UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 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
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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 of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive office) (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
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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(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
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Prospectus of registrant dated Part IV
December 3, 1980, as supplemented
Current Report on Form 8-K of Part IV
registrant dated October 12, 2000
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
2000 FORM 10-K
TABLE OF CONTENTS
Part I Page
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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
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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-5
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-5
Part III
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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
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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>
PART I
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Item 1. Business
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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, 2000 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, 2000, the Partnership owned directly the property set forth in the
following table:
Name of Joint Venture Date of
Name and Type of Property Acquisition of Type of
Location Size Interest Ownership (1)
------------------------------- ---- ---------- -----------------------
Northeast Plaza Shopping Center 121,005 9/25/81 Fee ownership of land
Sarasota, Florida gross and improvements subject
leasable to a master lease.
sq. ft.
(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.
Subsequent to year end, on October 12, 2000, the Partnership sold the
wholly-owned Northeast Plaza Shopping Center to an unrelated third party for a
gross sale price of $3,712,500. After deducting closing costs of $32,000, net
property proration adjustments totalling $126,000 and the prepayment of the
first mortgage debt and accrued interest secured by the property of
approximately $758,000, the Partnership received net sale proceeds of
approximately $2,796,000. The Partnership was entitled to 100% of these net sale
proceeds because the master lease agreement which had covered the Northeast
Plaza property was terminated prior to the sale. As of August 1, 2000, the
master lease agreement was terminated in return for the Partnership's release of
the master lessee from any liability regarding the known environmental issues at
the property. As discussed further below, as part of the October 12, 2000 sale
transaction the Partnership was indemnified by the buyer against claims arising
from the known environmental problems at the Northeast Plaza property. As
previously reported, the Partnership had been focusing on a sale of the
Northeast Plaza Shopping Center, its remaining real estate investment, and a
liquidation of the Partnership. With the sale of the Northeast Plaza property
completed, the Partnership is currently proceeding with an orderly liquidation.
On November 15, 2000, a Liquidating Distribution, which included the net
proceeds of the Northeast Plaza transaction, along with the remaining
Partnership reserves after the payment of all liquidation-related expenses, was
paid to unitholders of record as of the October 12, 2000 sale date. The formal
liquidation of the Partnership will be completed prior to the end of calendar
year 2000.
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. 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, would 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, 2000, the Limited Partners had received cumulative
cash distributions totalling approximately $39,455,000, or approximately $1,858
per original $1,000 investment for the Partnership's earliest investors. In
addition, as noted above, on November 15, 2000 the Partnership made a Final
Distribution of approximately $2,451,000, or $113.74 per original $1,000
investment, as a result of the sale of the Northeast Plaza Shopping Center. Of
the total distributions paid through September 30, 2000, 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 was sheltered from
current taxable income. In addition to returning 100% of the Limited Partners'
original invested capital from the capital transactions described above, the
Partnership paid out the equivalent of a 7% cumulative annual return to the
Limited Partners over the life of the Partnership.
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, Mobil 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. 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 was 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 resulted in a dismissal of the
appeal of its damages claims against Mobil with both parties bearing their own
costs and attorneys' fees. Under the terms of the settlement agreement, which
was finalized in September 2000, Mobil remained subject to the injunctive order,
and the cleanup was to proceed as set forth in the court order. In accordance
with the Northeast Plaza purchase and sale agreement, all liabilities associated
with the pre-existing environmental conditions at the property were transferred
to the buyer at the time of the October 12, 2000 sale, and the buyer agreed to
indemnify the Partnership against claims arising from known environmental
problems. In addition, for the purpose of addressing risks relating to cleanup
cost overruns and any unknown environmental conditions, the buyer purchased
environmental insurance under which the Partnership is included as an additional
insured. As a result, the Partnership is free to proceed with its planned
liquidation.
The Partnership had no real estate investments located outside the United
States. The Partnership was engaged solely in the business of real estate
investment, therefore, presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The General Partner of the Partnership is Third Income Properties, Inc.
(the "General Partner"), a wholly-owned subsidiary of PaineWebber. Subject to
the General Partner's overall authority, the business of the Partnership is
managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
General Partner of the Partnership are set forth in Items 11 and 13 below to
which reference is hereby made for a description of such terms and transactions.
Item 2. Properties
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As of September 30, 2000, 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. As discussed in Item 1, this
property was sold subsequent to the fiscal year end, on October 12, 2000.
Occupancy figures for each fiscal quarter during 2000, along with an
average for the year, are presented below for the property:
Percent Leased At
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Fiscal 2000
12/31/99 3/31/00 6/30/00 9/30/00 Average
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Northeast Plaza Shopping Center 100% 100% 100% 100% 100%
Item 3. Legal Proceedings
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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, Mobil 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 was 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 resulted in a dismissal of the appeal of
its damages claims against Mobil with both parties bearing their own costs and
attorneys' fees. Under the terms of the settlement agreement, which was
finalized in September 2000, Mobil remained subject to the injunctive order, and
the cleanup was due to proceed as set forth in the court order.
