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 December 31, 1998
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: 0-14857
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 04-2866287
-------- ----------
(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>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Operating investment properties:
Land $ 3,700 $ 5,218
Building and improvements 18,943 32,691
---------- -----------
22,643 37,909
Less accumulated depreciation (10,181) (15,131)
---------- -----------
12,462 22,778
Investments in and notes receivable
from unconsolidated joint ventures,
at equity 15,097 24,369
Cash and cash equivalents 6,029 3,118
Restricted cash 258 150
Prepaid expenses - 13
Accounts receivable 80 69
Accounts receivable - affiliates 35 308
Net advances to consolidated ventures 121 -
Deferred rent receivable 97 415
Deferred expenses, net 364 732
Other assets 478 290
---------- -----------
$ 35,021 $ 52,242
========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Net advances from consolidated ventures $ - $ 32
Accounts payable and accrued expenses 420 412
Interest payable 201 71
Bonds payable - 1,420
Mortgage notes payable 14,500 14,720
Partners' capital 19,900 35,587
---------- -----------
$ 35,021 $ 52,242
========== ===========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 1,441 $1,459 $ 3,553 $ 2,971
Interest and other income 426 112 540 246
-------- ------ -------- -------
1,867 1,571 4,093 3,217
Expenses:
Interest expense 298 361 864 846
Depreciation and amortization 600 480 1,567 1,183
Property operating expenses 635 673 1,365 1,230
Real estate taxes 67 71 227 230
General and administrative 137 156 345 412
-------- ------ -------- -------
1,737 1,741 4,368 3,901
-------- ------ -------- -------
Operating income (loss) 130 (170) (275) (684)
Gain on sale of operating
investment property 7,401 - 7,401 -
Consolidated venture partner's
share of operations (187) - (187) -
Investment income from
unconsolidated ventures:
Interest income on notes
receivable from
unconsolidated ventures - 200 400 600
Partnership's share of
gains on sale of
unconsolidated operating
investment properties 18,891 - 18,891 -
Partnership's share of
unconsolidated ventures'
income (losses) (599) (17) (82) 10
-------- ------ -------- -------
Net income (loss) $ 25,636 $ 13 $26,148 $ (74)
======== ======= ======= ========
Net income (loss) per
Limited Partnership Unit $ 12.69 $ 0.01 $ 12.94 $ (0.04)
======== ======= ======= =======
Cash distributions per
Limited Partnership Unit $ 20.41 $ 0.25 $ 20.91 $ 0.75
======== ======= ======= =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 2,000,000 Limited Partnership Units outstanding during
each period.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended December 31, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (950) $ 38,813
Net loss (1) (73)
Cash distributions (15) (1,500)
-------- --------
Balance at December 31, 1997 $ (966) $ 37,240
======== ========
Balance at March 31, 1998 $ (973) $ 36,560
Net income 275 25,873
Cash distributions (15) (41,820)
-------- --------
Balance at December 31, 1998 $ (713) $ 20,613
======== ========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1998 and 1997 (Unaudited) Increase
(Decrease) in Cash and Cash Equivalents (In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 26,148 $ (74)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain on sale of operating investment property (7,401) -
Partnership's share of gains on sale of
unconsolidated investment properties (18,891) -
Consolidated venture partner's share of
operations 187 -
Partnership's share of unconsolidated
ventures' income (losses) 82 (10)
Depreciation and amortization 1,567 1,183
Amortization of deferred financing costs 15 15
Changes in assets and liabilities:
Prepaid expenses 13 123
Accounts receivable (11) (284)
Accounts receivable - affiliates 273 (45)
Deferred rent receivable 19 (7)
Deferred expenses (236) 353
Accounts payable and accrued expenses 8 (333)
Interest payable 130 (21)
Net advances to/from consolidated ventures (153) 112
--------- --------
Total adjustments (24,398) 1,086
--------- --------
Net cash provided by operating activities 1,750 1,012
--------- --------
Cash flows from investing activities:
Net proceeds from sale of operating
investment property 15,589 -
Distributions from unconsolidated joint ventures 28,683 852
Additions to operating investment properties (250) (110)
Net withdrawals from restricted cash (108) -
Additional investments in unconsolidated
joint ventures (602) (971)
--------- --------
Net cash provided by (used in)
investing activities 43,312 (229)
--------- --------
Cash flows from financing activities:
Repayment of principal on mortgage notes payable (220) (207)
Repayment of district bond assessments (96) (31)
Distributions to partners (41,835) (1,515)
--------- --------
Net cash used in financing activities (42,151) (1,753)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,911 (970)
Cash and cash equivalents, beginning of period 3,118 4,617
--------- --------
Cash and cash equivalents, end of period $ 6,029 $ 3,647
========= ========
Cash paid during the period for interest $ 719 $ 831
========= ========
Supplemental Schedule of Noncash Financing Activities:
- ------------------------------------------------------
Assumption of bonds payable by buyer
of operating investment property $ 1,324 $ -
========= ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes in the
Partnership's Annual Report for the year ended March 31, 1998. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting 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 December 31, 1998 and March 31, 1998 and revenues and
expenses for each of the three- and nine-month periods ended December 31, 1998
and 1997. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Accounts receivable - affiliates at December 31, 1998 and March 31, 1998
includes $20,000 and $167,000, respectively, of investor servicing fees due from
several joint ventures for reimbursement of certain expenses incurred in
reporting Partnership operations to the Limited Partners of the Partnership.
