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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-14857
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 04-2866287
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
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, 1999 and March 31, 1999 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Operating investment properties:
Land $ - $ 3,700
Building and improvements - 18,767
------- ---------
- 22,467
Less accumulated depreciation - (10,215)
------- ---------
- 12,252
Investments in unconsolidated joint ventures,
at equity 12,060 15,129
Cash and cash equivalents 5,281 5,753
Accounts receivable - 29
Accounts receivable - affiliates 4 36
Deferred rent receivable - 138
Deferred expenses, net - 292
Other assets - 478
------- ---------
$17,345 $ 34,107
======= =========
LIABILITIES AND PARTNERS' CAPITAL
Net advances from consolidated ventures $ - $ 48
Accounts payable and accrued expenses 244 368
Mortgage notes payable (net of discount at March 31) 6,007 13,527
Mortgage participation liability - 1,830
Partners' capital 11,094 18,334
------- ---------
$17,345 $ 34,107
======= =========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1999 and 1998 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ - $ 1,441 $ 1,187 $ 3,553
Interest and other income 147 426 371 540
------ ------- ------- -------
147 1,867 1,558 4,093
Expenses:
Interest expense 137 298 1,231 864
Depreciation and amortization - 600 238 1,567
Property operating expenses - 635 898 1,365
Real estate taxes - 67 131 227
General and administrative 106 137 389 345
Bad debt expense - - 25 -
------ ------- ------- -------
243 1,737 2,912 4,368
------ ------- ------- -------
Operating income (loss) (96) 130 (1,354) (275)
Gain on sales of operating
investment properties - 7,401 8,051 7,401
Consolidated venture partners'
share of operations - (187) (534) (187)
Investment income:
Interest income on notes
receivable from
unconsolidated ventures - - - 400
Partnership's share of gains
on sales of unconsolidated
operating investment
properties 3,940 18,891 3,940 18,891
Partnership's share of
unconsolidated ventures'
income (losses) 330 (599) 557 (82)
------ ------- ------- -------
Net income $4,174 $25,636 $10,660 $26,148
====== ======= ======= =======
Net income per Limited
Partnership Unit $ 2.06 $ 12.69 $ 5.27 $ 12.94
====== ======= ======= =======
Cash distributions per
Limited Partnership Unit $ 5.60 $ 20.41 $ 8.95 $ 20.91
====== ======= ======== =======
The above net income 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, 1999 and 1998 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
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
========= ========
Balance at March 31, 1999 $ (729) $ 19,063
Net income 112 10,548
Cash distributions - (17,900)
-------- --------
Balance at December 31, 1999 $ (617) $ 11,711
======== ========
See accompanying notes
<PAGE>
PAINEWEBBER EQUITY PARTNERS ONE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1999 and 1998 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 10,660 $ 26,148
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Gain on sales of operating investment properties (8,051) (7,401)
Consolidated venture partners' share of operations 534 187
Partnership's share of gains on sales of
unconsolidated investment properties (3,940) (18,891)
Partnership's share of unconsolidated
ventures' income (losses) (557) 82
Depreciation and amortization 238 1,567
Amortization of discount on mortgage note payable 887 -
Amortization of deferred financing costs 3 15
Changes in assets and liabilities:
Accounts receivable 29 (11)
Accounts receivable - affiliates 32 273
Prepaid expenses - 13
Deferred rent receivable (16) 19
Deferred expenses (26) (236)
Accounts payable and accrued expenses (124) 138
Net advances from consolidated ventures (48) (153)
--------- ---------
Total adjustments (11,039) (24,398)
--------- ---------
Net cash (used in) provided by operating activities (379) 1,750
--------- ---------
Cash flows from investing activities:
Net proceeds from sales of operating investment
properties 20,886 15,589
Distributions from unconsolidated joint ventures 7,816 28,683
Additions to operating investment properties (102) (250)
Net withdrawals from restricted cash - (108)
Additional investments in unconsolidated joint ventures (250) (602)
--------- ---------
Net cash provided by investing activities 28,350 43,312
--------- ---------
Cash flows from financing activities:
Repayment of principal on mortgage notes and
bonds payable (8,418) (316)
Payment of mortgage participation liability (2,125) -
Distributions to partners (17,900) (41,835)
--------- ---------
Net cash used in financing activities (28,443) (42,151)
--------- ---------
Net (decrease) increase in cash and cash equivalents (472) 2,911
Cash and cash equivalents, beginning of period 5,753 3,118
--------- ---------
Cash and cash equivalents, end of period $ 5,281 $ 6,029
========= =========
Cash paid during the period for interest $ 567 $ 719
========= =========
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, 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 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, 1999 and March 31, 1999 and revenues and
expenses for each of the three- and nine-month periods ended December 31, 1999
and 1998. Actual results could differ from the estimates and assumptions used.
