UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-10979
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3038189
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 2000 and September 30, 1999 (Unaudited)
(In thousands)
ASSETS
March 31 September 30
-------- ------------
Operating investment property, at cost:
Land $ 950 $ 950
Building and improvements 4,088 4,088
--------- ---------
5,038 5,038
Less accumulated depreciation (1,746) (1,695)
--------- ---------
Net operating investment property 3,292 3,343
Cash and cash equivalents 554 809
--------- ---------
$ 3,846 $ 4,152
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ - $ 1
Accounts payable and accrued expenses 1,075 979
Mortgage note payable 871 967
Partners' capital 1,900 2,205
--------- ---------
$ 3,846 $ 4,152
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 2000 and 1999 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Rental revenues $ 119 $ 119 $ 239 $ 239
Interest income 10 22 21 32
------- ------- ------- -------
129 141 260 271
Expenses:
Environmental remediation
expense - - 300 -
Interest expense 40 30 83 60
Management fees - 1 1 2
Depreciation expense 25 25 51 51
General and administrative 31 46 73 89
------- ------- ------- -------
96 102 508 202
------- ------- ------- -------
Operating income (loss) 33 39 (248) 69
Gain on sale of operating
investment property - 2,298 - 2,661
------- ------- ------- -------
Net income (loss) $ 33 $ 2,337 $ (248) $ 2,730
======= ======= ======= =======
Net income (loss) per Limited
Partnership Unit $ 1.50 $107.38 $(11.45) $125.42
======= ======= ======= =======
Cash distributions per Limited
Partnership Unit $ 1.31 $117.31 $ 2.62 $118.62
======= ======= ======= =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 21,550 Units of Limited Partnership Interest outstanding
for each period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended March 31, 2000 and 1999 (Unaudited)
(In thousands)
General Limited
Partner Partners
------- --------
Balance at September 30, 1998 $ 52 $ 3,019
Cash distributions (1) (2,556)
Net income 27 2,703
-------- -------
Balance at March 31, 1999 $ 78 $ 3,166
======== =======
Balance at September 30, 1999 $ 68 $ 2,137
Cash distributions (1) (56)
Net loss (2) (246)
-------- -------
Balance at March 31, 2000 $ 65 $ 1,835
======== =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2000 and 1999 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
2000 1999
---- ----
Cash flows from operating activities:
Net income (loss) $ (248) $ 2,730
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Gain on sale of operating investment property - (2,661)
Depreciation expense 51 51
Amortization of deferred financing costs - 11
Changes in assets and liabilities:
Accounts payable - affiliates (1) -
Accounts payable and accrued expenses 96 (134)
-------- --------
Total adjustments 146 (2,733)
-------- --------
Net cash used in operating activities (102) (3)
-------- --------
Cash flows from investing activities:
Net proceeds from collection of mortgage
note receivable - 2,661
-------- --------
Net cash provided by investing activities - 2,661
-------- --------
Cash flows from financing activities:
Distributions to partners (57) (2,557)
Principal payments on mortgage note payable (96) (83)
-------- --------
Net cash used in financing activities (153) (2,640)
-------- --------
Net (decrease) increase in cash and
cash equivalents (255) 18
Cash and cash equivalents, beginning of period 809 911
-------- --------
Cash and cash equivalents, end of period $ 554 $ 929
======== ========
Cash paid during the period for interest $ 83 $ 49
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
Notes to Financial Statements
(Unaudited)
1. General
- ------------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended September 30, 1999. In the
opinion of management, the accompanying financial statements, which have not
been audited, reflect all adjustments necessary to present fairly the results
for the interim period. All of the adjustments reflected in the accompanying
interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of March 31, 2000 and September 30, 1999 and revenues and
expenses for the three- and six-month periods ended March 31, 2000 and 1999.
Actual results could differ from the estimates and assumptions used.
As of March 31, 2000, the Partnership has one remaining real estate asset,
the wholly-owned Northeast Plaza Shopping Center (see Note 4). The Partnership's
goal during fiscal 1999 had been to pursue a disposition strategy for its
investment in Northeast Plaza which would have enabled the Partnership to
complete a liquidation prior to the end of calendar year 1999. For the reasons
set forth in detail in Notes 5 and 6, this goal was not achieved. The
Partnership still hopes to complete a liquidation during calendar year 2000.
However, there can be no assurances that the disposition of the remaining
investment and a liquidation of the Partnership will be completed within this
time frame.
