UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1997
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: 0-15035
PAINE WEBBER GROWTH PARTNERS THREE L.P.
Delaware 04-2882258
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- - --------- -------------------
Prospectus of registrant dated Part IV
September 3, 1985, as supplemented
Current Report on Form 8-K of registrant Part IV
dated January 21, 1997
<PAGE>
PAINEWEBBER GROWTH PARTNERS THREE L. P.
1997 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-4
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-6
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-6
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial
Owners and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-25
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-5 of
this Form 10-K.
PART I
Item 1. Business
PaineWebber Growth Partners Three L.P. (the "Partnership") is a limited
partnership formed in May 1985 under the Uniform Limited Partnership Act of the
State of Delaware for the purpose of investing, either directly or through joint
venture partnerships, in a portfolio of rental apartments or commercial
properties which had potential for capital appreciation. The Partnership
originally had interests in three properties: two apartment complexes and a
hotel. As discussed further below, the Partnership's hotel property was
foreclosed on by the mortgage lender on April 21, 1992 and one of the
Partnership's apartment complexes was sold to an unrelated third party on
December 27, 1996. The Partnership authorized the issuance of a maximum of
60,000 Partnership Units, at $1,000 per Unit, of which 25,657 were subscribed
and issued between September 3, 1985 and July 31, 1986. Limited Partners will
not be required to make any additional contributions.
As of March 31, 1997, the Partnership owned, through a joint venture
partnership, an interest in the operating property referred to below:
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- - -------- ---- ----------- -------------
St. Louis Woodchase 186 units 12/31/85 Fee ownership of
Associates land and improvements
Woodchase Apartments (through joint
St. Louis, Missouri venture)
(1) See Notes to the Financial Statements filed in Item 14(a)(1) of this Annual
Report for a description of the mortgage indebtedness secured by the
Partnership's operating property investment and for a description of the
agreement through which the Partnership has acquired this real estate
investment.
The Partnership previously had investment interests in the LaJolla Marriott
Hotel, a 360-room hotel located in LaJolla, California and Tara Associates,
Ltd., a joint venture which owned the Summerwind Apartments, a 208-unit
apartment complex located in Jonesboro, Georgia. On April 21, 1992, the holder
of the mortgage debt secured by the LaJolla Marriott Hotel, which represented
approximately 74% of the Partnership's original investment portfolio, foreclosed
on the operating property due to the Partnership's inability to meet the
required debt service payments under the modified terms of the loan agreement.
The efforts by the Managing General Partner to recapitalize, sell or refinance
the property were unsuccessful. As a result, the Partnership no longer has any
ownership interest in this property. On December 27, 1996, Tara Associates, Ltd.
sold the Summerwind Apartments, which represented approximately 13% of the
Partnership's original investment portfolio, to an unrelated third party for a
net price of $550,000 plus the assumption of the outstanding principal balance
of the first mortgage debt secured by the property of $8,330,000. The
Partnership received net proceeds of approximately $319,000 after deducting
closing costs and other credits to the buyer. On June 13, 1997, the Partnership
made a special distribution in the amount of approximately $308,000, or $12 per
original $1,000 Unit, from the proceeds of this transaction. See Note 4 to the
financial statements of the Partnership accompanying this Annual Report for a
further discussion of this transaction.
<PAGE>
The Partnership's original investment objectives were to invest the net cash
proceeds from the offering of limited partnership units in rental apartment and
commercial properties with the goals of obtaining:
(1) capital appreciation;
(2) tax losses during the early years of operations from deductions generated
by investments;
(3) equity build-up through principal repayments of mortgage loans on
Partnership properties; and
(4) cash distributions from rental income.
As a result of the foreclosure of the LaJolla Marriott Hotel and the sale of
the Summerwind Apartments referred to above for an amount substantially below
the Partnership's original investment, the Partnership will be unable to achieve
most of its original objectives. The Partnership has generated tax losses from
operations since inception. However, the benefits of such losses to investors
have been significantly reduced by changes in federal income tax law subsequent
to the organization of the Partnership. Furthermore, the Partnership's
investment properties have not produced sufficient cash flow from operations to
provide the limited partners with cash distributions to date. As noted above,
the LaJolla Marriott Hotel and the Summerwind Apartments represented
approximately 74% and 13%, respectively, of the Partnership's original invested
capital. In addition to the $12 per original $1,000 investment returned to the
Limited Partners from the Summerwind sale transaction, the portion of the
Limited Partners' original capital investment which will be returned will depend
upon the ultimate selling price obtained for the Woodchase property at the time
of its final disposition, which cannot presently be determined. As discussed
further in Item 7, the Partnership is currently examining the potential for a
near-term sale of this remaining property and a liquidation of the Partnership
by the end of calendar 1997. However, no assurances can be given that both a
sale of the property and a liquidation of the Partnership will be completed
within this time frame.
The Partnership's remaining joint venture apartment property investment is
located in a real estate market in which it faces significant competition for
the revenues it generates. The apartment complex competes with numerous projects
of similar type, generally on the basis of price and amenities. Apartment
properties in all markets also compete with the single family home market for
prospective tenants. The continued availability of low interest rates on home
mortgage loans has increased the level of this competition over the past several
years. However, the impact of the competition from the single-family home market
has generally been offset by the lack of significant new construction activity
in the multi-family apartment market over most of this period. In the past 12
months, development activity for multi-family properties in many markets has
escalated significantly. However, the suburban St. Louis market in which
Woodchase is located has not experienced a significant increase in development
activity to date.
The Partnership has no real property investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment; therefore, a presentation of information about industry segments is
not applicable.
The Partnership has no salaried employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of Paine Webber Group Inc.
("PaineWebber").
The general partners of the Partnership (the "General Partners") are Third
PW Growth Properties, Inc. and Properties Associates 1985, L.P. Third PW Growth
Properties, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber, is the managing general partner of the Partnership. The associate
general partner is Properties Associates 1985, L.P. (the "Associate General
Partner"), a Virginia limited partnership, certain limited partners of which are
also officers of the Adviser and the Managing General Partner.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
<PAGE>
Item 2. Properties
As of March 31, 1997, the Partnership owns, through a joint venture
partnership, an interest in the property referred to under Item 1 above to which
reference is made for the name, location, and description of the property.
Occupancy figures for each fiscal quarter during fiscal 1997, along with an
average for the year, are presented below for each property owned during fiscal
1997.
Percent Occupied At
------------------------------------------------
Fiscal
1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ------- --------
Summerwind Apartments (1) 98% 95% N/A N/A N/A
Woodchase Apartments 93% 96% 92% 93% 94%
(1) The property was sold on December 27, 1996.
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments and REIT Stocks,
including those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"),
among others, by allegedly dissatisfied partnership investors. In March 1995,
after the actions were consolidated under the title In re PaineWebber Limited
Partnership Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Third PW Growth Properties,
Inc. and Properties Associates 1985, L.P. ("PA1985"), which are the General
Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Growth Partners
Three L.P., PaineWebber, Third PW Growth Properties, Inc. and PA1985 (1) failed
to provide adequate disclosure of the risks involved; (2) made false and
misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in PaineWebber
Growth Partners Three L.P., also alleged that following the sale of the
partnership interests, PaineWebber, Third PW Growth Properties, Inc. and PA1985
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Third PW Growth
Properties, Inc. and PA1985 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement. As a result of this settlement,
PaineWebber also agreed to waive any amounts that is was due under the terms of
the advisory contract with the Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation with respect to the
Abbate action was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which provided for
the complete resolution of this action. Final releases and dismissals with
regard to this action were received subsequent to March 31, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1997 there were 2,147 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for the resale of Units will develop. The
Managing General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Growth Partners Three L.P.
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands, except for per Unit data)
1997(1) 1996 1995 1994 1993(2)
------- ---- ---- ----- -------
Revenues $2,783 $1,460 $1,394 $1,341 $ 2,521
Operating loss $ (234) $ (429) $ (376) $ (439) $ (3,654)
Partnership's share of
unconsolidated
venture's loss $ (47) $ (181) $ (236) $ (233) $ (245)
Gain on sale of operating
investment property $3,152 - - - -
Income (loss) before
extraordinary gains $3,246 $ (610) $ (612) $ (672) $ (3,899)
Extraordinary gains $1,265 - - - $ 11,532
Net income (loss) $4,511 $ (610) $ (612) $ (672) $ 7,633
Total assets $1,198 $7,024 $7,402 $7,815 $ 8,345
Note payable - $8,330 $8,330 $8,330 $ 8,330
Per Limited Partnership Unit:
Income (loss) before
extraordinary gain $120.17 $(22.61) $(22.64) $(24.87) $(129.37)
Extraordinary gain $ 46.84 - - - $ 367.93
Net income (loss) $167.01 $(22.61) $(22.64) $ (24.87) $ 238.56
(1) On December 27, 1996, the Summerwind Apartments was sold to an unrelated
third party for a net price of $550,000 plus the assumption of the
outstanding principal balance of the bonds secured by the property of
$8,330,000. As a result, the Partnership's fiscal 1997 net income includes a
gain on the sale of $3.2 million. The fiscal 1997 operating results also
include an extraordinary gain of $1,265,000 which resulted from the waiver
of deferred management fees owed to the Adviser. See Item 7 and the notes to
the Partnership's financial statements which accompany this Annual Report
for a further discussion of these matters.