The Partnership initially invested approximately $97,472,000 (excluding
acquisition fees of $2,830,000) in seven operating properties through joint
venture investments. In fiscal 1990, the Partnership received approximately
$7,479,000 from the proceeds of a sale of a part of one of the operating
properties. The Partnership used the proceeds from this sale to repay a zero
coupon loan and replenish its cash reserves. During fiscal 1999, the Partnership
sold its interests in an office/R&D complex and two multi-family apartment
complexes. As of March 31, 1999, the Partnership retained an ownership interest
in four operating investment properties, which consisted of one commercial
office property, two office/R&D complexes and one mixed-use retail/office
property. During the quarter ended June 30, 1999, the Partnership sold its
interest in the mixed-use retail/office property. During the quarter ended
September 30, 1999, the Partnership sold its interest in one of the office/R&D
complexes. In addition, during the quarter ended December 31, 1999, the
Partnership closed on the sale of the other office/R&D complex. After these sale
transactions, the Partnership retains a joint venture interest in one operating
property, the 625 North Michigan Office Building. The Partnership is currently
focusing on potential disposition strategies for the remaining investment in its
portfolio. Initial sale efforts began during the quarter ended December 31,
1999. As discussed further in Note 3, the property is currently under contract
for sale to an affiliate of the Partnership's co-venture partner. A sale
transaction is expected to close in late March or early April 2000. While no
assurances can be given, management currently expects the liquidation of the
Partnership to be completed during the second quarter of calendar year 2000.
2. Related Party Transactions
--------------------------
Accounts receivable - affiliates at December 31, 1999 and March 31, 1999
includes $4,000 and $10,000, respectively, of expenses paid by the Partnership
on behalf of the joint ventures during fiscal 1993. Accounts receivable -
affiliates at March 31, 1999 also included $26,000 of investor servicing fees
due from a joint venture for reimbursement of certain expenses incurred in
reporting Partnership operations to the Limited Partners of the Partnership.
Included in general and administrative expenses for the nine-month periods
ended December 31, 1999 and 1998 is $143,000 and $138,000, 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, 1999 and 1998 is $12,000 and $4,000, 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, 1999, the Partnership had an investment in one
unconsolidated joint venture partnership (four at March 31, 1998) which owns an
operating property 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.
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 property.
On November 2, 1999, Framingham - 1881 Associates, a joint venture in
which the Partnership had an interest, sold the property known as the 1881
Worcester Road Office Building, located in Framingham, Massachusetts, to an
unrelated third party for $7,850,000. The Partnership received net proceeds of
approximately $6,540,000 after deducting a tenant improvement credit of
$295,000, closing costs of approximately $310,000, net closing proration
adjustments of approximately $133,000, and a payment to the Partnership's
co-venture partner of approximately $572,000 as its share of the sale proceeds
in accordance with the joint venture agreement. The Partnership made a special
distribution to the Limited Partners of $73 per original $1,000 investment, or
$7,300,000, on November 15, 1999. Of the $73 total, $65.37 resulted from the
sale of 1881 Worcester Road and $7.63 was from Partnership reserves which
exceeded expected future requirements. The Partnership's policy is to recognize
its share of ventures' operations three months in arrears. However, the
Partnership's policy is also to record significant lag-period transaction in the
period in which they occur. Accordingly, the Partnership accelerated the
recognition of the operating results of Framingham - 1881 Associates during the
quarter ended December 31, 1999 and recorded a gain of $3,940,000 on the sale of
the operating investment property.