2. Related Party Transactions
- --------------------------------
Management fees earned by the Adviser for the six-month periods ended
March 31, 2000 and 1999 totalled $1,000 and $2,000, respectively. Regular
quarterly distributions to the Limited Partners, upon which the management fees
are based, were suspended effective for the quarter ended March 31, 2000. Since
distributions are no longer being paid, no management fee was earned by the
Advisor for the quarter ended March 31, 2000. Accounts payable - affiliates at
September 30, 1999 consisted of $1,000 of management fees payable to the
Adviser.
Included in general and administrative expenses the six-month periods
ended March 31, 2000 and 1999 are $38,000 and $37,000, respectively,
representing reimbursements to an affiliate of the General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for each of the
six-month periods ended March 31, 2000 and 1999 is $1,000, representing fees
paid to an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
3. Note and Interest Receivable, Net
- ---------------------------------------
On September 15, 1981, the Partnership acquired a 35% interest in
Briarwood Joint Venture, an existing Pennsylvania general partnership which
owned two apartment complexes, comprising 686 units, in Bucks County,
Pennsylvania (the Briarwood and Gatewood Apartments). The Partnership originally
invested approximately $4,815,000 (including an acquisition fee of $500,000 paid
to the Adviser) for its interest. The Partnership's interest was acquired
subject to two institutional nonrecourse first mortgages with balances totalling
approximately $8,925,000 at the time of the closing.
On December 20, 1984, the joint venture partners sold their ownership
interests in the Briarwood Joint Venture for $33,152,000. After the payment of
mortgage obligations and closing costs, the Partnership's allocable share of the
proceeds was $10,935,000, represented by cash of $7,490,000 and a note
receivable of $3,445,000. For financial accounting purposes, a gain of
$7,255,000 resulted from the transaction of which $3,810,000 was recognized at
the time of the sale and the remainder was deferred under the cost recovery
method. For income tax purposes, a gain of $4,829,000 was recognized upon sale
and the remainder deferred utilizing the installment method. The difference in
the amount of gain recognized for financial accounting and tax purposes resulted
from accounting differences related to the carrying value of the Partnership's
investment.
The principal amount of the note receivable of $3,445,336 was to bear
interest at 9% annually and was subordinated to a first mortgage loan. Interest
and principal payments on the note were payable only to the extent of net cash
flow from the properties sold, as defined in the sales documents. Any interest
not received was to accrue additional interest of 9% per annum. The
Partnership's policy was to defer recognition of all interest income on the note
until collected, due to the uncertainty of its collectibility. Until the quarter
ended June 30, 1998, the Partnership had not received any interest payments
since the inception of the note. During the quarter ended June 30, 1998, the
Partnership received $149,000 from the borrower which was recorded as interest
income during fiscal 1998.
On June 22, 1998, the Partnership initiated a lawsuit in Massachusetts
state court in connection with this note receivable. The suit alleged that the
defendants in this lawsuit, acting as agents for the Partnership, improperly
released six of the ten properties (including the Briarwood and Gatewood
apartment properties) from the mortgage that secured the note receivable, and
that they improperly extended the maturity date of the note by ten years. The
defendants denied any and all liability in the lawsuit. By Agreement dated
December 30, 1998, the Partnership and the defendants settled the lawsuit, with
the defendants and their affiliates admitting no liability, and the parties
exchanged releases. Under the terms of the Agreement, the defendants agreed to
pay the Partnership the aggregate amount of $3 million and the Partnership
assigned its interest in the note to certain of the parties to the Agreement. Of
the $3 million settlement amount, the sum of $500,000 was paid to the
Partnership on December 30, 1998, and the balance of $2.5 million was received
on January 29, 1999. The settlement payments resulted in the recognition of
previously deferred gains on the sale of the Briarwood and Gatewood properties,
net of the expenses incurred in fiscal 1999 in connection with the litigation.
As a result of the settlement, the Partnership no longer has an interest in the
note receivable. The Partnership incurred approximately $500,000 of legal costs
in fiscal 1998 and 1999 associated with the litigation and collection of the
settlement of this note receivable. Consequently, approximately $2,500,000 of
settlement proceeds was available to distribute to the Limited Partners.
Accordingly, a Special Capital Distribution in the amount of $2,499,800, or $116
per original $1,000 investment, was paid on February 12, 1999, to holders of
record on January 29, 1999, along with the regular quarterly distribution for
the quarter ended December 31, 1998.
