UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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
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(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
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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
1999 FORM 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1 Business I-1
Item 2 Properties I-4
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 7A Market Risk Disclosures II-7
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 Principal Executive Officers of the
Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners and
Management III-2
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-25
<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, 1999 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, 1999, the Partnership owned directly the property set forth in the
following table:
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition of Type of
Location Size Interest Ownership (1)
- ------------------------------------- ---- ---------- ----------------
<S> <C> <C> <C>
Northeast Plaza Shopping Center 121,005 9/25/81 Fee ownership of land
Sarasota, Florida gross and improvements subject
leasable to a master lease.
sq. ft.
</TABLE>
(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. 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, 1999, the Limited Partners had received cumulative
cash distributions totalling approximately $39,398,000, or approximately $1,856
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;
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;
and approximately $2,500,000, or $116 per original $1,000 investment, represents
the proceeds from the assignment of the subordinated mortgage note received as
part of the December 1984 sale of Briarwood and Gatewood apartment properties in
February 1999. 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 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.
As discussed further in Item 7 and the notes to the financial statements
accompanying this Annual Report, 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 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. 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. 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 subsequently began the process of appealing the
judgment pertaining to its damages claims, and Mobil filed a cross-appeal
challenging the scope of the injunctive order. 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 believed
reflected only a small deduction for the stigma associated with the Mobil
contamination. The agreement was signed on November 29, 1998 and was contingent
on the master-lessee's ability to obtain a commitment for sufficient financing
by January 29, 1999 to pay the Partnership for its ownership interest. This
financing commitment date was subsequently extended to April 19, 1999. As noted
below, the master-lessee has been unable to secure a commitment for financing
because of an unrelated environmental issue, which resulted in the termination
of the purchase agreement. The appeal of the Mobil litigation was stayed until
mid-December 1999 pending the resolution of this potential sale transaction.
Subsequent to the year ended September 30, 1999, the Partnership decided not to
pursue the appeal of its damages claims against Mobil. Mobil also agreed to drop
its cross-appeal related to the scope of the injunctive order, and the cleanup
is expected to proceed as set forth in the court order.
During the quarter ended June 30, 1999, the Partnership was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination at the Shopping Center which appears to have been caused by the
operation of dry cleaning equipment at the Center. The Partnership has confirmed
the presence of this contamination and is in the process of assessing the extent
of the contamination, the anticipated cost and time to take appropriate action,
and the feasibility of recovering associated costs from responsible third
parties. The Partnership accrued a liability of $1 million during fiscal 1999 to
cover expected legal and environmental testing and remediation costs regarding
this contamination based on the preliminary reports obtained from the
master-lessee and the work performed to date by the Partnership's own
environmental consultants. This represents an estimate of the potential
liability associated with this situation. It is possible that this estimate
could change materially in the near term as further testing, consultation with
appropriate state environmental agencies and actual remediation work progresses.
The Partnership will continue to assess and revise this estimate as further
information becomes available. At the same time, the Partnership continues to
work with the Northeast Plaza master-lessee, the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.
The maturity date of the existing first mortgage loan secured by the
property was March 29, 1999. The maturity date was extended by the lender in
February 1999 to June 29, 1999 and subsequently extended again to December 15,
1999 to allow the master-lessee to complete its planned acquisition of the
Partnership's interest in the property. The current lender has indicated a
willingness to work with the Partnership on a further short-term extension of
the maturity date to accommodate the timing of a sale transaction. However, as
discussed further in Item 7, in light of the most recent environmental issue at
the property, the timing of a sale transaction is uncertain at the present time,
and no further formal extension has been granted. As a result, as of December
15, 1999 the Partnership is in default of the first mortgage agreement. There
can be no assurances regarding what actions, if any, the mortgage lender will
take to enforce its legal remedies in light of this default situation.
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.