As of December 31, 1999, the Partnership retains a joint venture interest
in one operating property, the 625 North Michigan Office Building. As discussed
in Note 1, the Partnership is currently focusing on potential disposition
strategies for the remaining investment in its portfolio. During the quarter
ended September 30, 1999, the Partnership selected a real estate brokerage firm
to market the 625 North Michigan Avenue property for sale. Materials for the
marketing packages for the 625 North Michigan property were finalized and
initial sale efforts began during the quarter ended December 31, 1999. 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 asked to submit best and
final offers. All of the best and final offers received were substantially in
excess of the property's 1998 year-end estimated value. The highest bidder was
an affiliate of the Partnership's co-venture partner in the 625 North Michigan
joint venture. After completing an evaluation of the offers and the relative
strength of the prospective purchasers, the Partnership chose to negotiate a
purchase and sale agreement with the affiliate of the co-venturer, which was
signed on January 13, 2000. The prospective buyer has made a deposit of $400,000
in connection with the transaction and completed its due diligence as of
February 3, 2000. The prospective buyer has until February 14, 2000 to secure
its financing for the transaction, at which time an additional deposit of
$600,000 is required and the entire deposit becomes non-refundable. While no
assurances can be given, the transaction is expected to close in late March or
early April 2000. The sale of the Partnership's interest in the 625 North
Michigan joint venture would be followed by an orderly liquidation of the
Partnership.
<PAGE>
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, 1999 and 1998
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 2,378 $ 2,914 $ 6,421 $ 8,527
Interest and other income 2 75 1 178
------- ------- ------- -------
2,380 2,989 6,437 8,705
Expenses:
Property operating expenses 714 1,128 2,136 2,767
Real estate taxes 502 606 1,423 1,575
Mortgage interest expense - 1,060 - 1,411
Interest expense payable to
partner - - - 400
Depreciation and amortization 696 776 2,098 2,300
------- ------- ------- -------
1,912 3,570 5,657 8,453
------- ------- ------- -------
Operating income (loss) 468 (581) 780 252
Gains on sales of operating
investment properties 4,479 21,756 4,479 21,756
------- ------- ------- -------
Net income $ 4,947 $21,175 $ 5,259 $22,008
======= ======= ======= =======
Net income:
Partnership's share of
combined income $ 4,274 $18,805 $ 4,510 $19,345
Co-venturers' share of
combined income 673 2,370 749 2,663
------- ------- ------- -------
$ 4,947 $21,175 $ 5,259 $22,008
======= ======= ======= =======
Reconciliation of Partnership's Share of Operations
For the three and nine and nine months ended December 31, 1999 and 1998
(in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Partnership's share of
combined income, as
shown above $ 4,274 $18,805 $ 4,510 $19,345
Amortization of excess basis (4) (513) (13) (536)
------- ------- ------- -------
Partnership's share of
unconsolidated
ventures' net income $ 4,270 $18,292 $ 4,497 $18,809
======= ======= ======= =======
The Partnership's share of the unconsolidated ventures' net income is
presented as follows on the accompanying consolidated statements of operations
(in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Partnership's share of
unconsolidated ventures'
income (losses) $ 330 $ (599) $ 557 $ (82)
Partnership's share of
gains on sale of
operating investment
properties 3,940 18,891 3,940 18,891
------- ------- ------- -------
$ 4,270 $18,292 $ 4,497 $18,809
======= ======= ======= =======
<PAGE>
4. Operating Investment Properties
-------------------------------
As of March 31, 1998, the Partnership owned one operating investment
property directly and had interests in two consolidated joint ventures that
owned operating investment properties. On September 24, 1999, Warner/Red Hill
Associates, a joint venture in which the Partnership had an interest, sold the
property known as the Warner/Red Hill Business Center located in Tustin,
California, to an unrelated third party for $10.9 million. 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 received
net proceeds of approximately $3,452,000 after deducting a purchase price credit
to the buyer of $75,000, closing costs of approximately $194,000, net closing
proration adjustments of approximately $75,000, the repayment of the existing
mortgage note of approximately $4,969,000, accrued interest of approximately
$10,000 and a payment to the lender of approximately $2,125,000 as its share of
the sale proceeds. As discussed further in Note 5, the lender received a 40%
participation in the residual value of this property as part of a loan workout
dated August 15, 1993. On October 15, 1999, the Partnership made a special
distribution to the Limited Partners of $39.00 per original $1,000 investment,
or $3,900,000, to unitholders of record on the September 24, 1999 sale date. Of
the $39.00 total, $34.52 resulted from the sale of Warner/Red Hill and $4.48 was
from Partnership reserves which exceeded expected future requirements. The
Partnership recorded a gain of $7,488,000 on the sale of the operating
investment property.