Accounts receivable - affiliates at both December 31, 1998 and March 31, 1998
also includes $15,000 of expenses paid by the Partnership on behalf of one of
the joint ventures during fiscal 1993. In addition, accounts
receivable-affiliates at March 31, 1998 includes $126,000 due from one joint
venture for interest earned on a permanent loan.
Included in general and administrative expenses for the nine-month periods
ended December 31, 1998 and 1997 is $138,000 and $136,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
Also included in general and administrative expenses for the nine-month
periods ended December 31, 1998 and 1997 is $4,000 and $10,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
As of December 31, 1998, the Partnership had investments in two
unconsolidated joint venture partnerships (four at December 31, 1997) which own
operating properties as more fully described in the Partnership's Annual Report.
The unconsolidated joint ventures are accounted for by using the equity method
because the Partnership does not have a voting control interest in the ventures.
Under the equity method, the assets, liabilities, revenues and expenses of the
unconsolidated joint ventures do not appear in the Partnership's financial
statements. Instead, the investments are carried at cost adjusted for the
Partnership's share of each venture's earnings, losses and distributions. The
Partnership reports its share of unconsolidated joint venture earnings or losses
three months in arrears. As discussed further in Note 4, effective in fiscal
1998 the Partnership assumed control over the affairs of Warner/Red Hill
Associates. Accordingly, this venture, which had been accounted for under the
equity method in prior years, is presented on a consolidated basis beginning in
the fourth quarter of fiscal 1998.
On October 2, 1998, Lake Sammamish Limited Partnership and Crow
PaineWebber LaJolla Limited Partnership, two joint ventures in which the
Partnership had an interest, sold the properties known as the Chandler's Reach
Apartments and the Monterra Apartments to the same unrelated third parties.
Chandler's Reach, located in Redmond, Washington, was sold for $17.85 million,
and Monterra, located in LaJolla, California, was sold for $20.1 million. The
Partnership received net proceeds of approximately $12,359,000 from the sale of
Chandler's Reach after deducting closing costs of approximately $561,000,
closing proration adjustments of approximately $55,000, the repayment of the
existing mortgage note of approximately $3,415,000 and a prepayment penalty of
approximately $354,000 (of which $205,000 was paid by the buyer), and a payment
of approximately $1,311,000 to the Partnership's co-venture partner for its
share of the sale proceeds in accordance with the joint venture agreement. The
Partnership received net proceeds of approximately $14,796,000 from the sale of
Monterra after deducting closing costs of approximately $306,000, closing
proration adjustments of approximately $114,000, the repayment of the existing
mortgage note of approximately $4,672,000 and a prepayment penalty of
approximately $500,000 (of which $295,000 was paid by the buyer), and a payment
of approximately $7,000 to the Partnership's co-venture partner for its share of
the sale proceeds in accordance with the joint venture agreement. The
Partnership distributed $24,800,000 of the net proceeds from the sales of the
Chandler's Reach and Monterra properties in the form of a special distribution
to the Limited Partners of $248 per original $1,000 investment on November 13,
1998. The remainder of the net proceeds were retained and added to the
Partnership's cash reserves to ensure that the Partnership has sufficient
capital resources to fund its share of potential capital improvement expenses at
its remaining investment properties. Due to the Partnership's policy of
reporting significant lag-period transactions in the period in which they occur,
the Partnership accelerated the recognition of the operating results of Lake
Sammamish Limited Partnership and Crow PaineWebber LaJolla Limited Partnership
during the quarter ended December 31, 1998 and recorded gains of $9,208,000 and
$9,683,000, respectively, on the sales of the operating investment properties.