<PAGE>
Item 2. Properties
As of September 30, 1999, 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 1999, along with an
average for the year, are presented below for the property:
<TABLE>
<CAPTION>
Percent Leased At
-----------------------------------------------------
Fiscal 1999
12/31/98 3/31/99 6/30/99 9/30/99 Average
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Northeast Plaza Shopping Center 100% 100% 100% 100% 100%
</TABLE>
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 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 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. 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 subsequently began the process of appealing the
judgment pertaining to its damages claims and Mobil filed a cross-appeal
challenging the scope of the injunctive order. 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 believed
reflected only a small deduction for the stigma associated with the Mobil
contamination. The agreement was signed on November 29, 1998 and was contingent
on the master-lessee's ability to obtain a commitment for sufficient financing
by January 29, 1999 to pay the Partnership for its ownership interest. This
financing commitment date was subsequently extended to April 19, 1999. As
discussed further in Item 7, the master-lessee has been unable to secure a
commitment for financing because of an unrelated environmental issue, which
resulted in the termination of the purchase agreement. The appeal of the Mobil
litigation was stayed until mid-December 1999 pending the resolution of this
potential sale transaction. Subsequent to the year ended September 30, 1999, the
Partnership proposed a settlement agreement which would result in a dismissal of
the appeal of its damages claims against Mobil with both parties bearing their
own costs and attorneys' fees. Under the proposed settlement, Mobil would remain
subject to the injunctive order, and the cleanup would proceed as set forth in
the court order. While the parties have agreed in principle to such a
settlement, the matter remains subject to the negotiation and execution of a
definitive settlement agreement.
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 denied any and all liability in the lawsuit. By Agreement dated
December 30, 1998, the Partnership and the defendants settled the lawsuit, with
the defendants and their affiliates admitting no liability, and the parties
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 paid on
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, 1999, there were 1,499 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 1999.
Item 6. Selected Financial Data
Paine Webber Income Properties Three Limited Partnership
--------------------------------------------------------
(In thousands, except per Unit data)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 534 $ 714 $ 579 $ 562 $ 492
Operating loss $ (913) $ (116) $ (130) $ (80) $ (246)
Partnership's share
of ventures' income (loss) - $ (155) $ 403 $ 696 $ 510
Gain on sale of joint
venture interest - - $ 3,565 - -
Partnership's share of gain
on sale of operating
investment property - $ 2,391 - $ 5,926 -
Gain on sale of operating
investment property $ 2,661 - - - -
Net income $ 1,748 $ 2,120 $ 3,838 $ 6,542 $ 264
Per Limited Partnership Unit:
Net income $ 80.30 $ 97.41 $176.32 $300.56 $ 12.14
Cash distributions from
operations $ 5.24 $ 8.81 $ 19.52 $ 19.40 $ 19.40
Cash distributions from
sale transactions $116.00 $106.00 $285.25 $256.00 -
Total assets $ 4,152 $ 4,367 $ 4,767 $ 7,645 $ 7,151
Mortgage note payable $ 967 $ 1,124 $ 1,278 $ 1,420 $ 1,549
</TABLE>
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, 1999, 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, during fiscal 1999 the
Partnership reached a settlement agreement which resulted in the assignment to
the borrower of 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 related to
its remaining investment to pay for its share of certain required capital
improvement and/or environmental remediation expenses.
During fiscal 1999, the Partnership settled the note receivable that it
had 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 on the
accompanying fiscal 1998 statement of operations. 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 denied any and all
liability in the lawsuit. By Agreement dated December 30, 1998, the Partnership
and the defendants settled the lawsuit, with the defendants and their affiliates
admitting no liability, and the parties 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 paid on January 29, 1999. The settlement payments were
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.
With the settlement of the subordinated mortgage note receivable position
related to the Briarwood and Gatewood properties, the Partnership's remaining
asset consists of the wholly-owned Northeast Plaza Shopping Center in Sarasota,
Florida. The Partnership's goal during fiscal 1999 was to pursue a disposition
strategy for its investment in Northeast Plaza which would enable the
Partnership to complete a liquidation prior to the end of calendar year 1999.
For the reasons set forth in detail further below, this goal was not achieved.
The Partnership still hopes to complete a liquidation during calendar year 2000.
However, there can be no assurances that the disposition of the remaining
investment and a liquidation of the Partnership will be completed within this
time frame.
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 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. 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. 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 subsequently began the process of appealing the
judgement pertaining to its damages claims, and Mobil filed a cross-appeal
challenging the scope of the injunctive order.
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 believed reflected only a small deduction for the
stigma associated with the Mobil contamination. The agreement was signed on
November 29, 1998 and was contingent on the master-lessee's ability to obtain a
commitment for sufficient financing by January 29, 1999 to pay the Partnership
for its ownership interest. This financing commitment date was subsequently
extended to April 19, 1999. As noted below, the master-lessee has been unable to
secure a commitment for financing because of an unrelated environmental issue,
which resulted in the termination of the purchase agreement. The appeal of the
Mobil litigation was stayed until mid-December 1999 pending the resolution of
this potential sale transaction. Subsequent to the year ended September 30,
1999, the Partnership proposed a settlement agreement which would result in a
dismissal of the appeal of its damages claims against Mobil with both parties
bearing their own costs and attorneys' fees. Under the proposed settlement,
Mobil would remain subject to the injunctive order, and the cleanup would
proceed as set forth in the court order. While the parties have agreed in
principle to such a settlement, the matter remains subject to the negotiation
and execution of a definitive settlement agreement.