4. Operating Investment Property
- -----------------------------------
The Partnership has one wholly-owned operating investment property. On
September 25, 1981, the Partnership purchased Northeast Plaza, a 67,000 square
foot existing shopping center in Sarasota, Florida. Subsequent to the
acquisition, the shopping center was expanded to its current size of 121,005
square feet. The aggregate cash invested by the Partnership was approximately
$2,888,000 (including an acquisition fee of $268,000 paid to the Adviser). The
property was acquired subject to a nonrecourse wrap-around mortgage loan of
approximately $2,480,000. On March 29, 1994, the Partnership refinanced the
existing wraparound mortgage note secured by the Northeast Plaza Shopping
Center, which had been in default for over two years, with a new non-recourse
loan issued by the prior underlying first mortgage lender (see Note 5). The
refinancing was negotiated in conjunction with a restructuring of the master
lease that covers the Partnership's interest in Northeast Plaza. The master
lessee was also the holder of the wraparound mortgage. As part of the
refinancing, the wrap note holder applied withheld rental payments, which
totalled $661,000, against the outstanding balance of the wraparound mortgage.
Rental payments to the Partnership were reinstated beginning in April 1994.
At the time of the original purchase of the shopping center, the
Partnership entered into a lease agreement with the seller of the property for
the operation and management of the property. The lease has an initial term of
30 years and two 5-year renewal options. This master lease agreement has been
classified as an operating lease and, therefore, rental income is reported when
earned. Under the terms of the agreement, the Partnership receives annual basic
rent of $435,000. The Partnership also receives contingent rent equal to the
greater of (a) approximately 47.5% of annual increases to gross rental income
over a specified base amount or (b) $43,000 annually. The agreement provides
specifically that the manager pay all costs of operating the shopping center and
all annual taxes, insurance and administrative expenses. The manager is further
required to pay for all costs of repair and replacement required in connection
with the shopping center. Minimum lease payments under the initial term of the
lease agreement, including the minimum amount of contingent rent, amount to
$478,000 in each year.
Under the amended terms of the master lease, upon the sale or refinancing
of the project, any remaining proceeds, after repayment of the outstanding
balance on the mortgage loan, payment of certain priority items to the
Partnership, repayment of the Partnership's original investment and the
reimbursement to the lessee of certain capital improvement expenditures, will be
allocated equally to the Partnership and to the manager of the property as a
return on the leasehold interest.
5. Mortgage Note Payable
- ---------------------------
The mortgage note payable at March 31, 2000 and September 30, 1999 is
secured by the Partnership's wholly-owned Northeast Plaza Shopping Center.
During the first quarter of fiscal 1999, the Partnership had entered into an
agreement to sell Northeast Plaza to the master lessee in conjunction with a
refinancing of the first mortgage debt secured by the property. The agreement
was signed on November 29, 1998 and was contingent on the master-lessee's
ability to obtain a commitment for sufficient financing by January 29, 1999 to
pay the Partnership for its ownership interest. This financing commitment date
was subsequently extended to April 19, 1999. As discussed further in Note 6, the
master-lessee has been unable to secure a commitment for financing because of an
environmental issue, which resulted in the termination of the purchase
agreement.
On March 29, 1994, the Partnership refinanced the existing wraparound
mortgage note secured by Northeast Plaza, which had been in default for over two
years, with a new loan issued by the prior underlying first mortgage lender. The
new loan, in the initial principal amount of $1,722,000, 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. As noted above, however, the
completion of a sale transaction has been affected by an environmental issue and
did not occur by June 29, 1999. On July 16, 1999, the lender issued a default
notice as of June 29, 1999 and assessed default interest at a rate of 25% per
annum on the outstanding balance of approximately $998,000. On August 31, 1999,
the Partnership and the lender executed a forbearance agreement. Under the
forbearance agreement, the lender agreed not to foreclose or exercise any remedy
available to it under the loan agreement until December 15, 1999. The
Partnership agreed to pay a $35,000 extension fee; $10,000 of which was paid on
August 31, 1999 and $25,000 of which was payable by December 15, 1999. Under the
forbearance agreement, interest accrued at a rate of 18% on the unpaid principal
balance. Monthly principal and interest payments were increased to $30,000
beginning August 31, 1999. On January 20, 2000, the lender agreed to extend the
forbearance agreement to June 30, 2000. Interest will continue to accrue on the
unpaid principal balance at a rate of 18%, and monthly principal and interest
payments remain at $30,000. The Partnership agreed to pay the $25,000 fee which
was payable on December 15, 1999 plus an additional extension fee of $10,000. If
the Partnership makes all payments due under the forbearance agreement during
its term and repays the loan in full by June 30, 2000, the lender will waive the
payment of the additional $10,000 extension fee (see Note 6).