(2) On April 21, 1992, the mortgage lender took title to the LaJolla Marriott
Hotel through foreclosure proceedings. As a result, the Partnership's fiscal
1993 net operating results reflect an extraordinary gain from the settlement
of the debt obligation of $11.5 million and a loss on transfer of assets at
foreclosure of $2.9 million (included in operating loss).
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the 25,657
Limited Partnership Units outstanding during each year.
<PAGE>
Item 7. 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 below 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
- - -------------------------------
The Partnership offered limited partnership interests to the public from
September 3, 1985 to July 31, 1986 pursuant to a Registration Statement filed
under the Securities Act of 1933. Gross proceeds of $25,657,000 were received by
the Partnership and, after deducting selling expenses and offering costs,
approximately $17,085,000 was originally invested directly or through joint
venture interests in three operating investment properties. As previously
reported, the Partnership's investment in the LaJolla Marriott Hotel, which
represented 74% of the original investment portfolio, was lost through
foreclosure proceedings in April 1992 after a protracted period of negotiations
failed to produce a mutually acceptable restructuring, refinancing, or sale
agreement. As discussed further below, on December 27, 1996 the Summerwind
Apartments, which represented 13% of the original investment portfolio, was sold
to an unrelated third party for an amount substantially below the Partnership's
original investment.
During the third quarter of fiscal 1997, the Partnership signed a letter
of intent with an unrelated third party to sell the Summerwind Apartments for a
net price of $550,000 in cash. The net purchase price reflected the assumption
by the purchaser of the $8,330,000 first mortgage loan secured by the operating
investment property. The Partnership received net proceeds of approximately
$319,000 after deducting closing costs and other credits to the buyer. The
Partnership made a special distribution to the Limited Partners on June 13, 1997
in the amount of approximately $308,000, or $12 per original $1,000 investment,
from the proceeds of this transaction. The Partnership's original investment in
the Summerwind joint venture, which represented 13% of the original portfolio
investment, totalled approximately $2.4 million. Despite recovering less than
15% of the original investment, management believes it was the right time to
sell this asset in light of the property's estimated market value, the limited
potential for near-term appreciation and the lack of options for extending or
refinancing the venture's long-term debt.
The Summerwind joint venture had been generating excess cash flow from
operations as a result of the low level of the variable interest rate on the
venture's first mortgage loan. Such excess cash flow was being used to pay
Partnership operating expenses. The debt secured by the Summerwind property,
which required interest-only payments on a monthly basis, consisted of
tax-exempt revenue bonds issued by a local housing authority. The interest rate
on such debt, which was tied to comparable tax-exempt bond obligations, was
significantly lower than rates on conventional mortgage financing. In fact, the
venture's cash flow would likely not have been sufficient to support
conventional financing, including monthly principal amortization, at current
market interest rates. The mortgage loan secured by the Summerwind Apartments
was subject to various prepayment provisions including a mandatory redemption on
March 16, 1997, the first scheduled remarketing date, as defined, which
coincided with the expiration of the letter of credit agreement which secured
the underlying bonds. Unless the letter of credit was replaced or extended, the
venture's mortgage loan would have been immediately due and payable upon this
scheduled expiration date. Management's estimate of the fair market value of the
Summerwind Apartments put the value of the property at or slightly above the
amount of the outstanding first mortgage loan as of December 1996. Accordingly,
it was unlikely that the property would have satisfied a letter of credit
issuer's loan-to-value ratio requirements for issuing a new letter of credit.
Consequently, the property would likely have been subject to foreclosure
proceedings during fiscal 1997 if the Partnership had not completed the sale
transaction. The price that the buyer was willing to pay for the Summerwind
property was based mainly upon the ability to receive current net cash flow
after completing a modification and extension agreement with the mortgage
lender. The modification and extension agreement required that the buyer deposit
significant additional collateral with the mortgage lender.
As a result of the sale of the Summerwind Apartments, the Partnership has
one remaining joint venture investment, the Woodchase Apartments. Management of
the Partnership will now focus on achieving a near-term sale of the property and
possibly completing a liquidation of the Partnership by the end of calendar
1997. There are no assurances, however, that both the disposition of the
remaining investment and the liquidation of the Partnership will be accomplished
within this time frame. On September 13, 1995, the Partnership, along with its
co-venture partner, refinanced the mortgage debt secured by the Woodchase
Apartments with a new lender. The new non-recourse mortgage loan was in the
initial principal amount of $8,200,000 and bears interest at a rate of 7.5% per
annum. The new loan requires monthly principal and interest payments of
approximately $57,000 and matures on October 1, 2002. In refinancing the
Woodchase debt obligation, management obtained assumable financing which reduced
the venture's debt service costs and enhances the marketability of the property
for a possible sale. Market conditions for multi-family properties in the St.
Louis sub-market in which Woodchase is located are stable at the present time
with a limited amount of new construction activity in progress. The occupancy
level at the Woodchase Apartments averaged 94% in fiscal 1997, rental rates at
the property are being increased gradually and no rental concessions are
currently being offered to prospective tenants. A program of significant
property repairs and improvements was initiated at Woodchase during calendar
1994 in anticipation of the venture's refinancing efforts and has continued
subsequent to the refinancing in anticipation of a potential sale of the
property. This program, combined with the continued improvements in the
apartment segment of the real estate market, has enhanced the market value of
the Woodchase property over the past several years. As a result, the Partnership
is expected to recover its original net investment in the Woodchase property, of
$2.3 million, from a near term sale transaction. The Partnership is currently
involved in discussions with the co-venture partner in the Woodchase joint
venture regarding plans to attempt to market and sell the property during the
second half of calendar 1997. Under the terms of the joint venture agreement,
both the Partnership and the co-venturer have certain first refusal rights with
respect to a sale of the property. Additional planned improvements at the
Woodchase property in calendar 1997 include the necessary replacement of roofs
on three buildings and the repair of deteriorating wood on a number of apartment
balconies.
At March 31, 1997, the Partnership had available cash and cash equivalents
of approximately $1,112,000. Such cash and cash equivalents include the net
proceeds of approximately $308,000 from the sale of Summerwind that were
distributed to the Limited Partners in June 1997, as discussed above. The
remainder of the cash and cash equivalents will be used for the working capital
needs of the Partnership through its expected liquidation. The source of future
liquidity and distributions to the partners is expected to be through the
proceeds received from the sale or refinancing of the Partnership's remaining
investment property. Subsequent to the eventual sale of the Woodchase
investment, the net sale proceeds, along with the remaining Partnership reserves
after the payment of all liquidation-related expenses, will be distributed to
the Limited Partners.
Results of Operations
1997 Compared to 1996
- - ---------------------
The Partnership reported net income of $4,511,000 for fiscal 1997 as
compared to a net loss of $610,000 for the prior year. The Partnership's net
income for fiscal 1997 is a result of the $3,152,000 gain recognized on the sale
of the Summerwind Apartments in December 1996, as discussed further above, and
an extraordinary gain of $1,265,000 resulting from the waiver of deferred
management fees payable to the Adviser pursuant to the settlement of the class
action claim discussed further in Note 7 to the accompanying financial
statements. The gain on the sale of the Summerwind Apartments represents the
difference between the gross purchase price of $8,880,000 net of selling costs,
and the carrying value of the operating investment property, net of accumulated
depreciation, as of the date of the sale on December 27, 1996. As discussed in
the notes to the accompanying financial statements, the Partnership's policy was
to report the operations of the Summerwind joint venture on a three-month lag.
Accordingly, despite completing the sale in the third quarter of fiscal 1997,
the operating results reflected in the accompanying consolidated financial
statements for fiscal 1997 include, effectively, a full twelve months of
revenues and expenses of the Summerwind joint venture. The waiver of deferred
management fees was part of the class action settlement agreement finalized in
the fourth quarter of fiscal 1997. The Partnership's management fees had been
expensed and deferred since September 1986 due to a lack of cash flow from the
Partnership's real estate investments. Decreases in management fee expense of
$106,000 and property operating expenses of $47,000 also contributed to the
favorable change in net operating results for the current fiscal year.