During the quarter ended June 30, 1999, the Partnership was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination at the Shopping Center which appears to have been caused by the
operation of dry cleaning equipment at the Center. The Partnership has confirmed
the presence of this contamination and is in the process of assessing the extent
of the contamination, the anticipated cost and time to take appropriate action,
and the feasibility of recovering associated costs from responsible third
parties. While the Partnership believes that the cleanup costs should be the
responsibility of the lessee under the terms of the master lease, the
Partnership is proceeding on its own to begin the cleanup process in order to
protect its investment. The prospects for any future recoveries of these costs
are uncertain at the present time. The Partnership accrued a liability of $1
million during fiscal 1999 to cover expected legal and environmental testing and
remediation costs regarding this contamination based on the preliminary reports
obtained from the master-lessee and the work performed to date by the
Partnership's own environmental consultants. Through September 30, 1999, the
Partnership had incurred actual legal and environmental testing expenses of
$79,000 in connection with this situation. The remaining balance of the accrued
liability of $921,000 is included in the balance of accrued expenses on the
accompanying balance sheet. This amount represents an estimate of the potential
liability associated with this situation. It is possible that this estimate
could change materially in the near term as further testing, consulting with
appropriate state environmental agencies and actual remediation work progresses.
The Partnership will continue to assess and revise this estimate as further
information becomes available. At the same time, the Partnership continues to
work with the Northeast Plaza master-lessee, the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.
The maturity date of the existing first mortgage loan secured by the
property was March 29, 1999. The maturity date was extended by the lender in
February 1999 to June 29, 1999 to allow for the master-lessee to complete its
planned refinancing and acquisition of the Partnership's interest in the
property. As noted above, however, the completion of a sale transaction has been
affected by an environmental issue and did not occur by June 29, 1999. On July
16, 1999, the lender issued a default notice as of June 29, 1999 and assessed
default interest at a rate of 25% per annum on the outstanding balance of
approximately $998,000. On August 31, 1999, the Partnership and the lender
executed a forbearance agreement. Under the forbearance agreement, the lender
agreed not to foreclose or exercise any remedy available to it under the loan
agreement until December 15, 1999. The Partnership agreed to pay a $35,000
extension fee; $10,000 of which was paid on August 31, 1999 and $25,000 of which
was payable by December 15, 1999. Under the forbearance agreement, interest
accrued at a rate of 18% on the unpaid principal balance of approximately
$997,000. Monthly principal and interest payments were increased to $30,000
beginning August 31, 1999. The current lender has indicated a willingness to
work with the Partnership on a further short-term extension of the maturity date
to accommodate the timing of a sale transaction. However, in light of the most
recent environmental issue at the property, the timing of a sale transaction is
uncertain at the present time, and no further formal extension has been granted.
As a result, as of December 15, 1999 the Partnership is in default of the first
mortgage agreement. Management is negotiating a forbearance agreement with the
lender which would have terms similar to that which expired on December 15,
1999. While a final agreement has not been reached, management expects that the
forbearance period will extend at least six months, and possibly as long as nine
months, from the expiration of the prior forbearance agreement. Such agreement
is subject to final negotiation and the execution of definitive documents.
Therefore, there can be no assurances regarding what actions, if any, the
mortgage lender will take to enforce its legal remedies in light of the current
default situation. As noted above, management still hopes to complete a sale of
the Northeast Plaza property in the near term once a formal remediation plan has
been developed and approved to address the environmental problem. Management
intends to take all reasonable steps to continue to hold the property until such
time as a sale transaction can be consummated.
The occupancy level at Northeast Plaza remained at 100% for the year ended
September 30, 1999. The focus of the property's leasing team during fiscal 1999
was the renewal of the leases with five tenants occupying 37,300 square feet
that were scheduled to expire during fiscal 1999. All five tenants have renewed
their leases. One of these tenants was one of the center's two anchor tenants
which has a 25,600 square foot lease that expired in January of 1999. This
tenant 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 and a 1,600 square foot hair salon signed one-year lease extensions.
During the fourth quarter of fiscal 1999, leases with two tenants occupying a
total of 6,800 square feet were renewed. The property's leasing team is working
with four tenants occupying a total of 5,600 square feet on renewals of their
leases which expire within the next twelve months. Based on current
negotiations, all four tenants are expected to renew their leases.
At September 30, 1999, the Partnership had available cash and cash
equivalents of $809,000. 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 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, the Partnership expects to be liquidated in the near term.
