three months ended December 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Rental revenues and expense
recoveries $ 288 $ 949
Interest and other income 5 4
-------- -------
293 953
Property operating expenses 85 389
Interest expense 110 333
Depreciation and amortization 22 126
-------- -------
217 848
-------- -------
Net income $ 76 $ 105
======== =======
Net income:
Partnership's share of income $ 29 $ 92
Co-venturers' share of income 47 13
-------- -------
$ 76 $ 105
======== =======
Reconciliation of Partnership's Share of Operations
For the three months ended December 31, 1997 and 1996 (in thousands)
1997 1996
---- ----
Partnership's share of income,
as shown above $ 29 $ 92
Amortization of excess basis - (1)
-------- -------
Partnership's share of
ventures' income $ 29 $ 91
======== =======
4. Note and Interest Receivable, Net
---------------------------------
Note and interest receivable at December 31, 1997 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 will accrue additional interest of 9% per annum. The
Partnership's policy has been to defer recognition of all interest income on the
note until collected, due to the uncertainty of its collectibility. To date, the
Partnership has not received any interest payments. Per the terms of the note
agreement, accrued interest receivable as of December 31, 1997 would be
approximately $7,158,000. Since the properties securing the note continue to
generate operating deficits and the Partnership's note receivable is
subordinated to other first mortgage debt, there is significant uncertainty as
to the collectibility of both the principal and accrued interest as of December
31, 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
---------------------
The mortgage note payable at December 31, 1997 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 December 31, 1997 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 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 utilizes the
substantial discovery and trial preparation work already completed for the
Federal case. The Partnership is seeking judgment against Mobil which would
award the Partnership compensatory damages, out-of-pocket costs, attorneys' fees
and such other relief as the court may deem proper. On November 14, 1996, the
state court granted the Partnership's Motion for Partial Summary Judgment as to
liability with regard to the Partnership's claims for damages, due to trespass
and nuisance. By obtaining a summary judgment of liability and subsequently
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 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. 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. The
matter is set for a jury trial during the two-week period commencing April 6,
1998. The completion of discovery is expected to occur during the second quarter
of fiscal 1998. The Partnership is seeking damages in excess of $2,000,000.
Subject to the foregoing, it is impossible to determine at this time, with
reasonable certainty, the likely range of potential recovery, if any, by the
Partnership.
<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 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 $285.25 per original $1,000 investment on September 15, 1997. 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 have shared 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 was 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 comprised 73% of the property's total base rental
income and nearly 82% of the total net leasable area. One anchor's lease term
was to expire in January 2002, two other anchor leases were to expire in
November 2006, and the fourth anchor lease was to expire in January 2012. As a
result of these circumstances, management believed that accepting the net sale
price of $6,150,000 for the interest was in the Partnership's best interests.
With the sale of the Partnership's interest in the Pine Trail Shopping
Center, the Partnership's remaining assets consist of a joint venture interest
in the Central Plaza Shopping Center, 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. As discussed further
below, the Partnership has been exploring potential opportunities to sell
Central Plaza, and there is a possibility that a sale of the property could be
completed in early calendar year 1998. The Partnership also 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 sales of the Partnership's 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.
As noted above, the Partnership's remaining joint venture investment is an
interest in Central Plaza, a 151,857 square foot shopping center in Lubbock,
Texas. The occupancy level at Central Plaza remained at 92% as of December 31,
1997, unchanged from the prior quarter end. There are currently no leases due to
expire at the property until 1999. As discussed further in the Annual Report,
the Partnership and its co-venture partner 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 would be $8,350,000, which is
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 contains
a prepayment penalty amount that is greater than the $525,000 credit to the
buyer, carries an interest rate of 10% per annum. Since this interest rate is
higher than current market rates obtainable by the prospective buyer, the credit
was negotiated. The net proceeds from the sale under the proposed terms are
greater than if the venture received the gross sale price of $8,875,000 and paid
the prepayment penalty called for under the loan agreement. The loan is not
prepayable without penalty until February 2002. Both the Partnership and the
co-venturer believe the risks associated with holding this property until the
prepayment penalty expires outweigh the reduction in net proceeds resulting from
the interest rate credit negotiated with the prospective buyer as part of the
current sale contract. The sale is scheduled to close in the second quarter of
fiscal 1998. However, since the sale remains subject to certain due diligence
contingencies and the lender's approval of the loan assumption, there are no
assurances that a sale transaction will be completed. If this sale transaction
is completed, the Partnership would expect to receive net proceeds of
approximately $2.2 million, which would be distributed to the Limited Partners
within approximately 30 days of the closing date.
The occupancy level at the Northeast Plaza Shopping Center in Sarasota,
Florida, remained at 100% for the quarter ended December 31, 1997. During the
quarter, two current tenants signed lease renewals. Both of these tenants occupy
1,200 square foot spaces at the property. One of the tenants operates a retail
bookstore. This tenant's lease expired at the end of December, and they signed a
new lease for an additional year with a small increase in their rental rate. The
other tenant uses its 1,200 square foot space for a clothing store, and they
elected to renew their lease for an additional three years, with a rental rate
increase effective in the third year. There is one lease for 6,500 square feet
that will expire in the upcoming 12 months, and this tenant is expected to renew
its lease. 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. 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 subsequently
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 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.
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. The matter is set for a jury trial during the two-week
period commencing April 6, 1998. The completion of discovery is expected to
occur during the second quarter of fiscal 1998. The Partnership is seeking
damages in excess of $2,000,000. It is impossible to determine at this time,
with reasonable certainty, the likely range of potential recovery, if any, by
the Partnership.
At December 31, 1997, the Partnership had available cash and cash
equivalents of $978,000. 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
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 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 December 31, 1997
- ------------------------------------
The Partnership reported net income of $66,000 for the three months ended
December 31, 1997, as compared to net income of $117,000 for the same period in
the prior year. This $51,000 decrease in net income is primarily attributable to
a $62,000 decrease in the Partnership's share of ventures' income. The
Partnership's share of ventures' income decreased mainly due to the inclusion of
the operating results of the Pine Trail joint venture in the prior period
results. As discussed further above, the Partnership sold its interest in Pine
Trail in August of 1997. The net income of the Central Plaza joint venture
improved in the current three-month period mainly due to an increase in tenant
reimbursement income and a reduction in certain administrative expenses. The
Partnership's operating income improved by $11,000 for the current three-month
period primarily as a result of an increase of $15,000 in interest and other
income.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
The status of the Partnership's litigation with Mobil Oil Corporation
remains unchanged from what was reported in the Partnership's Annual Report on
Form 10-K for the year ended September 30, 1997.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
By: THIRD INCOME PROPERTIES, INC.
General Partner
By:/s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: February 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 978
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 978
<PP&E> 5,177
<DEPRECIATION> 1,517
<TOTAL-ASSETS> 4,664
<CURRENT-LIABILITIES> 36
<BONDS> 1,241
0
0
<COMMON> 0
<OTHER-SE> 3,387
<TOTAL-LIABILITY-AND-EQUITY> 4,664
<SALES> 0
<TOTAL-REVENUES> 177
<CGS> 0
<TOTAL-COSTS> 77
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 66
<INCOME-TAX> 0
<INCOME-CONTINUING> 66
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66
<EPS-PRIMARY> 3.03
<EPS-DILUTED> 3.03
</TABLE>