Management fees declined as a result of the Partnership having reached a
limitation during the first quarter of fiscal 1997 on the cumulative amount of
allowable management fees payable to the Adviser pursuant to the Partnership's
advisory contract. Property operating expenses at the consolidated Summerwind
Apartments for fiscal 1997, through the date of sale, decreased when compared to
the prior year mainly due to a $55,000 reduction in repairs and maintenance
expenses. A $31,000 increase in rental income from the consolidated Summerwind
property and a $27,000 increase in interest and other income also contributed to
the favorable change in the Partnership's net operating results in fiscal 1997.
Rental income increased due to an increase in average rental rates at the
Summerwind Apartments. Interest and other income increased partly due to the
temporary investment of the net proceeds from the sale of the Summerwind
Apartments. The co-venture partner in the consolidated Summerwind joint venture
was allocated losses of $375,000 upon the liquidation of the venture to
eliminate their remaining net equity position. This allocation of loss to the
co-venturer favorably impacted the Partnership's net income in the current year.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Woodchase joint venture, decreased by $134,000 for
fiscal 1997, when compared to the prior year. This favorable change in the
Partnership's share of the Woodchase joint venture's operations is mainly due to
a $237,000 decrease in the venture's mortgage interest expense. Interest expense
decreased due to the September 1995 refinancing of the venture's prior mortgage
debt, as discussed further above, which resulted in a lower interest rate and
lower debt service costs. Increases in depreciation expense and salaries and
related costs of $41,000 and $30,000, respectively, partially offset the
decrease in the venture's mortgage interest expense. Depreciation expense
increased due to the addition of $266,000 of capital assets to the venture's
operating investment property during the year as a result of an ongoing property
improvement program. Salaries and related costs increased mainly due to the
addition of a full-time maintenance position at the property.
1996 Compared to 1995
- - ---------------------
The Partnership's net loss decreased by $2,000 in fiscal 1996 when
compared to the prior year. This decrease in the Partnership's net loss was the
result of a decrease of $55,000 in the Partnership's share of unconsolidated
venture's loss, which represented the allocable net loss from the Woodchase
joint venture, offset by an increase in the Partnership's operating loss of
$53,000.
The decrease in the Partnership's share of unconsolidated venture's loss
was mainly a result of an increase in rental income at Woodchase for fiscal
1996. The increase in rental income, of $75,000, was primarily attributable to
rental rate increases implemented as a result of the fairly strong market
conditions existing in the suburban St. Louis market and the capital improvement
program implemented at the property over 1996 and 1995. The average occupancy
level at Woodchase increased from 93% for calendar 1994 to 94% for calendar
1995, which also contributed to the 5% increase in rental income. Slight
increases in the venture's property operating expenses and depreciation charges
partially offset the increase in rental income for 1996.
The Partnership's operating loss increased primarily due to an increase in
interest expense of $89,000. Interest expense increased as a result of an
increase in the average interest rate paid during the year on the variable rate
mortgage loan secured by the consolidated Summerwind Apartments. The increase in
interest expense was partially offset by an increase in rental income at
Summerwind of $65,000. Rental income increased as a result of an increase in
rental rates from the prior year, along with an increase in the average
occupancy level from 95% for calendar 1994 to 97% for calendar 1995. Small
increases in repairs and maintenance expenses at Summerwind and Partnership
general administrative expenses also contributed to the increase in the
Partnership's operating loss for fiscal 1996. Partnership general and
administrative expenses increased by $15,000 for fiscal 1996 mainly due to an
increase in certain required professional services.
1995 Compared to 1994
- - ---------------------
The Partnership's net loss decreased by $60,000 in fiscal 1995 when compared
to the prior year. The primary reasons for the decrease in net loss were an
increase in rental income at the Summerwind Apartments of $36,000, an increase
in interest income earned on cash and cash equivalents of $17,000 and decreases
in property operating expenses and general and administrative expenses of
$47,000 and $8,000, respectively. The increase in rental income at the
Summerwind Apartments was the result of an increase in rental rates, as
occupancy actually declined slightly during the year from an average of 99% for
calendar 1993 to an average of 95% for calendar 1994. Interest income earned on
cash and cash equivalents increased as a result of an increase in the average
outstanding balance of cash and cash equivalents and an increase in interest
rates earned during fiscal 1995. Property operating expenses at the Summerwind
Apartments decreased due to a large decrease in repairs and maintenance
expenses. Repairs and maintenance expenses decreased mainly as a result of the
completion of the painting of all building exteriors during fiscal 1995. General
and administrative expenses decreased as a result of a decrease in legal fees
during fiscal 1995. The Partnership incurred additional legal fees in fiscal
1994 as a result of the refinancing of the debt secured by the Woodchase
Apartments. The positive effect of the above items on net loss was partially
offset by an increase in interest expense of $44,000. The higher interest
expense reflected an increase in the variable interest rate on the Summerwind
mortgage loan. In addition, the Partnership's share of unconsolidated venture's
loss, which represents the allocable net loss from the Woodchase joint venture,
increased by $3,000 due to an increase in interest expense. This increase in
interest expense was a result of the terms of the mortgage loan secured by the
Woodchase Apartments which provide for the compounding of interest on deferred
amounts owed to the lender.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
- - --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investment will be significantly impacted by the competition from
comparable properties in its local market area. The occupancy levels and rental
rates achievable at the property are largely a function of supply and demand in
the market. To date there has not been a significant increase in new development
activity in Woodchase's submarket. However, in many other markets across the
country development of new multi-family properties has surged in the past 12
months. Existing properties in such markets have generally experienced increased
vacancy levels, declines in effective rental rates and, in some cases, declines
in estimated market values as a result of the increased competition. There are
no assurances that such an increase in development activity will not affect the
Woodchase property in the near term.
Impact of Joint Venture Structure. The ownership of the remaining investment
through a joint venture partnership could adversely impact the timing of the
Partnership's planned liquidation and the amount of proceeds received from the
disposition of the final investment. It is possible that the Partnership's
co-venture partner could have economic or business interests which are
inconsistent with those of the Partnership. Given the rights which both parties
have under the terms of the joint venture agreement, any conflict between the
partners could result in delays in completing a sale of the property and could
lead to an impairment in the marketability of the property to third parties for
purposes of achieving the highest possible sale price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining asset is
critical to the Partnership's ability to realize the current estimated fair
market value of the Woodchase investment property and to complete the
liquidation of the Partnership on a timely basis. Demand by buyers of
multi-family apartment properties is affected by many factors, including the
size, quality, age, condition and location of the subject property, potential
environmental liability concerns, the existing debt structure, the liquidity in
the debt and equity markets for asset acquisitions, the general level of market
interest rates and the general and local economic climates.
INFLATION
- - ---------
The Partnership commenced operations in 1985 and completed its eleventh full
year of operations in the current fiscal year. The effects of inflation and
changes in prices on the Partnership's operating results to date have not been
significant.
Inflation in future periods may increase revenues as well as operating
expenses at the Partnership's operating investment properties. Tenants at the
Partnership's apartment property have short-term leases, generally of one year
or less in duration. Rental rates at this property can be adjusted to keep pace
with inflation, to the extent market conditions allow, as the leases are renewed
or turned over. Such increases in rental income would be expected to at least
partially offset the corresponding increases in Partnership and property
operating expenses resulting from inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Third PW Growth
Properties, Inc. a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1985, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 54 5/22/85 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors and
executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and executive officers have been elected to serve until
the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which PaineWebber Properties Incorporated ("PWPI") serves as the
investment adviser. The business experience of each of the directors and
principal executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher
previously worked for a major law firm in New York City. He has a J.D. from
Harvard Law School, an M.B.A. from Harvard Graduate School of Business
Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining PWPI.
Mr. Arnold is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner, a limited partner of the Associate General Partner,
and a First Vice President and Assistant Treasurer of the Adviser which he
joined in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer
of Property Capital Advisors, Inc. and also, from March 1974 to February 1980,
the Assistant Treasurer of Capital for Real Estate, which provided real estate
investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General
Partner and a Vice President and Treasurer of the Adviser which he joined in
1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the
Managing General Partner and PWPI. From 1983 to 1986, Mr. Medlock was associated
with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in
1983 and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and a
Vice President and Manager of Financial Reporting of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended March 31, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership. The
Partnership is required to pay certain fees to the Adviser and the General
Partners are entitled to receive a share of Partnership cash distributions and a
share of profits and losses. These items are described in Item 13.
The Partnership has never paid regular quarterly distributions of excess
cash flow. Furthermore, the Partnership's Limited Partnership Units are not
actively traded on any organized exchange, and no efficient secondary market
exists. Accordingly, no accurate price information is available for these Units.
Therefore, a presentation of historical Unitholder total returns would not be
meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
Managing General Partner, Third PW Growth Properties, Inc., is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia limited partnership, certain limited partners of which are also
officers of the Adviser and the Managing General Partner. No limited partner is
known by the Partnership to own beneficially more than 5% of the outstanding
interests of the Partnership.
