UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 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
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant dated Part IV
December 3, 1980, as supplemented
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
1998 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-28
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-6 of
this Form 10-K.
PART I
Item 1. Business
Paine Webber Income Properties Three Limited Partnership (the
"Partnership") is a limited partnership formed in June 1980 under the Uniform
Limited Partnership Act of the State of Delaware for the purpose of investing in
a diversified portfolio of existing income-producing properties including
shopping centers and apartment complexes. The Partnership sold $21,550,000 in
Limited Partnership units (the "Units"), representing 21,550 Units at $1,000 per
unit, during the offering period pursuant to a Registration Statement on Form
S-11 filed under the Securities Act of 1933 (Registration No. 2-68360). Limited
Partners will not be required to make any additional contributions.
The Partnership originally invested the net proceeds of the public
offering, either directly or through joint venture partnerships, in six
operating properties. As discussed below, through September 30, 1998 four of the
operating properties had been sold, and the Partnership sold its interest in
another joint venture to its co-venture partner during fiscal 1997. As of
September 30, 1998, the Partnership owned directly the property set forth in the
following table:
Name of Joint Venture Date of
Name and Type of Property Acquisition of Type of
Location Size Interest Ownership (1)
- ------------------------------- ---- ---------- ----------------
Northeast Plaza Shopping Center 121,005 9/25/81 Fee ownership of land
Sarasota, Florida gross and improvements
leasable subject to a master
sq. ft. lease.
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the long-term mortgage indebtedness secured by the
Partnership's operating property investment and for a description of the
agreement through which the Partnership has acquired this real estate
investment.
The Partnership previously had investment interests in the Briarwood Joint
Venture, which owned the Briarwood Apartments and Gatewood Apartments in Bucks
County, Pennsylvania; Camelot Associates, which owned the Camelot Apartments in
Fairfield, Ohio; Pine Trail Partnership, which owned the Pine Trail Shopping
Center in West Palm Beach, Florida, and Boyer Lubbock Associates, which owned
the Central Plaza Shopping Center in Lubbock, Texas. On December 20, 1984, the
Partnership sold its investment in the Briarwood Joint Venture for cash of
$7,490,000 and a note receivable. See Note 6 to the financial statements of the
Partnership accompanying this Annual Report for a further discussion of this
transaction and the outstanding note receivable. On June 19, 1996, Camelot
Associates sold the Camelot Apartments to an unrelated third party for
$15,150,000. The Partnership received net sales proceeds of approximately $5.9
million after deducting closing costs, the repayment of two outstanding first
mortgage loans, the buyout of an underlying ground lease and the co-venturers'
share of the net proceeds. See Note 5 to the financial statements of the
Partnership accompanying this Annual Report for a further discussion of this
transaction. On August 1, 1997, the Partnership sold its interest in the Pine
Trail Partnership to its joint venture partner for a net price of $6,150,000.
See Note 5 to the financial statements of the Partnership accompanying this
Annual Report for a further discussion of this transaction. 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 net sales proceeds of
approximately $2,199,000 after the buyer's assumption of the first mortgage
loan, closing costs and proration adjustments and the co-venturer's share of the
net proceeds. See Note 5 to the financial statements of the Partnership
accompanying this Annual Report for a further discussion of this transaction
The Partnership's original investment objectives were to:
(1) provide the Limited Partners with cash distributions which, to some extent,
will not constitute taxable income;
(2) preserve and protect Limited Partners' capital;
(3) achieve long-term appreciation in the value of its properties; and
(4) provide a build up of equity through the reduction of mortgage loans on its
properties.
Through September 30, 1998, the Limited Partners had received cumulative
cash distributions totalling approximately $36,785,000, or approximately $1,734
per original $1,000 investment for the Partnership's earliest investors. Of
these total distributions, approximately $7,516,000, or $348.75 per original
$1,000 investment, represents proceeds from the sale of the Briarwood and
Gatewood Apartments in fiscal 1985; approximately $108,000, or $5 per original
$1,000 investment, represents proceeds from the fiscal 1986 repayment of an
additional investment that was made in Northeast Plaza; approximately
$5,517,000, or $256 per original $1,000 investment, represents proceeds from the
sale of the Camelot Apartments in fiscal 1996; approximately $6,147,000, or
$285.25 per original $1,000 investment, represents proceeds from the sale of the
Partnership's interest in the Pine Trail Shopping Center during fiscal 1997, and
approximately $2,284,000, or $106.00 per original $1,000 investment, represents
proceeds from the sale of the Central Plaza Shopping Center during fiscal 1998.
The remaining distributions have been made from the net operating cash flow of
the Partnership. A substantial portion of such distributions has been sheltered
from current taxable income. In addition to returning 100% of the Limited
Partners' original invested capital from the capital transactions completed to
date, the Partnership retains its ownership interest in one of its six original
investment properties as well as in a note receivable related to the Briarwood
and Gatewood properties, and continues to make quarterly distributions of $1.31
per original $1,000 Unit. The Partnership's success in meeting its capital
appreciation objective will depend upon the proceeds received from the final
liquidation of its remaining investment. The amount of such proceeds will
ultimately depend upon the value of the underlying investment property at the
time of its final disposition, which cannot be determined with certainty at the
present time. At the present time, real estate values for retail shopping
centers in certain markets continue to be adversely impacted by the effects of
overbuilding and consolidations among retailers which have resulted in an
oversupply of space. Currently, occupancy at the Partnership's remaining retail
shopping center remains high and operations to date do not appear to have been
affected by this general trend.
As discussed further in the notes to the financial statements, management
believed that the Partnership's efforts to sell or refinance the Northeast Plaza
property from fiscal 1991 through fiscal 1998 were 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 has appealed the judgment pertaining to
its damages claims. Subsequently, the Partnership has negotiated a contract to
sell the Northeast Plaza property to the master-lessee at a net price which the
Partnership believes reflects only a small deduction for the stigma associated
with the contamination. However, since this sale remains contingent upon, among
other things, the buyer obtaining sufficient financing to complete the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, 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's one remaining operating property is a retail shopping
center that is located in the real estate market in which it faces significant
competition for the revenues it generates. The shopping center competes for
long-term retail tenants with numerous projects of similar type generally on the
basis on location, rental rates, tenant mix and tenant improvement allowances.
The Partnership has no real estate investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment, therefore, presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group, Inc.
("PaineWebber").
The General Partner of the Partnership is Third Income Properties, Inc.
(the "General Partner"), a wholly-owned subsidiary of PaineWebber. Subject to
the General Partner's overall authority, the business of the Partnership is
managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
General Partner of the Partnership are set forth in Items 11 and 13 below to
which reference is hereby made for a description of such terms and transactions.
Item 2. Properties
As of September 30, 1998, the Partnership owned one property directly.
Such property is referred to under Item 1 above to which reference is made for
the name, location and description of the property.
Occupancy figures for each fiscal quarter during 1998, along with an
average for the year, are presented below for the property:
Percent Leased At
--------------------------------------------------
Fiscal
1998
12/31/97 3/31/98 6/30/98 9/30/98 Average
-------- ------- ------- ------- -------
Northeast Plaza Shopping
Center 100% 100% 100% 100% 100%
Item 3. Legal Proceedings
Mobil Oil Corporation Litigation
- --------------------------------
As discussed further in Item 7, during fiscal 1993 the Partnership filed
suit against Mobil Oil Corporation because of Mobil's failure to compensate the
Partnership under the terms of an indemnification agreement between the parties
related to the soil and ground water contamination affecting the Partnership's
Northeast Plaza Shopping Center investment. Management believed that the
Partnership's efforts to sell or refinance the Northeast Plaza property from
fiscal 1991 through fiscal 1998 were impeded by potential buyer and lender
concerns of an environmental nature with respect to the property. During 1990,
it was discovered that certain underground storage tanks of a Mobil service
station located adjacent to the shopping center had leaked and contaminated the
ground water in the vicinity of the station. Since the time that the
contamination was discovered, Mobil has investigated the problem and is
progressing with efforts to remediate 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 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 was 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. The Partnership sought judgment against
Mobil which would award the Partnership compensatory damages, costs, attorneys'
fees and such other relief as the Court may deem proper.
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 has appealed the judgment pertaining to its
damages claims. Subsequently, the Partnership has negotiated a contract to sell
the Northeast Plaza property to the master-lessee at a net price which the
Partnership believes reflects only a small deduction for the stigma associated
with the contamination. However, since this sale remains contingent upon, among
other things, the buyer obtaining sufficient financing to complete the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, 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.
Briarwood/Gatewood Litigation
- -----------------------------
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
defendants have denied any and all liability in the lawsuit. By Agreement dated
December 30, 1998, the Partnership and the defendants have settled the lawsuit,
with the defendants and their affiliates admitting no liability, and the parties
have exchanged releases. Under the terms of the Agreement, the defendants have
agreed to pay the Partnership the aggregate amount of $3 million and the
Partnership has assigned its interest in the note to certain of the parties to
the Agreement. Of the $3 million settlement amount, the sum of $500,000 was paid
to the Partnership on December 30, 1998, and the balance of $2.5 million is to
be paid by no later than January 29, 1999.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1998, there were 1,525 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for Units will develop. Upon request, the General Partner
will endeavor to assist a Unitholder desiring to transfer his Units and may
utilize the services of PWI in this regard. The price to be paid for the Units
will be subject to negotiation by the Unitholder. The General Partner will not
redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1998.