Summarized operations of the unconsolidated joint ventures, for the
periods indicated, are as follows:
Condensed Combined Summary Of Operations
For the three and nine months ended September 30, 1998 and 1997
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and
expense recoveries $ 2,914 $ 2,142 $ 8,527 $ 7,693
Interest and other income 75 52 178 144
------- ------- ------- -------
2,989 2,194 8,705 7,837
Expenses:
Property operating expenses 1,128 762 2,767 2,912
Real estate taxes 606 526 1,575 1,577
Mortgage interest expense 1,060 106 1,411 538
Interest expense payable
to partner - 200 400 600
Depreciation and
amortization 776 552 2,300 2,153
------- ------- ------- -------
3,570 2,146 8,453 7,780
------- ------- ------- -------
Operating income (loss) (581) 48 252 57
Gains on sale of operating
investment properties 21,756 - 21,756 -
------- ------- ------- -------
Net income $21,175 $ 48 $22,008 $ 57
======= ====== ======= =======
Net income:
Partnership's share
of combined income
(loss) $18,805 $ (5) $19,345 $ 45
Co-venturers' share
of combined income
(loss) 2,370 53 2,663 12
------- ------ ------- -------
$21,175 $ 48 $22,008 $ 57
======= ====== ======= =======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended December 31, 1998 and 1997
(in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
combined income (losses),
as shown above $18,805 $ (5) $19,345 $ 45
Amortization of excess basis (513) (12) (536) (35)
------- ----- ------- -------
Partnership's share of
unconsolidated ventures'
income (losses) $18,292 $ (17) $18,809 $ 10
======= ===== ======= =======
The Partnership's share of the unconsolidated ventures' net income (loss)
is presented as follows on the accompanying consolidated statements of
operations (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
unconsolidated ventures'
income (losses) $ (599) $ (17) $ (82) $ 10
Partnership's share of
gains on sale of
operating investment
properties 18,891 - 18,891 -
------- ----- ------- ------
$18,292 $ (17) $18,809 $ 10
======= ===== ======= ======
4. Operating Investment Properties
-------------------------------
At December 31, 1998, the Partnership's balance sheet includes two
operating investment properties (three at December 31, 1997): the wholly-owned
Crystal Tree Commerce Center and the Warner/Red Hill Business Center, owned by
Warner/Red Hill Associates, a majority-owned and controlled joint venture. On
November 20, 1998, Sunol Center Associates, a joint venture in which the
Partnership had an interest, sold the property known as the Sunol Center Office
Buildings, to an unrelated third party for $15.75 million. The Sunol Center
Office Buildings comprise 116,680 square feet of leasable space, located in
Pleasanton, California. The Partnership received net proceeds of approximately
$15,532,000 from the sale of Sunol Center after deducting closing costs of
approximately $161,000 and net closing proration adjustments of approximately
$57,000. As a result of the sale, the Partnership made a special distribution to
the Limited Partners of $15,520,000, or $155.20 per original $1,000 investment,
on December 4, 1998.
Effective August 1, 1997, the co-venture partner in Warner/Red Hill
Associates assigned its interest in the joint venture to First Equity Partners,
Inc., the Managing General Partner of the Partnership, in return for a release
from any further obligations under the terms of the joint venture agreement. As
a result, the Partnership assumed control of the operations of the Warner/Red
Hill joint venture. Accordingly, the venture is presented on a consolidated
basis in the Partnership's financial statements beginning in the fourth quarter
of fiscal 1998. Previously the venture was accounted for on the equity method
(see Note 3). The Crystal Tree Commerce Center consists of three one-story
retail plazas containing an aggregate of 74,923 square feet of leasable space
and one four-story office building containing 40,115 square feet of leasable
space, located in North Palm Beach, Florida. The Warner/Red Hill Business Center
consists of three two-story office buildings totalling 93,895 net rentable
square feet located in Tustin, California. The Partnership's policy is to report
the operations of the consolidated joint ventures on a three-month lag. However,
the Partnership's policy is also to record significant lag-period transactions
in the period in which they occur. Accordingly, the Partnership accelerated the
recognition of the operating results of Sunol Center Associates during the
quarter ended December 31, 1998 and recorded a gain of $7,401,000 on the sale of
the operating investment property.
The following is a combined summary of property operating expenses for the
Crystal Tree Commerce Center, the Sunol Center Office Buildings (through the
date of sale) and the Warner/Red Hill Business Center (fiscal 1999 only) as
reported in the Partnership's consolidated statements of operations for the
three and nine months ended December 31, 1998 and 1997 (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Property operating expenses:
Insurance $ 14 $ 36 $ 44 $ 66
Repairs and maintenance 245 248 506 438
Utilities 119 169 279 264
Management fees 81 56 129 106
Administrative and other 176 164 407 356
------ ----- ------ ------
$ 635 $ 673 $1,365 $1,230
====== ===== ====== ======
5. Bonds Payable
-------------
Bonds payable at December 31, 1997 consisted of the Sunol Center joint
venture's share of liabilities for bonds issued by the City of Pleasanton,
California for public improvements that benefited the Sunol Center operating
investment property. Bond assessments were levied on a semi-annual basis as
interest and principal became due on the bonds. The bonds for which the
operating investment property was subject to assessment bore interest at rates
ranging from 5% to 7.87%, with an average rate of 7.2%. Principal and interest
were payable in semi-annual installments and were due to mature in years 2004
through 2017. As a result of the sale of the operating investment property on
November 20, 1998 (see Note 4), the liability for the bond assessments was
transferred to the buyer.