(b) Neither the officers and directors of the Managing General Partner nor
the limited partners of the Associate General Partner, individually, own any
Units of limited partnership interest of the Partnership. No officer or director
of the Managing General Partner, nor any limited partner of the Associate
General Partner, possesses a right to acquire beneficial ownership of Units of
limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
Subject to the Managing General Partner's overall authority, the business of
the Partnership is managed by PWPI pursuant to an advisory contract. The General
Partners, PWPI and other affiliates receive fees and compensation, determined on
an agreed upon basis, in consideration of various services performed in
connection with the sale of the Units, the management of the Partnership and the
acquisition, management, financing and disposition of Partnership investments.
In addition, the General Partners and their affiliates are reimbursed for their
direct expenses relating to the offering of units, the administration of the
Partnership and the operations of the Partnership's real property investments.
Selling commissions paid by the Partnership to PaineWebber Incorporated, a
wholly-owned subsidiary of PaineWebber, for the sale of Limited Partnership
interests aggregated $2,181,000 through the conclusion of the offering period.
In connection with investing Partnership capital in investment properties, PWPI
was paid acquisition fees of $1,283,000, equal to 5% of the gross proceeds of
the offering.
All distributable cash, as defined, for each fiscal year will be distributed
annually in the ratio of 95% to the Limited Partners and 5% to the General
Partners. All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the Partnership
Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income and tax
losses of the Partnership from both current operations and capital transactions
generally will be allocated 95% to the Limited Partners and 5% to the General
Partners, except that the General Partners shall be allocated an amount of
taxable income from a capital transaction at least sufficient to eliminate their
deficit capital account balance. Allocations of the Partnership's operations
between the General Partners and the Limited Partners for financial accounting
purposes have been made in conformity with the allocations of taxable income or
tax loss.
Under the advisory contract, PWPI has specific management responsibilities:
to administer the day-to-day operations of the Partnership, and to report
periodically the performance of the Partnership to the Managing General Partner.
PWPI was entitled to earn an annual management fee of up to 1/2 of 1% of the
gross offering proceeds, subject to a cumulative limitation which was reached
during fiscal 1997. PWPI earned management fees of $22,000 for the year ended
March 31, 1997. PWPI had deferred payment of its management fee beginning in
September of 1986 pending the generation of cash flow from the Partnership's
investment properties. Through September of 1986, PWPI received cash payments
for management fees totalling approximately $16,000. As part of the settlement
agreement finalized in the fourth quarter of fiscal 1997 regarding the class
action lawsuit discussed further in Item 3, PWPI agreed to waive any amounts due
to it under the advisory contract with the Partnership. Consequently, $1,265,000
of deferred management fees were written off and recognized as an extraordinary
gain by the Partnership in fiscal 1997.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended March 31, 1997 is $42,000, representing reimbursements to this
affiliate of the Managing General Partner for providing such services to the
Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $2,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1997. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of the
Adviser.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1)and (2) Financial Statements and Schedules: The response
to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial
Statements and Financial Statement Schedules
at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to
exhibits at page IV-3 are filed as part of this Report.
(b) A Current Report on Form 8-K dated January 21, 1997 was filed to
report the sale of the Summerwind Apartments on December 27, 1996.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this Report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER GROWTH PARTNERS THREE L. P.
By: Third PW Growth Properties, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President
Dated: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Bruce J. Rubin Date: June 27, 1997
------------------ -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 27, 1997
----------------------- -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER GROWTH PARTNERS THREE L. P.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- - ----------- ----------------------- ------------------
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated September 3, 1985 as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by
reference to the Restated reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or 15(d) of
statements and amendments thereto the Securities Act of 1934 and
of the registrant together with all incorporated herein by reference.
such contracts filed as exhibits
of previously filed Forms 8-K and
Forms 10-K are hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal 1997
has been sent to the Limited
Partners. An Annual Report will
be sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of PartI of this
Report page I-1, to which reference
is hereby made.
(27) Financial Data Schedule Filed as the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER GROWTH PARTNERS THREE L. P.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
PaineWebber Growth Partners Three L. P.:
Report of independent auditors F-2
Consolidated balance sheets as of March 31, 1997 and 1996 F-3
Consolidated statements of operations for the years
ended March 31, 1997, 1996 and 1995 F-4
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1997, 1996 and 1995 F-5
Consolidated statements of cash flows for the years
ended March 31, 1997, 1996 and 1995 F-6
Notes to consolidated financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-17
St. Louis Woodchase Associates:
Report of independent auditors F-18
Balance sheets as of December 31, 1996 and 1995 F-19
Statements of operations and changes in venturers' deficit for the
years ended December 31, 1996, 1995 and 1994 F-20
Statements of cash flows for the years ended December
31, 1996, 1995 and 1994 F-21
Notes to financial statements F-22
Schedule III - Real Estate and Accumulated Depreciation F-25
Other financial statement schedules have been omitted since the required
information is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Growth Partners Three L.P.:
We have audited the accompanying consolidated balance sheets of PaineWebber
Growth Partners Three L.P. as of March 31, 1997 and 1996, and the related
consolidated statements of operations, changes in partners' capital (deficit),
and cash flows for each of the three years in the period ended March 31, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Growth Partners Three L.P. at March 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/S/ ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 10, 1997
<PAGE>
PAINEWEBBER GROWTH PARTNERS THREE L.P.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
1997 1996
---- ----
Operating investment property, at cost:
Land $ - $ 670
Buildings - 7,932
Equipment and improvements - 572
------- ---------
- 9,174
Less accumulated depreciation - (3,336)
------- ---------
- 5,838
Investment in unconsolidated join
venture, at equity 86 73
Cash and cash equivalents 1,112 801
Accounts receivable - 2
Prepaid expenses - 16
Deferred expenses, net of
accumulated amortization of $320 in 1996 - 67
Other assets - 227
------- ---------
$ 1,198 $ 7,024
======= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable and accrued expenses $ 26 $ 107
Accrued interest payable - 231
Loans payable to affiliates - 357
Advances from consolidated venture - 95
Deferred management fees payable to affiliate - 1,243
Note payable - 8,330
--------- ----------
Total liabilities 26 10,363
Partners' capital (deficit):
General Partners:
Capital contribution 1 1
Cumulative net income (loss) 82 (144)
Limited Partners ($1,000 per Unit,
25,657 units outstanding at
March 31, 1997 and 1996):
Capital contributions, net
of offering costs of $3,193 22,464 22,464
Cumulative net loss (21,074) (25,359)
Cumulative cash distributions (301) (301)
--------- ----------
Total partners' capital (deficit) 1,172 (3,339)
--------- ----------
$ 1,198 $ 7,024
========= ==========
See accompanying notes.
<PAGE>
PAINEWEBBER GROWTH PARTNERS THREE L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1997, 1996 and 1995
(In thousands, except for per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Rental income $ 1,457 $ 1,426 $ 1,361
Interest and other income 61 34 33
-------- -------- --------
1,518 1,460 1,394
Expenses:
Interest expense and related fees 558 551 462
Depreciation expense 272 271 270
Property operating expenses 719 766 752
Partnership management fees 22 128 128
General and administrative 181 173 158
-------- --------- --------
1,752 1,889 1,770
-------- --------- --------
Operating loss (234) (429) (376)
Partnership's share of unconsolidated
venture's loss (47) (181) (236)
Gain on sale of operating investment
property 3,152 - -
Co-venture partner's share of
consolidated venture's operations 375 - -
--------- --------- ---------
Income (loss) before extraordinary gain 3,246 (610) (612)
Extraordinary gain from waiver
of Partnership management fees 1,265 - -
--------- --------- ----------
Net income (loss) $ 4,511 $ (610) $ (612)
========= ========= =========
Per Limited Partnership Unit:
Income (loss) before
extraordinary gain $ 120.17 $ (22.61) $ (22.64)
Extraordinary gain 46.84 - -
--------- ---------- ----------
Net income (loss) $ 167.01 $ (22.61) $ (22.64)
========= ========== ==========
The above per Limited Partnership Unit information is based upon the 25,657
Limited Partnership Units outstanding for each year.
See accompanying notes.