On May 14, 1999, the Partnership sold the wholly-owned property known as
the Crystal Tree Commerce Center, located in North Palm Beach, Florida, to an
unrelated third party for $10.55 million. The Partnership received net proceeds
of approximately $6,690,000 from the sale of Crystal Tree after deducting
closing costs of approximately $295,000, net closing proration adjustments of
approximately $287,000 and the repayment of the outstanding first mortgage loan
and accrued interest of $3,278,000. As a result of the sale, the Partnership
made a special distribution of $6,700,000, or $67 per original $1,000
investment, on June 15, 1999. The Partnership recognized a gain of $563,000 on
the sale of the operating investment property.
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.
5. Mortgage Notes Payable
----------------------
Mortgage notes payable at December 31, 1999 and March 31, 1999 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 in
May 2000. 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, 1999 and
March 31, 1999. $ 6,007 $ 6,088
8.39% nonrecourse note payable to
an insurance company, which was
secured by the Crystal Tree
Commerce Center. Monthly payments,
including interest, of $28 were due
beginning November 15, 1994 through
maturity on September 19, 2001. The
fair value of the mortgage note
payable approximated its carrying
value at March 31, 1999. This loan
was repaid in full from the
proceeds of the sale of the Crystal
Tree property on May 14, 1999 (see
Note 4). - 3,261
Nonrecourse note payable to an
insurance company which was secured
by the Warner/Red Hill operating
investment property. The note was
amended and restated during 1994
(see discussion below). The note
bore interest at 2.875% per annum,
required monthly payments of $24
and had a scheduled maturity date
of August 1, 2003. This loan was
repaid in full from the proceeds of
the sale of the Warner/Red Hill
property on September 24, 1999 (see
Note 4). - 5,076
------- -------
6,007 14,425
Less: Discount on Warner/Red Hill
debt, net of amortization of $932
at December 31, 1998. See
discussion below. - (898)
------- -------
$ 6,007 $13,527
======= =======
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 bore interest at
2.875% per annum and monthly principal and interest payments of $24,000 were
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 would 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 participation paid to the lender upon the sale of the property
on September 24, 1999 was approximately $2,125,000. 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 were 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.
Effective in fiscal 1999, the Partnership adopted Statement of Position
97-1, Accounting by Participating Mortgage Loan Borrowers ("SOP 97-1"), which
establishes the borrower's accounting for a participating mortgage loan if the
lender participates in increases in the market value of the mortgaged real
estate project, the results of operations of that mortgaged real estate project,
or both. SOP 97-1 states that if a lender is entitled to participate in the
market value of the mortgaged real estate project, the borrower should determine
the fair value of the participation feature at the inception of the loan and
recognize a participation liability in that amount, with a corresponding entry
to a debt discount account. The debt discount is to be amortized over the life
of the loan using the interest method and the effective interest rate. At the
end of each reporting period, the participation liability should be adjusted to
equal the current fair value of the participation feature. The Partnership's
mortgage participation liability related to the Warner/Red Hill debt was
estimated at $1,830,000 at March 31, 1999. Due to the expected sale of the
Warner/Red Hill property during fiscal 2000, the Partnership elected to amortize
the debt discount over the expected remaining holding period of two years as
opposed to over the remaining term of the mortgage note. The mortgage
participation liability was adjusted to reflect the actual obligation paid to
the mortgage lender in connection with the sale of the property, as discussed
further above, as of the September 24, 1999 sale date. Amortization of the debt
discount totalled $887,000 in fiscal 2000 through the date of the sale. The
remaining unamortized discount of $307,000 as of the date of the sale was
written off against the gain on the sale transaction.