6. Mortgage Notes Payable
----------------------
Mortgage notes payable at December 31, 1998 and March 31, 1998 consist of
the following (in thousands):
December 31 March 31
----------- --------
9.125% nonrecourse loan payable to
an insurance company, which is
secured by the 625 North Michigan
Avenue operating investment
property. The terms of the note
were modified effective May 31,
1994. Monthly payments, including
interest, of $55 are due beginning
July 1, 1994 through maturity on
May 31, 1999. In addition, the loan
requires monthly deposits to a
capital improvement escrow. The
fair value of the mortgage note
payable approximated its carrying
value at December 31, 1998 and
March 31, 1998. $ 6,114 $ 6,188
8.39% nonrecourse note payable to
an insurance company, which is
secured by the Crystal Tree
Commerce Center operating
investment property. Monthly
payments, including interest, of
$28 are due beginning November 15,
1994 through maturity on September
19, 2001. The fair value of the
mortgage note payable approximated
its carrying value at December 31,
1998 and March 31, 1998. 3,275 3,318
Nonrecourse note payable to an
insurance company which is secured
by the Warner/Red Hill operating
investment property. The note was
amended and restated during 1994
(see discussion below). The note
bears interest at 2.875% per annum,
requires monthly payments of $24
and has a scheduled maturity date
of August 1, 2003. 5,111 5,214
------- -------
$14,500 $14,720
======= =======
During the quarter ended December 31, 1993, the Partnership negotiated and
signed a letter of intent with the existing lender to modify and extend the
maturity of a zero coupon loan secured by the Warner/Red Hill Office Building
with an accreted principal balance of $5,763,000. The terms of the extension and
modification agreement, which was finalized in August 1994, provided for a
10-year extension of the note effective as of the original maturity date of
August 15, 1993. During the term of the agreement, the loan will bear interest
at 2.875% per annum and monthly principal and interest payments of $24,000 will
be required. In addition, the lender required a participation in the proceeds of
a future sale or debt refinancing in order to enter into this agreement.
Accordingly, upon the sale or refinancing of the Warner/Red Hill property, the
lender will receive 40% of the residual value of the property, as defined, above
a specified level after the repayment of the outstanding balance of the loan
payable. The extension and modification agreement also required the Partnership
to establish an escrow account in the name of the joint venture and to fund such
escrow with an equity contribution of $350,000. The escrowed funds are to be
used solely for the payment of capital and tenant improvements, leasing
commissions and real estate taxes related to the Warner/Red Hill property. The
balance of the escrow account is to be maintained at a minimum level of
$150,000. In the event that the escrow balance falls below $150,000, all net
cash flow from the property is to be deposited into the escrow until the minimum
balance is re-established. It is not practicable for management to estimate the
fair value of the mortgage note secured by the Warner/Red Hill property without
incurring excessive costs due to the unique terms of the note.
In addition to the long-term mortgage debt described above, the
Partnership had indemnified Crow/PaineWebber - LaJolla, Ltd. and Lake Sammamish
Limited Partnership, along with the related co-venture partners, against all
liabilities, claims and expenses associated with certain outstanding secured
borrowings of the unconsolidated joint ventures. During September 1994, the
Partnership obtained two new nonrecourse, current-pay mortgage loans in the
amounts of $3,600,000 secured by the Chandler's Reach Apartments and $4,920,000
secured by the Monterra Apartments. The Chandler's Reach and Monterra
nonrecourse loans, which were recorded on the books of the unconsolidated joint
ventures, both had terms of seven years and were scheduled to mature in
September of 2001. The Chandler's Reach loan bore interest at a rate of 8.33%
and required monthly principal and interest payments of $29,000. The Monterra
loan bore interest at a rate of 8.45% and required monthly principal and
interest payments of $40,000. As discussed further in Note 3, the outstanding
balances of these mortgage loans were repaid in full out of the proceeds from
the sales of the Chandler's Reach and Monterra properties which occurred on
October 2, 1998.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE 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 March 31, 1998 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
In light of the continued strength in the national real estate market with
respect to multi-family apartment properties and the recent improvements in the
office/R&D property markets, management believes that this may be an opportune
time to begin the process of selling the Partnership's operating investment
properties. As a result, management has been focusing on potential disposition
strategies for the remaining investments in the Partnership's portfolio.