Item 6. Selected Financial Data
Paine Webber Income Properties Three Limited Partnership
(In thousands, except per Unit data)
Years Ended September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 714 $ 579 $ 562 $ 492 $ 483
Operating loss $ (116) $ (130) $ (80) $ (246) $ (197)
Partnership's share
of ventures' income
(loss) $ (155) $ 403 $ 696 $ 510 $ 442
Gain on sale of joint
venture interest - $ 3,565 - - -
Partnership's share
of gain on sale of
operating investment
property $ 2,391 - $ 5,926 - -
Net income $ 2,120 $ 3,838 $ 6,542 $ 264 $ 245
Per Limited
Partnership Unit:
Net income $ 97.41 $176.32 $300.56 $ 12.14 $ 11.26
Cash distributions
from operations $ 8.81 $ 19.52 $ 19.40 $ 19.40 $ 19.40
Cash distributions
from sale
transactions $106.00 $285.25 $256.00 - -
Total assets $ 4,367 $ 4,767 $ 7,645 $ 7,151 $ 7,429
Mortgage note
payable $ 1,124 $ 1,278 $ 1,420 $ 1,549 $ 1,667
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the
21,550 Limited Partnership Units outstanding during each year.
Item 7. 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 below 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
- -------------------------------
The Partnership offered limited partnership interests to the public from
December 1980 to December 1981 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $21,550,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
approximately $18,802,000 was originally invested in six operating investment
properties, comprised of three multi-family apartment complexes and three retail
shopping centers. Through September 30, 1998, the three multi-family apartment
properties have been sold, the Partnership sold its interest in one of the
retail shopping centers to its co-venture partner during fiscal 1997, and
another retail shopping center was sold to an unrelated third party during
fiscal 1998. The one remaining retail property is owned directly and is subject
to a master lease. As discussed further below, the Partnership also retains a
subordinated mortgage note receivable position related to two of the
multi-family properties which were sold in fiscal 1985. At the present time, the
Partnership does not have any commitments for additional capital expenditures or
investments but may be called upon to advance funds to its existing investments
to pay for its share of certain required capital improvement expenses.
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 buyer's 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 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, 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 fiscal 1985. As
discussed further below, the Partnership has entered into an agreement to sell
the Northeast Plaza property to the master lessee which could be completed
during fiscal 1999. However, there can be no assurances that this sale
transaction will be completed, and the Partnership has certain litigation
outstanding related to Mobil Oil Corporation's contamination of the Northeast
Plaza property and a pending settlement of litigation related to the second
mortgage loan receivable position that the Partnership holds related to the
Briarwood and Gatewood properties. The sale or other disposition of the
Partnership's remaining assets and the resolution of the outstanding litigation
matters would be followed by a liquidation of the Partnership. It is currently
contemplated that dispositions of the Partnership's remaining assets could be
completed by the end of calendar year 1999. There are no assurances, however,
that the sales of the remaining assets, the resolution of the outstanding
litigation 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 year ended September 30, 1998. The focus of
the property's leasing team continues to be with the renewal of the leases with
five tenants occupying 37,300 square feet that are scheduled to expire in the
next twelve months. All five tenants are expected to renew their leases. One of
these tenants is 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 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 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 believed that
the Partnership's efforts to sell or refinance the Northeast Plaza property from
fiscal 1991 through fiscal 1998 were 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 has appealed the judgement pertaining to
its damages claims. Subsequently, the Partnership has negotiated a contract to
sell the Northeast Plaza property to the master-lessee at a net price which the
Partnership believes reflects only a small deduction for the stigma associated
with the contamination. However, since this sale remains contingent upon, among
other things, the buyer obtaining sufficient financing to complete the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, 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 also has a note receivable that it received as a portion
of the proceeds from the sale of its interest in the Briarwood joint venture in
fiscal 1985. The note and related accrued interest receivable have been netted
against a deferred gain of a like amount on the accompanying balance sheet. The
interest owed on the note receivable is 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. 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 defendants have denied
any and all liability in the lawsuit. By Agreement dated December 30, 1998, the
Partnership and the defendants have settled the lawsuit, with the defendants and
their affiliates admitting no liability, and the parties have exchanged
releases. Under the terms of the Agreement, the defendants have agreed to pay
the Partnership the aggregate amount of $3 million and the Partnership has
assigned its interest in the note to certain of the parties to the Agreement. Of
the $3 million settlement amount, the sum of $500,000 was paid to the
Partnership on December 30, 1998, and the balance of $2.5 million is to be paid
by no later than January 29, 1999. The settlement payments will be recorded as
income in the period in which they are received.
At September 30, 1998, the Partnership had available cash and cash
equivalents of $911,000. Such cash and cash equivalents will be used for working
capital requirements and distributions to the partners. The source of future
liquidity and distributions to the partners is expected to be through cash
generated from the operations of the Partnership's income-producing investment
property, settlement payments from the assignment of the note receivable
discussed further above and proceeds received from the sale or refinancing of
such property or a sale of the Partnership's interest in 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.
As noted above, the Partnership expects to be liquidated by the end of
calendar year 1999. Notwithstanding this, the Partnership believes that it has
made all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership's net income decreased by $1,718,000 during fiscal 1998,
when compared to the prior year. The decrease in the Partnership's net income
for the current fiscal year is primarily the result of the Partnership's share
of the gain from the sale of its interest in the Pine Trail joint venture in
fiscal 1997, which totalled $3,565,000. During fiscal 1998, the Partnership
realized a gain of $2,391,000 from the sale of the Central Plaza shopping
center. In addition to this decrease in gain realized from sales of $1,174,000,
an unfavorable change in the Partnership's share of ventures' income (loss) of
$558,000 also contributed to the decline in net income for the current fiscal
year. The Partnership reported a loss from its share of ventures' operations of
$155,000 during the year ended September 30, 1998 as compared to income of
$403,000 during 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.
The Partnership's operating loss decreased by $14,000 in fiscal 1998.
Operating loss decreased due to an increase in interest and other income of
$135,000 and a decline in management fee expense of $13,000. Interest income
increased due to the interest payment received on the Briarwood note in fiscal
1998, as discussed further above. Management fee expense decreased primarily due
to the sales of Pine Trail and Central Plaza which reduced the Partnership's
operating cash flow, upon which such fees are based. In addition, interest
expense decreased by $13,000 as a result of the scheduled principal amortization
on the outstanding mortgage loan payable secured by Northeast Plaza. The
increase in interest income and the decreases in management fees and interest
expense were partially offset by an increase of $147,000 in general and
administrative expenses. General and administrative expenses increased mainly
due to a $196,000 increase in legal fees as a result of the continued litigation
against Mobil Oil Corporation and the litigation initiated in fiscal 1998
related to the Briarwood/Gatewood note receivable, as discussed further above.
1997 Compared to 1996
- ---------------------
The Partnership's net income decreased by $2,704,000 during fiscal 1997,
when compared to the prior year. The decrease in the Partnership's net income
for fiscal 1997 was primarily the result of the Partnership's share of the gain
from the sale of the Camelot Apartments in fiscal 1996, which totalled
$5,926,000. During fiscal 1997, the Partnership realized a gain of $3,565,000
from the sale of its interest in the Pine Trail joint venture. In addition, the
Partnership's share of ventures' income decreased by $293,000 when compared to
fiscal 1996. The Partnership's share of ventures' income decreased due, in part,
to the $151,000 of income allocated to the Partnership from the operations of
the Camelot Apartments in fiscal 1996 prior to the sale of that property. In
addition, the Partnership's share of the net income from the Central Plaza joint
venture decreased by $182,000 in fiscal 1997 primarily due to the method of
allocating income between the venture partners in accordance with the joint
venture agreement. Income was allocated between the venture partners in
proportion to the cash distributions received during the year. During fiscal
1996, the Partnership received 100% of the distributions, whereas in fiscal 1997
the distributable cash was split between the Partnership and the co-venturer in
a ratio of approximately 56% and 44%, respectively. The Partnership's share of
net income from the Pine Trail joint venture increased by $35,000 in fiscal
1997, despite not owning the interest for the last two months of the year,
mainly as a result of a decrease in depreciation expense due to some assets
having become fully depreciated during fiscal 1996.
An increase in the Partnership's operating loss of $50,000 also
contributed to the decrease in net income in fiscal 1997. Operating loss
increased due to an increase in general and administrative expenses of $79,000.
General and administrative expenses increased primarily due to a $92,000
increase in legal fees as a result of the continued litigation against Mobil Oil
Corporation, as discussed further above. The increase in legal fees was
partially offset by an increase in interest income of $17,000 and a $12,000
decrease in interest expense. Interest income increased due to the higher
average outstanding cash balances resulting from the temporary investment of the
Pine Trail sale proceeds pending the special distribution to the Limited
Partners which occurred on September 15, 1997. Interest expense decreased as a
result of the scheduled principal amortization on the outstanding mortgage loan
payable.
1996 Compared to 1995
- ---------------------
The Partnership's net income increased by $6,278,000 during fiscal 1996,
when compared to the prior year. The substantial increase in the Partnership's
net income for fiscal 1996 was primarily the result of the Partnership's share
of the gain from the sale of the Camelot Apartments, which occurred in June
1996. The gain recognized by the Camelot joint venture totalled $12,089,000 and
the Partnership's share of such gain amounted to $5,926,000, net of the
write-off of the unamortized balance of the Partnership's excess basis in the
Camelot joint venture of $1,506,000. In addition, the Partnership's share of
ventures' operating income increased by $186,000, when compared to fiscal 1995.