<PAGE>
PAINEWEBBER GROWTH PARTNERS THREE L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended March 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at March 31, 1994 $ (82) $(2,035) $(2,117)
Net loss (31) (581) (612)
------- ------- -------
Balance at March 31, 1995 (113) (2,616) (2,729)
Net loss (30) (580) (610)
-------- ------- -------
Balance at March 31, 1996 (143) (3,196) (3,339)
Net income 226 4,285 4,511
-------- ------- --------
Balance at March 31, 1997 $ 83 $ 1,089 $ 1,172
======== ======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER GROWTH PARTNERS THREE L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,511 $ (610) $ (612)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Gain on sale of operating investment property (3,152) - -
Co-venture partner's share of consolidated
venture's operations (375) - -
Partnership's share of unconsolidated venture's loss 47 181 236
Depreciation expense 272 271 270
Amortization of deferred financing costs 67 55 55
Deferred management fees 22 128 128
Extraordinary gain from waiver of
Partnership management fees (1,265) - -
Changes in assets and liabilities:
Accounts receivable 2 - -
Prepaid expenses 16 (1) 5
Accounts payable and accrued expenses (81) 11 4
Accrued interest payable 14 35 29
Advances from consolidated venture (95) 58 37
-------- ---------- -------
Total adjustments (4,528) 738 764
------- ---------- -------
Net cash (used in) provided by operating
activities (17) 128 152
Cash flows from investing activities:
Net proceeds from sale of operating investment property 469 - -
Additions to operating investment property (81) (31) (16)
Advances to unconsolidated venture (60) - -
-------- ---------- --------
Net cash provided by (used in) investin
activities 328 (31) (16)
Cash flows from financing activities:
Withdrawals from restricted cash - - 201
--------- ---------- -------
Net cash provided by financing activities - - 201
Net increase in cash and cash equivalents 311 97 337
Cash and cash equivalents, beginning of year 801 704 367
--------- ---------- --------
Cash and cash equivalents, end of year $ 1,112 $ 801 $ 704
========= ========== ========
Supplemental disclosures:
Cash paid during the year for interest $ 355 $ 396 $ 252
========= ========= ========
Non-cash financing activities:
Assumption of mortgage loan by purchaser
of operating investment property $ (8,330) $ - $ -
========= ========== ========
Conversion of loans and accrued interest
payable to affiliates to co-venturer's capital $ (602) $ - $ -
======== ========== ========
</TABLE>
See accompanying notes.
<PAGE>
PAINEWEBBER GROWTH PARTNERS THREE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
PaineWebber Growth Partners Three L.P. (the "Partnership") is a
limited partnership organized pursuant to the laws of the State of Delaware
in May 1985 for the purpose of investing in a portfolio of rental
apartments or commercial properties which had potential for capital
appreciation. The Partnership authorized the issuance of units (the
"Units") of limited partnership interests (at $1,000 per Unit) of which
25,657 were subscribed and issued between September 3, 1985 and July 31,
1986.
The Partnership originally invested the proceeds of the offering in
three operating properties. On April 21, 1992, the Partnership's largest
asset, the LaJolla Marriott Hotel, was foreclosed on by the mortgage lender
after extensive workout negotiations failed to produce an acceptable
modification agreement. As discussed further in Note 4, as a result of the
sale of the operating property owned by the Summerwind joint venture in
December 1996, the Partnership has one remaining joint venture investment,
the Woodchase Apartments (see Note 5). Management of the Partnership is
currently evaluating a potential liquidation of the Partnership which could
be accomplished during calendar 1997. There are no assurances, however,
that both the disposition of the remaining real estate investment and the
liquidation of the Partnership will be accomplished within this time frame.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of March 31, 1997 and 1996 and revenues
and expenses for each of the three years in the period ended March 31, 1997.
Actual results could differ from the estimates and assumptions used.
The joint ventures in which the Partnership has invested are required
to maintain their accounting records on a calendar year basis for income tax
reporting purposes. As a result, the Partnership records its share of the
operations of the joint ventures based on financial information which is
three months in arrears to that of the Partnership.
The accompanying consolidated financial statements include the
Partnership's investments in two joint venture partnerships which own or
owned operating properties. As further discussed in Note 4, the Partnership
acquired complete control of Tara Associates, Ltd. in fiscal 1990 as a
result of an amendment to the joint venture agreement. Accordingly, the
accompanying financial statements present the financial position and results
of operations of this joint venture on a consolidated basis through the
December 1996 sale of the venture's operating investment property. As
discussed above, the joint venture had a December 31 year-end and operations
of the venture were reported on a three-month lag. All material transactions
between the Partnership and the joint venture have been eliminated upon
consolidation, except for lag period cash transfers which were accounted for
as advances to or from affiliate. The consolidated joint venture's operating
investment property (Summerwind Apartments) was carried at cost, adjusted
for certain guaranteed payments (see Note 4) and accumulated depreciation,
as of December 31, 1995.
Depreciation expense was computed using the straight-line method over
an estimated useful life of thirty years for buildings and five years for
equipment and improvements. Acquisition fees paid to PaineWebber Properties
Incorporated (PWPI) were capitalized and were included in the cost of the
operating investment property.
The Partnership accounts for its remaining joint venture investment
(St. Louis Woodchase Associates) using the equity method because the
Partnership does not have majority voting control in the venture. Under the
equity method the investment in a joint venture is carried at cost adjusted
for the Partnership's share of the venture's earnings and losses and
distributions. See Note 5 for a description of this joint venture
partnership.
The consolidated joint venture leases apartment units under leases with
terms generally of one year or less. Rental income is recorded monthly as
earned.
Deferred expenses at March 31, 1996 consisted of loan fees of Tara
Associates, Ltd., the Partnership's consolidated joint venture, which were
being amortized on a straight-line basis over the remaining term of the
loan. The amortization of such fees is included in interest expense on the
accompanying statements of operations. All unamortized deferred expenses
were written off upon the sale of the operating investment property in
fiscal 1997 (see Note 4).
For purposes of reporting cash flows, the Partnership considers all
highly liquid investments with original maturities of 90 days or less to be
cash equivalents.
No provision for income taxes has been made as the liability for such
taxes is that of the individual partners rather than the Partnership. Upon
the sale or disposition of the Partnership's investments, the taxable gain
or loss incurred will be allocated among the partners. In the case where a
taxable gain would be incurred, gain would first be allocated to the General
Partners in an amount at least sufficient to eliminate their deficit capital
balance. Any remaining gain would then be allocated to the Limited Partners.
In certain cases, the Limited Partners could be allocated taxable income in
excess of any liquidation proceeds that they may receive. Additionally, in
cases where the disposition of any investment involves a foreclosure by, or
voluntary conveyance to, the mortgage lender, taxable income could occur
without distribution of cash. Income from the sale or disposition of the
Partnership's investments represents passive income to the partners which
can be offset by each partner's existing passive losses, including any
carryovers from prior years.
The cash and cash equivalents appearing on the accompanying
consolidated balance sheets represent financial instruments for purposes of
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments." The carrying amount of these assets
approximates their fair value as of March 31, 1997 and 1996 due to
the short-term maturities of these instruments.
Certain fiscal 1996 and 1995 amounts have been reclassified to conform
to the fiscal 1997 presentation.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Third PW Growth Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. ("PaineWebber") and Properties Associates 1985, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of PWPI and the Managing General
Partner. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by PWPI pursuant to an advisory
contract. The General Partners, PWPI and other affiliates receive fees and
compensation, determined on an agreed upon basis, in consideration of
various services performed in connection with the sale of the Units, the
management of the Partnership, and the acquisition, management, financing
and disposition of Partnership investments. In addition, the General
Partners and their affiliates are reimbursed for their direct expenses
relating to the offering of units, the administration of the Partnership and
the operations of the Partnership's real property investments.
Selling commissions paid by the Partnership to PaineWebber
Incorporated, a wholly-owned subsidiary of PaineWebber, for the sale of
Limited Partnership interests aggregated $2,181,000 through the conclusion
of the offering period. In connection with investing Partnership capital in
investment properties, PWPI was paid acquisition fees of $1,283,000, equal
to 5% of the gross proceeds of the offering.
All distributable cash, as defined, for each fiscal year will be
distributed annually in the ratio of 95% to the Limited Partners and 5% to
the General Partners. All sale or refinancing proceeds shall be distributed
in varying proportions to the Limited and General Partners, as specified in
the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income and
tax losses of the Partnership from both current operations and capital
transactions generally will be allocated 95% to the Limited Partners and 5%
to the General Partners, except that the General Partners shall be allocated
an amount of taxable income from a capital transaction at least sufficient
to eliminate their deficit capital account balance. Allocations of the
Partnership's operations between the General Partners and the Limited
Partners for financial accounting purposes have been made in conformity with
the allocations of taxable income or tax loss.
Under the advisory contract, PWPI has specific management
responsibilities: to administer the day-to-day operations of the
Partnership, and to report periodically the performance of the Partnership
to the Managing General Partner. PWPI was entitled to earn an annual
management fee of up to 1/2 of 1% of the gross offering proceeds, subject to
a cumulative limitation which was reached during fiscal 1997. PWPI earned
management fees of $22,000 for the year ended March 31, 1997 and $128,000
for each of the two years ended March 31, 1996 and 1995. PWPI had deferred
payment of its management fee beginning in September of 1986 pending the
generation of cash flow from the Partnership's investment properties. As
part of the settlement agreement finalized in the fourth quarter of fiscal
1997 regarding the class action lawsuit discussed further in Note 7, PWPI
agreed to waive any amounts due to it under the advisory contract with the
Partnership. Consequently, $1,265,000 of deferred management fees were
written off and recognized as an extraordinary gain in fiscal 1997.
