UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
June 30, 2000 and September 30, 1999 (Unaudited)
(In thousands)
ASSETS
------
June 30 September 30
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Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
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5,038 5,038
Less accumulated depreciation (1,772) (1,695)
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Net operating investment property 3,266 3,343
Cash and cash equivalents 447 809
Accounts receivable 11 -
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$ 3,724 $ 4,152
======== ========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable - affiliates $ - $ 1
Accounts payable and accrued expenses 1,335 979
Mortgage note payable in default 819 967
Partners' capital 1,570 2,205
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$ 3,724 $ 4,152
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 2000 and 1999 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Rental revenues $ 119 $ 119 $ 358 $ 358
Interest income 9 12 30 44
------- ------- ------- -------
128 131 388 402
Expenses:
Environmental remediation
expenses 350 1,000 650 1,000
Interest expense 49 23 132 83
Management fees - 1 1 3
Depreciation expense 26 26 77 77
General and administrative 33 38 106 127
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458 1,088 966 1,290
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Operating loss (330) (957) (578) (888)
Gain on sale of operating
investment property - - - 2,661
------- ------- ------- -------
Net income (loss) $ (330) $ (957) $ (578) $ 1,773
======= ======= ======= =======
Net income (loss) per
Limited Partnership Unit $(15.12) $(43.96) $(26.57) $ 81.46
======= ======= ======= =======
Cash distributions per Limited
Partnership Unit $ - $ 1.31 $ 2.62 $119.93
======= ======= ======= =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 21,550 Units of Limited Partnership Interest outstanding
for each period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the nine months ended June 30, 2000 and 1999 (Unaudited)
(In thousands)
General Limited
Partner Partners
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Balance at September 30, 1998 $ 52 $ 3,019
Cash distributions (1) (2,584)
Net income 18 1,755
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Balance at June 30, 1999 $ 69 $ 2,190
======== =======
Balance at September 30, 1999 $ 68 $ 2,137
Cash distributions (1) (56)
Net loss (6) (572)
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Balance at June 30, 2000 $ 61 $ 1,509
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2000 and 1999 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
2000 1999
---- ----
Cash flows from operating activities:
Net income (loss) $ (578) $ 1,773
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities:
Gain on sale of operating investment property - (2,661)
Depreciation expense 77 77
Amortization of deferred financing costs - 11
Changes in assets and liabilities:
Accounts receivable (11) -
Accounts payable - affiliates (1) -
Accounts payable and accrued expenses 356 858
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Total adjustments 421 (1,715)
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Net cash (used in) provided by
operating activities (157) 58
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Cash flows from investing activities:
Net proceeds from collection of mortgage
note receivable - 2,661
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Net cash provided by investing activities - 2,661
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Cash flows from financing activities:
Distributions to partners (57) (2,585)
Principal payments on mortgage note payable (148) (125)
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Net cash used in financing activities (205) (2,710)
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Net (decrease) increase in cash and cash
equivalents (362) 9
Cash and cash equivalents, beginning of period 809 911
------- -------
Cash and cash equivalents, end of period $ 447 $ 920
======= =======
Cash paid during the period for interest $ 122 $ 72
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
Notes to Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended September 30, 1999. In the
opinion of management, the accompanying financial statements, which have not
been audited, reflect all adjustments necessary to present fairly the results
for the interim period. All of the adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of June 30, 2000 and September 30, 1999 and revenues and
expenses for the three- and nine-month periods ended June 30, 2000 and 1999.
Actual results could differ from the estimates and assumptions used.
As of June 30, 2000, the Partnership has one remaining real estate asset,
the wholly-owned Northeast Plaza Shopping Center (see Note 4). The Partnership's
goal during fiscal 1999 had been to pursue a disposition strategy for its
investment in Northeast Plaza which would have enabled the Partnership to
complete a liquidation prior to the end of calendar year 1999. For the reasons
set forth in detail in Notes 5 and 6, 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. Related Party Transactions
--------------------------
Management fees earned by the Adviser totalled $1,000 and $3,000 for the
nine-month periods ended June 30, 2000 and 1999, respectively. Regular quarterly
distributions to the Limited Partners, upon which the management fees are based,
were suspended effective for the quarter ended March 31, 2000. Since
distributions are no longer being paid, no management fees have been earned by
the Adviser subsequent to the quarter ended December 31, 1999. Accounts payable
- affiliates at September 30, 1999 consisted of $1,000 of management fees
payable to the Adviser.