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
1999 Compared to 1998
- ---------------------
The Partnership's net income decreased by $372,000 during fiscal 1999,
when compared to the prior year. This decrease in net income was mainly due to
an increase of $797,000 in the Partnership's operating loss. This increase in
the Partnership's operating loss was primarily the result of an increase in
general and administrative expenses due to the $1 million accrual made by the
Partnership in fiscal 1999 for potential costs associated with the most recent
contamination issue at the Northeast Plaza Shopping Center, as described further
above. Overall general and administrative expenses increased by only $624,000 in
fiscal 1999, despite this $1 million accrual, mainly due to a reduction in legal
fees associated with the Mobil litigation referred to above. In addition,
interest income decreased by $180,000 for fiscal 1999, due to the interest
earned during the prior year on the Central Plaza Shopping Center sale proceeds
prior to the distribution to the Limited Partners which occurred in April 1998.
A $270,000 increase in gains realized from the sales of operating
investment properties and a $155,000 decrease in the Partnership's share of
venture's losses partially offset the unfavorable change in operating loss for
fiscal 1999. The increase in gains on sales of operating investment properties
represents the difference between the $2,661,000 gain realized due to the
Briarwood note settlement in fiscal 1999, as discussed further above, and the
$2,391,000 gain realized on the sale of the Central Plaza Shopping Center in
fiscal 1998. 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. As a result, there was no income or loss
from joint venture operations for the year ended September 30, 1999.
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 fiscal 1998 was 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 fiscal 1998. 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 was mainly due to the inclusion of the operating
results of the Pine Trail joint venture in the fiscal 1997 results. The
Partnership sold its interest in Pine Trail in August of 1997. As a result, the
fiscal 1998 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
which had 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.
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.
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. However,
there can be no assurance that any non-compliance, liability or claim will not
arise in the future. As discussed further above, the Partnership did become
aware in fiscal 1999 of an environmental problem at Northeast Plaza related to
the operation of dry cleaning equipment at the Center. The Partnership has
accrued a liability for the estimated legal and environmental testing and
remediation costs expected to be incurred in connection with this situation. As
noted above, however, there are no assurances that this estimate will not change
materially in the near term as further information becomes available.
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 in general continues to suffer to some extent 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 eighteenth full year of operations in fiscal
1999 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 and includes a
contingent rent provision based on increases in the property's operating
revenues above certain base-year expense levels, as adjusted for inflation.
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 7A. Market Risk Disclosures
- ---------------------------------
As discussed further in the notes to the accompanying financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents and a mortgage note payable. The cash equivalents are invested
exclusively in short-term money market instruments and the long-term debt
consists exclusively of a fixed rate obligation. The Partnership does not invest
in derivative financial instruments or engage in hedging transactions. In light
of these facts, and due to the Partnership's expected near-term liquidation,
management does not believe that the Partnership's financial instruments have
any material exposure to market risk factors.
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 40 8/22/96
Terrence E. Fancher Director 46 10/10/96
Walter V. Arnold Senior Vice President
and Chief Financial Officer 52 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 57 6/13/80*
Thomas W. Boland Vice President and Controller 37 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.
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, 1999, 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,
1999. No incentive management fees were earned during the year ended September
30, 1999.
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, 1999 is $74,000, 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 $2,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1999. 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 1999.
(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: December 29, 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: December 29, 1999
----------------------- -----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: December 29, 1999
----------------------- -----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<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, 1999 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
Balance sheets at September 30, 1999 and 1998 F-3
Statements of income for the years ended September 30, 1999,
1998 and 1997 F-4
Statements of changes in partners' capital for the years ended
September 30, 1999, 1998 and 1997 F-5
Statements of cash flows for the years ended September 30, 1999,
1998 and 1997 F-6
Notes to financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-17
Combined Joint Ventures of PaineWebber Income Properties Three Limited
Partnership
Report of independent auditors - Ernst & Young LLP F-18
Combined balance sheet as of September 30, 1997 F-19
Combined statements of income and changes in venturers' capital
(deficit) for the period October 1, 1997 through March 3, 1998
and the year ended September 30, 1997 F-20
Combined statements of cash flows for the period October 1, 1997
through March 3, 1998 and the year ended September 30, 1997 F-21
Notes to combined financial statements F-22
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, 1999 and 1998, and the
related statements of income, changes in partners' capital, and cash flows for
each of the three years in the period ended September 30, 1999. 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.