The Partnership's share of ventures' operating income increased primarily due to
an increase in the portion of the income allocated to the Partnership from the
Central Plaza joint venture. The joint venture's income allocation primarily
followed the allocation of cash distributions. The Partnership was allocated
100% of the cash distributions from Central Plaza during fiscal 1996 as compared
to approximately 60% of cash distributions during the prior year. While fiscal
1996 net income increased by only $65,000 at Central Plaza, the Partnership's
share of the venture's income increased by $224,000. Net income at Central Plaza
increased in fiscal 1996 primarily due to an increase in revenues resulting from
higher average rental rates. The increase in the Partnership's share of
venture's income from Central Plaza was partially offset by a decrease in
operating income from the Camelot Apartments joint venture due to the sale of
the property on June 19, 1996.
A decrease in the Partnership's operating loss of $166,000 also
contributed to the increase in net income in fiscal 1996. Operating loss
decreased due to an increase in interest income of $70,000 and a decrease in
general and administrative expenses of $85,000. Interest income increased due to
the higher average outstanding cash balances resulting from the temporary
investment of the Camelot sale proceeds pending the special distribution to the
Limited Partners which occurred on August 15, 1996. General and administrative
expenses decreased primarily as a result of incremental expenses incurred in
fiscal 1995 relating to an independent valuation of the Partnership's operating
properties.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
remaining property with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
Notwithstanding the environmental situation at the Northeast Plaza
property described above, the Partnership is not aware of any notification by
any private party or governmental authority of any non-compliance, liability or
other claim in connection with environmental conditions at the property that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to its remaining property that it believes will involve any such
material expenditure. However, there can be no assurance that any
non-compliance, liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investment, which is a retail shopping center, will be significantly
impacted by the competition from comparable properties in its local market area.
The occupancy level and rental rates achievable at the property are largely a
function of supply and demand in the market. The retail segment of the real
estate market is currently suffering from an oversupply of space in many markets
resulting from overbuilding in recent years and the trend of consolidations and
bankruptcies among retailers prompted by the generally flat rate of growth in
overall retail sales. There are no assurances that these competitive pressures
will not adversely affect the operations and/or market value of the
Partnership's investment property in the future.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining asset is
critical to the Partnership's ability to realize the estimated fair market value
of the property at the time of its final disposition. Demand by buyers of retail
properties is affected by many factors, including the size, quality, age,
condition and location of the subject property, the quality and stability of the
tenant roster, the terms of any long-term leases, potential environmental
liability concerns, the existing debt structure, the liquidity in the debt and
equity markets for asset acquisitions, the general level of market interest
rates and the general and local economic climates.
Inflation
- ---------
The Partnership completed its seventeenth full year of operations in
fiscal 1998 and the effects of inflation and changes in prices on revenues and
expenses to date have not been significant.
Inflation in future periods may increase revenues, as well as operating
expenses, at the Partnership's operating investment property. The master lease
on the Partnership's wholly-owned retail shopping center requires the lessee to
pay all of the expenses associated with operating the property. Increases in
rental income would be expected to at least partially offset the corresponding
increases in Partnership and property operating expenses caused by future
inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Principal Executive Officers of the Partnership
The General Partner of the Partnership is Third Income Properties, Inc., a
Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The
General Partner has overall authority and responsibility for the Partnership's
operations, however, the day-to-day business of the Partnership is managed by
the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the General Partner of the Partnership are as follows:
Date
elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 39 8/22/96
Terrence E. Fancher Director 45 10/10/96
Walter V. Arnold Senior Vice President
and Chief Financial Officer 51 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 56 6/13/80 *
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President and Controller 36 12/1/91
* The date of incorporation of the General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or officers of the General Partner of the Partnership. All of the foregoing
directors and executive officers have been elected to serve until the annual
meeting of the General Partner.
(e) All of the directors and officers of the General Partner hold similar
positions in affiliates of the General Partner, which are the corporate general
partners of other real estate limited partnerships sponsored by PWI, and for
which Paine Webber Properties Incorporated serves as the Adviser. The business
experience of each of the directors and principal executive officers of the
General Partner is as follows:
Bruce J. Rubin is President and Director of the General Partner. Mr. Rubin
was named President and Chief Executive Officer of PWPI in August 1996. Mr.
Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a
Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by
Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to
his association with Kidder, Mr. Rubin was a Senior Vice President and Director
of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a
First Vice President and a real estate workout specialist at Shearson Lehman
Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced
law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a
graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a
result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible
for the origination and execution of all of PaineWebber's REIT transactions,
advisory assignments for real estate clients and certain of the firm's real
estate debt and principal activities. He joined Kidder, Peabody in 1985 and,
beginning in 1989, was one of the senior executives responsible for building
Kidder, Peabody's real estate department. Mr. Fancher previously worked for a
major law firm in New York City. He has a J.D. from Harvard Law School, an
M.B.A. from Harvard Graduate School of Business Administration and an A.B. from
Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the General Partner and Senior Vice President and Chief Financial Officer of the
Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the
acquisition of Rotan Mosle, Inc. where he had been First Vice President and
Controller since 1978, and where he continued until joining the Adviser. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
General Partner and a First Vice President and an Assistant Treasurer of the
Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr.
Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also,
from March 1974 to February 1980, the Assistant Treasurer of Capital for Real
Estate, which provided real estate investment, asset management and consulting
services.
Timothy J. Medlock is a Vice President and Treasurer of the General Partner
and Vice President and Treasurer of the Adviser which he joined in 1986. From
June 1988 to August 1989, Mr. Medlock served as the Controller of the General
Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with
Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983
and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President and Controller of the General Partner
and a Vice President and Controller of the Adviser which he joined in 1988. From
1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland
is a Certified Public Accountant licensed in the state of Massachusetts. He
holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston
University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of her or his ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended September 30, 1998, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's General Partner receive no
current or proposed remuneration from the Partnership. The Partnership is
required to pay certain fees to the Adviser, and the General Partners are
entitled to receive a share of cash distributions and a share of profits or
losses. These items are described under Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 3% to 6% per annum on remaining invested
capital over the past five years. Despite achieving the return of 100% of the
Limited Partners' original invested capital subsequent to the special
distribution in April 1998 from the sale of Central Plaza, the Partnership
continues to make quarterly distributions of $1.31 per original $1,000 Unit.
However, the Partnership's Units of Limited Partnership Interest are not
actively traded on any organized exchange, and no efficient secondary market
exists. Accordingly, no accurate price information is available for these Units.
Therefore, a presentation of historical Unitholder total returns would not be
meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
General Partner, Third Income Properties, Inc. is owned by PaineWebber. No
limited partner is known by the Partnership to own beneficially more than 5% of
the outstanding interests of the Partnership.
(b) Neither officers and directors of the General Partner nor the general
partners of the Associate General Partner, individually, own any Units of
limited partnership interest of the Partnership. No director or officer of the
General Partner, possesses a right to acquire beneficial ownership of Units of
limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partner of the Partnership is Third Income Properties, Inc.
(the "General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc.
("PaineWebber"). Subject to the General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties Incorporated
(the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber. The General Partner, the Adviser and PWI receive fees and
compensation, determined on an agreed-upon basis, in consideration of various
services performed in connection with the sale of the Units, the management of
the Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with investing Partnership Capital, the Adviser received
acquisition fees of 9% of the gross proceeds from the sale of Partnership Units.
In connection with the sale of each property, the Adviser may receive a
disposition fee, payable upon liquidation of the Partnership, in an amount equal
to 3/4% of the selling price of the property, subordinated to the payment of
certain amounts to the Limited Partners.
All distributable cash, as defined, for each fiscal year is distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partner. All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the Partnership
Agreement. In accordance with the Partnership Agreement, the General Partner has
not received any sale or refinancing proceeds to date.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss from operations of the Partnership will be allocated 99% to the Limited
Partners and 1% to the General Partner. Taxable income or tax loss arising from
a sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partner in proportion to the amounts of sale or
refinancing proceeds to which they are entitled provided that the General
Partner will be allocated at least 1% of taxable income arising from a sale or
refinancing. If there are no sale or refinancing proceeds, taxable income or tax
loss from a sale or refinancing will be allocated 99% to the Limited Partners
and 1% to the General Partner. Allocations of the Partnership's operations
between the General Partner and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer the day-to-day operations of the Partnership,
and to report periodically the performance of the Partnership to the General
Partners. The Adviser is paid a basic management fee (4% of Adjusted Cash Flow,
as defined) and an incentive management fee (5% of Adjusted Cash Flow
subordinated to a noncumulative annual return to the Limited Partners equal to
6% based upon their adjusted capital contribution) for services rendered. The
Adviser earned basic management fees of $4,000 for the year ended September 30,
1998. No incentive management fees were earned during the year ended September
30, 1998.
An affiliate of the General Partner performs certain accounting, tax
preparation, securities law compliance and investor communications and relations
services for the Partnership. The total costs incurred by this affiliate in
providing such services allocated among several entities, including the
Partnership. Included in general and administrative expenses for the year ended
September 30, 1998 is $71,000, representing reimbursements to this affiliate for
providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $5,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1998. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this report.