Included in general and administrative expenses for the nine-month periods
ended June 30, 2000 and 1999 is $51,000 and $56,000, respectively, representing
reimbursements to an affiliate of the General Partner for providing certain
financial, accounting and investor communication services to the Partnership.
Also included in general and administrative expenses for both of the
nine-month periods ended June 30, 2000 and 1999 is $1,000, representing fees
paid to an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
3. Note and Interest Receivable, Net
---------------------------------
On September 15, 1981, the Partnership acquired a 35% interest in
Briarwood Joint Venture, an existing Pennsylvania general partnership which
owned a 686-unit apartment complex in Bucks County, Pennsylvania. The
Partnership originally invested approximately $4,815,000 (including an
acquisition fee of $500,000 paid to the Adviser) for its interest. The
Partnership's interest was acquired subject to two institutional nonrecourse
first mortgages with balances totalling approximately $8,925,000 at the time of
the closing.
On December 20, 1984, the joint venture partners sold their ownership
interests in the Briarwood Joint Venture for $33,152,000. After the payment of
mortgage obligations and closing costs, the Partnership's allocable share of the
proceeds was $10,935,000, represented by cash of $7,490,000 and a note
receivable of $3,445,000. For financial accounting purposes, a gain of
$7,255,000 resulted from the transaction of which $3,810,000 was recognized at
the time of the sale and the remainder was deferred under the cost recovery
method. For income tax purposes, a gain of $4,829,000 was recognized upon sale
and the remainder deferred utilizing the installment method. The difference in
the amount of gain recognized for financial accounting and tax purposes resulted
from accounting differences related to the carrying value of the Partnership's
investment.
The principal amount of the note receivable of $3,445,336 was to bear
interest at 9% annually and was subordinated to a first mortgage loan. Interest
and principal payments on the note were payable only to the extent of net cash
flow from the properties sold, as defined in the sales documents. Any interest
not received was to accrue additional interest of 9% per annum. The
Partnership's policy was to defer recognition of all interest income on the note
until collected, due to the uncertainty of its collectibility. Until the quarter
ended June 30, 1998, the Partnership had not received any interest payments
since the inception of the note. During the quarter ended June 30, 1998, the
Partnership received $149,000 from the borrower which was recorded as interest
income during fiscal 1998.
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 received
on January 29, 1999. The settlement payments resulted in the recognition of
previously deferred gains on the sale of the Briarwood and Gatewood properties,
net of the expenses incurred in fiscal 1999 in connection with the litigation.
As a result of the settlement, the Partnership no longer has an interest in the
note receivable. The Partnership incurred approximately $500,000 of legal costs
in fiscal 1998 and 1999 associated with the litigation and collection of the
settlement of this note receivable. Consequently, approximately $2,500,000 of
settlement proceeds was available to distribute to the Limited Partners.
Accordingly, a Special Capital Distribution in the amount of $2,499,800, or $116
per original $1,000 investment, was paid on February 12, 1999, to holders of
record on January 29, 1999, along with the regular quarterly distribution for
the quarter ended December 31, 1998.