6. Legal Proceedings and Related Contingencies
- ------------------------------------------------
Management believed that the Partnership's efforts to sell or refinance
the Northeast Plaza property from fiscal 1991 through fiscal 1998 were impeded
by potential buyer and lender concerns of an environmental nature with respect
to the property. During 1990, it was discovered that certain underground storage
tanks of a Mobil service station located adjacent to the shopping center had
leaked and contaminated the ground water in the vicinity of the station. Since
the time that the contamination was discovered, Mobil Oil Corporation (Mobil)
has investigated the problem and is progressing with efforts to remediate the
soil and ground water contamination under the supervision of the Florida
Department of Environmental Protection, which has approved Mobil's remedial
action plan. During fiscal 1990, the Partnership had obtained an indemnification
agreement from Mobil in which Mobil agreed to bear the cost of all damages and
required clean-up expenses. Furthermore, Mobil indemnified the Partnership
against its inability to sell, transfer, or obtain financing on the property
because of the contamination. Subsequent to the discovery of the contamination,
the Partnership experienced difficulty in refinancing the mortgages on the
property that matured in 1991. The existence of contamination on the property
impacted the Partnership's ability to obtain standard market financing.
Ultimately, the Partnership was able to refinance its first mortgage at a
substantially reduced loan-to-value ratio. In addition, the Partnership was
unable to sell the property at an uncontaminated market price. The Partnership
also retained outside counsel and environmental consultants to review Mobil's
remediation efforts and incurred significant out-of-pocket expenses in
connection with this situation. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
disagreed as to the extent of the indemnification and has refused to compensate
the Partnership for any of its damages.
During the first quarter of fiscal 1993, the Partnership filed suit
against Mobil for breach of indemnity and property damage. On April 28, 1995,
Mobil was successful in obtaining a Partial Summary Judgment which removed the
case from the Federal Court system. Subsequently, the Partnership filed an
action in the Florida State Court system. A jury trial against Mobil Oil
Corporation took place during the two-week period ended April 17, 1998, in state
court in Sarasota, Florida. The Partnership sought an injunctive order to force
Mobil to clean up the contamination and sought to recover damages suffered by
the Partnership as a result of the contamination. During the trial, Mobil
stipulated to the entry of an injunctive order compelling Mobil to continue the
cleanup until state water quality standards are achieved. As previously
reported, the Partnership had obtained a summary judgment as to liability on its
claims for trespass and nuisance. The issues of damages on these two counts, as
well as the Partnership's breach of contract claim, were submitted to the jury.
On April 17, 1998, the jury returned a verdict in favor of the defendant, Mobil.
The Partnership's subsequent motion for a new trial was not granted. A final
judgment in favor of Mobil as to the Partnership's damages claims has been
entered with the Court. In addition, a final judgment compelling Mobil to
cleanup the contamination at the Northeast Plaza Shopping Center was entered
with the Court. The Partnership subsequently began the process of appealing the
judgment pertaining to its damages claims, and Mobil filed a cross-appeal
challenging the scope of the injunctive order.
During the quarter ended December 31, 1998, the Partnership negotiated a
contract to sell the Northeast Plaza property to the master lessee at a net
price which the Partnership believed reflected only a small deduction for the
stigma associated with the Mobil contamination. The agreement was signed on
November 29, 1998 and was contingent on the master-lessee's ability to obtain a
commitment for sufficient financing by January 29, 1999 to pay the Partnership
for its ownership interest. This financing commitment date was subsequently
extended to April 19, 1999. As noted below, the master-lessee has been unable to
secure a commitment for financing because of an unrelated environmental issue,
which resulted in the termination of the purchase agreement. The appeal of the
Mobil litigation was stayed until mid-December 1999 pending the resolution of
this potential sale transaction. During the quarter ended December 31, 1999, the
Partnership proposed a settlement agreement which would result in a dismissal of
the appeal of its damages claims against Mobil with both parties bearing their
own costs and attorneys' fees. Under the proposed settlement, Mobil would remain
subject to the injunctive order, and the cleanup would proceed as set forth in
the court order. While the parties have agreed in principle to such a
settlement, the matter remains subject to the execution of a final settlement
agreement.