<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, 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
- -------------------------------
Subsequent to the sales of the Crystal Tree, Warner/Red Hill and 1881
Worcester Road properties on May 14, 1999, September 24, 1999 and November 2,
1999, respectively, as discussed further below, the Partnership's only remaining
real estate investment is a joint venture interest in the 625 North Michigan
Office Building. As previously reported, management is currently focusing on
potential disposition strategies for the remaining investment in the
Partnership's portfolio. With regard to the remaining commercial office
property, the Partnership is working with the property's leasing and management
team to develop and implement programs that will protect and enhance value and
maximize cash flow at the property while at the same time exploring potential
sale opportunities. During the prior quarter, the Partnership selected a real
estate brokerage firm to market the 625 North Michigan Avenue property for sale.
Materials for the marketing packages were finalized and initial sale efforts
began during the quarter ended December 31, 1999. As discussed further below,
the property is currently under contract for sale to an affiliate of the
Partnership's co-venture partner. A sale transaction is expected to close in
late March or early April 2000. While no assurances can be given, management
currently expects the liquidation of the Partnership to be completed during the
second quarter of calendar year 2000.
On November 2, 1999, Framingham - 1881 Associates, a joint venture in
which the Partnership had an interest, sold the property known as the 1881
Worcester Road Office Building, located in Framingham, Massachusetts, to an
unrelated third party for $7,850,000. The Partnership received net proceeds of
approximately $6,540,000 after deducting a tenant improvement credit of
$295,000, closing costs of approximately $310,000, net closing proration
adjustments of approximately $133,000, and a payment to the Partnership's
co-venture partner of approximately $572,000 as its share of the sale proceeds
in accordance with the joint venture agreement. The Partnership made a special
distribution to the Limited Partners of $73 per original $1,000 investment, or
$7,300,000, on November 15, 1999. Of the $73 total, $65.37 resulted from the
sale of 1881 Worcester Road and $7.63 was from Partnership reserves which
exceeded expected future requirements. The Partnership's policy is to recognize
its share of ventures' operations three months in arrears. However, the
Partnership's policy is also to record significant lag-period transaction in the
period in which they occur. Accordingly, the Partnership accelerated the
recognition of the operating results of Framingham - 1881 Associates during the
quarter ended December 31, 1999 and recorded a gain of $3,940,000 on the sale of
the operating investment property.
As previously reported, while the two-story 1881 Worcester Road property
was leased to two financially strong tenants with no lease expirations until
December 31, 2002, the tenant leasing the entire second floor of the property
informed the Partnership that it would be consolidating its operations at
another location and had requested a lease termination. This tenant's lease did
not expire until February 28, 2003. Negotiations with this tenant concerning a
lease termination agreement were completed during the fourth quarter of fiscal
1999. Because of the agreement on a lease termination, the property's leasing
team was then able to negotiate and secure a new lease for all of the space
being vacated by the former tenant. The new lease was at a higher rental rate
than the rate payable under the former tenant's lease. Once this new lease was
signed, the Partnership and its co-venture partner decided to sell 1881
Worcester Road. A firm was selected to market the property for sale, and a sales
package was finalized during the first quarter of fiscal 2000. Comprehensive
sale efforts were underway by early May 1999. As a result of such efforts, nine
offers were received. Subsequent to the end of the first quarter, the
Partnership evaluated the offers, selected a prospective buyer and negotiated a
purchase and sale agreement which was signed on July 30, 1999. The buyer
completed its due diligence on August 31, 1999 and made non-refundable deposits
totalling $450,000 prior to the closing of the transaction, which occurred as
described above on November 2, 1999.
As previously reported, the owner of a gas station abutting the 1881
Worcester Road property notified the Partnership and its co-venture partner of a
leak in an underground storage tank on the gas station property. They also
notified the Partnership that contamination had migrated to the 1881 property
because ground water flows in the direction of the 1881 Worcester Road building.
At the time of the discovery of the gasoline leak, the Partnership received an
indemnification from the operator of the gas station against any loss, cost or
damage resulting from failure to remediate the contamination. As part of the
November 2, 1999 sale, the buyer of the 1881 Worcester Road property received
these same protections through an assignment of the indemnification agreement.