4. 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 5). 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. Mortgage Note Payable in Default
--------------------------------
The mortgage note payable at June 30, 2000 and September 30, 1999 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 6, 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, has a term of five
years and bears interest at a fixed rate of 9% per annum. Monthly principal and
interest payments of approximately $22,000 were due until maturity on March 29,
1999. While the maturity date of the existing first mortgage loan was March 29,
1999, this 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. Monthly principal and interest payments were increased to $30,000
beginning August 31, 1999. On January 20, 2000, the lender agreed to extend the
forbearance agreement to June 30, 2000. Interest has continued to accrue on the
unpaid principal balance at a rate of 18%, and monthly principal and interest
payments have remained at $30,000. In return for the extension, the Partnership
agreed to pay the $25,000 fee which was payable on December 15, 1999 plus an
additional extension fee of $10,000 to be payable in the event that the loan was
not repaid in full by June 30, 2000. As of June 30, 2000, the loan had not been
repaid because the environmental issues affecting the property (as discussed
further in Note 6) have delayed the Partnership's plans to market and sell the
shopping center. As a result, the loan is currently in default. The Partnership
and the lender have had discussions about a further extension of the forbearance
agreement, but no definitive agreement has been reached to date. There can be no
assurances that the lender will agree to grant any such extension. As a result,
the ultimate outcome of this situation is uncertain at the present time.
6. Legal Proceedings and Related Contingencies
-------------------------------------------
Management believed that the Partnership's efforts to sell or refinance
the Northeast Plaza property from fiscal 1991 through fiscal 1998 were impeded
by potential buyer and lender concerns of an environmental nature with respect
to the property. During 1990, it was discovered that certain underground storage
tanks of a Mobil service station located adjacent to the shopping center had
leaked and contaminated the ground water in the vicinity of the station. Since
the time that the contamination was discovered, Mobil Oil Corporation (Mobil)
has investigated the problem and is progressing with efforts to remediate the
soil and ground water contamination under the supervision of the Florida
Department of Environmental Protection, which has approved Mobil's remedial
action plan. During fiscal 1990, the Partnership had obtained an indemnification
agreement from Mobil in which Mobil agreed to bear the cost of all damages and
required clean-up expenses. Furthermore, Mobil indemnified the Partnership
against its inability to sell, transfer, or obtain financing on the property
because of the contamination. Subsequent to the discovery of the contamination,
the Partnership experienced difficulty in refinancing the mortgages on the
property that matured in 1991. The existence of contamination on the property
impacted the Partnership's ability to obtain standard market financing.
Ultimately, the Partnership was able to refinance its first mortgage at a
substantially reduced loan-to-value ratio. In addition, the Partnership was
unable to sell the property at an uncontaminated market price. The Partnership
also retained outside counsel and environmental consultants to review Mobil's
remediation efforts and 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. During the quarter ended December 31, 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 execution of a final 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. On December 13, 1999, the
Partnership submitted a Site Assessment Report to the state regulatory authority
that confirmed the presence of the contamination, described the location of
elevated contaminant concentrations, and outlined an initial analysis of
remedial alternatives based on preliminary reports obtained from the
master-lessee and work performed by the Partnership's own environmental
consultants. On April 6, 2000, the Partnership submitted a Supplemental Site
Assessment Report further defining the nature and extent of the contamination.
In early May 2000, the Partnership's environmental consultant prepared a
Remedial Action Plan and submitted the Plan to the state regulatory authority
for review and approval. Assuming the Plan is approved by the state regulatory
authority, the environmental consultant has proposed to implement the Plan at a
cost of approximately $1.2 million. In addition, if appropriate, the Partnership
will secure an insurance policy at a price of approximately $100,000 to cover
possible cost overruns on the cleanup process. Such an insurance policy, which
could be issued in the first instance to a purchaser of the Northeast Plaza
property or modified to cover such a purchaser, is intended to facilitate a
near-term sale of the property. While the Partnership believes that the
environmental response costs should be the responsibility of the lessee under
the terms of the master lease, the Partnership is proceeding on its own to
address this matter 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 initial work performed by the Partnership's own environmental
consultants. Based on preliminary feedback from the state regulatory authority
on the Site Assessment Report, the Partnership believed that the scope of the
remediation work would be broader than originally expected. As a result, during
the quarter ended December 31, 1999, the Partnership accrued an additional
liability of $300,000. Based on the final cost estimates of the environmental
consultant and the quotes received for the insurance policy referred to above,
the Partnership accrued another $350,000 of environmental remediation expenses
during the quarter ended June 30, 2000, bringing the total accrued expenses to
$1,650,000. Through June 30, 2000, the Partnership had incurred actual legal and
environmental testing expenses of $353,000 in connection with this situation.