During the quarter ended June 30, 1999, the Partnership was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination at the Shopping Center which appears to have been caused by the
operation of dry cleaning equipment at the Center. On December 13, 1999, the
Partnership submitted a Site Assessment Report to the state regulatory authority
that confirms the presence of the contamination, describes the location of
elevated contaminant concentrations, and outlines an initial analysis of
remedial alternatives based on preliminary reports obtained from the
master-lessee and work performed to date by the Partnership's own environmental
consultants. The Partnership is in the process of completing further
investigation to assist in assessing the extent of the contamination, the
anticipated cost and time to take appropriate action, and the feasibility of
recovering associated costs from responsible third parties. While the
Partnership believes that the cleanup costs should be the responsibility of the
lessee under the terms of the master lease, the Partnership is proceeding on its
own to begin the cleanup process in order to protect its investment. The
prospects for any future recoveries of these costs are uncertain at the present
time. The Partnership accrued a liability of $1 million during fiscal 1999 to
cover expected legal and environmental testing and remediation costs regarding
this contamination based on the preliminary reports obtained from the
master-lessee and the initial work performed by the Partnership's own
environmental consultants. The Partnership has received comments from the state
regulatory authority on the Site Assessment Report and is currently in the
process of drafting a Remedial Action Plan. Until a Remedial Action Plan is
approved by the state regulatory authority, it is unlikely that a sale
transaction could be completed. Based on the preliminary feedback from the state
regulatory authority on the Site Assessment Report, the Partnership believes
that the scope of the remediation work may be broader than originally expected.
As a result, during the quarter ended December 31, 1999, the Partnership accrued
an additional liability of $300,000. Through March 31, 2000, the Partnership had
incurred actual legal and environmental testing expenses of $263,000 in
connection with this situation. The remaining balance of the accrued liability
of $1,037,000 is included in the balance of accrued expenses on the accompanying
balance sheet. This amount represents an estimate of the potential liability
associated with this situation. It is possible that this estimate could change
materially in the near term as further testing, consulting with appropriate
state environmental agencies and actual remediation work progresses. The
Partnership will continue to assess and revise this estimate as further
information becomes available. At the same time, the Partnership continues to
work with the Northeast Plaza master-lessee, the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center. At the
present time, the Partnership hopes to have an approved Remedial Action Plan in
place which would allow negotiations for a sale of the property to commence
prior to the June 30, 2000 expiration of the loan forbearance agreement
described in Note 5. Even if the Partnership is able to accomplish this, it is
likely that a further extension of the forbearance agreement will be required in
order to accommodate the timing of the closing of a sale transaction. There can
be no assurances that the mortgage lender will agree to grant any further
extensions.
As a result of the current uncertainty regarding the potential capital
needed to fund the environmental remediation costs at Northeast Plaza, the
Managing General Partner has recommended that the Partnership discontinue making
quarterly cash distributions until further notice. Accordingly, after the
payment made on February 15, 2000 for the quarter ended December 31, 1999, no
further quarterly distributions are planned.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended September 30, 1999 under the heading "Certain Factors Affecting
Future Operating Results," which could cause actual results to differ materially
from historical results or those anticipated. The words "believe," "expect,"
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2000, the Partnership's only remaining real estate asset
consists of the wholly-owned Northeast Plaza Shopping Center. The Partnership's
goal during fiscal 1999 had been to pursue a disposition strategy for its
investment in Northeast Plaza which would have enabled the Partnership to
complete a liquidation prior to the end of calendar year 1999. For the reasons
set forth in detail further below, this goal was not achieved. The Partnership
still hopes to complete a liquidation during calendar year 2000. However, there
can be no assurances that the disposition of the remaining investment and a
liquidation of the Partnership will be completed within this time frame.
The occupancy level at the Northeast Plaza Shopping Center in Sarasota,
Florida, remained at 100% for the quarter ended March 31, 2000. The focus of the
property's leasing team during fiscal 1999 was the renewal of the leases with
five tenants occupying 37,300 square feet that were scheduled to expire during
fiscal 1999. All five tenants renewed their leases. One of these tenants was one
of the center's two anchor tenants which has a 25,600 square foot lease that
expired in January of 1999. This tenant exercised one of its two five-year
options and renewed its lease with a 10% increase in the rental rate. A second
tenant, which operates a 6,500 square foot discount retail store, exercised an
option and renewed its lease for five years at a slightly increased rental rate.
Additionally, a 1,200 square foot bookstore and a 1,600 square foot hair salon
signed one-year lease extensions. During the first quarter of fiscal 2000, a
lease with one tenant occupying 1,200 square feet was renewed. During the second
quarter, the property's leasing team worked with five tenants occupying a total
of 6,800 square feet on renewals of their leases which were scheduled to expire
within the next year. Four of these tenants, representing 5,600 square feet,
renewed their leases, and negotiations continue with the fifth tenant on a
possible renewal.