On September 24, 1999, Warner/Red Hill Associates, a joint venture in
which the Partnership had an interest, sold the property known as the Warner/Red
Hill Business Center located in Tustin, California, to an unrelated third party
for $10.9 million. The Partnership received net proceeds of approximately
$3,452,000 after deducting a purchase price credit to the buyer of $75,000,
closing costs of approximately $194,000, net closing proration adjustments of
approximately $75,000, the repayment of the existing mortgage note of
approximately $4,969,000, accrued interest of approximately $10,000 and a
payment to the lender of approximately $2,125,000 as its share of the sale
proceeds. As previously reported, the lender received a 40% participation in the
residual value of this property as part of a loan workout dated August 15, 1993,
as described below. On October 15, 1999, the Partnership made a special
distribution to the Limited Partners of $39.00 per original $1,000 investment,
or $3,900,000, to unitholders of record on the September 24, 1999 sale date. Of
the $39.00 total, $34.52 resulted from the sale of Warner/Red Hill and $4.48 was
from Partnership reserves which exceeded expected future requirements.
As previously reported, because of the strong rental market in Orange
County, California, the Partnership believed it was the opportune time to sell
the Warner/Red Hill Business Center. As part of a plan to market the property
for sale, the Partnership selected a national real estate firm that is a leading
seller of this property type. Preliminary sales materials were prepared and
initial marketing efforts were undertaken in March 1999. A marketing package was
then finalized and comprehensive sale efforts began in early April 1999. Seven
offers were received, all of which were in excess of the property's 1998
year-end estimated value. 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 asked to submit best and final offers. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership selected an offer. The Partnership then negotiated a
purchase and sale agreement which was signed on June 24, 1999. The prospective
buyer completed its due diligence review work on July 23, 1999 and made a
non-refundable deposit of $150,000. The Partnership recorded a gain of
$7,488,000 on the sale transaction, which closed on September 24, 1999 as
described above.
While the Partnership's net sale proceeds of approximately $3,452,000 were
significantly below its original net investment in the Warner/Red Hill property
of $12,250,000, they were higher than any amount that would have been available
to distribute in August 1993 when the original zero coupon mortgage loan secured
by the property matured. The partial return of capital can be attributed to the
Partnership's efforts in negotiating a loan extension and modification agreement
with the first mortgage lender in August 1994. Without this modification, which
included a reduction in the annual interest rate from 9.36% to 2.875% and a
ten-year extension of the original August 15, 1993 maturity date of the mortgage
loan, it was highly likely that the property could have been lost to a
foreclosure action by the lender. Due to the deteriorating economic conditions
of the early 1990's, the value of the property in August 1993 and August 1994
was not sufficient to refinance the loan. Limited sources for the financing of
commercial office buildings in general, as well as the stringent loan-to-value
requirements for such loans, prohibited refinancing the Warner/Red Hill property
by conventional means. As an inducement for the lender to agree to such a
modification, the Partnership negotiated a participation interest contingency
that would allow the lender to share in a future sale or refinancing of the
property. This agreement allowed the new monthly principal and interest payments
to the lender on the $5,763,000 loan balance to be covered from operating cash
flow of the property from August 1993 through the September 1999 sale date. The
loan extension also allowed the Partnership to retain its ownership position in
the property while providing time for revenues and value to rise so that a sale
which would provide proceeds to the Partnership could eventually be completed.
As previously reported, management had been positioning the Crystal Tree
Commerce Center, located in North Palm Beach, Florida, for a possible sale by
having the property's management and leasing team negotiate rental rates for new
leases on a triple-net basis, whereby each tenant is 100% responsible for its
share of operating expenses. With an occupancy level of 100% and a stable base
of tenants, the Partnership believed this was an opportune time to sell the
property. As part of its 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. 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 selected an
offer and negotiated a purchase and sale agreement which was signed on March 4,
1999. On May 14, 1999, Crystal Tree was sold for $10.55 million. The Partnership
received net proceeds of approximately $6,690,000 from the sale of Crystal Tree
after deducting closing costs of approximately $295,000, net closing proration
adjustments of approximately $287,000 and the repayment of the outstanding first
mortgage loan and accrued interest of $3,278,000. As a result of the sale, the
Partnership made a special distribution to the Limited Partners of $6,700,000,
or $67 per original $1,000 investment, on June 15, 1999. The Partnership
recognized a gain of $563,000 on the sale of the operating investment property.