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 Paine Webber Income
Properties Three Limited Partnership at September 30, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1999, 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 15, 1999
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1999 and 1998
(In thousands, except per Unit amounts)
ASSETS
1999 1998
---- ----
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
---------- ---------
5,038 5,038
Less accumulated depreciation (1,695) (1,593)
---------- --------
Net operating investment property 3,343 3,445
Cash and cash equivalents 809 911
Deferred expenses, net of accumulated
amortization of $95 in 1998 - 11
Note and interest receivable, net - -
---------- ---------
$ 4,152 $ 4,367
========== =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 1 $ 1
Accrued expenses 979 171
Mortgage note payable in default 967 1,124
---------- ---------
Total liabilities 1,947 1,296
Partners' capital:
General Partner:
Capital contribution 1 1
Cumulative net income 222 205
Cumulative cash distributions (155) (154)
Limited Partners ($1,000 per Unit; 21,550
Units issued):
Capital contributions, net of offering costs 19,397 19,397
Cumulative net income 22,138 20,407
Cumulative cash distributions (39,398) (36,785)
---------- ----------
Total partners' capital 2,205 3,071
---------- ----------
$ 4,152 $ 4,367
========== ==========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the years ended September 30, 1999, 1998 and 1997
(In thousands, except per Unit amounts)
1999 1998 1997
---- ---- ----
Revenues:
Rental revenues $ 478 $ 478 $ 478
Interest and other income 56 236 101
--------- --------- ---------
534 714 579
Expenses:
Interest expense 123 130 143
Management fees 4 4 17
Depreciation expense 102 102 102
General and administrative 1,218 594 447
--------- --------- ---------
1,447 830 709
--------- --------- ---------
Operating loss (913) (116) (130)
Partnership's share of ventures'
income (loss) - (155) 403
Gain on sale of joint venture interest
(net of write-off of unamortized
excess basis of $50 in 1997) - - 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) - 2,391 -
Gain on sale of operating investment
property 2,661 - -
--------- --------- ---------
Net income $ 1,748 $ 2,120 $ 3,838
========= ========= =========
Net income per Limited
Partnership Unit $ 80.30 $ 97.41 $ 176.32
========= ========= =========
Cash distributions per Limited
Partnership Unit $ 121.24 $ 114.81 $ 304.77
========= ========= =========
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
For the years ended September 30, 1999, 1998 and 1997
(In thousands)
General Limited
Partner Partners Total
------- -------- -----
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
Cash distributions (1) (2,613) (2,614)
Net income 17 1,731 1,748
------ ------- -------
Balance at September 30, 1999 $ 68 $ 2,137 $ 2,205
====== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended September 30, 1999, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,748 $ 2,120 $ 3,838
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 102 102 102
Amortization of deferred financing costs 11 21 21
Partnership's share of ventures' income (loss) - 155 (403)
Gain on sale of joint venture interest - - (3,565)
Partnership's share of gain on sale
of operating investment property - (2,391) -
Gain on sale of operating investment property (2,661) - -
Changes in assets and liabilities:
Accounts receivable - - 99
Accounts payable - affiliates - (3) -
Accrued expenses 808 113 (2)
-------- --------- --------
Total adjustments (1,740) (2,003) (3,748)
-------- --------- --------
Net cash provided by operating activities 8 117 90
-------- --------- --------
Cash flows from investing activities:
Proceeds from sale of joint venture interest - - 6,150
Distributions from joint ventures - 2,451 447
Net proceeds from collection of mortgage note receivable 2,661 - -
-------- --------- --------
Net cash provided by investing activities 2,661 2,451 6,597
-------- --------- --------
Cash flows from financing activities:
Distributions to partners (2,614) (2,476) (6,572)
Principal payments on mortgage note payable (157) (154) (142)
-------- --------- --------
Net cash used in financing activities (2,771) (2,630) (6,714)
-------- --------- --------
Net decrease in cash and cash equivalents (102) (62) (27)
Cash and cash equivalents, beginning of year 911 973 1,000
-------- --------- --------
Cash and cash equivalents, end of year $ 809 $ 911 $ 973
======== ========= ========
Cash paid during the year for interest $ 112 $ 109 $ 122
======== ========= ========
</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, 1999, the three
multi-family apartment properties have been sold, the Partnership's interest in
one of the retail shopping centers was sold in fiscal 1997, 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 settlement achieved in fiscal 1999 of the subordinated mortgage
note receivable position related to the Briarwood and Gatewood properties which
were sold in fiscal 1985 (see Note 6), the Partnership's remaining asset
consists of the wholly-owned Northeast Plaza Shopping Center (see Note 4). The
Partnership's goal during fiscal 1999 was to pursue a disposition strategy for
its investment in Northeast Plaza which would enable the Partnership to complete
a liquidation prior to the end of calendar year 1999. For the reasons set forth
in detail in Notes 4 and 8, this goal was not achieved. The Partnership still
hopes to complete a liquidation during calendar year 2000. However, there can be
no assurances that the disposition of the remaining investment and a 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, 1999 and 1998 and revenues and expenses for