Although there are no assurances, it is currently contemplated that sales of the
Partnership's remaining assets could be completed by the end of calendar year
1999. As discussed further below, marketing efforts for the sale of the
Chandler's Reach and Monterra apartment properties commenced during the quarter
ended June 30, 1998, and both properties were sold on October 2, 1998. In
addition, Sunol Center was sold on November 20, 1998. The operations of the four
remaining commercial office and retail properties in the Partnership's portfolio
are either stable or improving. As discussed further below, management has
tentative plans to market the 1881 Worcester Road property for sale as soon as
certain leasing and environmental issues are resolved. Given the zoning approval
recently received at the 625 North Michigan property, as discussed further
below, and the recent leasing improvements at the Crystal Tree and Warner/Red
Hill properties, the Partnership is also exploring potential sale opportunities
for these properties.
On October 2, 1998, Lake Sammamish Limited Partnership and Crow
PaineWebber LaJolla Limited Partnership, two joint ventures in which the
Partnership had an interest, sold the properties known as the Chandler's Reach
Apartments and the Monterra Apartments to the same unrelated third parties.
Chandler's Reach, located in Redmond, Washington, was sold for $17.85 million,
and Monterra, located in LaJolla, California, was sold for $20.1 million. The
Partnership received net proceeds of approximately $12,359,000 from the sale of
Chandler's Reach after deducting closing costs of approximately $561,000,
closing proration adjustments of approximately $55,000, the repayment of the
existing mortgage note of approximately $3,415,000 and a prepayment penalty of
approximately $354,000 (of which $205,000 was paid by the buyer), and a payment
of approximately $1,311,000 to the Partnership's co-venture partner for its
share of the sale proceeds in accordance with the joint venture agreement. The
Partnership received net proceeds of approximately $14,796,000 from the sale of
Monterra after deducting closing costs of approximately $306,000, closing
proration adjustments of approximately $114,000, the repayment of the existing
mortgage note of approximately $4,672,000 and a prepayment penalty of
approximately $500,000 (of which $295,000 was paid by the buyer), and a payment
of approximately $7,000 to the Partnership's co-venture partner for its share of
the sale proceeds in accordance with the joint venture agreement.
Despite incurring sizable prepayment penalties on the repayment of both
outstanding first mortgage loans, management believed that the current sale of
the Chandler's Reach and Monterra properties was in the best interests of the
Limited Partners due to the exceptionally strong market conditions that exist at
the present time and which resulted in the achievement of very favorable selling
prices. The Partnership distributed $24,800,000 of the net proceeds from the
sales of the Chandler's Reach and Monterra properties in the form of a special
distribution to the Limited Partners of $248 per original $1,000 investment on
November 13, 1998. The remainder of the net proceeds were retained and added to
the Partnership's cash reserves to ensure that the Partnership has sufficient
capital resources to fund its share of potential capital improvement expenses at
its remaining investment properties. Due to the Partnership's policy of
reporting significant lag-period transactions in the period in which they occur,
the Partnership accelerated the recognition of the operating results of Lake
Sammamish Limited Partnership and Crow PaineWebber LaJolla Limited Partnership
during the quarter ended December 31, 1998 and recorded gains of $9,208,000 and
$9,683,000, respectively, on the sales of the operating investment properties.
During the quarter ended June 30, 1998, the Partnership began exploring
potential opportunities to sell Sunol Center. As part of these efforts, the
Partnership initiated discussions with real estate firms with a strong
background in selling properties like Sunol Center. The Partnership subsequently
selected a national firm that is a leading seller of this type of property.
Preliminary sales materials were prepared and initial marketing efforts were
undertaken. A marketing package was then finalized and comprehensive sale
efforts began in June 1998. As a result of those efforts, several offers were
received. After completing an evaluation of these offers and the relative
strength of the prospective purchasers, the Partnership selected an offer. A
purchase and sale agreement was negotiated with an unrelated third-party
prospective buyer on September 21, 1998 and a non-refundable deposit of $750,000
was made on October 21, 1998. On November 20, 1998, Sunol Center Associates, a
joint venture in the Partnership had an interest, sold the property known as the
Sunol Center Office Buildings, located in Pleasanton, California, to this
unrelated third party for $15.75 million. The Partnership received net proceeds
of approximately $15,532,000 from the sale of Sunol Center after deducting
closing costs of approximately $161,000 and net closing proration adjustments of
approximately $57,000. As a result of the sale, the Partnership made a special
distribution to the Limited Partners of $15,520,000, or $155.20 per original
$1,000 investment, on December 4, 1998. Due to the Partnership's policy of
recording significant lag-period transactions in the period in which they occur,
the Partnership accelerated the recognition of the operating results of Sunol
Center Associates during the quarter ended December 31, 1998 and recorded a gain
of $7,401,000 on the sale of the operating investment property. With the sales
of the Chandler's Reach Apartments, Monterra Apartments and Sunol Center Office
Buildings during the quarter ended December 31, 1998, and the resulting
reduction in distributable cash flow to be received by the Partnership, the
payment of a regular quarterly distribution will be discontinued beginning with
the quarter ending March 31, 1999. A final regular quarterly distribution of
$5.00 per original $1,000 investment, which is equivalent to a 2% annualized
rate of return on an original $1,000 investment will be made on February 12,
1999 for the quarter ended December 31, 1998.