As discussed further in Items 1 and 7, the Northeast Plaza property was
sold subsequent to the fiscal year-end, on October 12, 2000. The settlement
agreement described above was not affected by the sale, and Mobil remains
subject to the injunctive order. Furthermore, the Partnership was indemnified by
the buyer of Northeast Plaza against claims arising from the known environmental
problems at the property and was named as an additional insured on an insurance
policy purchased by the buyer which covers potential cleanup cost overruns and
any unknown environmental conditions. Accordingly, subsequent to the sale of the
Northeast Plaza property, the Partnership was free to proceed with an orderly
liquidation (see Item 7).
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
<PAGE>
PART II
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Item 5. Market for the Partnership's Limited Partnership Interests
and Related Security Holder Matters
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At September 30, 2000, there were 1,495 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 2000.
Item 6. Selected Financial Data
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Paine Webber Income Properties Three Limited Partnership
(In thousands, except per Unit data)
Years Ended September 30,
----------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues $ 618 $ 534 $ 714 $ 579 $ 562
Operating loss $ (506) $ (913) $ (116) $ (130) $ (80)
Partnership's share of
ventures' income (loss) - - $ (155) $ 403 $ 696
Gain on sale of joint
venture interest - - - $3,565 -
Partnership's share of gain
on sale of operating
investment property - - $2,391 - $5,926
Gain on sale of operating
investment property - $2,661 - - -
Net income (loss) $ (506) $1,748 $2,120 $3,838 $6,542
Per Limited Partnership
Unit:
Net income (loss) $(23.24) $ 80.30 $ 97.41 $176.32 $300.56
Cash distributions
from operations $ 2.62 $ 5.24 $ 8.81 $ 19.52 $ 19.40
Cash distributions from
sale transactions - $116.00 $106.00 $285.25 $256.00
Total assets $3,779 $ 4,152 $ 4,367 $ 4,767 $ 7,645
Mortgage note payable $ 755 $ 967 $ 1,124 $ 1,278 $ 1,420
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.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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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, 2000, the three multi-family apartment
properties had 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 was the Northeast Plaza Shopping Center, a
121,000 square foot retail center located in Sarasota, Florida. Subsequent to
year end, on October 12, 2000, the Partnership sold the wholly-owned Northeast
Plaza Shopping Center to an unrelated third party for a gross sale price of
$3,712,500. After deducting closing costs of $32,000, net property proration
adjustments totalling $126,000 and the prepayment of the first mortgage debt and
accrued interest secured by the property of approximately $758,000, the
Partnership received net sale proceeds of approximately $2,796,000. The
Partnership was entitled to 100% of these net sale proceeds because the master
lease agreement which had covered the Northeast Plaza property had been
terminated prior to the sale. As of August 1, 2000, the master lease agreement
was terminated in return for the Partnership's release of the master lessee from
any liability regarding the known environmental issues at the property. As
discussed further below, as part of the October 12, 2000 sale transaction the
Partnership was indemnified by the buyer against claims arising from the known
environmental problems at the Northeast Plaza property. As previously reported,
the Partnership had been focusing on a sale of the Northeast Plaza Shopping
Center, its remaining real estate investment, and a liquidation of the
Partnership. With the sale of the Northeast Plaza property completed, the
Partnership is currently proceeding with an orderly liquidation. On November 15,
2000, a Liquidating Distribution, which included the net proceeds of the
Northeast Plaza transaction, along with the remaining Partnership reserves after
the payment of all liquidation-related expenses, was paid to unitholders of
record as of the October 12, 2000 sale date. The Final Distribution amount of
approximately $2,451,000, or $113.74 per original $1,000 investment, was
comprised of $94.74 from the sale of the Northeast Plaza property and $19.00 of
remaining Partnership reserves.