The remaining balance of the accrued liability of $1,297,000 is included in the
balance of accrued expenses on the accompanying balance sheet as of June 30,
2000. This amount represents an estimate of the potential liability associated
with this situation. The Partnership will continue to assess and revise this
estimate as further information becomes available.
The Partnership is currently awaiting formal approval of the Remedial
Action Plan by the state regulatory authority. In the interim, the Partnership
has initiated efforts to market and sell the Northeast Plaza property on terms
that would allocate to the purchaser responsibility for pre-existing
environmental conditions. During the quarter ended June 30, 2000, the
Partnership and the master lessee terminated discussions regarding a potential
sale of the property to the lessee and began discussing the possibility of
terminating the master lease agreement in return for releasing the lessee from
any liability regarding the known environmental issues at the property.
Management believes that an agreement of this sort, which remains subject to
final negotiation, would facilitate a sale of the property to a third party,
maximize the value of the Partnership's interest and be in the best interests of
the Limited Partners.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
--------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended September 30, 1999 under the heading "Certain Factors Affecting
Future Operating Results," which could cause actual results to differ materially
from historical results or those anticipated. The words "believe," "expect,"
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2000, the Partnership's only remaining real estate asset
consists of the wholly-owned Northeast Plaza Shopping Center. The Partnership's
goal during fiscal 1999 had been to pursue a disposition strategy for its
investment in Northeast Plaza which would have enabled 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.
The occupancy level at the Northeast Plaza Shopping Center in Sarasota,
Florida, remained at 100% for the quarter ended June 30, 2000. During the first
quarter of fiscal 2000, a lease with one tenant occupying 1,200 square feet was
renewed. During the second quarter, the property's leasing team worked with five
tenants occupying a total of 6,800 square feet on renewals of their leases which
were scheduled to expire within the next year. Four of these tenants,
representing 5,600 square feet, renewed their leases during the second quarter.
Negotiations with the fifth tenant on a possible renewal continued during the
third quarter.
As previously reported, management believed that the Partnership's efforts
to sell or refinance the Northeast Plaza property from fiscal 1991 through
fiscal 1998 were impeded by potential lender concerns of an environmental nature
with respect to the property. During 1990, it was discovered that certain
underground storage tanks at a Mobil service station located adjacent to the
shopping center had leaked and contaminated the ground water in the vicinity of
the station. Since the time that the contamination was discovered, Mobil has
investigated the leak and is progressing with efforts to remedy the soil and
ground water contamination under the supervision of the Florida Department of
Environmental Protection, which has approved Mobil's remedial action plan.
During fiscal 1990, the Partnership had obtained a formal indemnification
agreement from Mobil Oil Corporation in which Mobil agreed to bear the cost of
all damages and required clean-up expenses. Furthermore, Mobil indemnified the
Partnership against its inability to sell, transfer or obtain financing on the
property because of the contamination. Subsequent to the discovery of the
contamination, the Partnership experienced difficulty in refinancing the
mortgages on the property that matured in 1991. The existence of contamination
on the property impacted the Partnership's ability to obtain standard market
financing. Ultimately, the Partnership was able to refinance its first mortgage
at a substantially reduced loan-to-value ratio. In addition, the Partnership was
unable to sell the property at an uncontaminated market price. The Partnership
also retained outside counsel and environmental consultants to review Mobil's
remediation efforts and has incurred significant out-of-pocket expenses in
connection with this situation. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
disagreed as to the extent of the indemnification and has refused to compensate
the Partnership for any of its damages.