The 625 North Michigan Office Building in Chicago, Illinois was 95% leased
as of December 31, 1999, compared to 91% leased as of September 30, 1999. During
the third quarter of fiscal 2000, one tenant leasing a total of 10,858 square
feet signed a new short-term lease and took occupancy. In addition, an existing
tenant expanded its leased space by 6,395 square feet. This new leasing was
partially offset when three tenants occupying a total of 4,354 square feet moved
from the building. Over the next year, 3 leases representing a total of
approximately 10,000 square feet will expire. Two of these leases representing
3,000 square feet will not be renewed because that space is included in the
retail redevelopment plan, and the third tenant currently expects to move from
the building when its lease for 7,000 square feet expires on August 31, 2000.
The property's leasing team continues to negotiate with several prospective
tenants which have expressed an interest in leasing space at 625 North Michigan
Avenue. As previously reported, the Partnership has been actively working with
the co-venture partner on potential redevelopment and leasing opportunities with
specialty and fashion retailers looking to locate stores near the building.
These retailers pay significantly higher rental rates than office rental rates.
Formal approval received from the City Council during fiscal 1999 to enclose the
arcade sections of the first floor will greatly improve the chances of adding a
major retail component to the building's North Michigan Avenue frontage. Once
this approval was obtained, the Partnership began exploring potential
opportunities to sell this property with the development rights.
As previously reported, during the quarter ended September 30, 1999 the
Partnership selected a real estate brokerage firm to market the 625 North
Michigan Avenue property for sale. Materials for the marketing packages for the
625 North Michigan property were finalized and initial sale efforts began during
the quarter ended December 31, 1999. 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 asked to submit best and final offers. All of the
best and final offers received were substantially in excess of the property's
1998 year-end estimated value. The highest bidder was an affiliate of the
Partnership's co-venture partner in the 625 North Michigan joint venture. After
completing an evaluation of the offers and the relative strength of the
prospective purchasers, the Partnership chose to negotiate a purchase and sale
agreement with the affiliate of the co-venturer, which was signed on January 13,
2000. The prospective buyer has made a deposit of $400,000 in connection with
the transaction and completed its due diligence as of February 3, 2000. The
prospective buyer has until February 14, 2000 to secure its financing for the
transaction, at which time an additional deposit of $600,000 is required and the
entire deposit becomes non-refundable. While no assurances can be given, the
transaction is expected to close in late March or early April 2000. The sale of
the Partnership's interest in the 625 North Michigan joint venture would be
followed by an orderly liquidation of the Partnership.
At December 31, 1999, the Partnership had available cash and cash
equivalents of approximately $5,281,000. Such cash and cash equivalents, along
with the future cash flow distributions from the remaining operating property,
will be utilized for the working capital requirements of the Partnership,
monthly loan payments and the funding of capital enhancements and potential
leasing costs for its one remaining commercial property investment. The source
of future liquidity and distributions to the partners is expected to be from the
sale or refinancing of the remaining operating investment 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 December 31, 1999
- ------------------------------------
The Partnership had net income of $4,174,000 for the three months ended
December 31, 1999, as compared to net income of $25,636,000 for the same period
in the prior year. This $21,462,000 decrease in the Partnership's net income was
mainly a result of the gains realized in the prior year from the sale of three
operating investment properties. As discussed further in the Annual Report, 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. The gains realized on the sales in the
prior year were partially offset the gain of $3,940,000 realized in the current
year on the sale of the 1881 Worcester Road Office Building.
In addition, the Partnership reported an operating loss of $96,000 for the
three months ended December 31, 1999 as compared to operating income of $130,000
for the same period in the prior year. This $226,000 unfavorable change in
operating income (loss) was primarily a result of a decrease in interest and
other income of $279,000 which was partially offset by a $31,000 reduction in
general and administrative expenses. Interest income declined mainly due to a
decrease in the average outstanding cash balances as a result of the receipt and
temporary investment of the sales proceeds from the three operating investment
properties sold in the prior period pending the special distributions to the
Limited Partners. General and administrative expenses declined primarily due to
a reduction in certain required professional services for the current
three-month period.