each of the three years in the period ended September 30, 1999. 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 was represented by a note and
accrued interest receivable as of September 30, 1998. The note and accrued
interest receivable have been netted against the deferred gain on the
accompanying balance sheet. The Partnership settled the note and interest
receivable during fiscal 1999 and recognized a gain of $2,661,000 (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. The Partnership has assessed the future cash flows
expected from the Northeast Plaza property, net of the expected environmental
remediation costs, in light of the environmental problem discussed further in
Note 8. Based on such assessment, the Partnership does not believe that this
asset is impaired as of September 30, 1999. The Partnership will continue to
reassess the potential impairment of this asset in light of any future changes
to the estimate of environmental remediation costs. 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, 1999 and 1998 due to the
short-term maturities of these instruments. The mortgage note payable is also a
financial instrument for purposes of SFAS 107. 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 operating investment property 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 both of the years ended September 30, 1999
and 1998 and $17,000 for the year ended September 30, 1997. No incentive
management fees were earned during the three-year period ended September 30,
1999. Accounts payable - affiliates at both September 30, 1999 and 1998 consists
of management fees payable to the Adviser of $1,000.
Included in general and administrative expenses for the years ended
September 30, 1999, 1998 and 1997 is $74,000, $71,000 and $67,000, 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 $2,000, $5,000 and $7,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1999, 1998 and 1997,
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.
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, 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, 1999 and 1998, the Partnership had no joint venture
partnership investments. 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.
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 summary of operations of these joint ventures for fiscal 1998 and 1997
(through the dates of the sales) follow.
<PAGE>
Condensed Combined Summary of Operations
For the period October 1, 1997 through March 3, 1998 and
the year ended September 30, 1997
(in thousands)
1998 1997
---- ----
Revenues:
Rental revenues and expense recoveries $ 444 $ 3,232
Interest income 8 25
------- -------
452 3,257
Expenses:
Property operating expenses 202 1,121
Depreciation and amortization 221 284
Interest expense 182 1,179
------- -------
605 2,584
Operating income (loss) (153) 673
Gain on sale of operating investment property 5,567 -
------- -------
Net income $ 5,414 $ 673
======= =======
Net income:
Partnership's share of combined income $ 2,259 $ 405
Co-venturers' share of combined income 3,155 268
------- -------
$ 5,414 $ 673
======= =======
Reconciliation of Partnership's Share of Income
1998 1997
---- ----
Partnership's share of income, as shown above $ 2,259 $ 405
Amortization of excess basis (23) (2)
------- -------
Partnership's share of ventures' net income $ 2,236 $ 403
======= =======
The Partnership's share of ventures' net income is presented as follows in
the statements of operations (in thousands):
1998 1997
---- ----
Partnership share of ventures' income (loss) $ (155) $ 403
Partnership's share of gain on sale
of operating investment property 2,391 -
------- -------
$ 2,236 $ 403
======= =======
The Partnership received cash distributions from the joint ventures as set
forth below:
1998 1997
---- ----
Boyer Lubbock Associates $ 2,451 $ 172
Pine Trail Partnership - 275
------- -------
Total $ 2,451 $ 447
======= =======
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.
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,
the property manager earned fees of $63,000. In addition, the property manager
was entitled to leasing commissions at prevailing market rates. Leasing
commissions earned by the property manager were $18,000 for the ten months ended
July 31, 1997.
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 year ended September 30,
1997, the affiliate of the co-venturer earned fees of $16,000 and $38,000,
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 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 on the
accompanying statement of operations for fiscal 1998. Per the terms of the note
agreement, accrued interest receivable as of December 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 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 denied any and all liability in the lawsuit. By Agreement dated
December 30, 1998, the Partnership and the defendants 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 were 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.
7. Mortgage Note Payable
---------------------
The mortgage note payable at September 30, 1999 and 1998 is secured by the
Partnership's wholly-owned Northeast Plaza Shopping Center. 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. The agreement was signed on
November 29, 1998 and was contingent on the master-lessee's ability to obtain a
commitment for sufficient financing by January 29, 1999 to pay the Partnership
for its ownership interest. This financing commitment date was subsequently
extended to April 19, 1999. As discussed further in Note 8, the master-lessee
has been unable to secure a commitment for financing because of an environmental
issue, which resulted in the termination of the purchase agreement.