The 64,000 square foot 1881 Worcester Road Office Building was 100% leased
as of December 31, 1998, unchanged from the previous quarter. With the property
100% leased to two financially strong tenants and no lease expirations until
2002, management had been developing potential sale strategies for this asset.
However, during the first quarter of fiscal 1999 the tenant leasing the entire
second floor of the property informed the Partnership that it is consolidating
its operations and requested a lease termination. This tenant's lease does not
expire until February 28, 2003. Negotiations with this tenant concerning a lease
termination agreement continued during the third fiscal quarter. During fiscal
1998, the former operator of a gas station abutting the 1881 Worcester Road
property notified the Partnership of a leak in an underground storage tank on
the gas station property and of the risk of potential contamination of the
Partnership's property. Subsequent to this notification, the Partnership
received an indemnification from the former operator of the gas station against
any loss, cost or damage resulting from failure to remediate the contamination.
The extent of the contamination and any resulting impact on the future
operations and market value of the 1881 Worcester Road property cannot be
determined at the present time. Negotiations are continuing with the operator of
the gas station to discuss the proposed clean-up plan. Management believes that
the uncertainty regarding the lease termination request and the contamination
issue could depress the sale price for the property. As a result, the marketing
efforts for this property have been delayed. After the re-leasing of the second
floor and resolution of the ground water contamination issue, this property is
expected to be marketed for sale.
The Warner/Red Hill Business Center was 99% leased and occupied as of
December 31, 1998, compared to 97% leased and occupied at the end of the prior
quarter. During the third quarter of fiscal 1998, a tenant occupying 13,160
square feet declared bankruptcy and moved from the building in January 1998.
During the quarter ended June 30, 1998, the Partnership signed a lease with a
replacement tenant for the entire 13,160 square foot space. This tenant took
occupancy during the quarter ended September 30, 1998. In addition, the
bankruptcy case with the tenant that previously occupied the 13,160 square foot
space was resolved during the second quarter, with the Partnership receiving a
settlement of $100,701 before payment of attorney fees. During the third
quarter, one tenant signed a new lease for a total of 1,702 square feet. Over
the next 12 months, leases with four tenants will expire. Only one tenant, that
occupies 15,266 square feet, is not expected to renew its lease. With an
occupancy level of 99% and a stable base of tenants, the Partnership believes it
may be an opportune time to sell Warner/Red Hill Business Center. As part of a
plan to market the property for sale, discussions were initiated with real
estate firms with a specialty in selling properties like Warner/Red Hill
Business Center. The Partnership subsequently selected a national real estate
firm that is a leading seller of this property type to market Warner/Red Hill
for sale. As previously reported, the co-venture partner in Warner/Red Hill
Associates assigned its interest in the joint venture to First Equity Partners,
Inc., the Managing General Partner of the Partnership, in return for a release
from any further obligations under the terms of the joint venture agreement. As
a result, the Partnership assumed control of the operations of the Warner/Red
Hill joint venture. Accordingly, the venture is presented on a consolidated
basis in the Partnership's financial statements beginning in the fourth quarter
of fiscal 1998. Previously the venture had been accounted for on the equity
method.
The 625 North Michigan Office Building in Chicago, Illinois, was 96%
leased and 95% occupied at December 31, 1998. During the third quarter, a new
tenant signed a lease and took occupancy of 2,602 square feet of space. In
addition, one tenant occupying 2,115 square feet renewed its lease. During the
second quarter, a lease was signed with an existing tenant that occupies
approximately 8,000 square feet. This tenant will relocate and expand into a
total of 10,200 square feet. The space is still being renovated in preparation
for the tenant's occupancy which is now expected to occur by the end of March
1999. The downtown Chicago real estate market continues to display an improving
trend. A competitive office property within the local market has recently
obtained approvals to convert its lower floors into a hotel. This should result
in the removal of 290,000 square feet of office space from the market. In
addition, an office tenant at that property has recently completed a 62,000
square foot expansion, which brings the occupancy level in the building's office
portion to 100%. In this local market, where there is no current or planned new
construction of office space, this reduction in vacant office space has resulted
in a reduction in the market vacancy level and places more upward pressure on
rental rates. The higher effective rents currently being achieved at 625 North
Michigan are expected to increase cash flow and value as new tenants sign leases
and existing tenants sign lease renewals in calendar year 1999. Retail and hotel
development in the local market continues, as evidenced by plans for a
Nordstrom's-anchored 95,000 square foot retail development which recently
received preliminary approval from the City. This proposed development, which
will be located two blocks from 625 North Michigan, is part of a master plan
that includes several new hotels, entertainment and parking facilities
encompassing five city blocks. Management continues to analyze a potential
project for the property which includes an upgrade to the building lobby and the
addition of a major retail component to the building's North Michigan Avenue
frontage. Rental rates paid by high-end retailers on North Michigan Avenue are
substantially greater than those paid by office tenants. While the costs of such
a project would be substantial, it could have a significant positive effect on
the market value of the 625 North Michigan property. During the quarter ended
June 30, 1998, preliminary approval was received from the City to enclose the
arcade sections of the first floor of the 625 North Michigan building, which
opens the way for this potential retail development. Formal approval was
received at the September meeting of the City Council. Now that this approval
has been obtained, the Partnership is exploring potential sale opportunities for
this property.
