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 MARCH 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-10979
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3038189
-------- ----------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 1999 and September 30, 1998 (Unaudited)
(In thousands)
ASSETS
March 31 September 30
-------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
--------- ---------
5,038 5,038
Less accumulated depreciation (1,644) (1,593)
--------- ---------
Net operating investment property 3,394 3,445
Cash and cash equivalents 929 911
Deferred expenses, net of accumulated
amortization - 11
--------- ---------
$ 4,323 $ 4,367
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 1
Accrued expenses 37 171
Mortgage note payable 1,041 1,124
Partners' capital 3,244 3,071
--------- ---------
$ 4,323 $ 4,367
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the three and six months ended March 31, 1999 and 1998 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rental revenues $ 119 $ 119 $ 239 $ 239
Interest income 22 26 32 54
------- ------- -------- -------
141 145 271 293
Expenses:
Interest expense 30 33 60 67
Management fees 1 1 2 2
Depreciation expense 25 25 51 51
General and administrative 46 78 89 128
------- ------ -------- -------
102 137 202 248
------- ------- -------- -------
Operating income 39 8 69 45
Partnership's share of venture's
losses - (184) - (155)
Partnership's share of gain on
sale of investment property - 2,392 - 2,392
Gain on sale of operating
investment property 2,298 - 2,661 -
------- ------- -------- -------
Net income $ 2,337 $ 2,216 $ 2,730 $ 2,282
======= ======= ======= =======
Net income per Limited
Partnership Unit $107.38 $101.80 $125.42 $104.83
======= ======= ======= =======
Cash distributions per
Limited Partnership Unit $117.31 $ 1.31 $118.62 $ 9.76
======= ======= ======= =======
The above net income and cash distributions per Limited Partnership Unit
are based upon the 21,550 Units of Limited Partnership Interest outstanding for
each period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended March 31, 1999 and 1998 (Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1997 $ 33 $ 3,394
Cash distributions (1) (133)
Net income 23 2,259
------- -------
Balance at March 31, 1998 $ 55 $ 5,520
======= =======
Balance at September 30, 1998 $ 52 $ 3,019
Cash distributions (1) (2,556)
Net income 27 2,703
------- -------
Balance at March 31, 1999 $ 78 $ 3,166
======= =======
See accompanying notes.
<PAGE>
<TABLE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the six months ended March 31, 1999 and 1998 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,730 $ 2,282
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Partnership's share of gain on sale of investment property - (2,392)
Gain on sale of operating investment property (2,661) -
Depreciation expense 51 51
Amortization of deferred financing costs 11 11
Partnership's share of venture's losses - 155
Changes in assets and liabilities:
Accounts payable - affiliates - (29)
Accounts payable and accrued expenses (134) (3)
Total adjustments (2,733) (2,207)
--------- ---------
Net cash (used in) provided by operating activities (3) 75
--------- ---------
Cash flows from investing activities:
Distributions from joint ventures - 2,452
Net proceeds from collection of mortgage note receivable 2,661 -
--------- ---------
Net cash provided by investing activities 2,661 2,452
--------- ---------
Cash flows from financing activities:
Distributions to partners (2,557) (134)
Principal payments on mortgage note payable (83) (75)
--------- ---------
Net cash used in financing activities (2,640) (209)
--------- ---------
Net increase in cash and cash equivalents 18 2,318
Cash and cash equivalents, beginning of period 911 973
--------- ---------
Cash and cash equivalents, end of period $ 929 $ 3,291
========= =========
Cash paid during the period for interest $ 49 $ 56
========= =========
See accompanying notes.
</TABLE>
<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 March 31, 1999 and September 30, 1998 and revenues and
expenses for the three and six-month periods ended March 31, 1999 and 1998.
Actual results could differ from the estimates and assumptions used.
As of March 31, 1999, the Partnership has one remaining real estate asset,
the wholly-owned Northeast Plaza Shopping Center (see Note 4). As discussed
further in Note 3, the subordinated mortgage note receivable related to the
Briarwood and Gatewood properties which were sold in fiscal 1985 was released in
return for a cash settlement 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 six-month periods
ended March 31, 1999 and 1998 totalled $2,000. Accounts payable - affiliates at
both March 31, 1999 and September 30, 1998 consist of $1,000 of management fees
payable to the Adviser.