As previously reported, management believed that the Partnership's efforts
to sell or refinance the Northeast Plaza property from fiscal 1991 through
fiscal 1998 were impeded by potential lender concerns of an environmental nature
with respect to the property. During 1990, it was discovered that certain
underground storage tanks at a Mobil service station located adjacent to the
shopping center had leaked and contaminated the ground water in the vicinity of
the station. Since the time that the contamination was discovered, Mobil has
investigated the leak and is progressing with efforts to remedy the soil and
ground water contamination under the supervision of the Florida Department of
Environmental Protection, which has approved Mobil's remedial action plan.
During fiscal 1990, the Partnership had obtained a formal indemnification
agreement from Mobil Oil Corporation in which Mobil agreed to bear the cost of
all damages and required clean-up expenses. Furthermore, Mobil indemnified the
Partnership against its inability to sell, transfer or obtain financing on the
property because of the contamination. Subsequent to the discovery of the
contamination, the Partnership experienced difficulty in refinancing the
mortgages on the property that matured in 1991. The existence of contamination
on the property impacted the Partnership's ability to obtain standard market
financing. Ultimately, the Partnership was able to refinance its first mortgage
at a substantially reduced loan-to-value ratio. In addition, the Partnership was
unable to sell the property at an uncontaminated market price. The Partnership
also retained outside counsel and environmental consultants to review Mobil's
remediation efforts and has incurred significant out-of-pocket expenses in
connection with this situation. Despite repeated requests by the Partnership for
compensation under the terms of the indemnification agreement, to date Mobil has
disagreed as to the extent of the indemnification and has refused to compensate
the Partnership for any of its damages.
<PAGE>
During the first quarter of fiscal 1993, the Partnership filed suit in
Federal Court against Mobil for breach of indemnity and property damage. On
April 28, 1995, Mobil was successful in dismissing the action from the Federal
Court system on jurisdictional grounds. Subsequently, the Partnership filed an
action in the Florida State Court system. During November 1996, the Partnership
and Mobil attempted to settle the action through mediation. A settlement was not
achieved. Mobil's proposal to settle the case, which included a proposed
purchase of the contaminated portion of the Northeast Plaza property from the
Partnership, failed due to Mobil's inability to obtain a zoning variance which
was necessary to make such a transaction possible. A jury trial against Mobil
Oil Corporation took place during the two-week period ended April 17, 1998, in
state court in Sarasota, Florida. The Partnership sought an injunctive order to
force Mobil to clean up the contamination and sought to recover damages suffered
by the Partnership as a result of the contamination. During trial, Mobil
stipulated to the entry of an injunctive order compelling Mobil to continue the
cleanup until state water quality standards are achieved. The experts currently
predict that the cleanup will be completed in approximately one-to-three years.
As previously reported, the Partnership had obtained a summary judgment as to
liability on its claims for trespass and nuisance. The issues of damages on
these two counts, as well as the Partnership's breach of contract claim, were
submitted to the jury. On April 17, 1998, the jury returned a verdict in favor
of the defendant, Mobil. The Partnership's subsequent motion for a new trial was
denied. A final judgment in favor of Mobil as to the Partnership's damage claims
has been entered with the Court. In addition, a final judgment compelling Mobil
to cleanup the contamination at the Northeast Plaza Shopping Center was entered
with the Court. The Partnership subsequently began the process of appealing the
judgement pertaining to its damages claims, and Mobil filed a cross-appeal
challenging the scope of the injunctive order.
During the quarter ended December 31, 1998, the Partnership negotiated a
contract to sell the Northeast Plaza property to the master lessee at a net
price which the Partnership believed reflected only a small deduction for the
stigma associated with the Mobil contamination. The agreement was signed on
November 29, 1998 and was contingent on the master-lessee's ability to obtain a
commitment for sufficient financing by January 29, 1999 to pay the Partnership
for its ownership interest. This financing commitment date was subsequently
extended to April 19, 1999. As noted below, the master-lessee has been unable to
secure a commitment for financing because of an unrelated environmental issue,
which resulted in the termination of the purchase agreement. The appeal of the
Mobil litigation was stayed until mid-December 1999 pending the resolution of
this potential sale transaction. During the quarter ended December 31, 1999, the
Partnership proposed a settlement agreement which would result in a dismissal of
the appeal of its damages claims against Mobil with both parties bearing their
own costs and attorneys' fees. Under the proposed settlement, Mobil would remain
subject to the injunctive order, and the cleanup would proceed as set forth in
the court order. While the parties have agreed in principle to such a
settlement, the matter remains subject to the execution of a final settlement
agreement.