(b) No Current Reports on Form 8-K were filed during the last quarter of
fiscal 1998.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
See (a) (1) and (2) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES
THREE LIMITED PARTNERSHIP
By: Third Income Properties, Inc.
----------------------------
General Partner
By: /s/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President and Controller
Dated: January 13, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1999
----------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 13, 1999
----------------------- ----------------
Terrence E. Fancher
Director
<PAGE>
<TABLE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ------------------------ ------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated December 3, 1980, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended September 30, 1998 has been
sent to the Limited Partners.
An Annual Report will be sent to
the Limited Partners subsequent to
this filing.
(21) List of Subsidiaries Included in Item 1 of Part I of this
Report Page I-1, to which reference
is hereby made.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial
Statement Schedule required by
Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
Paine Webber Income Properties Three Limited Partnership:
Report of independent auditors - Ernst & Young LLP F-2
Report of independent accountants - Coopers & Lybrand L.L.P. F-3
Balance sheets at September 30, 1998 and 1997 F-4
Statements of income for the years ended September 30, 1998,
1997 and 1996 F-5
Statements of changes in partners' capital (deficit) for the
years ended September 30, 1998, 1997 and 1996 F-6
Statements of cash flows for the years ended September 30, 1998,
1997 and 1996 F-7
Notes to financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-19
Combined Joint Ventures of PaineWebber Income Properties Three Limited
Partnership
Report of independent auditors - Ernst & Young LLP F-20
Report of independent accountants - Coopers & Lybrand L.L.P. F-21
Combined balance sheet as of September 30, 1997 F-22
Combined statements of income and changes in venturers' capital
(deficit)for the period October 1, 1997 through March 3, 1998
and the years ended September 30, 1997 and 1996 F-23
Combined statements of cash flows for the period October 1, 1997
through March 3, 1998 and the years ended September 30, 1997 and
1996 F-24
Notes to combined financial statements F-25
Other schedules have been omitted since the required information is not
applicable, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Three Limited Partnership:
We have audited the accompanying balance sheets of Paine Webber Income
Properties Three Limited Partnership as of September 30, 1998 and 1997, and the
related statements of income, changes in partners' capital (deficit), and cash
flows for each of the three years in the period ended September 30, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits. The financial
statements of Camelot Associates (a partnership in which the Partnership had a
50% interest) have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the financial statements relates to
data included for Camelot Associates, it is based solely on their report. In the
financial statements, the Partnership's share of venture's income of Camelot
Associates is stated at $190,000 for the year ended September 30, 1996, and the
Partnership's share of gain on the sale of Camelot Associates' operating
investment property is stated at $7,432,000 for the year ended September 30,
1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Paine Webber Income Properties Three Limited
Partnership at September 30, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
December 18, 1998,
except for the
fifth paragraph of Note 6,
as to which the
date is December 30, 1998
<PAGE>
Report of Independent Accountants
To the Venturers of
Camelot Associates:
We have audited the accompanying balance sheets of Camelot Associates (an
Ohio Partnership) as of June 19, 1996 and September 30, 1995, and the related
statements of income, venturers' deficit and cash flows for the period October
1, 1995 to June 19, 1996 and for each of the two years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Camelot Associates (an Ohio
Partnership) as of June 19, 1996 and September 30, 1995, and the results of its
operations and its cash flows for the period October 1, 1995 to June 19, 1996
and for each of the two years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
As described in Note 1, the partnership sold its operating properties in
1996.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 10, 1997
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1998 and 1997
(In thousands, except per Unit amounts)
ASSETS
1998 1997
---- ----
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
--------- ---------
5,038 5,038
Less accumulated depreciation (1,593) (1,491)
--------- ---------
Net operating investment property 3,445 3,547
Investments in joint ventures, at equity - 215
Cash and cash equivalents 911 973
Deferred expenses, net of accumulated amortization
of $95 ($74 in 1997) 11 32
Note and interest receivable, net - -
--------- ---------
$ 4,367 $ 4,767
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 4
Accrued expenses 171 58
Mortgage note payable 1,124 1,278
---------- ----------
Total liabilities 1,296 1,340
Partners' capital:
General Partner:
Capital contribution 1 1
Cumulative net income 205 184
Cumulative cash distributions (154) (152)
Limited Partners ($1,000 per Unit; 21,550 Units issued):
Capital contributions, net of offering costs 19,397 19,397
Cumulative net income 20,407 18,308
Cumulative cash distributions (36,785) (34,311)
Total partners' capital 3,071 3,427
--------- --------
$ 4,367 $ 4,767
========= ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the years ended September 30, 1998, 1997 and 1996
(In thousands, except per Unit amounts)
1998 1997 1996
---- ---- ----
Revenues:
Rental revenues $ 478 $ 478 $ 478
Interest and other income 236 101 84
-------- -------- --------
714 579 562
Expenses:
Interest expense 130 143 155
Management fees 4 17 17
Depreciation expense 102 102 102
General and administrative 594 447 368
-------- -------- --------
830 709 642
-------- -------- --------
Operating loss (116) (130) (80)
Partnership's share of ventures'
income (loss) (155) 403 696
Gain on sale of joint venture interest
(net of write-off of unamortized excess
basis of $50) - 3,565 -
Partnership's share of gain on sale
of operating investment property
(net of write-off of unamortized
excess basis of $19 in 1998
and $1,506 in 1996) 2,391 - 5,926
-------- -------- --------
Net income $ 2,120 $ 3,838 $ 6,542
======== ======== ========
Net income per Limited Partnership Unit $ 97.41 $176.32 $300.56
======= ======= =======
Cash distributions per Limited
Partnership Unit $114.81 $304.77 $275.40
======= ======= =======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 21,550 Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT
For the years ended September 30, 1998, 1997 and 1996
(In thousands)
General Limited
Partner Partners Total
------- -------- -----
Balance at September 30, 1995 $ (61) $ 5,619 $ 5,558
Cash distributions (4) (5,935) (5,939)
Net income 65 6,477 6,542
------ ------- -------
Balance at September 30, 1996 - 6,161 6,161
Cash distributions (5) (6,567) (6,572)
Net income 38 3,800 3,838
------ ------- -------
Balance at September 30, 1997 33 3,394 3,427
Cash distributions (2) (2,474) (2,476)
Net income 21 2,099 2,120
------ ------- -------
Balance at September 30, 1998 $ 52 $ 3,019 $ 3,071
====== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended September 30, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,120 $ 3,838 $ 6,542
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 102 102 102
Amortization of deferred financing costs 21 21 21
Partnership's share of ventures' income (loss) 155 (403) (696)
Gain on sale of joint venture interest - (3,565) -
Partnership's share of gain on sale
of operating investment property (2,391) - (5,926)
Changes in assets and liabilities:
Accounts receivable - 99 -
Accounts payable - affiliates (3) - -
Accrued expenses 113 (2) 20
-------- -------- ---------
Total adjustments (2,003) (3,748) (6,479)
-------- -------- ---------
Net cash provided by operating activities 117 90 63
-------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of joint venture interest - 6,150 -
Distributions from joint ventures 2,451 447 6,709
-------- -------- ---------
Net cash provided by investing activities 2,451 6,597 6,709
-------- -------- ---------
Cash flows from financing activities: (2,476) (6,572) (5,939)
Principal payments on mortgage note payable (154) (142) (129)
-------- -------- ---------
Net cash used in financing activities (2,630) (6,714) (6,068)
-------- -------- ---------
Net (decrease) increase in cash and cash equivalents (62) (27) 704
Cash and cash equivalents, beginning of year 973 1,000 296
-------- -------- ---------
Cash and cash equivalents, end of year $ 911 $ 973 $ 1,000
======== ========= =========
Cash paid during the year for interest $ 109 $ 122 $ 134
======== ========= =========
</TABLE>
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Notes to Financial Statements
1. Organization and Nature of Operations
-------------------------------------
Paine Webber Income Properties Three Limited Partnership (the
"Partnership") is a limited partnership organized pursuant to the laws of the
State of Delaware in June 1980 for the purpose of investing in a diversified
portfolio of income-producing properties. The Partnership authorized the
issuance of units (the "Units") of partnership interests (at $1,000 per Unit) of
which 21,550 Units were subscribed and issued between December 3, 1980 and
December 10, 1981.
The Partnership originally invested the net proceeds of the public
offering, either directly or through joint venture partnerships, in six
operating properties, comprised of three multi-family apartment complexes and
three retail shopping centers. Through September 30, 1998, the three
multi-family apartment properties have been sold, the Partnership's interest in
one of the retail shopping centers has been sold, and another retail shopping
center was sold during fiscal 1998 (see Note 5). The remaining retail property
is owned directly and is subject to a master lease.