In accordance with the Partnership Agreement, sale or refinancing proceeds
are to be distributed first, 100% to the Limited Partners until the Limited
Partners have received their original capital contributions and a cumulative
annual return of 7% based upon a Limited Partner's Adjusted Capital
Contributions, as defined in the Partnership Agreement. Then a real estate
brokerage commission is payable to the Partnership's Adviser. In connection with
the sale of each property, the Adviser is entitled to receive a real estate
brokerage commission in an amount equal to 0.75% of the selling prices of all of
the properties in the portfolio. Pursuant to this provision, a total of
approximately $380,000 was paid to the Adviser as a real estate brokerage
commission. Any remaining sale or refinancing proceeds are to be distributed 85%
to the Limited Partners and 15% to the General Partner. Including the Final
Liquidating Distribution discussed further above, Limited Partners who acquired
their Units during the original offering period received a full return of their
original capital contributions, their cumulative preferred return of 7%, as
defined in the Partnership Agreement, and their proportionate share of
approximately $2.1 million which represents an 85% share in the remaining sale
or refinancing proceeds after the payment of the brokerage commission to the
Adviser. The General Partner of the Partnership received a total of
approximately $375,000 as their 15% residual share noted above. Prior to the
Final Distribution, all sale and refinancing proceeds were distributed 100% to
the Limited Partners. Pursuant to the settlement of the consolidated class
action involving certain PaineWebber affiliated Limited Partnerships, including
the Partnership, all net commissions and distributions paid to the Adviser and
to the General Partner of the Partnership have been assigned to an escrow
account for the benefit of the class members.
As previously reported, 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 appeared
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. During the fourth quarter of fiscal 2000, the Plan was
effectively approved by the state regulatory authority subject to the execution
of a voluntary cleanup agreement with the state. The Partnership's environmental
consultant had proposed to implement the Plan at a cost of approximately $1.2
million.
However, while awaiting the approval of the Plan, the Partnership had also
initiated efforts to market and sell the Northeast Plaza property on terms that
would allocate to the purchaser responsibility for pre-existing environmental
conditions. In July 2000, the Partnership distributed four sales packages to
prospective purchasers who were targeted as potential buyers of property with
pre-existing environmental conditions. As a result of that effort, three offers
were received. After evaluating the offers and the strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
subsequently negotiated and signed on August 31, 2000 with this prospective
third-party buyer. After completing its due diligence work in September 2000,
the prospective buyer made two non-refundable deposits totalling $200,000. The
transaction closed as described above on October 12, 2000. In accordance with
the Northeast Plaza purchase and sale agreement, all liabilities associated with
the pre-existing environmental conditions at the property were transferred to
the buyer at the time of the sale, and the buyer agreed to indemnify the
Partnership against claims arising from known environmental problems. In
addition, for the purpose of addressing risks relating to cleanup cost overruns
and any unknown environmental conditions, the buyer purchased environmental
insurance under which the Partnership is included as an additional insured. As a
result, the Partnership is free to proceed with its planned liquidation which
will be completed prior to the end of calendar year 2000.
The Partnership had accrued a liability of $1 million during fiscal 1999 to
cover expected legal and environmental testing and remediation costs regarding
the Northeast Plaza dry cleaner 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 the preliminary feedback
from the state regulatory authority on the Site Assessment Report, the
Partnership believed that the scope fo 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, 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
September 30, 2000, the Partnership had incurred actual legal and environmental
testing expenses of $465,000 in connection with this situation (including
$386,000 incurred in fiscal 2000). The remaining balance of the accrued
liability of $1,185,000 is included in the balance of accrued expenses on the
accompanying balance sheet as of September 30, 2000. As noted above, the
Partnership was indemnified by the buyer of Northeast Plaza against claims
arising from the known environmental problems at the property and was named as
an additional insured on an insurance policy purchased by the buyer which covers
potential cleanup cost overruns and any unknown environmental conditions. Since
the Partnership has no further liability for any environmental expenses under
the terms of the Northeast Plaza sale agreement, the remaining balance of the
accrued liability of $1,185,000 will be recovered on the Partnership's income
statement for period ending December 31, 2000.
At September 30, 2000, the Partnership had available cash and cash
equivalents of $514,000. Such cash and cash equivalents, along with the net
proceeds received subsequent to year-end in connection with the sale of
Northeast Plaza, were used for the working capital requirements of the
Partnership and to pay for final liquidation-related expenses. The remainder was
paid out to the General Partner, the Limited Partners and the Adviser in
accordance with the Partnership Agreement, as described in more detail above.
Results of Operations
2000 Compared to 1999
---------------------
The Partnership reported a net loss of $506,000 for the year ended
September 30, 2000, as compared to net income of $1,748,000 for the prior year.
This $2,254,000 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 6 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 year. 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 were made during fiscal 2000 as further
information on the extent of the contamination and the scope of the required
cleanup work became available. In addition, an increase of $36,000 in interest
expense and a decline of $19,000 in interest and other income also contributed
to the unfavorable change in the Partnership's net operating results for the
current year. 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 in Note 7 to the accompanying financial statements.
