UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-10979
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3038189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and September 30, 1998 (Unaudited)
(In thousands)
ASSETS
December 31 September 30
----------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
--------- ---------
5,038 5,038
Less accumulated depreciation (1,619) (1,593)
--------- --------
Net operating investment property 3,419 3,445
Cash and cash equivalents 1,138 911
Deferred expenses, net of accumulated
amortization 5 11
--------- ---------
$ 4,562 $ 4,367
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 1
Accrued expenses 43 171
Mortgage note payable 1,083 1,124
Partners' capital 3,435 3,071
--------- ---------
$ 4,562 $ 4,367
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the three months ended December 31, 1998 and 1997
(Unaudited)
(In thousands, except per Unit amounts)
1998 1997
---- ----
Revenues:
Rental revenues $ 119 $ 119
Interest income 11 29
------ ------
130 148
Expenses:
Interest expense 30 34
Management fees 1 1
Depreciation expense 26 26
General and administrative 180 50
------ ------
237 111
------ ------
Operating income (loss) (107) 37
Partnership's share of venture's income - 29
Gain on sale of operating investment
property 500 -
------ ------
Net income $ 393 $ 66
====== ======
Net income per Limited Partnership Unit $18.04 $ 3.03
====== ======
Cash distributions per Limited
Partnership Unit $ 1.31 $ 4.88
====== ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 21,550 Units of Limited Partnership Interest outstanding for each
period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the three months ended December 31, 1998 and 1997
(Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1997 $ 33 $ 3,394
Cash distributions (1) (105)
Net income 1 65
-------- -------
Balance at December 31, 1997 $ 33 $ 3,354
======== =======
Balance at September 30, 1998 $ 52 $ 3,019
Cash distributions (1) (28)
Net income 4 389
-------- -------
Balance at December 31, 1998 $ 55 $ 3,380
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 393 $ 66
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 26 26
Amortization of deferred financing costs 6 6
Partnership's share of venture's income - (29)
Changes in assets and liabilities:
Accounts payable - affiliates - (3)
Accounts payable and accrued expenses (128) (23)
------- --------
Total adjustments (96) (23)
------- --------
Net cash provided by operating activities 297 43
Cash flows from investing activities:
Distributions from joint ventures - 105
Cash flows from financing activities:
Distributions to partners (29) (106)
Principal payments on mortgage note payable (41) (37)
------- --------
Net cash used in financing activities (70) (143)
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Net increase in cash and cash equivalents 227 5
Cash and cash equivalents, beginning of period 911 973
------- --------
Cash and cash equivalents, end of period $ 1,138 $ 978
======= ========
Cash paid during the period for interest $ 24 $ 28
======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
Notes to Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended September 30, 1998. In the
opinion of management, the accompanying financial statements, which have not
been audited, reflect all adjustments necessary to present fairly the results
for the interim period. All of the adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of December 31, 1998 and September 30, 1998 and revenues and
expenses for the three-month periods ended December 31, 1998 and 1997. Actual
results could differ from the estimates and assumptions used.
With the fiscal 1998 sale of the Central Plaza Shopping Center (see Note
4), as of December 31, 1998, the Partnership's remaining assets consisted 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 3). As discussed further in
Note 3, the subordinated mortgage note receivable was released in return for a
cash settlement which was completed in January 1999. As discussed further in
Note 6, the Partnership continues to negotiate with the master lessee regarding
a potential sale of the Northeast Plaza property. The Partnership also has
certain litigation outstanding related to Mobil Oil Corporation's contamination
of the Northeast Plaza property. The sale or other disposition of the
Partnership's remaining asset and the resolution of the outstanding litigation
would be followed by a liquidation of the Partnership. It is currently
contemplated that the disposition of the Partnership's remaining asset could be
completed by the end of calendar year 1999. There are no assurances, however,
that the sale of the remaining asset, the resolution of the outstanding
litigation and the liquidation of the Partnership will be completed within this
time frame.
2. Related Party Transactions
--------------------------
Management fees earned by the Adviser for each of the three-month periods
ended December 31, 1998 and 1997 totalled $1,000. Accounts payable - affiliates
at both December 31, 1998 and September 30, 1998 consist of $1,000 of management
fees payable to the Adviser.
Included in general and administrative expenses for the three months ended
December 31, 1998 and 1997 is $19,000 and $18,000, respectively, representing
reimbursements to an affiliate of the General Partner for providing certain
financial, accounting and investor communication services to the Partnership.
Also included in general and administrative expenses for each of the three
months ended December 31, 1998 and 1997 is $125 representing fees paid to an
affiliate, Mitchell Hutchins Institutional Investors, Inc., for managing the
Partnership's cash assets.