The decrease in gains realized on the sales of operating investment
properties and the unfavorable change in the Partnership's operating income
(loss) was partially offset by a favorable change of $929,000 in the
Partnership's share of unconsolidated ventures' income (losses). The
Partnership's share of unconsolidated ventures' income (losses) changed
primarily as a result of the prior year sales of the Monterra and Chandler's
Reach Apartments. Both the Monterra and Chandler's Reach joint ventures had
operating losses during the prior year primarily due to prepayment penalties on
their respective debts upon the sales of the properties.
Nine Months Ended December 31, 1999
- -----------------------------------
The Partnership had net income of $10,660,000 for the nine months ended
December 31, 1999, as compared to net income of $26,148,000 for the same period
in the prior year. This $15,488,000 decrease in the Partnership's net income was
primarily a result of the gains realized from the sale of three operating
investment properties during the prior year exceeding the gains realized from
the sale of three operating investment properties during the current year by
$14,301,000. 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. During the current year, the Partnership sold the wholly-owned
Crystal Tree Commerce Center on May 14, 1999 and realized a gain of $563,000. In
addition, the Partnership sold the consolidated Warner/Red Hill Business Center
on September 24, 1999 and realized a gain of $7,488,000. The Partnership also
sold the unconsolidated 1881 Worcester Road Office Building on November 2, 1999
and realized a gain of $3,940,000.
In addition to the decrease in gains realized from the sales of operating
investment properties, the Partnership reported an operating loss of $1,354,000
for the nine months ended December 31, 1999 as compared to an operating loss of
$275,000 for the same period in the prior year. The Partnership's operating loss
included the operating results of the wholly-owned Crystal Tree Commerce Center
and the consolidated Warner/Red Hill joint venture during the current year plus
the consolidated Sunol Center during the prior year. The operating loss
increased mainly due to the sale of the Warner/Red Hill operating investment
property, as discussed above. The current period results included the
amortization of the discount on the Warner/Red Hill debt, as discussed further
in the Annual Report, which was the primary cause of the $367,000 increase in
interest expense for the current nine-month period. In addition, the prior year
results included net operating income of $25,000 from the operations of the
wholly-owned Crystal Tree Commerce Center, which was sold on May 14, 1999, as
compared to a net loss of $317,000 for the current period due to a decrease in
rental income and various write-offs due to the sale of the property. In
addition, the prior year results also included net operating income of $112,000
from the operations of the consolidated Sunol Center joint venture. A decrease
of $400,000 in interest income on notes receivable from unconsolidated ventures
as a result of the sales of the Chandler's Reach and Monterra Apartments during
fiscal 1999 also contributed to the decrease in the Partnership's net income for
the current nine-month period.
The decrease in gains realized on the sales of operating investment
properties, the increase in the Partnership's operating loss and the decrease in
interest income on notes receivable from unconsolidated ventures were partially
offset by a favorable change in the Partnership's share of unconsolidated
ventures' income (losses). The Partnership's share of income from unconsolidated
ventures was $557,000 during the nine months ended December 31, 1999, as
compared to a loss of $82,000 for the same period in the prior year. The
Partnership's share of unconsolidated ventures' income (losses) improved
primarily as a result of the prior year sales of the Monterra and Chandler's
Reach Apartments. Both the Monterra and Chandler's Reach joint ventures had
operating losses during the prior year primarily due to prepayment penalties on
their respective debts upon the sales of the properties.
<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 November 2, 1999 was filed by the
Partnership during the current quarter to report the sale of the 1881 Worcester
Road Office Building 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 11, 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 December 31, 1999 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-31-2000
<PERIOD-END> Dec-31-1999
<CASH> 5,281
<SECURITIES> 0
<RECEIVABLES> 4
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,285
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,345
<CURRENT-LIABILITIES> 244
<BONDS> 6,007
0
0
<COMMON> 0
<OTHER-SE> 11,094
<TOTAL-LIABILITY-AND-EQUITY> 17,345
<SALES> 0
<TOTAL-REVENUES> 14,106
<CGS> 0
<TOTAL-COSTS> 1,681
<OTHER-EXPENSES> 534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,231
<INCOME-PRETAX> 10,660
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,660
<EPS-BASIC> 5.27
<EPS-DILUTED> 5.27
</TABLE>