Interest income declined due to a reduction in the average outstanding balance
of the Partnership's cash reserves during fiscal 2000. An increase in rental
revenues, net of additional property-related expenses, in fiscal 2000 resulting
from the termination of the Northeast Plaza master lease agreement on August 1,
2000, partially offset these unfavorable changes in net income. As discussed
further above, the master lease was terminated during fiscal 2000 in return for
the Partnership's release of the master lessee from any liability regarding the
known environmental issues at the property. Subsequent to the master lease
termination, the income from the individual tenant leases at the property, net
of property operating expenses, was higher than the master lease payments that
the Partnership had been receiving.
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 dry cleaner
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 fiscal 1998 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 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 Note 5 to the
accompanying financial statements. 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 fiscal
1997. 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 were 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 in the
notes to the accompanying financial statements.
Inflation
---------
The Partnership completed its nineteenth full year of operations as of
September 30, 2000 and the effects of inflation and changes in prices on
revenues and expenses through that date and for the period through the date of
the Partnership's liquidation have not been significant.
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 were invested
exclusively in short-term money market instruments and the long-term debt
consisted 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 the Partnership's subsequent 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 41 8/22/96
Terrence E. Fancher Director 47 10/10/96
Walter V. Arnold Senior Vice President
and Chief Financial Officer 53 10/29/85
Thomas W. Boland Vice President and Controller 38 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.
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, 2000, 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 paid cash distributions to the Unitholders on a quarterly
basis at rates ranging from 3% to 5% per annum on remaining invested capital
over the past five years. Quarterly distributions of net operating cash flow
were suspended after the payment made on February 15, 2000 for the quarter ended
December 31, 1999. 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.
All distributable cash, as defined, for each fiscal year was distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partner. In accordance with the Partnership Agreement, sale or refinancing
proceeds are to be distributed first, 100% to the Limited Partners until the
Limited Partners have received their original capital contributions and a
cumulative annual return of 7% based upon a Limited Partner's Adjusted Capital
Contributions, as defined in the Partnership Agreement. Then a real estate
brokerage commission is payable to the Partnership's Adviser. In connection with
the sale of each property, the Adviser is entitled to receive a real estate
brokerage commission in an amount equal to 0.75% of the selling prices of all of
the properties in the portfolio. Pursuant to this provision, a total of
approximately $380,000 was paid to the Adviser as a real estate brokerage
commission. Any remaining sale or refinancing proceeds are to be distributed 85%
to the Limited Partners and 15% to the General Partner. Including the Final
Liquidating Distribution discussed further above, Limited Partners who acquired
their Units during the original offering period received a full return of their
original capital contributions, their cumulative preferred return of 7%, as
defined in the Partnership Agreement, and their proportionate share of
approximately $2.1 million which represents an 85% share in the remaining sale
or refinancing proceeds after the payment of the brokerage commission to the
Adviser. The General Partner of the Partnership received a total of
approximately $375,000 as their 15% residual share noted above. Prior to the
Final Distribution, all sale and refinancing proceeds were distributed 100% to
the Limited Partners. Pursuant to the settlement of the consolidated class
action involving certain PaineWebber affiliated Limited Partnerships, including
the Partnership, all net commissions and distributions paid to the Adviser and
to the General Partner of the Partnership have been assigned to an escrow
account for the benefit of the class members.
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 is entitled to receive
a disposition fee, payable upon liquidation of the Partnership, in an amount
equal to 0.75% of the selling price of the property, subordinated to the payment
of certain amounts to the Limited Partners. As noted above, the Adviser received
a disposition fee of approximately $380,000 upon the liquidation of the
Partnership.
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.
Management fees earned by the Adviser totalled $1,000 and $4,000 for the years
ended September 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
were 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. No incentive management fees were earned during the year ended
September 30, 2000.
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, 2000 is $76,000, 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 2000. 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) A Current Report on Form 8-K dated October 12, 2000 was filed subsequent
to the year ended September 30, 2000 to report the sale of the
Partnership's final asset and is hereby incorporated herein by
reference.
(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, 2000
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, 2000
-------------------- -----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: December 29, 2000
------------------------ -----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER PROPERTIES THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
-----------------
Page Number in the Report
Exhibit No. Description of Document or Other Reference
----------- -------------------------------------- ------------------------
(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
Restated Certificate and Agreement by reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or
amendments thereto of the registrant 15(d) of the Securities
together with all such contracts filed Exchange Act of 1934 and
as exhibits of previously filed Forms incorporated herein by
8-K and Forms 10-K are hereby reference.
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the
year ended September 30,
2000 has been sent to the
Limited Partners. An
Annual Report will be
made available 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.