3. 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 $3,445,336 was to bear
interest at 9% annually and was subordinated to a first mortgage loan. 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 sales documents. Any interest
not received was to accrue additional interest of 9% per annum. The
Partnership's policy was 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 during fiscal 1998. Per the terms of the note agreement, accrued interest
receivable as of September 30, 1998 would have been approximately $8,112,000.
On June 22, 1998, the Partnership initiated a lawsuit in Massachusetts
state court in connection with this note receivable. The suit alleged 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 was
received subsequent to the quarter end, on January 29, 1999. The settlement
payments will be recognized as deferred gains on the sale of the Briarwood and
Gatewood properties, in keeping with the originally expected accounting for the
principal balance of the note, in the period in which they are received. As a
result of the settlement, the Partnership no longer has an interest in the note
receivable. The Partnership incurred approximately $500,000 of legal costs
associated with the litigation and collection of the settlement of this note
receivable. Consequently, approximately $2,500,000 of settlement proceeds is
available to distribute to the Limited Partners. Accordingly, a Special Capital
Distribution in the amount of $2,499,800, or $116 per original $1,000
investment, will be paid on February 12, 1999, to holders of record on January
29, 1999, along with the regular quarterly distribution for the quarter ended
December 31, 1998.
4. Real Estate Investments
-----------------------
As of December 31, 1998, the Partnership directly owns one operating
investment property, the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota, Florida (see Notes 5 and 6). The Partnership
had no joint venture partnership investments at December 31, 1998 (one at
December 31, 1997). On March 3, 1998, Boyer Lubbock Associates, a joint venture
in which the Partnership had an interest, sold the Central Plaza Shopping Center
to an unrelated third party for a net price of $8,350,000. The Partnership
received proceeds of approximately $2,199,000 after the assumption of the
outstanding first mortgage loan of $4,122,000, closing costs and proration
adjustments of $232,000, and the co-venture partner's share of the proceeds of
$1,797,000. In addition, the Partnership received $82,000 upon the liquidation
of the joint venture, which represented its share of the net cash flow from
operations through the date of the sale. As a result of this transaction, the
Partnership made a Special Distribution to the Limited Partners of approximately
$2,284,000, or $106 per original $1,000 investment, on April 3, 1998.
The joint venture was accounted for by using the equity method because the
Partnership did not have a voting control interest in the venture. Under the
equity method, the assets, liabilities, revenues and expenses of the joint
venture did not appear in the Partnership's financial statements. Condensed
combined financial statements of this joint venture follow:
<PAGE>
Condensed Combined Summary of Operations
For the three months ended December 31, 1997
(in thousands)
1997
----
Rental revenues and expense
recoveries $ 288
Interest and other income 5
-------
293
Property operating expenses 85
Interest expense 110
Depreciation and amortization 22
-------
217
-------
Net income $ 76
=======
Net income:
Partnership's share of net income $ 29
Co-venturer's share of net income 47
-------
$ 76
=======
5. Mortgage Note Payable
---------------------
The mortgage note payable at December 31, 1998 and September 30, 1998 is
secured by the Partnership's wholly-owned Northeast Plaza Shopping Center. On
March 29, 1994, the Partnership refinanced the existing wraparound mortgage note
secured by Northeast Plaza, which had been in default for over two years, with a
new loan issued by the prior underlying first mortgage lender. The new loan, in
the initial principal amount of $1,722,000, has a term of five years and bears
interest at a fixed rate of 9% per annum. Monthly principal and interest
payments of approximately $22,000 are due until maturity on March 29, 1999.
During the first quarter of fiscal 1999, the Partnership had 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. Subsequent to
the quarter end, the sales contract expired pursuant to its terms, but the
parties continue to negotiate for a potential sale transaction. 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 December 31, 1998
and September 30, 1998.
6. 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. During the quarter ended December 31, 1998, the Partnership
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. Subsequent to the quarter end, the sales contract expired
pursuant to its terms, but the parties continue to negotiate for a potential
sale transaction. 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.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended September 30, 1998 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
- -------------------------------
With the fiscal 1998 sale of the Central Plaza Shopping Center, as of
December 31, 1998, the Partnership's remaining assets consisted 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 subordinated mortgage note
receivable was released in return for a cash settlement which was completed
subsequent to the quarter end, and the Partnership continues to negotiate with
the master lessee regarding a potential sale of the Northeast Plaza property.