Included in general and administrative expenses for the years ended
March 31, 1997, 1996 and 1995 is $42,000, $46,000 and $48,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins
earned fees of $2,000 (included in general and administrative expenses) for
managing the Partnership's cash assets for each of the three years in the
period ended March 31, 1997.
4. Operating Investment Property
As of March 31, 1996, the Partnership's balance sheet included one
operating investment property; the Summerwind Apartments, owned by Tara
Associates, Ltd., a majority owned and controlled joint venture. As
discussed further below, the Summerwind Apartments was sold on December 27,
1996 to an unrelated third party. Tara Associates, Ltd., a Georgia limited
partnership (the "joint venture"), was organized on December 19, 1983 to
acquire and operate a 208-unit apartment complex, Summerwind Apartments,
located in Jonesboro, Georgia. On October 8, 1985, the Partnership acquired
a 70% general partnership interest in the joint venture. The remaining 30%
general and limited partnership interests were owned by John Lie-Nielson
(the "co-venturer"). Effective February 23, 1990, the Tara Associates, Ltd.
joint venture agreement was amended to provide that the co-venturer's entire
general partnership interest be converted to a limited partnership interest.
The conversion of the co-venturer's interest to that of a limited partner
effectively gave the Partnership complete control over the investment
property. As a result, the accompanying financial statements present the
financial position and results of operations of the joint venture on a
consolidated basis, through the date of sale on December 27, 1996. As
discussed in Note 2, the Partnership's policy was to report the operations
of the joint venture on a three-month lag. Accordingly, despite completing
the sale in the third quarter of fiscal 1997, the operating results
reflected in the accompanying consolidated financial statements for fiscal
1997 include, effectively, a full twelve months of revenues and expenses of
the Summerwind joint venture.
The aggregate cash investment by the Partnership for its interest was
approximately $2,427,000 (including an acquisition fee of $141,000 paid to
the Adviser). The apartment complex was acquired subject to a mortgage loan
of $8,330,000 at the time of closing. On March 15, 1990, the mortgage loan
was refinanced, as discussed further in Note 6. The letter of credit
securing the bonds payable which encumbered the venture's operating
investment property was due to expire in March 1997. Unless the letter of
credit was replaced or extended, the venture's mortgage loan would have
become immediately due and payable as of the scheduled expiration date. On
December 27, 1996, Tara Associates, Ltd. sold the Summerwind Apartments to
an unrelated third party for a net price of $550,000 plus the assumption of
the outstanding principal balance of the mortgage loan secured by the
property of $8,330,000. The joint venture received net proceeds of
approximately $319,000 after deducting closing costs, accrued fees owed
under the financing arrangement, and other credits to the buyer. All of such
net proceeds were due to the Partnership under the terms of the joint
venture agreement. The Partnership made a special distribution to the
Limited Partners subsequent to year-end, on June 13, 1997, in the amount of
approximately $308,000, or $12 per original $1,000 investment, from the
proceeds of this transaction.
The joint venture agreement provided that distributable funds would be
distributed as follows: 1) to repay interest and principal on optional
loans; 2) to repay interest and principal on mandatory loans; 3) to the
Partnership until it had received $180,800 per calendar year for the period
from the date of organization; and 4) any remainder 70% to the Partnership
and 30% to the co-venturer. Net proceeds from a sale or refinancing were to
be made in the same manner as (1) through (3) above; and then: (4) to the
Partnership until it had received cumulative distributions of $2,599,000;
and; (5) any remainder, 70% to the Partnership and 30% to the co-venturer.
Losses were generally allocated 100% to the Partnership and income was
allocated in the same proportion as distributable funds. If no funds were
distributed, then income was allocated 100% to the Partnership.
The joint venture agreement provided that if additional cash was
required to fund negative cash flow for a period of 24 months ending in
October 1987 (the guaranty period), the co-venturer and an affiliate of the
co-venturer were obligated to fund any capital deficits, as defined, of the
joint venture. The joint venture received payments aggregating $647,485
through the end of the Guaranty Period. Such payments have been recorded as
a reduction in the basis of the operating investment property for financial
reporting purposes. For a period of twelve months following the guaranty
period, the co-venturer and an affiliate were obligated to make mandatory
loans to the joint venture to fund any negative cash flow. The mandatory
loans bore interest at the prime rate plus 1% of the lending institution. As
of December 27, 1996, the joint venture had mandatory loans payable to the
co-venturer and an affiliate of $357,000 and accrued interest payable on
such mandatory loans of $245,000. Because there were not sufficient proceeds
from the sale of the venture's operating property in December 1996 to
provide for the repayment of any of the principal or accrued interest on
these mandatory loans in accordance with the joint venture agreement, the
liability of the venture to repay such amounts was eliminated in fiscal
1997. As of the date of the sale transaction, such amounts were converted to
equity and then the co-venturer was allocated losses of $375,000 to
eliminate their remaining net equity position.
The joint venture had entered into a property management contract with
an affiliate of the co-venturer, cancellable at the Partnership's option
upon the occurrence of certain events. The management fee was equal to 5% of
the gross receipts, as defined.
The following is a summary of property operating expenses through the
date of sale on December 27, 1996 and for the years ended December 31, 1995
and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 177 $ 232 $ 208
Salaries and related expenses 145 162 153
Administrative and other 127 113 117
Property taxes 93 104 118
Utilities 98 84 88
Management fees 79 71 68
-------- -------- --------
$ 719 $ 766 $ 752
======== ======== ========
5. Investment in Unconsolidated Joint Venture
The Partnership has an investment in one unconsolidated joint venture,
St. Louis Woodchase Associates. The unconsolidated joint venture is
accounted for on the equity method in the Partnership's financial statements
based on financial information of the venture which is three months in
arrears to that of the Partnership.
Condensed financial statements of the unconsolidated joint venture, for
the periods indicated, are as follows:
Condensed Balance Sheets
December 31, 1996 and 1995
(in thousands)
Assets
------
1996 1995
---- ----
Current assets $ 172 $ 112
Operating investment property, net 7,686 7,822
Deferred expenses, net 133 125
-------- ---------
$ 7,991 $ 8,059
======== =========
Liabilities and Venturers' Capital (Deficit)
Current portion of long-term mortgage debt $ 82 $ 77
Other current liabilities 134 80
Other liabilities 42 42
Loans from venturers and accrued interest 393 370
Long-term mortgage debt 8,029 8,111
Partnership's share of venturers' capital 16 64
Co-venturer's share of venturers' deficit (705) (685)
--------- ----------
$ 7,991 $ 8,059
========= ==========
<PAGE>
Condensed Summary of Operations
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Rental revenues $ 1,534 $ 1,518 $ 1,443
Interest income 4 1 1
Other income 50 54 32
-------- -------- ----------
Total revenues 1,588 1,573 1,476
Property operating expenses 618 598 586
Mortgage interest expense 636 873 884
Depreciation expense 402 361 342
-------- --------- ----------
Total expenses 1,656 1,832 1,812
--------- --------- ----------
Net loss $ (68) $ (259) $ (336)
========= ========= ==========
Net loss:
Partnership's share of
net loss $ (47) $ (181) $ (236)
Co-venturer's share of
net loss (21) (78) (100)
--------- --------- ----------
$ (68) $ (259) $ (336)
========= ======== ==========
Reconciliation of Partnership's Investment
March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Partnership's share of capital at
December 31, as shown above $ 16 $ 64
Partnership's share of venture's current
liabilities 70 9
-------- --------
Investment in unconsolidated joint venture,
at equity at March 31 $ 86 $ 73
======== ========
Investment in unconsolidated joint venture, at equity, at March 31, 1997
and 1996 is the Partnership's net investment in the Woodchase joint venture.
The joint venture is subject to a partnership agreement which determines the
distribution of available funds, the disposition of the venture's assets and
the rights of the partners, regardless of the Partnership's percentage
ownership interest in the venture. As a result, substantially all of the
Partnership's investment in this joint venture is restricted as to
distributions.
A description of the unconsolidated joint venture's property and the terms of
the joint venture agreement are summarized below:
St. Louis Woodchase Associates - St. Louis, Missouri
----------------------------------------------------
St. Louis Woodchase Associates, a Missouri general partnership (the
"joint venture") was organized on December 27, 1985 by PaineWebber Growth
Partners Three, L. P., a Delaware limited partnership (the "Partnership")
and St. Louis Woodchase Company, Ltd. (the "co-venturer") to acquire and
operate Woodchase Apartments, a 186-unit apartment complex in St. Louis,
Missouri. The property was purchased on December 31, 1985.