With the fiscal 1998 sale of the Central Plaza Shopping Center (see Note
5), the Partnership's remaining assets consist of the wholly-owned Northeast
Plaza Shopping Center (see Note 4) and the subordinated mortgage note receivable
position related to the Briarwood and Gatewood properties which were sold in
fiscal 1985 (see Note 6). As discussed further in Note 8, the Partnership has
entered into an agreement to sell the Northeast Plaza property to the master
lessee which could be completed during fiscal 1999. However, there can be no
assurances that this sale transaction will be completed, and the Partnership has
certain litigation matters outstanding related to Mobil Oil Corporation's
contamination of the Northeast Plaza property and related to the second mortgage
loan receivable position that the Partnership holds from the sale of the
Briarwood and Gatewood properties. The sale or other disposition of the
Partnership's remaining assets and the resolution of the outstanding litigation
would be followed by a liquidation of the Partnership. It is currently
contemplated that dispositions of the Partnership's remaining assets could be
completed by the end of calendar year 1999. There are no assurances, however,
that the sales of the remaining assets, the resolution of the outstanding
litigation and the liquidation of the Partnership will be completed within this
time frame.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended September 30, 1998. Actual results
could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in certain joint venture partnerships which owned operating
properties. The Partnership accounted for its investments in joint venture
partnerships using the equity method because the Partnership did not have a
voting control interest in the ventures. Under the equity method the investment
in a joint venture is carried at cost adjusted for the Partnership's share of
the venture's earnings or losses and distributions. See Note 5 for a description
of the joint venture partnerships.
The Partnership deferred a portion of the gain on the sale of the
Briarwood Joint Venture property in fiscal 1985 using the cost recovery method.
The portion of the remaining gain to be recognized is represented by a note and
accrued interest receivable. The note and accrued interest receivable have been
netted against the deferred gain on the accompanying balance sheet. The gain
would be recognized if the note and interest receivable are collected (see Note
6).
The Partnership carries its operating investment property at cost, reduced
by accumulated depreciation, or an amount less than cost if indicators of
impairment are present in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which was adopted in fiscal 1997.
SFAS 121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount. The Partnership generally assesses indicators of impairment by
a review of independent appraisal reports on the operating investment property.
Such appraisals make use of a combination of certain generally accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. Depreciation on the operating investment property has
been provided on the straight-line method based upon an estimated useful life of
40 years for the building and improvements.
The Partnership's wholly-owned operating investment property is leased
under a master lease agreement which covers 100% of the rentable space of the
shopping center. The master lease is accounted for as an operating lease in the
Partnership's financial statements. Basic rental income under the master lease
is recorded on the straight-line basis.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
The cash and cash equivalents appearing on the accompanying balance sheets
represent financial instruments for purposes of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." The carrying amount of these cash and cash equivalents
approximates their fair value as of September 30, 1998 and 1997 due to the
short-term maturities of these instruments. The mortgage note payable is also a
financial instrument for purposes of SFAS 107. The fair value of the mortgage
note payable is estimated using discounted cash flow analysis based on the
current market rate for a similar type of borrowing arrangement. Information
regarding the fair value of the Partnership's mortgage note payable is provided
in Note 7.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership. The principal
differences between the Partnership's accounting for federal income tax purposes
and the accompanying financial statements prepared in accordance with generally
accepted accounting principals relate to the methods used to calculate
depreciation expense on the wholly-owned and unconsolidated operating investment
properties and the accrual of interest income on the mortgage loan receivable
for tax purposes.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partner of the Partnership is Third Income Properties, Inc.
(the "General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc.
("PaineWebber"). Subject to the General Partner's overall authority, the
business of the Partnership is managed by PaineWebber Properties Incorporated
(the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber. The General Partner, the Adviser and PWI receive fees and
compensation, determined on an agreed-upon basis, in consideration of various
services performed in connection with the sale of the Units, the management of
the Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with investing Partnership Capital, the Adviser received
acquisition fees of 9% of the gross proceeds from the sale of Partnership Units.
In connection with the sale of each property, the Adviser may receive a
disposition fee, payable upon liquidation of the Partnership, in an amount equal
to 3/4% of the selling price of the property, subordinated to the payment of
certain amounts to the Limited Partners.
All distributable cash, as defined, for each fiscal year is distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partner. All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the Partnership
Agreement. In accordance with the Partnership Agreement, the General Partner has
not received any sale or refinancing proceeds to date.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss from operations of the Partnership will be allocated 99% to the Limited
Partners and 1% to the General Partner. Taxable income or tax loss arising from
a sale or refinancing of investment properties will be allocated to the Limited
Partners and the General Partner in proportion to the amounts of sale or
refinancing proceeds to which they are entitled provided that the General
Partner will be allocated at least 1% of taxable income arising from a sale or
refinancing. If there are no sale or refinancing proceeds, taxable income or tax
loss from a sale or refinancing will be allocated 99% to the Limited Partners
and 1% to the General Partner. Allocations of the Partnership's operations
between the General Partner and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer the day-to-day operations of the Partnership,
and to report periodically the performance of the Partnership to the General
Partners. The Adviser earns a basic management fee (4% of Adjusted Cash Flow, as
defined) and an incentive management fee (5% of Adjusted Cash Flow subordinated
to a non-cumulative annual return to the Limited Partners equal to 6% based upon
their adjusted capital contribution) for services rendered. The Adviser earned
basic management fees of $4,000 for the year ended September 30, 1998 and
$17,000 for both of the years ended September 30, 1997and 1996. No incentive
management fees were earned during the three-year period ended September 30,
1998. Accounts payable - affiliates at both September 30, 1998 and 1997 consists
of management fees payable to the Adviser of $1,000 and $4,000, respectively.
Included in general and administrative expenses for the years ended
September 30, 1998, 1997 and 1996 is $71,000, $67,000 and $68,000, respectively,
representing reimbursements to an affiliate of the General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $5,000, $7,000 and $2,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1998, 1997 and 1996,
respectively.
4. Operating Investment Property
-----------------------------
The Partnership has one wholly-owned operating investment property. On
September 25, 1981, the Partnership purchased Northeast Plaza, a 67,000 square
foot existing shopping center in Sarasota, Florida. Subsequent to the
acquisition, the shopping center was expanded to its current size of 121,005
square feet. The aggregate cash invested by the Partnership was approximately
$2,888,000 (including an acquisition fee of $268,000 paid to the Adviser). The
property was acquired subject to a nonrecourse wrap-around mortgage loan of
approximately $2,480,000. On March 29, 1994, the Partnership refinanced the
existing wraparound mortgage note secured by the Northeast Plaza Shopping
Center, which had been in default for over two years, with a new non-recourse
loan issued by the prior underlying first mortgage lender (see Note 7). The
refinancing was negotiated in conjunction with a restructuring of the master
lease that covers the Partnership's interest in Northeast Plaza. The master
lessee was also the holder of the wraparound mortgage. As part of the
refinancing, the wrap note holder applied withheld rental payments, which
totalled $661,000, against the outstanding balance of the wraparound mortgage.
Rental payments to the Partnership were reinstated beginning in April 1994. As
discussed further in Note 8, the Partnership has entered into an agreement to
sell Northeast Plaza to the master lessee. There are no assurances, however,
that this sale transaction, which would result in a gain for financial reporting
purposes, will be completed.
At the time of the original purchase of the shopping center, the
Partnership entered into a lease agreement with the seller of the property for
the operation and management of the property. The lease has an initial term of
30 years and two 5-year renewal options. This master lease agreement has been
classified as an operating lease and, therefore, rental income is reported when
earned. Under the terms of the agreement, the Partnership receives annual basic
rent of $435,000. The Partnership also receives contingent rent equal to the
greater of (a) approximately 47.5% of annual increases to gross rental income
over a specified base amount or (b) $43,000 annually. The agreement provides
specifically that the manager pay all costs of operating the shopping center and
all annual taxes, insurance and administrative expenses. The manager is further
required to pay for all costs of repair and replacement required in connection
with the shopping center. Minimum lease payments under the initial term of the
lease agreement, including the minimum amount of contingent rent, will amount to
$478,000 in each year.
Under the amended terms of the master lease, upon the sale or refinancing
of the project, any remaining proceeds, after repayment of the outstanding
balance on the mortgage loan, payment of certain priority items to the
Partnership, repayment of the Partnership's original investment and the
reimbursement to the lessee of certain capital improvement expenditures, will be
allocated equally to the Partnership and to the manager of the property as a
return on the leasehold interest.
5. Joint Venture Partnerships
--------------------------
As of September 30, 1998, the Partnership had no joint venture partnership
investments (one as of September 30, 1997). As discussed further below, 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. 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. In addition, on June 19, 1996 Camelot Associates, in
which the Partnership had a joint interest, sold its operating investment
property to an unrelated third party and distributed the net proceeds to the
venture partners.
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. Condensed
combined financial statements of these joint ventures follow.
<PAGE>
Condensed Combined Balance Sheets
September 30, 1997
(in thousands)
Assets
1997
----
Current assets $ 793
Operating investment property, net 2,493
Other assets, net 203
--------
$ 3,489
========
Liabilities and Capital (Deficit)
Current liabilities $ 469
Other liabilities 9
Long-term mortgage debt 4,104
Partnership's share of combined capital
(deficit) 91
Co-venturers' share of combined capital
(deficit) (1,184)
--------
$ 3,489
========
Reconciliation of Partnership's Investment
1997
----
Partnership's share of capital,
as shown above $ 91
Partnership's share of current
liabilities and long-term debt 91
Excess basis due to investment in
ventures, net (1) 33
--------
Investments in joint ventures, at equity $ 215
========
(1)At September 30, 1997 the Partnership's investment exceeded its share of
the joint venture partnerships' capital accounts by $33,000. This amount,
which related to certain expenses incurred by the Partnership in
connection with acquiring its joint venture investments, was being
amortized over the estimated useful life of the related investment
property. The remaining unamortized excess basis was written off against
the gain on the sale of the operating investment property in fiscal 1998.