During the quarter ended June 30, 1999, the Partnership was notified by
the Northeast Plaza Shopping Center master-lessee of the presence of groundwater
contamination at the Shopping Center which appears to have been caused by the
operation of dry cleaning equipment at the Center. On December 13, 1999, the
Partnership submitted a Site Assessment Report to the state regulatory authority
that confirms the presence of the contamination, describes the location of
elevated contaminant concentrations, and outlines an initial analysis of
remedial alternatives based on preliminary reports obtained from the
master-lessee and work performed to date by the Partnership's own environmental
consultants. The Partnership is in the process of completing further
investigation to assist in assessing the extent of the contamination, the
anticipated cost and time to take appropriate action, and the feasibility of
recovering associated costs from responsible third parties. While the
Partnership believes that the cleanup costs should be the responsibility of the
lessee under the terms of the master lease, the Partnership is proceeding on its
own to begin the cleanup process in order to protect its investment. The
prospects for any future recoveries of these costs are uncertain at the present
time. The Partnership accrued a liability of $1 million during fiscal 1999 to
cover expected legal and environmental testing and remediation costs regarding
this contamination based on the preliminary reports obtained from the
master-lessee and the initial work performed by the Partnership's own
environmental consultants. The Partnership has received comments from the state
regulatory authority on the Site Assessment Report and is currently in the
process of drafting a Remedial Action Plan. Until a Remedial Action Plan is
approved by the state regulatory authority, it is unlikely that a sale
transaction could be completed. Based on the preliminary feedback from the state
regulatory authority on the Site Assessment Report, the Partnership believes
that the scope of the remediation work may be broader than originally expected.
As a result, during the quarter ended December 31, 1999, the Partnership accrued
an additional liability of $300,000. Through March 31, 2000, the Partnership had
incurred actual legal and environmental testing expenses of $263,000 in
connection with this situation. The remaining balance of the accrued liability
of $1,037,000 is included in the balance of accrued expenses on the accompanying
balance sheet. This amount represents an estimate of the potential liability
associated with this situation. It is possible that this estimate could change
materially in the near term as further testing, consulting with appropriate
state environmental agencies and actual remediation work progresses. The
Partnership will continue to assess and revise this estimate as further
information becomes available. At the same time, the Partnership continues to
work with the Northeast Plaza master-lessee, the current first mortgage lender
and a prospective lender in an attempt to complete a refinancing of the property
in combination with a sale of the Partnership's interest in the Center.
As a result of the current uncertainty regarding the potential capital
needed to fund the environmental remediation costs at Northeast Plaza, the
Managing General Partner has recommended that the Partnership discontinue making
quarterly cash distributions until further notice. Accordingly, after the
payment made on February 15, 2000 for the quarter ended December 31, 1999, no
further quarterly distributions are planned.
The maturity date of the existing first mortgage loan secured by the
Northeast Plaza property was March 29, 1999. The maturity date was extended by
the lender in February 1999 to June 29, 1999 to allow for the master-lessee to
complete its planned refinancing and acquisition of the Partnership's interest
in the property. As noted above, however, the completion of a sale transaction
has been affected by an environmental issue and did not occur by June 29, 1999.
On July 16, 1999, the lender issued a default notice as of June 29, 1999 and
assessed default interest at a rate of 25% per annum on the outstanding balance
of approximately $998,000. On August 31, 1999, the Partnership and the lender
executed a forbearance agreement. Under the forbearance agreement, the lender
agreed not to foreclose or exercise any remedy available to it under the loan
agreement until December 15, 1999. The Partnership agreed to pay a $35,000
extension fee; $10,000 of which was paid on August 31, 1999 and $25,000 of which
was payable by December 15, 1999. Under the forbearance agreement, interest
accrues at a rate of 18% on the unpaid principal balance. Monthly principal and
interest payments were increased to $30,000 beginning August 31, 1999. During
the current quarter, on January 20, 2000, the lender agreed to extend the
forbearance agreement to June 30, 2000. Interest will continue to accrue on the
unpaid principal balance at a rate of 18%, and monthly principal and interest
payments remain at $30,000. The Partnership agreed to pay the $25,000 fee which
was payable on December 15, 1999 plus an additional extension fee of $10,000. If
the Partnership makes all payments due under the forbearance agreement during
its term and repays the loan in full by June 30, 2000, the lender will waive the
payment of the additional $10,000 extension fee. At the present time, the
Partnership hopes to have an approved Remedial Action Plan in place which would
allow negotiations for a sale of the property to commence prior to the June 30,
2000 expiration of the loan forbearance agreement described above. Even if the
Partnership is able to accomplish this, it is likely that a further extension of
the forbearance agreement will be required in order to accommodate the timing of
the closing of a sale transaction. There can be no assurances that the mortgage
lender will agree to grant any further extensions.