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, had a term of five
years and bore 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. While the maturity date of the existing first mortgage loan was March 29,
1999, this date was extended by the lender to June 29, 1999 to allow for the
master-lessee to complete its planned refinancing and acquisition of the
Partnership's interest in the property. As noted above, however, the completion
of a sale transaction has been affected by an environmental issue and did not
occur by June 29, 1999. On July 16, 1999, the lender issued a default notice as
of June 29, 1999 and assessed default interest at a rate of 25% per annum on the
outstanding balance of approximately $998,000. On August 31, 1999, the
Partnership and the lender executed a forbearance agreement. Under the
forbearance agreement, the lender agreed not to foreclose or exercise any remedy
available to it under the loan agreement until December 15, 1999. The
Partnership agreed to pay a $35,000 extension fee; $10,000 of which was paid on
August 31, 1999 and $25,000 of which was payable by December 15, 1999. Under the
forbearance agreement, interest accrued at a rate of 18% on the unpaid principal
balance. Monthly principal and interest payments were increased to $30,000
beginning August 31, 1999. The current lender has indicated a willingness to
work with the Partnership on a further short-term extension of the maturity date
to accommodate the timing of a sale transaction. However, as discussed further
in Note 8, in light of the most recent environmental issue at the property, the
timing of a sale transaction is uncertain at the present time, and no further
formal extension has been granted. As a result, as of December 15, 1999 the
Partnership is in default of the first mortgage agreement. Management is
negotiating a forbearance agreement with the lender which would have terms
similar to that which expired on December 15, 1999. While a final agreement has
not been reached, management expects that the forbearance period will extend at
least six months, and possibly as long as nine months, from the expiration of
the prior forbearance agreement. Such agreement is subject to final negotiation
and the execution of definitive documents. Therefore, there can be no assurances
regarding what actions, if any, the mortgage lender will take to enforce its
legal remedies in light of the current default situation. As noted above,
management still hopes to complete a sale of the Northeast Plaza property in the
near term once a formal remediation plan has been developed and approved to
address the environmental problem. Management intends to take all reasonable
steps to continue to hold the property until such time as a sale transaction can
be consummated. It is impracticable for the Partnership to estimate the fair
value of this debt obligation as of September 30, 1999 as a result of its
current default status.
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 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. 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. 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 subsequently began the process of appealing the
judgment pertaining to its damages claims, and Mobil filed a cross-appeal
challenging the scope of the injunctive order.
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 believed reflected only a small deduction for the
stigma associated with the Mobil contamination. The agreement was signed on
November 29, 1998 and was contingent on the master-lessee's ability to obtain a
commitment for sufficient financing by January 29, 1999 to pay the Partnership
for its ownership interest. This financing commitment date was subsequently
extended to April 19, 1999. As noted below, the master-lessee has been unable to
secure a commitment for financing because of an unrelated environmental issue,
which resulted in the termination of the purchase agreement. The appeal of the
Mobil litigation was stayed until mid-December 1999 pending the resolution of
this potential sale transaction. Subsequent to the year ended September 30,
1999, the Partnership proposed a settlement agreement which would result in a
dismissal of the appeal of its damages claims against Mobil with both parties
bearing their own costs and attorneys' fees. Under the proposed settlement,
Mobil would remain subject to the injunctive order, and the cleanup would
proceed as set forth in the court order. While the parties have agreed in
principle to such a settlement, the matter remains subject to the negotiation
and execution of a definitive settlement agreement.
During the quarter ended June 30, 1999, the Partnership was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination at the Shopping Center which appears to have been caused by the
operation of dry cleaning equipment at the Center. The Partnership has confirmed
the presence of this contamination and is in the process of assessing the extent
of the contamination, the anticipated cost and time to take appropriate action,
and the feasibility of recovering associated costs from responsible third
parties. While the Partnership believes that the cleanup costs should be the
responsibility of the lessee under the terms of the master lease, the
Partnership is proceeding on its own to begin the cleanup process in order to
protect its investment. The prospects for any future recoveries of these costs
are uncertain at the present time. The Partnership accrued a liability of $1
million during fiscal 1999 to cover expected legal and environmental testing and
remediation costs regarding this contamination based on the preliminary reports
obtained from the master-lessee and the work performed to date by the
Partnership's own environmental consultants. Through September 30, 1999, the
Partnership had incurred actual legal and environmental testing expenses of
$79,000 in connection with this situation. The remaining balance of the accrued
liability of $921,000 is included in the balance of accrued expenses on the
accompanying balance sheet. This amount represents an estimate of the potential
liability associated with this situation. It is possible that this estimate
could change materially in the near term as further testing, consulting with
appropriate state environmental agencies and actual remediation work progresses.