The Partnership also has certain litigation outstanding related to Mobil Oil
Corporation's contamination of the Northeast Plaza property. The sale or other
disposition of the Partnership's remaining asset and the resolution of the
outstanding litigation would be followed by a liquidation of the Partnership. It
is currently contemplated that the disposition of the Partnership's remaining
asset could be completed by the end of calendar year 1999. There are no
assurances, however, that the sale of the remaining asset, 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 quarter ended December 31, 1998. The focus of
the property's leasing team has been with the renewal of the leases with five
tenants occupying 37,300 square feet that were scheduled to expire in the next
twelve months. One of these tenants is one of the center's two anchor tenants
which has a 25,600 square foot lease that was scheduled to expire in January of
1999. This tenant has exercised one of its two five-year options and renewed its
lease with a 10% increase in the rental rate. A second tenant, which operates a
6,500 square foot discount retail store, exercised an option and renewed its
lease for five years at a slightly increased rental rate. Additionally, a 1,200
square foot bookstore tenant and a 1,600 square foot hair salon signed one-year
lease extensions. The fifth tenant operates a 2,400 square foot restaurant and
has a lease which expires in June 1999. 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. During the quarter ended December 31, 1998, the Partnership
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. Subsequent to the quarter end, the sales contract expired
pursuant to its terms, but the parties continue to negotiate for a potential
sale transaction. 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 had 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 interest owed on the note receivable was 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 was recorded as interest income during fiscal 1998. On June 22, 1998, the
Partnership initiated a lawsuit in Massachusetts state court in connection with
this note receivable. The suit alleged 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 was received subsequent to
the quarter end, on January 29, 1999. The settlement payments will be recognized
as deferred gains on the sale of the Briarwood and Gatewood properties, in
keeping with the originally expected accounting for the principal balance of the
note, in the period in which they are received. As a result of the settlement,
the Partnership no longer has an interest in the note receivable. The
Partnership incurred approximately $500,000 of legal costs associated with the
litigation and collection of the settlement of this note receivable.
Consequently, approximately $2,500,000 of settlement proceeds is available to
distribute to the Limited Partners. Accordingly, a Special Capital Distribution
in the amount of $2,499,800, or $116 per original $1,000 investment, will be
paid on February 12, 1999, to holders of record on January 29, 1999, along with
the regular quarterly distribution for the quarter ended December 31, 1998.
At December 31, 1998, the Partnership had available cash and cash
equivalents of $1,138,000. Such cash and cash equivalents will be used for the
working capital requirements of the Partnership and for distributions to the
partners. The source of future liquidity and distributions to the partners is
expected to be through settlement payments from the assignment of the note
receivable discussed above, cash generated from the operations of the
Partnership's remaining income-producing investment property and proceeds
received from the sale or refinancing of such property. Such sources of
liquidity are expected to be sufficient to meet the Partnership's needs on both
a short-term and long-term basis.
Results of Operations
Three Months Ended December 31, 1998
- ------------------------------------
The Partnership reported net income of $393,000 for the three months ended
December 31, 1998, as compared to net income of $66,000 for the same period in
the prior year. This $327,000 increase in net income is attributable to the gain
of $500,000 realized in the current period due to the Briarwood note settlement,
as discussed further above. The Partnership had been deferring a portion of the
gain on the sale of the venture's operating investment properties, which were
sold in 1984, under the cost recovery method. The gain in the current period was
partially offset by an unfavorable change in the Partnership's operating income
(loss). The Partnership reported an operating loss of $107,000 during the
current three-month period as compared to operating income of $37,000 during the
same period in the prior year. The unfavorable change in operating income (loss)
was primarily the result of an increase of $130,000 in general and
administrative expenses for the current three-month period. General and
administrative expenses increased mainly due to an increase in certain required
professional services during the current period. Also, as discussed further
above, the Partnership completed the sale of the Central Plaza property on March
3, 1998. Therefore, there was no income or loss from joint venture operations
for the quarter ended December 31, 1998, as compared to income of $29,000 during
the same period in the prior year.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
Mobil Oil Corporation
- ---------------------
The status of the Partnership's litigation with Mobil Oil Corporation
remains unchanged from what was reported in the Partnership's Annual Report on
Form 10-K for the year ended September 30, 1998.
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 alleged 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 was
received subsequent to the quarter end, on January 29, 1999. As a result of the
settlement, the Partnership no longer has an interest in the note receivable.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
By: THIRD INCOME PROPERTIES, INC.
-----------------------------
General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: February 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the period ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Dec-31-1998
<CASH> 1,138
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,138
<PP&E> 5,038
<DEPRECIATION> 1,619
<TOTAL-ASSETS> 4,562
<CURRENT-LIABILITIES> 44
<BONDS> 1,083
0
0
<COMMON> 0
<OTHER-SE> 3,435
<TOTAL-LIABILITY-AND-EQUITY> 4,562
<SALES> 0
<TOTAL-REVENUES> 630
<CGS> 0
<TOTAL-COSTS> 207
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 393
<INCOME-TAX> 0
<INCOME-CONTINUING> 393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393
<EPS-PRIMARY> 18.04
<EPS-DILUTED> 18.04
</TABLE>