Included in general and administrative expenses for the six months ended
March 31, 1999 and 1998 is $37,000 and $35,000, 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 six
months ended March 31, 1999 and 1998 is $1,000, 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 resulted
from accounting differences related to the carrying value of the Partnership's
investment.
<PAGE>
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 agreed
to pay the Partnership the aggregate amount of $3 million and the Partnership
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
on January 29, 1999. The settlement payments have been 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, net of the
expenses incurred in fiscal 1999 in connection with the litigation. 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 in
fiscal 1998 and 1999 associated with the litigation and collection of the
settlement of this note receivable. Consequently, approximately $2,500,000 of
settlement proceeds was 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, was 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 March 31, 1999, the Partnership directly owns one operating
investment property, the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota, Florida (see Notes 5 and 6). The Partnership
had no joint venture partnership investments at March 31, 1999 and 1998. 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 for the period in fiscal
1998 prior to the sale of the property follow:
<PAGE>
Condensed Combined Summary of Operations
For the three and six months ended March 31, 1998
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1998
---- ----
Rental revenues and expense
recoveries $ 155 $ 443
Interest and other income 3 8
------- -------
158 451
Property operating expenses 130 215
Interest expense 61 171
Depreciation and amortization 202 224
------- -------
393 610
------- -------
Operating loss (235) (159)
Gain on sale of investment property 5,567 5,567
------- -------
Net income $ 5,332 $ 5,408
======= =======
Net income:
Partnership's share of net income $ 2,225 $ 2,254
Co-venturer's share of net income 3,107 3,154
------- -------
$ 5,332 $ 5,408
======= =======
Reconciliation of Partnership's Share of Operations
For the three and six months ended March 31, 1998 (in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1998
---- ----
Partnership's share of net income,
as shown above $ 2,225 $ 2,254
Amortization of excess basis (17) (17)
------- -------
Partnership's share of
venture's net income $ 2,208 $ 2,237
======= =======
The Partnership's share of venture's net income is presented as follows in
the accompanying fiscal 1998 statements of operations (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1998
---- ----
Partnership's share of
venture's losses $ (184) $ (155)
Partnership's share of gain on
sale of investment
property 2,392 2,392
------- -------
$ 2,208 $ 2,237
======= =======
5. Mortgage Note Payable
---------------------
The mortgage note payable at March 31, 1999 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 were due until maturity on March 29, 1999. In
February, 1999, the Partnership negotiated an extension of the maturity date of
this note with the lender to June 29, 1999. Monthly principal and interest
payments of approximately $22,000 will continue to be due through the extended
maturity date. In connection with the potential sale of the Northeast Plaza
property discussed below, further extension of the maturity date may be
necessary to accommodate the timing of a sale transaction. There can be no
assurances that the lender will consent to any such extensions.
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. During the
current quarter, the sales contract expired pursuant to its terms, but the
parties continue to negotiate for a potential sale transaction. There are no
assurances, however, that a sale transaction will be completed. The loan may be
prepaid at anytime without penalty. The fair value of this mortgage note payable
approximated its carrying value as of March 31, 1999 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 damage
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 damage 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. During the current quarter,
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 for a period of ten months 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
- -------------------------------
As of March 31, 1999, the Partnership's only remaining real estate asset
consists of the wholly-owned Northeast Plaza Shopping Center. As discussed
further below, the subordinated mortgage note receivable related to the
Briarwood and Gatewood properties was released in return for a cash settlement
which was completed during the current quarter, 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 March 31, 1999. During the
quarter, the property's leasing team focused on the renewal of leases with four
tenants occupying a total of 6,930 square feet. Two of these tenants which
occupy a total of 3,840 square feet exercised their options and renewed their
leases for five years. Two other tenants occupying a total of 3,090 square feet
extended their leases for a year. The property's leasing team continues to work
with three tenants occupying a total of 16,400 square feet on renewals of their
leases. Based on current negotiations, all three are expected to renew their
leases. 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 damage
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 damage 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. During the current quarter,
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 for a period of ten months 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 agreed to pay the Partnership
the aggregate amount of $3 million and the Partnership 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 on January 29, 1999. The
settlement payments have been 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, net of the expenses incurred
in fiscal 1999 in connection with the litigation. 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 in fiscal 1998 and
1999 associated with the litigation and collection of the settlement of this
note receivable. Consequently, approximately $2,500,000 of settlement proceeds
was 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, was paid on February 12, 1999, to holders of record on January 29,
1999, along with the regular quarterly distribution for the quarter ended March
31, 1999.