The Partnership will continue to assess and revise this estimate as further
information becomes available. At the same time, the Partnership continues to
work with the Northeast Plaza master-lessee, the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.
9. Subsequent Event
----------------
On November 15, 1999, the Partnership distributed $28,000 to the Limited
Partners and $1,000 to the General Partner for the quarter ended September 30,
1999.
<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, 1999
(In thousands)
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 $ 967 $950 $1,930 $2,158 $950 $4,088 $5,038 $1,695 1964 - 1978 9/25/81 40 years
======= ==== ====== ====== ==== ====== ====== ======
Notes:
(A) The aggregate cost of real estate owned at September 30, 1999 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:
1999 1998 1997
---- ---- ----
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 $ 1,593 $ 1,491 $ 1,389
Depreciation expense 102 102 102
------- ------- -------
Balance at end of year $ 1,695 $ 1,593 $ 1,491
======= ======= =======
</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 year ended September 30, 1997. 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 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
the year ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
-----------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 22, 1998
<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 real 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' 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
year ended September 30, 1997
(In thousands)
1998 1997
---- ----
Revenues:
Rental income $ 398 $ 2,515
Reimbursements from tenants 46 717
Interest and other income 8 25
-------- -------
452 3,257
Expenses:
Interest expense 182 1,179
Depreciation expense 29 266
Real estate taxes 71 408
Management fees 16 101
Ground rent - 96
Repairs and maintenance 58 372
Insurance - 28
Utilities 15 59
General and administrative 36 57
Other 6 -
Amortization expense 192 18
-------- -------
605 2,584
-------- -------
Operating income (loss) (153) 673
Gain on sale of operating investment
property 5,567 -
-------- -------
Net income 5,414 673
Distributions to venturers (4,321) (621)
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
-------- --------
Venturers' capital (deficit), end of year $ - $ (1,093)
======== ========
See accompanying notes.
<PAGE>
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
year ended September 30, 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 5,414 $ 673
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 221 284
Amortization of deferred financing costs 11 26
Gain on sale of operating investment property (5,567) -
Changes in assets and liabilities:
Escrowed funds 307 (34)
Accounts receivable 67 (50)
Note receivable 40 40
Prepaid expenses 1 23
Capital improvement reserve - -
Deferred expenses - (29)
Accounts payable (23) (35)
Accrued interest (34) 1
Accrued real estate taxes (106) (45)
Other accrued liabilities - (3)
Prepaid rent - -
Tenant security deposits (9) -
--------- --------
Total adjustments (5,092) 178
--------- --------
Net cash provided by operating activities 322 851
--------- --------
Cash flows from investing activities:
Additions to operating investment properties - (64)
Proceeds from sale of operating investment property 8,031 -
--------- --------
Net cash provided by (used in)
investing activities 8,031 (64)
--------- --------
Cash flows from financing activities:
Principal payments on long-term debt (4,135) (173)
Distributions to venturers (4,596) (432)
--------- --------
Net cash used in financing activities (8,731) (605)
--------- --------
Net (decrease) increase in cash and cash equivalents (378) 182
Less: cash balance of Pine Trail joint venture - (2)
--------- --------
(378) 180
Cash and cash equivalents, beginning of period 378 198
--------- --------
Cash and cash equivalents, end of period $ - $ 378
========= ========
Cash paid during the period for interest $ 205 $ 1,152
========= ========
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 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
------------- -----------
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. 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 year ended September 30,
1997. 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. 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.
b. 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).
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 and $101,000 were paid to affiliates of the
co-venturers for the period October 1, 1997 through March 3, 1998 and the year
ended September 30, 1997, respectively.
Certain of the joint ventures paid leasing commissions to affiliates of
the co-venturers. Leasing commissions paid to affiliates amounted to $18,000 in
fiscal 1997. 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 audited financial statements for the year ended September 30, 1999
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-30-1999
<PERIOD-END> Sep-30-1999
<CASH> 809
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 809
<PP&E> 5,038
<DEPRECIATION> 1,695
<TOTAL-ASSETS> 4,152
<CURRENT-LIABILITIES> 980
<BONDS> 967
0
0
<COMMON> 0
<OTHER-SE> 2,205
<TOTAL-LIABILITY-AND-EQUITY> 4,152
<SALES> 0
<TOTAL-REVENUES> 3,195
<CGS> 0
<TOTAL-COSTS> 1,324
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 1,748
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,748
<EPS-BASIC> 80.30
<EPS-DILUTED> 80.30
</TABLE>