<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 F-2
Balance sheets at September 30, 2000 and 1999 F-3
Statements of operations for the years ended September 30, 2000,
1999 and 1998 F-4
Statements of changes in partners' capital for the years ended
September 30, 2000, 1999 and 1998 F-5
Statements of cash flows for the years ended September 30, 2000,
1999 and 1998 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 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, 2000 and 1999, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended September 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States. 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, 2000
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 2000 and 1999
(In thousands, except per Unit amounts)
ASSETS
------
2000 1999
---- ----
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
--------- ---------
5,038 5,038
Less accumulated depreciation (1,797) (1,695)
--------- ---------
Net operating investment property 3,241 3,343
Cash and cash equivalents 514 809
Prepaid expenses 24 -
--------- ---------
$ 3,779 $ 4,152
========= =========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable - affiliates $ - $ 1
Accounts payable and accrued expenses 1,318 979
Security deposits 14 -
Other liabilities 50 -
Mortgage note payable in default 755 967
--------- ---------
Total liabilities 2,137 1,947
Partners' capital:
General Partner:
Capital contribution 1 1
Cumulative net income 217 222
Cumulative cash distributions (155) (155)
Limited Partners ($1,000 per Unit; 21,550
Units issued):
Capital contributions, net of offering costs 19,397 19,397
Cumulative net income 21,637 22,138
Cumulative cash distributions (39,455) (39,398)
--------- ---------
Total partners' capital 1,642 2,205
--------- ---------
$ 3,779 $ 4,152
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the years ended September 30, 2000, 1999 and 1998
(In thousands, except per Unit amounts)
2000 1999 1998
---- ---- ----
Revenues:
Rental revenues $ 581 $ 478 $ 478
Interest and other income 37 56 236
-------- -------- --------
618 534 714
Expenses:
Interest expense 159 123 130
Management fees 1 4 4
Depreciation expense 102 102 102
Property operating expenses 22 - -
Real estate taxes 18 - -
General and administrative 172 218 594
Environmental remediation expenses 650 1,000 -
-------- -------- --------
1,124 1,447 830
-------- -------- --------
Operating loss (506) (913) (116)
Partnership's share of ventures'
income (loss) - - (155)
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 (loss) $ (506) $ 1,748 $ 2,120
======== ======== ========
Net income (loss) per Limited
Partnership Unit $ (23.24) $ 80.30 $ 97.41
======== ======== ========
Cash distributions per Limited
Partnership Unit $ 2.62 $ 121.24 $ 114.81
======== ======== ========
The above net income (loss) 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, 2000, 1999 and 1998
(In thousands)
General Limited
Partner Partners Total
------- -------- -----
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
Cash distributions - (57) (57)
Net loss (5) (501) (506)
------- -------- -------
Balance at September 30, 2000 $ 63 $ 1,579 $ 1,642
======= ======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended September 30, 2000, 1999 and 1998
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (506) $ 1,748 $ 2,120
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation 102 102 102
Amortization of deferred financing costs - 11 21
Partnership's share of ventures' income
(loss) - - 155
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:
Prepaid expenses (24) - -
Accounts payable - affiliates (1) - (3)
Accounts payable and accrued expenses 339 808 113
Security deposits 14 - -
Other liabilities 50 - -
------- -------- --------
Total adjustments 480 (1,740) (2,003)
------- -------- --------
Net cash (used in) provided by
operating activities (26) 8 117
------- -------- --------
Cash flows from investing activities:
Distributions from joint ventures - - 2,451
Net proceeds from collection of mortgage
note receivable - 2,661 -
------- -------- --------
Net cash provided by investing
activities - 2,661 2,451
------- -------- --------
Cash flows from financing activities:
Distributions to partners (57) (2,614) (2,476)
Principal payments on mortgage
note payable (212) (157) (154)
------- -------- --------
Net cash used in financing
activities (269) (2,771) (2,630)
------- -------- --------
Net decrease in cash and cash equivalents (295) (102) (62)
Cash and cash equivalents, beginning of year 809 911 973
------- -------- --------
Cash and cash equivalents, end of year $ 514 $ 809 $ 911
======= ======== ========
Cash paid during the year for interest $ 159 $ 112 $ 109
======= ======== ========
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, 2000, the three
multi-family apartment properties had 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 one remaining
retail property was the Northeast Plaza Shopping Center, a 121,000 square foot
retail center located in Sarasota, Florida.
As discussed further in Note 4, subsequent to year end, on October 12,
2000, the Partnership sold the wholly-owned Northeast Plaza Shopping Center to
an unrelated third party for a gross sale price of $3,712,500. After deducting
closing costs of $32,000, net property proration adjustments totalling $126,000
and the prepayment of the first mortgage debt and accrued interest secured by
the property of approximately $758,000, the Partnership received net sale
proceeds of approximately $2,796,000. As previously reported, the Partnership
had been focusing on a sale of the Northeast Plaza Shopping Center, its
remaining real estate investment, and a liquidation of the Partnership. With the
sale of the Northeast Plaza property completed, the Partnership is currently
proceeding with an orderly liquidation. On November 15, 2000, a Liquidating
Distribution, which included the net proceeds of the Northeast Plaza
transaction, along with the remaining Partnership reserves after the payment of
all liquidation-related expenses, was paid to unitholders of record as of the
October 12, 2000 sale date (see Note 9). The formal liquidation of the
Partnership will be completed prior to the end of calendar year 2000.