Condensed Combined Summary of Operations
For the period October 1, 1997 through March 3, 1998 and
the years ended September 30, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 444 $ 3,232 $ 5,632
Interest income 8 25 20
------- ------- -------
452 3,257 5,652
Expenses:
Property operating expenses 202 1,121 2,473
Depreciation and amortization 221 284 726
Interest expense 182 1,179 1,644
------- ------- -------
605 2,584 4,843
------- ------- -------
Operating income (loss) (153) 673 809
Gain on sale of operating investment
property 5,567 - 12,089
------- ------- -------
Net income $ 5,414 $ 673 $12,898
======= ======= =======
Net income:
Partnership's share of combined income $ 2,259 $ 405 $ 8,134
Co-venturers' share of combined income 3,155 268 4,764
------- ------- -------
$ 5,414 $ 673 $12,898
======= ======= =======
<PAGE>
Reconciliation of Partnership's Share of Income
1998 1997 1996
---- ---- ----
Partnership's share of income,
as shown above $ 2,259 $ 405 $ 8,134
Amortization of excess basis (23) (2) (1,512)
------- ------- -------
Partnership's share of ventures'
net income $ 2,236 $ 403 $ 6,622
======= ======= =======
The Partnership's share of ventures' net income is presented as follows in
the statements of operations (in thousands):
1998 1997 1996
---- ---- ----
Partnership share of ventures'
income (loss) $ (155) $ 403 $ 696
Partnership's share of gain on sale
of operating investment property 2,391 - 5,926
------- ------- -------
$ 2,236 $ 403 $ 6,622
======= ======= =======
Investments in joint ventures, at equity, on the accompanying balance
sheet at September 30, 1997 was comprised of the following joint venture
investment:
1997
----
Boyer Lubbock Associates $ 215
======
The Partnership received cash distributions from the joint ventures as set
forth below:
1998 1997 1996
---- ---- ----
Camelot Associates $ - $ - $ 6,078
Boyer Lubbock Associates 2,451 172 231
Pine Trail Partnership - 275 400
------- ------- -------
Total $ 2,451 $ 447 $6,709
======= ======= ======
A description of the joint ventures' properties and the terms of the joint
venture agreements are summarized below.
a) Pine Trail Partnership
----------------------
On November 12, 1981, the Partnership acquired an interest in Pine Trail
Partnership, a Florida general partnership organized to own and operate Pine
Trail Center, a 266,042 square foot shopping center in West Palm Beach, Florida.
The Partnership was a general partner in the joint venture. The Partnership's
co-venturer was a partnership comprised of certain individuals. The Partnership
invested approximately $6,236,000 (including an acquisition fee of $645,600 paid
to the Adviser) for its 50% interest. The co-venturer contributed its interest
in the property to the joint venture. The joint venture was subject to an
institutional nonrecourse first mortgage which had a balance of approximately
$8,140,000 at the time of the closing.
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 no longer holds an interest in this property. The Partnership
recognized a gain of $3,565,000 (net of the write-off of unamortized excess
basis of $50,000) 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 joint venture agreement provided that the Partnership would receive a
noncumulative annual cash distribution, payable quarterly, from net cash flow.
The first $515,000 of net cash flow was to be distributed to the Partnership,
and the next $235,788 of net cash flow was to be distributed to the co-venturer.
Any excess cash flow was to be allocated equally between the Partners. During
fiscal 1997 and 1996 the property did not generate sufficient cash flow for the
Partnership to receive its minimum preferred distribution of $515,000.
<PAGE>
Taxable income and tax loss from operations in each year was allocated to
the Partnership and the co-venturer in the same proportions as cash distribution
entitlements, subject to adjustments in the case of tax loss for an allocation
of a minimum to the co-venturer. Allocations of the venture's operations between
the Partnership and the co-venturer for financial accounting purposes have been
made in conformity with the allocations of taxable income or tax loss.
The joint venture had entered into a property management contract with an
affiliate of the co-venturer cancellable at the option of the Partnership upon
the occurrence of certain events. The contract provided for a management fee
equal to 4% of gross rents collected. For the ten months ended July 31, 1997 and
for the year ended September 30, 1996, the property manager earned fees of
$63,000 and $74,000, respectively. In addition, the property manager was
entitled to leasing commissions at prevailing market rates. Leasing commissions
earned by the property manager were $18,000 and $23,000 for the ten months ended
July 31, 1997 and for the year ended September 30, 1996, respectively.
b) Boyer Lubbock Associates
------------------------
On June 30, 1981, the Partnership acquired an interest in Boyer Lubbock
Associates, a Texas general partnership organized to purchase and operate
Central Plaza, a 151,857 square foot shopping center in Lubbock, Texas. The
Partnership is a general partner in the joint venture. The Partnership's
co-venturer is an affiliate of The Boyer Company. The aggregate cash investment
by the Partnership for its 50% interest was approximately $2,076,000 (including
an acquisition fee of $225,000 paid to the Adviser). The Partnership's interest
was acquired subject to an institutional nonrecourse first mortgage with a
balance of approximately $4,790,000 at the time of closing. The venture's debt
was originally scheduled to mature on December 1, 1994. During the first quarter
of fiscal 1995, the venture obtained an extension of the maturity date from the
lender to January 1, 1995. During the second quarter of fiscal 1995, the venture
obtained a mortgage loan from a new lender which enabled the venture to repay,
in full, this maturing obligation. The new loan, in the initial principal amount
of $4,200,000, bore interest at a rate of 10% per annum. Monthly payments of
principal and interest of approximately $37,000 were due until maturity in
January 2002.
On March 3, 1998, Boyer Lubbock Associates 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 buyer's
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 recognized a gain of $2,391,000 (net of the write-off of
unamortized excess basis of $19,000) 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 Central Plaza joint venture as of the date of the sale.
The joint venture agreement between the Partnership and the co-venturer
provided that from available cash flow the Partnership would receive an annual
preference, payable monthly, of $171,000, and the co-venturer would receive the
remaining distributable cash up to a maximum of $120,000. Additional cash flow
was to be distributed equally to the Partnership and the co-venturer.
Taxable income and tax loss before depreciation were allocated in
accordance with cash distributions, after equal allocation of profits in the
amount required to be transferred to the capital cash reserve accounts and to
amortize the indebtedness of the joint venture. Depreciation expense was
allocated in accordance with the tax basis of the capital contributions of the
Partnership and the co-venturer, after adjustment for liabilities and capital
improvements. Allocations of the venture's operations between the Partnership
and the co-venturer for financial accounting purposes have been made in
conformity with the allocations of taxable income or tax loss.
The Central Plaza property was co-managed by an affiliate of the
co-venturer and an unrelated third party. For the period from October 1, 1997
through the date of sale (March 3, 1998) and for the years ended September 30,
1997 and 1996, the affiliate of the co-venturer earned fees of $16,000, $38,000
and $41,000, respectively.
c) Camelot Associates
------------------
On June 29, 1981, the Partnership acquired an interest in Camelot
Associates ("Camelot") an Ohio limited partnership which owned and operated
Camelot Apartments, a 492-unit apartment complex in Fairfield, Ohio. The
aggregate cash investment by the Partnership for its 50% interest was
approximately $2,790,000 (including an acquisition fee of $300,000 paid to the
Adviser). The Partnership was a general partner in the joint venture. The
Partnership's co-venturers were Chelsea Moore Corporation and certain
individuals.
<PAGE>
On June 19, 1996, the joint venture which owned the Camelot Apartments
sold the operating investment property to an unrelated third party for
$15,150,000. The Partnership received net sales proceeds of approximately $5.9
million after deducting closing costs, the repayment of the outstanding first
mortgage loans, the buyout of an underlying ground lease and the co-venturers'
share of the net proceeds. The Partnership made a special distribution to the
Limited Partners from the Camelot sale proceeds of approximately $5.5 million,
or $256 per original $1,000 investment, on August 15, 1996. The remaining net
proceeds were added to the Partnership's cash reserves to provide for the
potential capital needs of the Partnership's remaining investments. The gain
recognized by the Camelot joint venture totaled $12,089,000 and the
Partnership's share of such gain amounted to $5,926,000, net of the write-off of
the unamortized balance of the Partnership's excess basis in the Camelot joint
venture of $1,506,000.
Taxable income and tax loss from operations in each year were allocated to
the Partnership and the co-venturers generally in accordance with cash
distributions except that all depreciation attributable to a step-up in basis
pursuant to an election under Section 754 of the Internal Revenue Code as a
result of the investment by the Partnership was allocated to the Partnership.
Allocations of the venture's operations among the Partnership and the
co-venturers for financial accounting purposes have been made in conformity with
the allocations of taxable income or tax loss.
The joint venture had entered into a property management contract with an
affiliate of the co-venturers. Fees due under the terms of the management
contract amounted to 4% of collected rents. For the period October 1, 1995 to
June 19, 1996 and the year ended September 30, 1995, the management company
earned fees of $76,000 and $103,000, respectively.
6. Note and Interest Receivable, Net
---------------------------------
On September 15, 1981, the Partnership acquired a 35% interest in
Briarwood Joint Venture, an existing Pennsylvania general partnership which
owned a 686-unit apartment complex in Bucks County, Pennsylvania. The
Partnership originally invested approximately $4,815,000 (including an
acquisition fee of $500,000 paid to the Adviser) for its interest. The
Partnership's interest was acquired subject to two institutional nonrecourse
first mortgages with balances totalling approximately $8,925,000 at the time of
the closing.