The Crystal Tree Commerce Center in North Palm Beach, Florida remained
100% leased and occupied for the quarter ended December 31, 1998. During the
third quarter, five tenants occupying a total of 5,343 square feet renewed their
leases. Two tenants occupying 2,493 square feet moved from the Center and the
space was leased to two new tenants. Over the next twelve months, leases with
seven tenants occupying 7,294 square feet will expire. All seven tenants are
expected to renew their leases. Rental rates and occupancy levels in the local
market are continuing to increase gradually. However, rents are not expected to
rise to a level over the near term that would justify new construction.
Management is continuing to position Crystal Tree Commerce Center for a possible
sale by having the property's management and leasing team negotiate rental rates
for new leases on a triple-net basis. This requires each tenant to be 100%
responsible for its share of operating expenses. Currently, 61% of the leases at
the property are on a triple-net basis. Consequently, at this time the property
owner is responsible for the tenant's portion of operating expenses above a base
amount for a total of 39% of the leases. Because most new leases in the local
market are on a triple-net basis, this conversion is expected to increase
interest from prospective buyers of the property and result in a higher sale
price. With the occupancy level of 100% and a stable base of tenants, the
Partnership believes it may be an opportune time to sell Crystal Tree Commerce
Center. As part of a plan to market the property for sale, the Partnership
selected a Florida real estate firm that is a leading seller of this type of
property. Preliminary sales materials were prepared and initial marketing
efforts were undertaken. A marketing package was then finalized and
comprehensive sale efforts began in December 1998. As a result of these sale
efforts, twelve offers were received subsequent to the quarter-end. As part of
the sale efforts to reduce the prospective buyer's due diligence work and the
time required to complete it, updated operating reports as well as environmental
information on the property were provided to the top prospective buyers, who
were then asked to submit best and final offers and did so. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership will select an offer and currently expects to begin
negotiating a purchase and sale agreement by February 28, 1999. Since any sale
remains contingent upon, among other things, the negotiation of a definitive
sales agreement and satisfactory completion of the buyer's due diligence, there
are no assurances that a sale transaction will be completed.
At December 31, 1998, the Partnership and its consolidated joint venture
had available cash and cash equivalents of approximately $6,029,000. These
funds, along with the future cash flow distributions from the operating
properties, will be utilized for the working capital requirements of the
Partnership, monthly loan payments, the funding of capital enhancements and
potential leasing costs for its commercial property investments, and for
distributions to the partners. The source of future liquidity and distributions
to the partners is expected to be from the sales or refinancings of the
remaining operating investment properties. Such sources of liquidity are
expected to be sufficient to meet the Partnership's needs on both a short-term
and long-term basis.
As noted above, the Partnership expects to be liquidated prior to the end
of calendar 1999. Notwithstanding this, the Partnership believes that it has
made all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
Three Months Ended December 31, 1998
- ------------------------------------
The Partnership had net income of $25,636,000 for the three months ended
December 31, 1998 as compared to net income of $13,000 for the same period in
the prior year. The increase in net income was primarily a result of the gains
realized from the sale of three operating investment properties during the
current period. As discussed further above, the Partnership sold the
consolidated Sunol Center Office Buildings on November 20, 1998 and realized a
gain of $7,401,000. The Partnership also realized gains from the sales of the
unconsolidated Monterra Apartments and Chandler's Reach Apartments, which were
both sold on October 2, 1998, in the amounts of $9,208,000 and $9,683,000,
respectively.