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, 2000 and 1999 and revenues and expenses for
each of the three years in the period ended September 30, 2000. 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 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. 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.
Through July 31, 2000, the Partnership's wholly-owned operating investment
property was leased under a master lease agreement which covered 100% of the
rentable space of the shopping center. The master lease was accounted for as an
operating lease in the Partnership's financial statements. Basic rental income
under the master lease was recorded on the straight-line basis. Effective August
1, 2000, the master lease was terminated and the Partnership leased retail space
to individual tenants under separate operating leases. Rental income was
recognized on a straight-line basis as earned. Subsequent to the termination of
the master lease, the Partnership entered into a property management agreement
with the former lessee. The management fees were 5% of gross receipts, as
defined.
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, 2000 and 1999 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.
All distributable cash, as defined, for each fiscal year was distributed
quarterly in the ratio of 99% to the Limited Partners and 1% to the General
Partner. In accordance with the Partnership Agreement, sale or refinancing
proceeds are to be distributed first, 100% to the Limited Partners until the
Limited Partners have received their original capital contributions and a
cumulative annual return of 7% based upon a Limited Partner's Adjusted Capital
Contributions, as defined in the Partnership Agreement. Then a real estate
brokerage commission is payable to the Partnership's Adviser. In connection with
the sale of each property, the Adviser is entitled to receive a real estate
brokerage commission in an amount equal to 0.75% of the selling prices of all of
the properties in the portfolio. Pursuant to this provision and subsequent to
the fiscal year ended September 30, 2000, a total of approximately $380,000 was
paid to the Adviser as a real estate brokerage commission. Any remaining sale or
refinancing proceeds are to be distributed 85% to the Limited Partners and 15%
to the General Partner. Including the Final Liquidating Distribution discussed
further above, Limited Partners who acquired their Units during the original
offering period received a full return of their original capital contributions,
their cumulative preferred return of 7%, as defined in the Partnership
Agreement, and their proportionate share of approximately $2.1 million which
represents an 85% share in the remaining sale or refinancing proceeds after the
payment of the brokerage commission to the Adviser. The General Partner of the
Partnership received a total of approximately $375,000 as their 15% residual
share noted above. Prior to the Final Distribution, all sale and refinancing
proceeds were distributed 100% to the Limited Partners. Pursuant to the
settlement of the consolidated class action involving certain PaineWebber
affiliated Limited Partnerships, including the Partnership, all net commissions
and distributions paid to the Adviser and to the General Partner of the
Partnership have been assigned to an escrow account for the benefit of the class
members.
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 is entitled to receive
a disposition fee, payable upon liquidation of the Partnership, in an amount
equal to 0.75% of the selling price of the property, subordinated to the payment
of certain amounts to the Limited Partners. As noted above, the Adviser received
a disposition fee of approximately $380,000 upon the liquidation of the
Partnership.
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.
Management fees earned by the Adviser totalled $1,000, $4,000 and $4,000 for the
years ended September 30, 2000, 1999 and 1998, 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 were 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. No incentive management fees were earned during the
three-year period ended September 30, 2000. Accounts payable - affiliates at
September 30, 1999 consisted of management fees payable to the Adviser of
$1,000.
Included in general and administrative expenses for the years ended
September 30, 2000, 1999 and 1998 is $76,000, $74,000 and $71,000, 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, $2,000 and $5,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 2000, 1999 and 1998,
respectively.
4. Operating Investment Property
-----------------------------
As of September 30, 2000, the Partnership had 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 covered 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 had an initial term of
30 years and two 5-year renewal options. This master lease agreement was
classified as an operating lease and, therefore, rental income was reported when
earned. Under the terms of the agreement, the Partnership received annual basic
rent of $435,000. The Partnership also received 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 provided
specifically that the manager pay all costs of operating the shopping center and
all annual taxes, insurance and administrative expenses. The manager was further
required to pay for all costs of repair and replacement required in connection
with the shopping center.