On December 20, 1984, the joint venture partners sold their ownership
interests in the Briarwood Joint Venture for $33,152,000. After the payment of
mortgage obligations and closing costs, the Partnership's allocable share of the
proceeds was $10,935,000, represented by cash of $7,490,000 and a note
receivable of $3,445,000. For financial accounting purposes, a gain of
$7,255,000 resulted from the transaction of which $3,810,000 was recognized at
the time of the sale and the remainder was deferred under the cost recovery
method. For income tax purposes, a gain of $4,829,000 was recognized upon sale
and the remainder deferred utilizing the installment method. The difference in
the amount of gain recognized for financial accounting and tax purposes results
from accounting differences related to the carrying value of the Partnership's
investment.
The principal amount of the note receivable of $3,445,000 was to bear
interest at 9% annually and was subordinated to a first mortgage. Interest and
principal payments on the note were payable only to the extent of net cash flow
from the properties sold, as defined in the sale documents. Any interest not
received was to 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. 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 was recorded as interest income on the
accompanying statement of operations for fiscal 1998. Per the terms of the note
agreement, accrued interest receivable as of September 30, 1998 and 1997 would
be approximately $7,858,000 and $6,925,000, respectively.
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
defendants have denied any and all liability in the lawsuit.
By Agreement dated December 30, 1998, the Partnership and the defendants
have settled the lawsuit, with the defendants and their affiliates admitting no
liability, and the parties have exchanged releases. Under the terms of the
Agreement, the defendants have agreed to pay the Partnership the aggregate
amount of $3 million and the Partnership has assigned its interest in the note
to certain of the parties to the Agreement. Of the $3 million settlement amount,
the sum of $500,000 was paid to the Partnership on December 30, 1998, and the
balance of $2.5 million is to be paid by no later than January 29, 1999. The
settlement payments will be recorded as income in the period in which they are
received.
7. Mortgage Note Payable
---------------------
The mortgage note payable at September 30, 1998 and 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 $22,000 are due through maturity on March 29, 1999. As discussed
further in Note 8, the Partnership has entered into an agreement to sell
Northeast Plaza to the master lessee in conjunction with a refinancing of the
first mortgage debt secured by the property. While there are no assurances that
this sale transaction will be completed, the Partnership believes that the
existing mortgage debt will be refinanced during fiscal 1999. The loan may be
prepaid at anytime without penalty. The fair value of this mortgage note payable
approximated its carrying value as of September 30, 1998 and 1997.
Scheduled maturity of the mortgage note payable for the next fiscal year
is as follows (in thousands):
1999 $ 1,124
8. Legal Proceedings and Related Contingencies
-------------------------------------------
Management believed that the Partnership's efforts to sell or refinance
the Northeast Plaza property from fiscal 1991 through fiscal 1998 were impeded
by potential buyer and lender concerns of an environmental nature with respect
to the property. During 1990, it was discovered that certain underground storage
tanks of a Mobil service station located adjacent to the shopping center had
leaked and contaminated the ground water in the vicinity of the station. Since
the time that the contamination was discovered, Mobil Oil Corporation (Mobil)
has investigated the problem and is progressing with efforts to remediate 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 an indemnification
agreement from Mobil in which Mobil agreed to bear the cost of all damages and
required clean-up expenses. Furthermore, Mobil indemnified the Partnership
against its inability to sell, transfer, or obtain financing on the property
because of the contamination. 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. 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 has appealed the judgment pertaining to
its damages claims. Subsequently, the Partnership has negotiated a contract to
sell the Northeast Plaza property to the master-lessee at a net price which the
Partnership believes reflects only a small deduction for the stigma associated
with the contamination. However, since this sale remains contingent upon, among
other things, the buyer obtaining sufficient financing to complete the
transaction, there are no assurances that a sale will be consummated. The appeal
of the Mobil litigation has been stayed pending the resolution of this potential
sale transaction. To the extent that this sale transaction is not completed, 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.
9. Subsequent Event
----------------
On November 13, 1998, the Partnership distributed $28,000 to the Limited
Partners and $1,000 to the General Partner for the quarter ended September 30,
1998.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Schedule of Real Estate and Accumulated Depreciation
September 30, 1998
(In thousands)
<CAPTION>
Life on Which
Initial Cost to Costs Gross Amount at Which Carried at Depreciation
Partnership Capitalized Close of period in Latest
Buildings (Removed) Buildings Income
and Subsequent to and Accumulated Date of Date Statement
Description Encumbrances Land Improvements Acquisition Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ ----------- ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping
Center
Sarasota,
Florida $ 1,124 $950 $1,930 $2,158 $950 $4,088 $5,038 $1,593 1964 - 1978 9/25/8 40 years
======= ==== ====== ====== ==== ====== ====== ======
Notes:
(A) The aggregate cost of real estate owned at September 30, 1998 for Federal income tax purposes is approximately $5,038,000.
(B) See Notes 4 and 7 to Financial Statements.
(C) Reconciliation of real estate owned:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 5,038 $ 5,038 $ 5,038
Improvements - - -
------- ------- -------
Balance at end of year $ 5,038 $ 5,038 $ 5,038
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 1,491 $ 1,389 $ 1,287
Depreciation expense 102 102 102
------- ------- -------
Balance at end of year $ 1,593 $ 1,491 $ 1,389
======= ======= =======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Three Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Three Limited Partnership as of
September 30, 1997, and the related combined statements of income and changes in
venturers' capital, and cash flows for the period October 1, 1997 through March
3, 1998 and the years ended September 30, 1997 and 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Camelot Associates,
which statements reflect total revenues of $2,044,000 for the year ended
September 30, 1996. Those statements were audited by other auditors, whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Camelot Associates, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the Combined Joint Ventures of
Paine Webber Income Properties Three Limited Partnership at September 30, 1997,
and the combined results of their operations and their cash flows for the period
October 1, 1997 through March 3, 1998 and for each of the two years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
-----------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 22, 1998
<PAGE>
Report of Independent Accountants
To the Venturers of
Camelot Associates:
We have audited the accompanying balance sheets of Camelot Associates (an
Ohio Partnership) as of June 19, 1996 and September 30, 1995, and the related
statements of income, venturers' deficit and cash flows for the period October
1, 1995 to June 19, 1996 and for each of the two years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Camelot Associates (an Ohio
Partnership) as of June 19, 1996 and September 30, 1995, and the results of its
operations and its cash flows for the period October 1, 1995 to June 19, 1996
and for each of the two years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
As described in Note 1, the partnership sold its operating properties in
1996.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 10, 1997
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
COMBINED BALANCE SHEET
September 30, 1997
(In thousands)
Assets
1997
----
Current assets:
Cash and cash equivalents $ 378
Escrowed funds, principally for payment of rea
estate taxes 307
Accounts receivable 67
Note receivable 40
Prepaid expenses 1
--------
Total current assets 793
Operating investment properties:
Land 967
Buildings, improvements and equipment 5,587
6,554
Less accumulated depreciation (4,061)
Net operating investment properties 2,493
Deferred expenses, net of accumulated amortization
of $243 203
--------
$ 3,489
========
Liabilities and Venturers' Capital (Deficit)
Current liabilities:
Accounts payable $ 23
Distributions payable to venturers 275
Accrued interest 34
Accrued real estate taxes 106
Long-term debt - current portion 31
--------
Total current liabilities 469
Tenant security deposits 9
Long-term debt 4,104
Venturers' deficit (1,093)
--------
$ 3,489
========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the period October 1, 1998 through March 3, 1998 and the years
ended September 30, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental income $ 398 $ 2,515 $ 4,892
Reimbursements from tenants 46 717 740
Interest and other income 8 25 20
-------- ------- -------
452 3,257 5,652
Expenses:
Interest expense 182 1,179 1,644
Depreciation expense 29 266 710
Real estate taxes 71 408 553
Management fees 16 101 190
Ground rent - 96 126
Repairs and maintenance 58 372 623
Insurance - 28 73
Utilities 15 59 229
General and administrative 36 57 360
Other 6 - 319
Amortization expense 192 18 16
-------- ------- -------
605 2,584 4,843
-------- ------- -------
Operating income (loss) (153) 673 809
Gain on sale of operating
investment property 5,567 - 12,089
-------- ------- -------
Net income 5,414 673 12,898
Distributions to venturers (4,321) (621) (10,939)
Reduction in combined capital due to
sale of joint venture interest (Note 3) - (4,859) -
Venturers' capital (deficit), beginning
of year (1,093) 3,714 1,755
-------- ------- -------
Venturers' capital (deficit), end of year $ - $(1,093) $ 3,714
======== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the period October 1, 1997 through
March 3, 1998 and the years ended September 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,414 $ 673 $ 12,898
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 221 284 726
Amortization of deferred financing costs 11 26 26
Gain on sale of operating investment property (5,567) - (12,089)
Changes in assets and liabilities:
Escrowed funds 307 (34) (39)
Accounts receivable 67 (50) (38)
Note receivable 40 40 (80)
Prepaid expenses 1 23 (1)
Capital improvement reserve - - (2)
Deferred expenses - (29) (59)
Accounts payable (23) (35) (114)
Accrued interest (34) 1 (33)
Accrued real estate taxes (106) (45) (125)
Other accrued liabilities - (3) (2)
Prepaid rent - - (18)
Tenant security deposits (9) - (88)
--------- ------- ---------
Total adjustments (5,092) 178 (11,936)
--------- ------- ---------
Net cash provided by operating activities 322 851 962
--------- ------- ---------
Cash flows from investing activities:
Additions to operating investment properties - (64) (230)
Proceeds from sale of operating investment property 8,031 - 14,470
--------- ------- ---------
Net cash provided by (used in)
investing activities 8,031 (64) 14,240
--------- ------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (4,135) (173) (4,479)
Distributions to venturers (4,596) (432) (11,325)
--------- ------- ---------
Net cash used in financing activities (8,731) (605) (15,804)
--------- ------- ---------
Net (decrease) increase in cash and cash equivalents (378) 182 (602)
Less: cash balance of Pine Trail joint venture - (2) -
--------- ------- ---------
(378) 180 (602)
Cash and cash equivalents, beginning of year 378 198 800
--------- ------- ---------
Cash and cash equivalents, end of year $ - $ 378 $ 198
======== ======= =========
Cash paid during the year for interest $ 205 $ 1,152 $ 1,652
======== ======= =========
</TABLE>
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Notes to Combined Joint Ventures Financial Statements
1. Organization and Nature of Operations
-------------------------------------
The accompanying financial statements of the Combined Joint Ventures of
Paine Webber Income Properties Three Limited Partnership (Combined Joint
Ventures) include the accounts of Camelot Associates (through the date of the
sale described below), an Ohio limited partnership; Boyer Lubbock Associates
(through the date of the sale described below), a Utah limited partnership and
Pine Trail Partnership (through the date of the sale described below), a Florida
general partnership. The financial statements of the Combined Joint Ventures are
presented in combined form, rather than individually, due to the nature of the
relationship between the co-venturers and Paine Webber Income Properties Three
Limited Partnership (PWIP3), which owned a substantial financial interest but
did not have voting control in each joint venture.