During the first quarter of fiscal 1993, the Partnership filed suit in
Federal Court against Mobil for breach of indemnity and property damage. On
April 28, 1995, Mobil was successful in dismissing the action from the Federal
Court system on jurisdictional grounds. Subsequently, the Partnership filed an
action in the Florida State Court system. During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved. Mobil's proposal to settle the case, which included a proposed
purchase of the contaminated portion of the Northeast Plaza property from the
Partnership, failed due to Mobil's inability to obtain a zoning variance which
was necessary to make such a transaction possible. A jury trial against Mobil
Oil Corporation took place during the two-week period ended April 17, 1998, in
state court in Sarasota, Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the Partnership as a result of the contamination. During trial, Mobil
stipulated to the entry of an injunctive order compelling Mobil to continue the
cleanup until state water quality standards are achieved. The experts currently
predict that the cleanup will be completed in approximately one-to-three years.
As previously reported, the Partnership had obtained a summary judgment as to
liability on its claims for trespass and nuisance. The issues of damages on
these two counts, as well as the Partnership's breach of contract claim, were
submitted to the jury. On April 17, 1998, the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
denied. A final judgment in favor of Mobil as to the Partnership's damage claims
has been entered with the Court. In addition, a final judgment compelling Mobil
to cleanup the contamination at the Northeast Plaza Shopping Center was entered
with the Court. The Partnership 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. During the quarter ended December 31, 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 execution of a final 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. On December 13, 1999, the
Partnership submitted a Site Assessment Report to the state regulatory authority
that confirmed the presence of the contamination, described the location of
elevated contaminant concentrations, and outlined an initial analysis of
remedial alternatives based on preliminary reports obtained from the
master-lessee and work performed by the Partnership's own environmental
consultants. On April 6, 2000, the Partnership submitted a Supplemental Site
Assessment Report further defining the nature and extent of the contamination.
In early May 2000, the Partnership's environmental consultant prepared a
Remedial Action Plan and submitted the Plan to the state regulatory authority
for review and approval. Assuming the Plan is approved by the state regulatory
authority, the environmental consultant has proposed to implement the Plan at a
cost of approximately $1.2 million. In addition, if appropriate, the Partnership
will secure an insurance policy at a price of approximately $100,000 to cover
possible cost overruns on the cleanup process. Such an insurance policy, which
could be issued in the first instance to a purchaser of the Northeast Plaza
property or modified to cover such a purchaser, is intended to facilitate a
near-term sale of the property. While the Partnership believes that the
environmental response costs should be the responsibility of the lessee under
the terms of the master lease, the Partnership is proceeding on its own to
address this matter 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 initial work performed by the Partnership's own environmental
consultants. Based on preliminary feedback from the state regulatory authority
on the Site Assessment Report, the Partnership believed that the scope of the
remediation work would be broader than originally expected. As a result, during
the quarter ended December 31, 1999, the Partnership accrued an additional
liability of $300,000. Based on the final cost estimates of the environmental
consultant and the quotes received for the insurance policy referred to above,
the Partnership accrued another $350,000 of environmental remediation expenses
during the quarter ended June 30, 2000, bringing the total accrued expenses to
$1,650,000. Through June 30, 2000, the Partnership had incurred actual legal and
environmental testing expenses of $353,000 in connection with this situation.
The remaining balance of the accrued liability of $1,297,000 is included in the
balance of accrued expenses on the accompanying balance sheet as of June 30,
2000. This amount represents an estimate of the potential liability associated
with this situation. The Partnership will continue to assess and revise this
estimate as further information becomes available.
The maturity date of the existing first mortgage loan secured by the
Northeast Plaza 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
accrues at a rate of 18% on the unpaid principal balance. Monthly principal and
interest payments were increased to $30,000 beginning August 31, 1999. On
January 20, 2000, the lender agreed to extend the forbearance agreement to June
30, 2000. Interest has continued to accrue on the unpaid principal balance at a
rate of 18%, and monthly principal and interest payments have remained at
$30,000. In return for the extension, the Partnership agreed to pay the $25,000
fee which was payable on December 15, 1999 plus an additional extension fee of
$10,000 to be payable in the event that the loan was not repaid in full by June
30, 2000. As of June 30, 2000, the loan had not been repaid because the
environmental issues affecting the property, as discussed further above, have
delayed the Partnership's plans to market and sell the shopping center. As a
result, the loan is currently in default. The Partnership and the lender have
had discussions about a further extension of the forbearance agreement, but no
definitive agreement has been reached to date. There can be no assurances that
the lender will agree to grant any such extension. As a result, the ultimate
outcome of this situation is uncertain at the present time.