The aggregate cash investment by the Partnership for its interest was
approximately $2,465,000 (including an acquisition fee of $145,000 paid to
the Adviser). The apartment complex was encumbered by a mortgage loan of
$10,200,000 at the time of purchase. On June 7, 1988 the joint venture which
owns the Woodchase Apartments entered into an agreement with the original
mortgage holder which permitted the repayment of the mortgage on July 1,
1988 at a discount of more than $2 million. During fiscal 1994, the joint
venture refinanced its $8,000,000 nonrecourse mortgage notes payable secured
by the operating investment property with the existing lender. The new note
payable had an effective date of November 1, 1993 and formally closed on
March 1, 1994. The note bore interest at 9% and was payable in monthly
installments, including principal and interest of $66,667 through November
1, 1998. Additional interest at the rate of 1.75% accrued monthly on the
outstanding principal balance and 10.75% accrued on the unpaid interest
balance. Subject to the terms of the loan agreement, net cash flow from
operations, as defined and if available, was to be applied to fund the
additional interest quarterly. In addition, the joint venture was required
to submit monthly escrow deposits of $3,875 for a replacement reserve.
Amounts in the replacement reserve were pledged as additional collateral for
the operating investment property. The mortgage loan was fully prepayable
without penalty through September 1995, after which time a prepayment
penalty would be owed on any prepayment prior to maturity. On September 13,
1995, the Partnership, along with its co-venture partner, refinanced the
mortgage debt secured by the Woodchase Apartments with a new lender. The new
non-recourse mortgage loan was in the initial principal amount of $8,200,000
and bears interest at a rate of 7.5% per annum. The new loan requires
monthly principal and interest payments of $57,000 and matures on October 1,
2002. The proceeds of the new loan were used to repay the existing $8
million debt as well as cover a portion of the refinancing costs. The
Partnership advanced $164,000 to the venture to cover the remaining
transaction costs. Although the principal amount of the new loan increased
slightly, the venture's annual debt service payments were reduced by
$112,000 due to the reduction in the interest rate, resulting in positive
cash flow for the joint venture. During the quarter ended December 31, 1995,
the Partnership received a distribution of $164,000 from the joint venture
in repayment of the advances referred to above which were made in connection
with the September 1995 refinancing transaction.
The joint venture agreement provides that the Partnership will receive from
available cash flow (after payment of any interest on operating loans by the
parties to the joint venture) an annual, cumulative preferred base return,
payable monthly, of 8% of the Partnership's net investment. Thereafter any
remaining cash flow shall be distributed 70% to the Partnership and 30% to
the co-venturer. The Partnership's cumulative preference return in arrears
totalled approximately $2,039,000 and $1,853,000 at December 31, 1996 and
1995, respectively.
After the end of each month during the year in which the Partnership has not
received its cumulative preference return, the co-venturer shall distribute
to the Partnership the lesser of (a) the excess, if any, of the
Partnership's cumulative preference return over the aggregate amount of net
cash flow previously distributed to the Partnership during the year or (b)
any net cash flow distributed to the co-venturer during the year.
Net income and net loss from operations shall be allocated in any year in
the same proportions as actual cash distributions, provided that the
co-venturer shall not be allocated less than 30% of the net income or net
loss after the Partnership has received cumulative losses equal to
$4,086,250. The Partnership was allocated cumulative losses equal to this
threshold during 1990. Additionally, the co-venturer shall not be allocated
net income in excess of cash distributions distributed to it during any
year.
Upon sale or refinancing, proceeds shall be distributed in the following
order of priority (after payment of mortgage debt and other indebtedness of
the joint venture): 1) the Partnership and the co-venturer shall receive any
amounts due for operating loans or additional cash contributions; 2) the
Partnership shall receive $2,685,250 plus certain closing costs incurred; 3)
the Partnership shall receive the aggregate amount of its cumulative annual
preference return not previously distributed; 4) the co-venturer shall
receive any accrued interest and principal of mandatory loans (as described
below); 5) the manager of the complex, an affiliate of the co-venturer,
shall receive any subordinated management fees. Any remaining proceeds shall
be distributed 70% to the Partnership and 30% to the co-venturer. Under the
terms of the joint venture agreement, both the Partnership and the
co-venturer have certain first refusal rights with respect to a sale of the
operating investment property.
The co-venturer guaranteed payment of all operating expenses and debt
service plus a $3,000 annual return to the Partnership from the date of
closing through December 31, 1987 (the Guaranty Period). The joint venture
received payments aggregating $347,000 during the Guaranty Period. Such
amounts have been recorded as a reduction of the basis of the operating
property for financial reporting purposes. The co-venturer was required to
make mandatory loans to the joint venture to pay all operating expenses and
debt service plus a $3,000 annual return to the Partnership for the
twelve-month period following the Guaranty Period. Mandatory loans totalling
$130,000 have been made by the co-venturer. Such loans bear interest at 1%
above the prime lending rate. The co-venturer was paid a fee of $288,000 in
consideration for its agreement to provide the guaranty and make the
mandatory loans. After the mandatory loan period, if additional cash is
required in connection with the joint venture, it may be provided by the
Partnership and the co-venturer as loans (evidenced by operating notes) to
the joint venture. Such loans are to be provided 70% by the Partnership and
30% by the co-venturer. Outstanding operating loans totalling $87,000 had
been made 100% by the co-venturer through December 31, 1995. During 1996,
the Partnership made an operating loan of $61,000 to the joint venture which
was used to repay the co-venturer for the 70% share of the principal amount
of the operating loans due from the Partnership under the agreement.
Interest payable to the co-venturer on the mandatory and operating loans
totalled $174,000 and $153,000 at December 31, 1996 and 1995, respectively.
Interest payable to the Partnership on its operating loan totalled $2,000 at
December 31, 1996.
The joint venture has entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the joint venture
upon the occurrence of certain events. The management fee is equal to 5% of
the gross receipts, as defined.
6. Note payable
Note payable at March 31, 1996 consisted of the following (in thousands):
1996
----
Mortgage loan payable by the
consolidated Tara Associates, Ltd.
which secured Housing Authority of
Clayton County Collateralized
Loan-to-Lender Housing Revenue
Bonds. The non-recourse mortgage
loan was secured by a deed to
secure debt and a security
agreement covering Tara Associates,
Ltd.'s real and personal property.
The loan bore interest at a
floating rate which was reset
weekly based on the market rate for
tax exempt securities with similar
maturities. The fair value of the
mortgage note payable approximated
its carrying value as of March 31,
1996. As discussed further in Note
4, on December 27, 1996 Tara
Associates, Ltd. sold the
Summerwind Apartments to an
unrelated third party which assumed
the outstanding first mortgage
loan. $ 8,330
========
The Summerwind Apartments were originally financed with the proceeds of
a 10 7/8% mortgage loan which secured $8,330,000 1983 Series A Housing
Authority of Clayton County Collateralized Loan-to-Lender Housing Revenue
Bonds. On March 15, 1990, the original loan secured by the Summerwind
Apartments was refinanced through the issuance of $8,330,000 of 1989 Series
Housing Authority of Clayton County Collateralized Loan-to-Lender Revenue
Bonds. The refinancing changed the interest rate on the bond from a fixed
rate of 10-7/8% per annum to a floating rate. The floating rate was reset
weekly based on the market rate for tax exempt securities with similar
maturities, as determined by the bond underwriter (3.9% at December 31,
1995). The maximum interest rate was 15%. Interest only was payable monthly
in arrears on the first day of each month and on the maturity date of the
loan.
The revenue bonds, which were secured by the mortgage loan, were also
secured by an irrevocable letter of credit agreement (the Agreement) between
the lender and the Housing Authority of Clayton County. The letter of
credit, which would have expired on March 16, 1997, was an irrevocable
obligation of the lender up to an amount sufficient to pay the then
outstanding principal of the bonds plus 45 days interest calculated at 15%
per annum. Under the terms of the Agreement, the joint venture paid a fee to
the lender at an annual rate of 1% of the mortgage loan. The fee was payable
monthly in arrears until termination of the Agreement. During 1996, 1995 and
1994, fees incurred under the letter of credit were $82,180, $83,300 and
$83,300, respectively, and are included in interest expense and related fees
in the accompanying statements of operations.
7. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court
for the Southern District of New York concerning PaineWebber Incorporated's
sale and sponsorship of various limited partnership investments and REIT
stocks, including those offered by the Partnership. The lawsuits were
brought against PaineWebber Incorporated and Paine Webber Group Inc.
(together "PaineWebber"), among others, by allegedly dissatisfied
partnership investors. In March 1995, after the actions were consolidated
under the title In re PaineWebber Limited Partnership Litigation, the
plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Third PW Growth Properties, Inc. and Properties
Associates 1985, L.P. ("PA1985"), which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court
certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interests in PaineWebber Growth
Partners Three L.P., PaineWebber, Third PW Growth Properties, Inc. and
PA1985 (1) failed to provide adequate disclosure of the risks involved; (2)
made false and misleading representations about the safety of the
investments and the Partnership's anticipated performance; and (3) marketed
the Partnership to investors for whom such investments were not suitable.