The dates of PWIP3's acquisition of interests in the joint ventures are as
follows:
Date of Acquisition
Joint Venture of Interest
----------------------- -------------------
Camelot Associates 6/29/81
Boyer Lubbock Associates 6/30/81
Pine Trail Partnership 11/12/81
During fiscal 1998, Boyer Lubbock Associates sold the Central Plaza
Shopping Center to an unrelated third party. During fiscal 1997, PWIP3 sold its
interest in the Pine Trail Partnership to its co-venturer partner. During fiscal
1996, Camelot Associates sold its operating investment property and distributed
the net proceeds to the venture partners. See Note 3 for a further discussion of
these transactions.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1997 and revenues and expenses for the
period October 1, 1997 through March 3, 1998 and the years ended September 30,
1997 and 1996. Actual results could differ from the estimates and assumptions
used.
Basis of presentation
---------------------
Generally, the records of the combined joint ventures were maintained on
the income tax basis of accounting and adjusted to generally accepted accounting
principles for financial reporting purposes, principally for depreciation.
Operating investment properties
-------------------------------
The operating investment properties were recorded at cost less accumulated
depreciation or an amount less than cost if indicators of impairment were
present in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which was adopted in fiscal 1997. SFAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets carrying amount.
Management generally assessed indicators of impairment by a review of
independent appraisal reports on the operating investment property. Such
appraisals make use of a combination of certain generally accepted valuation
techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. Acquisition fees were capitalized and included in the
cost of the operating investment property. Depreciation expense was computed on
a straight-line basis over the estimated useful lives of the buildings,
improvements and equipment, generally five to forty years.
Deferred expenses
-----------------
Deferred expenses consisted primarily of loan fees and leasing commissions
which were being amortized over the lives of the related loans and related
leases on the straight-line method. Amortization of deferred loan fees, which
approximated the effective interest method, was included in interest expense on
the accompanying income statements.
Income tax matters
------------------
The Combined Joint Ventures are comprised of entities which are not
taxable and accordingly, the results of their operations are included on the tax
returns of the various partners. Accordingly no income tax provision is
reflected in the accompanying combined financial statements.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and cash equivalents, escrowed funds and
reserved cash approximated their fair values as of September 30, 1997 due to the
short-term maturities of these instruments. Information regarding the fair value
of long-term debt is provided in Note 5. The fair value of long-term debt was
estimated using discounted cash flow analyses, based on current market rates for
similar types of borrowing arrangements.
Cash and cash equivalents
-------------------------
For purposes of the statement of cash flows, cash and cash equivalents
included all highly liquid investments with maturities of 90 days or less.
Capital improvement reserve
---------------------------
In accordance with the joint venture agreement of Boyer Lubbock
Associates, a capital improvement reserve account was established to insure that
adequate funds are available to pay for future capital improvements to the
venture's operating investment property. At the end of each month, 1% of the
gross minimum base rents and percentage rents collected from tenants during the
month was to be deposited into this account. These deposits were not made on a
monthly basis but were made periodically throughout the year in the aggregate
required amounts.
3. Joint Ventures
--------------
See Note 5 to the financial statements of PWIP3 included in this Annual
Report for a more detailed description of the joint ventures. Descriptions of
the ventures' properties are summarized below:
a. Camelot Associates
------------------
The joint venture owned and operated Camelot East and the Villas of
Camelot Apartments, a 492-unit apartment complex, located in Fairfield, Ohio. On
June 19, 1996, the joint venture sold the operating investment property to an
unrelated third party for $15,150,000. PWIP3 received net sales proceeds of
approximately $5.9 million after deducting closing costs, the repayment of the
two outstanding first mortgage loans, the buyout of an underlying ground lease
and the co-venturers' share of the net proceeds.
b. Boyer Lubbock Associates
------------------------
The joint venture owned and operated Central Plaza Shopping Center, a
151,857 square foot shopping center, located in Lubbock, Texas. On March 3,
1998, Boyer Lubbock Associates sold the Central Plaza Shopping Center to an
unrelated third party for a net price of $8,350,000. PWIP3 received proceeds of
approximately $2,199,000 after the buyer's 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, PWIP3 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.
c. Pine Trail Partnership
----------------------
The joint venture owned and operated Pine Trail Shopping Center, a 266,042
square foot shopping center, located in West Palm Beach, Florida. On August 1,
1997, PWIP 3 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. PWIP 3 no longer holds an interest in this property.
As a result, the accounts of Pine Trail Partnership are no longer included in
these combined financial statements effective as of August 1, 1997. Pine Trails'
net capital of $4,859,000 as of July 31, 1997 is shown as a reduction of
combined capital on the accompanying statement of changes in venturers' capital
(deficit).
<PAGE>
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
----------------------------------
The joint venture agreements generally provided that taxable income and
tax loss from operations were to be allocated between PWIP3 and the co-venturers
in the same proportion as net cash flow distributed to each partner for such
year, except for certain items which were specifically allocated to the
partners, as defined in the joint venture agreements. Allocations of income and
loss for financial reporting purposes have been made in accordance with the
allocations of taxable income and loss.
Gains or losses resulting from sales or other dispositions of the projects
were to be allocated as specified in the joint venture agreements.
Distributions
-------------
The joint venture agreements generally provided that distributions were to
be paid first to PWIP3 from net cash flow monthly or quarterly, equivalent to
$171,000 annually in the case of Boyer Lubbock Associates and $515,000 annually
for Pine Trail Partnership. After payment of certain amounts to the
co-venturers, any remaining net cash flow was to be allocated between the
partners in accordance with their respective ownership percentages.
Distribution of net proceeds resulting from the sale or refinancing of the
properties was to be made in accordance with formulas provided in the joint
venture agreements.
4. Related party transactions
--------------------------
The Combined Joint Ventures had entered into property management
agreements with affiliates of the co-venturers, cancellable at the joint
ventures' option upon the occurrence of certain events. The management fees
generally were equal to 4% of gross receipts, as defined in the agreements.
Management fees totalling $16,000, $101,000 and $190,000 were paid to affiliates
of the co-venturers for the period October 1, 1997 through March 3, 1998 and the
years ended September 30, 1997 and 1996, respectively.
Certain of the joint ventures paid leasing commissions to affiliates of
the co-venturers. Leasing commissions paid to affiliates amounted to $18,000 and
$23,000 in fiscal 1997 and 1996, respectively. No leasing commissions were paid
to affiliates during the period October 1, 1997 through March 3, 1998.
5. Long-term debt
--------------
Long-term debt at September 30, 1997 consisted of the following (in
thousands):
1997
----
10% nonrecourse mortgage loan secured by
Central Plaza Shopping Center, payable in
monthly installments of $37, including
interest, with a final payment of $3,983
due January 2, 2002. The fair value of
this mortgage note payable approximated its
carrying value as of September 30, 1997. $ 4,135
========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the year ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-END> Sep-30-1998
<CASH> 911
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 973
<PP&E> 5,038
<DEPRECIATION> 1,593
<TOTAL-ASSETS> 4,367
<CURRENT-LIABILITIES> 172
<BONDS> 1,124
0
0
<COMMON> 0
<OTHER-SE> 3,071
<TOTAL-LIABILITY-AND-EQUITY> 4,367
<SALES> 0
<TOTAL-REVENUES> 2,950
<CGS> 0
<TOTAL-COSTS> 700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> 2,120
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,120
<EPS-PRIMARY> 97.41
<EPS-DILUTED> 97.41
</TABLE>