In addition to the gains realized from the sales of the three operating
investment properties, the Partnership reported operating income of $130,000 for
the three months ended December 31, 1998 as compared to an operating loss of
$170,000 for the same period in the prior year. This $300,000 favorable change
in operating income (loss) is primarily a result of an increase in interest and
other income of $314,000. Interest and other income increased due to the
interest income earned on the sales proceeds from the three operating investment
properties discussed above. As noted above, a portion of the sale proceeds from
the Monterra and Chandler's Reach transactions was retained and added to the
Partnership's cash reserves. In addition, due to the Partnership's policy of
reporting all significant lag-period transactions in the period in which they
occur, the current three-month period ended December 31, 1998 includes the
operating results of Sunol Center for the four and two-third months from July 1,
1998 through November 20, 1998, the date of sale, as compared to three months of
operations for the same period in the prior year. Sunol's operating results
improved by approximately $92,000 mainly due to an increase in rental income.
The Partnership's share of losses from unconsolidated ventures increased
by $582,000 during the three months ended December 31, 1998 when compared to the
same period in the prior year. This increase in the Partnership's share of
losses from the unconsolidated ventures was primarily the result of the
prepayment penalties incurred in order to sell the Monterra and Chandler's Reach
properties. In order to prepay the outstanding debt on these two properties, the
joint ventures incurred prepayment penalties of $500,000 and $354,000,
respectively. The impact of the prepayment penalties was partially offset by an
increase in operating income from the Monterra and Chandler's Reach properties,
mainly due to the acceleration of the lag-period discussed further above.
Nine Months Ended December 31, 1998
- -----------------------------------
The Partnership had net income of $26,148,000 for the nine months ended
December 31, 1998 as compared to a net loss of $74,000 for the same period in
the prior year. The favorable change in net income (loss) was primarily a result
of the gains realized from the sale of three operating investment properties
during the current period. As discussed further above, the Partnership sold the
consolidated Sunol Center Office Buildings on November 20, 1998 and realized a
gain of $7,401,000. The Partnership also realized gains from the sales of the
unconsolidated Monterra Apartments and Chandler's Reach Apartments, which were
both sold on October 2, 1998, in the amounts of $9,208,000 and $9,683,000,
respectively.
In addition to the gains realized from the sales of the three operating
investment properties, the Partnership reported an operating loss of $275,000
for the nine months ended December 31, 1998 as compared to an operating loss of
$684,000 for the same period in the prior year. This $409,000 reduction in
operating loss is primarily a result of an increase in interest and other income
of $394,000. Interest and other income increased due to the interest income
earned on the sales proceeds from the three operating investment properties
discussed above. As noted above, a portion of the sale proceeds from the
Monterra and Chandler's Reach transactions was retained and added to the
Partnership's cash reserves. In addition, due to the Partnership's policy of
reporting all significant lag-period transactions in the period in which they
occur, the current nine-month period ended December 31, 1998 includes the
operating results of Sunol Center for the ten and two-third months from January
1, 1998 through November 20, 1998, the date of sale, as compared to nine months
of operations for the same period in the prior year. Sunol's operating results
improved by approximately $95,000 mainly due to an increase in rental income.
The Partnership's share of losses from unconsolidated ventures was $82,000
during the nine months ended December 31, 1998, as compared to income of $10,000
for the same period in the prior year. This unfavorable change in the
Partnership's share of unconsolidated ventures' income (losses) was primarily
the result of the prepayment penalties incurred in order to sell the Monterra
and Chandler's Reach properties. In order to prepay the outstanding debt on
these two properties, the joint ventures incurred prepayment penalties of
$500,000 and $354,000, respectively. The impact of the prepayment penalties was
partially offset by an increase in operating income from the Monterra and
Chandler's Reach properties, mainly due to the acceleration of the lag-period
discussed further above.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated October 2, 1998 was filed during the
current quarter to report the sales of the Chandler's Reach and Monterra
Apartment properties and is hereby incorporated herein by reference. An
additional Current Report on Form 8-K dated November 20, 1998 was filed during
the current quarter to report the sale of the Sunol Center Office Buildings and
is hereby incorporated herein by reference.
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
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.
PAINEWEBBER EQUITY PARTNERS ONE
LIMITED PARTNERSHIP
By: First Equity Partners, Inc.
---------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: February 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Dec-31-1998
<CASH> 6,029
<SECURITIES> 0
<RECEIVABLES> 115
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,523
<PP&E> 37,740
<DEPRECIATION> 10,181
<TOTAL-ASSETS> 35,021
<CURRENT-LIABILITIES> 621
<BONDS> 14,500
0
0
<COMMON> 0
<OTHER-SE> 19,900
<TOTAL-LIABILITY-AND-EQUITY> 35,021
<SALES> 0
<TOTAL-REVENUES> 30,785
<CGS> 0
<TOTAL-COSTS> 3,504
<OTHER-EXPENSES> 269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 864
<INCOME-PRETAX> 26,148
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,148
<EPS-PRIMARY> 12.94
<EPS-DILUTED> 12.94
</TABLE>