At March 31, 1999, the Partnership had available cash and cash equivalents
of $929,000. 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
from 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.
As noted above, it is expected that the Partnership will be liquidated
prior to 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.
<PAGE>
Results of Operations
Three Months Ended March 31, 1999
- ---------------------------------
The Partnership reported net income of $2,337,000 for the three months
ended March 31, 1999, as compared to net income of $2,216,000 for the same
period in the prior year. This increase in net income is attributable to a
decrease in the Partnership's share of venture's losses and an increase in the
Partnership's operating income. The decrease in the Partnership's share of
venture's losses resulted from the sale of the Central Plaza property on March
3, 1998, as discussed further in the Annual Report. Therefore, there was no
income or loss from joint venture operations for the quarter ended March 31,
1999, as compared to a loss of $184,000 during the same period in the prior
year. The favorable change in operating income was primarily the result of a
decrease in general and administrative expenses of $32,000 for the current
three-month period. General and administrative expenses decreased mainly due to
a reduction in certain required professional services during the current period.
The decrease in the Partnership's share of venture's losses and the increase in
the Partnership's operating income were partially offset by a decrease in the
gains recognized on the sale of operating investment properties between the two
three-month periods. The decrease represents the difference between the
$2,298,000 gain realized due to the Briarwood note settlement in the current
three-month period and the $2,392,000 gain realized on the sale of the Central
Plaza Shopping Center during the three months ended March 31, 1998.
Six Months Ended March 31, 1999
- -------------------------------
The Partnership reported net income of $2,730,000 for the six months ended
March 31, 1999, as compared to net income of $2,282,000 for the same period in
the prior year. This increase in net income is attributable to an increase of
$264,000 in the gains recognized on the sale of operating investment properties
between the two six-month periods, a decrease of $155,000 in the Partnership's
share of venture's losses and an increase of $24,000 in the Partnership's
operating income. The increase in gain on sale of operating investment property
represents the difference between the $2,661,000 gain realized due to the
Briarwood note settlement in the current period and the $2,392,000 gain realized
on the sale of the Central Plaza Shopping Center in the prior year, as discussed
further above. As discussed above in the three months results, the decrease in
the Partnership's share of venture's losses resulted from the sale of the
Central Plaza property on March 3, 1998. The favorable change in operating
income was primarily the result of a decrease in general and administrative
expenses of $39,000 and a reduction in interest expense of $7,000 for the
current six-month period. General and administrative expenses decreased mainly
due to a reduction in certain required professional services during the current
period. Interest expense declined due to the regular scheduled principal
payments made on the Northeast Plaza mortgage note payable. The decreases in
general and administrative expenses and interest expense were partially offset
by a decrease in interest income of $22,000 for the current six-month period.
Interest income decreased mainly due to the interest earned during the prior
six-month period on the Central Plaza Shopping Center sale proceeds prior to the
distribution to the Limited Partners, which occurred in April 1998.
<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 agreed
to pay the Partnership the aggregate amount of $3 million and the Partnership
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
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: May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended March 31,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Mar-31-1999
<CASH> 929
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 929
<PP&E> 5,038
<DEPRECIATION> 1,644
<TOTAL-ASSETS> 4,323
<CURRENT-LIABILITIES> 38
<BONDS> 1,041
0
0
<COMMON> 0
<OTHER-SE> 3,244
<TOTAL-LIABILITY-AND-EQUITY> 4,323
<SALES> 0
<TOTAL-REVENUES> 2,932
<CGS> 0
<TOTAL-COSTS> 142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 2,730
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,730
<EPS-PRIMARY> 125.42
<EPS-DILUTED> 125.42
</TABLE>