As discussed in Note 1, subsequent to year end, on October 12, 2000, the
Partnership sold the wholly-owned Northeast Plaza Shopping Center to an
unrelated third party for a gross sale price of $3,712,500. After deducting
closing costs of $32,000, net property proration adjustments totalling $126,000
and the prepayment of the first mortgage debt and accrued interest secured by
the property of approximately $758,000, the Partnership received net sale
proceeds of approximately $2,796,000. The Partnership was entitled to 100% of
these net sale proceeds because the master lease agreement which had covered the
Northeast Plaza property had been terminated prior to the sale. As of August 1,
2000, the master lease agreement was terminated in return for the Partnership's
release of the master lessee from any liability regarding the known
environmental issues at the property (see Note 8). The Partnership will
recognize a gain of approximately $445,000 for financial reporting purposes on
the sale of the Northeast Plaza property in fiscal 2001 through the date of the
Partnership's liquidation. As previously reported, the Partnership had been
focusing on a sale of the Northeast Plaza Shopping Center, its remaining real
estate investment, and a liquidation of the Partnership. With the sale of the
Northeast Plaza property completed, the Partnership is currently proceeding with
an orderly liquidation which will be completed prior to the end of calendar year
2000 (see Note 9).
5. Joint Venture Partnerships
--------------------------
As of September 30, 2000 and 1999, 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.
The Central Plaza joint venture was accounted for by using the equity
method because the Partnership did not have a voting control interest in the
venture. Under the equity method, the assets, liabilities, revenues and expenses
of the joint venture did not appear in the Partnership's financial statements.
Condensed combined summary of operations of the joint venture for fiscal 1998
(through the date of the sale) follow.
Condensed Combined Summary of Operations
For the period October 1, 1997 through March 3, 1998
(in thousands)
1998
----
Revenues:
Rental revenues and expense recoveries $ 444
Interest income 8
----------
452
Expenses:
Property operating expenses 202
Depreciation and amortization 221
Interest expense 182
----------
605
----------
Operating income (loss) (153)
Gain on sale of operating investment property 5,567
----------
Net income $ 5,414
==========
Net income:
Partnership's share of combined income $ 2,259
Co-venturers' share of combined income 3,155
----------
$ 5,414
==========
Reconciliation of Partnership's Share of Income
1998
----
Partnership's share of income, as shown above $ 2,259
Amortization of excess basis (23)
----------
Partnership's share of ventures' net income $ 2,236
==========
The Partnership's share of ventures' net income is presented as follows in
the statements of operations (in thousands):
1998
----
Partnership share of ventures' income (loss) $ (155)
Partnership's share of gain on sale
of operating investment property 2,391
----------
$ 2,236
==========
A description of the joint venture's property and the terms of the joint
venture agreement are summarized below.
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 was a general partner in the joint venture. The Partnership's
co-venturer was 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) during fiscal 1998 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. The
Partnership received total cash distributions (including sales proceeds) of
$2,451,000 during the year ended September 30, 1998.
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) the affiliate of the co-venturer earned
fees of $16,000.
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. 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, 2000 and 1999 was secured by
the Partnership's wholly-owned Northeast Plaza Shopping Center. On March 29,
1994, the Partnership refinanced the existing wraparound mortgage note secured
by Northeast Plaza, which had been in default for over two years, with a new
loan issued by the prior underlying first mortgage lender. The new loan, in the
initial principal amount of $1,722,000, 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 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. 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 was unable to secure a commitment
for financing because of an environmental issue, which resulted in the
termination of the purchase agreement. 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 continued to accrue on the
unpaid principal balance at a rate of 18%, and monthly principal and interest
payments remained at $30,000 during this extension period. 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 September
30, 2000, the loan had not been repaid because the environmental issues
affecting the property (as discussed further in Note 8) had delayed the
Partnership's plans to market and sell the shopping center. As a result, the
loan was technically in default as of September 30, 2000. As discussed further
in Note 4, the Northeast Plaza property was sold subsequent to year-end, on
October 12, 2000, and the first mortgage loan was repaid in full in connection
with this transaction. The lender agreed to accept interest at a rate of 18% per
annum through the date of the repayment. It is impracticable for the Partnership
to estimate the fair value of this debt obligation as of September 30, 2000 and
1999 as a result of its 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 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, Mobil 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 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 was 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 resulted in a dismissal of the
appeal of its damages claims against Mobil with both parties bearing their own
costs and attorneys' fees. Under the terms of the settlement agreement, which
was finalized in September 2000, Mobil remained subject to the injunctive order,
and the cleanup was to proceed as set forth in the court order.
As previously reported, 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 appeared
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. During the fourth quarter of fiscal 2000, the Plan was
effectively approved by the state regulatory authority subject to the execution
of a voluntary cleanup agreement with the state. The Partnership's environmental
consultant had proposed to implement the Plan at a cost of approximately $1.2
million.