At March 31, 2000, the Partnership had available cash and cash equivalents
of $554,000. Such cash and cash equivalents will be used for the working capital
requirements of the Partnership. The source of future liquidity and
distributions to the partners is expected to be from cash generated from the
operations of the Partnership's remaining income-producing investment property
and proceeds received from the sale or refinancing of such property. Such
sources of liquidity are expected to be sufficient to meet the Partnership's
needs on both a short-term and long-term basis.
Results of Operations
Three Months Ended March 31, 2000
- ---------------------------------
The Partnership reported net income of $33,000 for the three months ended
March 31, 2000, as compared to net income of $2,337,000 for the same period in
the prior year. This $2,304,000 decrease in net income was primarily
attributable to the gain of $2,298,000 realized in the prior year due to the
Briarwood note settlement, as discussed further in Note 3 to the accompanying
financial statements. In addition, the Partnership's operating income decreased
by $6,000 due to a $12,000 decrease in interest income and a $10,000 increase in
interest expense. Interest income decreased due to a reduction in the average
amount of cash and cash equivalents outstanding during the current period, as
compared to the same period in the perior 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 above. The
decrease in interest income and the increase in interest expense were partially
offset by a $15,000 decline in general and administrative expenses. This
decrease in general and administrative expenses was mainly due to a reduction in
professional fees incurred for the three months ended March 31, 2000.
Six Months Ended March 31, 2000
- -------------------------------
The Partnership reported a net loss of $248,000 for the six months ended
March 31, 2000, as compared to net income of $2,730,000 for the same period in
the prior year. This $2,978,000 unfavorable change in net operating results was
primarily attributable to the gain of $2,661,000 realized in the prior year from
the Briarwood note settlement, as discussed further in Note 3 to the
accompanying financial statements. In addition, the Partnership reported an
operating loss of $248,000 for the current six-month period as compared to
operating income of $69,000 during the same period in the prior year. This
unfavorable change in operating income (loss) was mainly due to the additional
accrual of $300,000 made in the current period for the estimated environmental
remediation costs at Northeast Plaza, as discussed further above. In addition,
interest income decreased by $11,000, due to a reduction in the average amount
of cash and cash equivalents outstanding during the current year, and interest
expense increased by $23,000, due to the higher interest rate on the outstanding
mortgage note payable called for under the terms of the forbearance agreement
discussed further above. The accrual of environmental remediation costs, the
decrease in interest income and the increase in interest expense were partially
offset by a $15,000 decline in general and administrative expenses. This
decrease in general and administrative expenses was mainly due to a reduction in
professional fees incurred for the six months ended March 31, 2000.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
Mobil Oil Corporation
- ---------------------
The status of the Partnership's litigation with Mobil Oil Corporation
remains unchanged from what was reported in the Partnership's Annual Report on
Form 10-K for the year ended September 30, 1999.
Item 2. through 5. NONE
- ------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER INCOME PROPERTIES THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES THREE
LIMITED PARTNERSHIP
By: THIRD INCOME PROPERTIES, INC.
-----------------------------
General Partner
By: /s/ Walter V. Arnold
---------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Date: May 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended March 31,
2000 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Sep-30-2000
<PERIOD-END> Mar-31-2000
<CASH> 554
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 554
<PP&E> 5,038
<DEPRECIATION> 1,746
<TOTAL-ASSETS> 3,846
<CURRENT-LIABILITIES> 1,075
<BONDS> 871
0
0
<COMMON> 0
<OTHER-SE> 1,900
<TOTAL-LIABILITY-AND-EQUITY> 3,846
<SALES> 0
<TOTAL-REVENUES> 260
<CGS> 0
<TOTAL-COSTS> 425
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> (248)
<INCOME-TAX> 0
<INCOME-CONTINUING> (248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (248)
<EPS-BASIC> (11.45)
<EPS-DILUTED> (11.45)
</TABLE>