The Partnership is currently awaiting formal approval of the Remedial
Action Plan by the state regulatory authority. In the interim, the Partnership
has initiated efforts to market and sell the Northeast Plaza property on terms
that would allocate to the purchaser responsibility for pre-existing
environmental conditions. During the quarter ended June 30, 2000, the
Partnership and the master lessee terminated discussions regarding a potential
sale of the property to the lessee and began discussing the possibility of
terminating the master lease agreement in return for releasing the lessee from
any liability regarding the known environmental issues at the property.
Management believes that an agreement of this sort, which remains subject to
final negotiation, would facilitate a sale of the property to a third party,
maximize the value of the Partnership's interest and be in the best interests of
the Limited Partners.
At June 30, 2000, the Partnership had available cash and cash equivalents
of $447,000. Such cash and cash equivalents will be used for the working capital
requirements of the Partnership and to pay for environmental remediation
expenses related to the Northeast Plaza Shopping Center prior to the planned
sale of the property. The source of future liquidity and distributions to the
partners is expected to be from cash generated from the operations of the
Partnership's remaining income-producing investment property and proceeds
received from the sale or refinancing of such property. Such sources of
liquidity are expected to be sufficient to meet the Partnership's needs through
its expected liquidation date.
Results of Operations
Three Months Ended June 30, 2000
--------------------------------
The Partnership reported a net loss of $330,000 for the three months ended
June 30, 2000, as compared to a net loss of $957,000 for the same period in the
prior year. This decrease in the Partnership's net loss was primarily the result
of the accrual of the initial $1 million estimate of environmental remediation
expenses for the Northeast Plaza property which was made during the quarter
ended June 30, 1999. During the current quarter, an additional accrual of
$350,000 was made for environmental remediation expenses, as discussed further
above. In addition, an increase of $26,000 in interest expense also contributed
to the increase in net loss for the current three-month period. Interest expense
increased due to the higher interest rate on the outstanding mortgage note
payable called for under the terms of the forbearance agreement discussed
further above.
Nine Months Ended June 30, 2000
-------------------------------
The Partnership reported a net loss of $578,000 for the nine months ended
June 30, 2000, as compared to net income of $1,773,000 for the same period in
the prior year. This $2,351,000 unfavorable change in net operating results was
primarily attributable to the gain of $2,661,000 realized in the prior year from
the Briarwood note settlement, as discussed further in Note 3 to the
accompanying financial statements. The impact of the Briarwood gain was
partially offset by a decrease of $350,000 in Northeast Plaza environmental
remediation expenses for the current nine-month period. The decline in
environmental remediation expenses, as discussed further above, represents the
difference between the initial $1 million estimate of expenses made during the
prior year and the additional accruals totalling $650,000 that have been made
during fiscal 2000 as further information on the extent of the contamination and
the scope of the required cleanup work has become available. In addition, an
increase of $49,000 in interest expense also contributed to the unfavorable
change in the Partnership's net operating results for the current nine-month
period. Interest expense increased due to the higher interest rate on the
outstanding mortgage note payable called for under the terms of the forbearance
agreement discussed further above.
PART II
Other Information
Item 1. Legal Proceedings
-------------------------
Mobil Oil Corporation
---------------------
The status of the Partnership's litigation with Mobil Oil Corporation
remains unchanged from what was reported in the Partnership's Annual Report on
Form 10-K for the year ended September 30, 1999.
Item 2. through 5. NONE
------------------
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
By: THIRD INCOME PROPERTIES, INC.
-----------------------------
General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: August 17, 2000