However, while awaiting the approval of the Plan, the Partnership had also
initiated efforts to market and sell the Northeast Plaza property on terms that
would allocate to the purchaser responsibility for pre-existing environmental
conditions. In July 2000, the Partnership distributed four sales packages to
prospective purchasers who were targeted as potential buyers of property with
pre-existing environmental conditions. As a result of that effort, three offers
were received. After evaluating the offers and the strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
subsequently negotiated and signed on August 31, 2000 with this prospective
third-party buyer. After completing its due diligence work in September 2000,
the prospective buyer made two non-refundable deposits totalling $200,000 (of
which $150,000 remained in escrow as of September 30, 2000). As described
further in Note 4, on October 12, 2000 the sale transaction closed. In
accordance with the Northeast Plaza purchase and sale agreement, all liabilities
associated with the pre-existing environmental conditions at the property were
transferred to the buyer at the time of the sale, and the buyer agreed to
indemnify the Partnership against claims arising from known environmental
problems. In addition, for the purpose of addressing risks relating to cleanup
cost overruns and any unknown environmental conditions, the buyer purchased
environmental insurance under which the Partnership is included as an additional
insured. As a result, the Partnership is free to proceed with its planned
liquidation which will be completed prior to the end of calendar year 2000.
The Partnership had accrued a liability of $1 million during fiscal 1999 to
cover expected legal and environmental testing and remediation costs regarding
the Northeast Plaza dry cleaner 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 the preliminary feedback
from the state regulatory authority on the Site Assessment Report, the
Partnership believed that the scope fo 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, 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
September 30, 2000, the Partnership had incurred actual legal and environmental
testing expenses of $465,000 in connection with this situation (including
$386,000 incurred in fiscal 2000). The remaining balance of the accrued
liability of $1,185,000 is included in the balance of accrued expenses on the
accompanying balance sheet as of September 30, 2000. As noted above, the
Partnership was indemnified by the buyer of Northeast Plaza against claims
arising from the known environmental problems at the property and was named as
an additional insured on an insurance policy purchased by the buyer which covers
potential cleanup cost overruns and any unknown environmental conditions. Since
the Partnership has no further liability for any environmental expenses under
the terms of the Northeast Plaza sale agreement, the remaining balance of the
accrued liability of $1,185,000 will be recovered on the Partnership's income
statement for period ending December 31, 2000.
9. Subsequent Event
----------------
On November 15, 2000, the Partnership made a Final Liquidating Distribution
of $2,451,000 to the Limited Partners and $375,000 to the General Partner as a
result of the sale of the Northeast Plaza Shopping Center (see Note 4). The
Final Distribution amount of approximately $2,451,000, or $113.74 per original
$1,000 investment, was comprised of $94.74 from the sale of the Northeast Plaza
property and $19.00 of remaining Partnership reserves. The difference between
the sum of the net proceeds received from the sale of Northeast Plaza, of
$2,922,000 (prior to property proration adjustments), and the net assets of the
Partnership as of September 30, 2000 (excluding the historical cost basis of the
operating investment property, the accrued environmental liability described in
Note 8 and the mortgage note payable repaid as part of the sale transaction), of
$341,000, and the amount of the Liquidating Distribution, of $2,826,000, totals
$437,000. This difference is comprised of the disposition fee of $380,000 paid
to the Partnership's Adviser in connection with the liquidation (see Note 3),
additional Partnership operating and liquidating expenses of $41,000 and a net
operating loss from the Northeast Plaza property for the period from October 1,
2000 through the date of the sale, of $25,000, net of additional interest income
of $9,000. Such Partnership expenses include $1,000 paid to Mitchell Hutchins
for managing the Partnership's cash assets through its liquidation and $30,000
paid to an affiliate of the General Partner for providing certain financial,
accounting and investor communication services through the Partnership's
liquidation date (see Note 3).
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
Schedule of Real Estate and Accumulated Depreciation
September 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Life on Which
Initial Cost to Costs Gross Amount at Which Carried at Depreciation
Partnership Capitalized Close of period in Latest
Buildings (Removed) Buildings Income
and Subsequent to and Accumulated Date of Date Statement
Description Encumbrances Land Improvements Acquisition Land Improvements Total Depreciation Construction Acquired is Computed
----------- ------------ ---- ------------ ----------- ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
Sarasota,
Florida $755 $950 $1,930 $2,158 $950 $4,088 $5,038 $1,797 1964 - 1978 9/25/81 40 years
==== ==== ====== ====== ==== ====== ====== ======
Notes:
------
(A) The aggregate cost of real estate owned at September 30, 2000 for Federal income tax purposes is approximately $5,038.
(B) See Notes 4 and 7 to Financial Statements.
(C) Reconciliation of real estate owned:
2000 1999 1998
---- ---- ----
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 $ 1,695 $ 1,593 $ 1,491
Depreciation expense 102 102 102
------- ------- -------
Balance at end of year $ 1,797 $ 1,695 $ 1,593
======= ======= =======
</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.
<PAGE>
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
========