The plaintiffs, who purported to be suing on behalf of all persons who
invested in PaineWebber Growth Partners Three L.P., also alleged that
following the sale of the partnership interests, PaineWebber, Third PW
Growth Properties, Inc. and PA1985 misrepresented financial information
about the Partnership's value and performance. The amended complaint alleged
that PaineWebber, Third PW Growth Properties, Inc. and PA1985 violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with
the plaintiffs in the New York Limited Partnership Actions outlining the
terms under which the parties have agreed to settle the case. Pursuant to
that memorandum of understanding, PaineWebber irrevocably deposited $125
million into an escrow fund under the supervision of the United States
District Court for the Southern District of New York to be used to resolve
the litigation in accordance with a definitive settlement agreement and
plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs
submitted a definitive settlement agreement which provides for the complete
resolution of the class action litigation, including releases in favor of
the Partnership and PWPI, and the allocation of the $125 million settlement
fund among investors in the various partnerships and REITs at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the
partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A
final hearing on the fairness of the proposed settlement was held in
December 1996, and in March 1997 the court announced its final approval of
the settlement. The release of the $125 million of settlement proceeds has
not occurred to date pending the resolution of an appeal of the settlement
by two of the plaintiff class members. As part of the settlement agreement,
PaineWebber has agreed not to seek indemnification from the related
partnerships and real estate investment trusts at issue in the litigation
(including the Partnership) for any amounts that it is required to pay
under the settlement. As a result of this settlement, PaineWebber also
agreed to waive any amounts that it was due under the terms of the advisory
contract with the Partnership (see Note 3).
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including
those offered by the Partnership. The complaint alleged, among other things,
that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating
the risks and failing to state material facts concerning the investments.
The complaint sought compensatory damages of $15 million plus punitive
damages against PaineWebber. In September 1996, the court dismissed many of
the plaintiffs' claims as barred by applicable securities arbitration
regulations. Mediation with respect to the Abbate action was held in
December 1996. As a result of such mediation, a settlement between
PaineWebber and the plaintiffs was reached which provided for the complete
resolution of this action. Final releases and dismissals with regard to this
action were received subsequent to March 31, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the
class action settlement referred to above, management does not expect that
the resolution of these matters will have a material impact on the
Partnership's financial statements, taken as a whole.
<PAGE>
<TABLE>
<CAPTION>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER GROWTH PARTNERS THREE, L.P.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1997
(In thousands)
Costs
Capitalized Life on Which
(Removed) Depreciation
Initial Cost to Subsequent to Gross Amount at Which Carried at in Latest
Partnership Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
- - ----------- ------------ ---- ------------ ------------ ---- ------------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summerwind
Apartments
Jonesboro,
GA $ 8,330 $ 720 $ 8,611 $ (76) - - - - 1985 10/8/85 5 - 30 yrs
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes was approximately $9,461.
(B) See Note 6 of Notes to FinancialStatements for a description of the debt encumbering the property.
(C) Reconciliation of real estate owned:
(D) Costs removed subsequent to acquisition represent guaranty payments from the co-venturer (See Note 4).
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 9,174 $ 9,143 $ 9,127
Acquisitions and improvements 81 31 16
Reduction due to sale of operating
investment property (1) (9,255) - -
------- -------- --------
Balance at end of period $ - $ 9,174 $ 9,143
======= ======== ========
(E) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 3,336 $ 3,065 $ 2,795
Depreciation expense 272 271 270
Reduction due to sale of operating
investment property (1) (3,608) - -
-------- -------- ---------
Balance at end of period $ - $ 3,336 $ 3,065
======== ======== =========
(1)See Note 4 to the accompanying financial statements for a discussion of the sale of the Summerwind Apartments
on December 27, 1996.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
St. Louis Woodchase Associates:
We have audited the accompanying balance sheets of St. Louis Woodchase
Associates (the "Joint Venture") as of December 31, 1996 and 1995, and the
related statements of operations and changes in venturers' deficit, and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Joint Venture's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of St. Louis Woodchase
Associates at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/S/ERNST & YOUNG
----------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 13, 1997
<PAGE>
ST. LOUIS WOODCHASE ASSOCIATES BALANCE SHEET
December 31, 1996 and 1995
(In thousands)
ASSETS
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 125 $ 81
Escrow deposits 36 18
Prepaid expenses and other assets 11 13
-------- -------
Total current assets 172 112
Operating investment property, at cost:
Land 983 983
Building and improvements 10,261 10,114
Furniture and fixtures 957 838
-------- --------
12,201 11,935
Less accumulated depreciation (4,515) (4,113)
-------- --------
Net operating investment property 7,686 7,822
Deferred expenses, net of accumulated amortization
of $30 ($5 in 1995) 133 125
-------- ---------
$ 7,991 $ 8,059
======== =========
LIABILITIES AND VENTURERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 82 $ 77
Accounts payable and accrued expenses 38 27
Accrued interest 51 51
Payable to property manager 45 2
-------- ---------
Total current liabilities 216 157
Tenant security deposits 33 33
Distribution payable to venturer 9 9
Venturer loans and accrued interest 393 370
Long-term debt 8,029 8,111
Venturers' deficit (689) (621)
-------- ---------
$ 7,991 $ 8,059
======== =========
See accompanying notes.
<PAGE>
ST. LOUIS WOODCHASE ASSOCIATES
STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' DEFICIT
For the years ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental income $ 1,534 $ 1,518 $ 1,443
Interest income 4 1 1
Other revenues 50 54 32
--------- -------- ---------
1,588 1,573 1,476
Expenses:
Depreciation expense 402 361 342
Mortgage interest 636 873 884
Interest expense on partner loans 23 26 21
Repairs and maintenance 94 90 86
Salaries and related costs 144 114 117
Real estate taxes 88 85 105
Management fees 79 78 72
Utilities 74 75 63
General and administrative 73 89 82
Insurance 26 26 26
Professional fees 17 15 14
--------- -------- --------
1,656 1,832 1,812
--------- -------- --------
Net loss (68) (259) (336)
Venturers' deficit, beginning of year (621) (362) (26)
---------- --------- ---------
Venturers' deficit, end of year $ (689) $ (621) $ (362)
========= ======== ========
See accompanying notes.
<PAGE>
ST. LOUIS WOODCHASE ASSOCIATES
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (68) $ (259) $ (336)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 402 361 342
Amortization of deferred interest 25 75 19
Changes in assets and liabilities:
Escrow deposits (18) - (17)
Prepaid expenses and other assets 2 (1) (3)
Accounts payable and accrued expenses 11 1 (34)
Accrued interest - (195) 151
Accrued interest on venturer loans 23 26 21
Tenant security deposits - 4 3
Payable to property manager 43 (2) 4
------ ------- ----
Total adjustments 488 269 486
------ ------- ----
Net cash provided by operating activities 420 10 150
Cash flows from investing activities:
Additions to operating investment property (266) (151) (54)
Cash flows from financing activities:
Refund of refinancing deposit - - 40
Increase in deferred expenses (33) (130) (27)
Payments of principal on long-term debt (77) (7,914) (86)
Proceeds from long-term debt - 8,200 -
------- ------ ------
Net cash (used in) provided by
financing activities (110) 156 (73)
Net increase in cash and cash equivalents 44 15 23
Cash at beginning of year 81 66 43
------ ------- ----
Cash and cash equivalents, end of year $ 125 $ 81 $ 66
====== ====== =====
Cash paid during the year for interest $ 611 $ 993 $ 714
====== ====== =======
See accompanying notes.
<PAGE>
ST. LOUIS WOODCHASE ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
-------
St. Louis Woodchase Associates, a Missouri general partnership, (the
"Joint Venture") was organized on December 27, 1985 in accordance with a
Joint Venture Agreement between PaineWebber Growth Partners Three Limited
Partnership (the "Partnership") and St. Louis Woodchase Company, Ltd. (the
"Co-Venturer"). The Joint Venture was organized to purchase and operate an
apartment complex in St. Louis County, Missouri. The Partnership and the
Co-Venturer are currently discussing potential plans to attempt to market
and sell the operating investment property during 1997. There are no
assurances, however, that any sale transaction will be completed in the
near term as a result of such discussions.
Basis of Presentation
---------------------
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, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended
December 31, 1996. Actual results could differ from the estimates and
assumptions used.
Generally, the records of the joint venture are maintained on the
accrual basis of accounting used for federal income tax purposes and
adjusted to generally accepted accounting principles for financial reporting
purposes, principally for depreciation.
Operating investment property
-----------------------------
Operating investment property is stated at cost, net of accumulated
depreciation, or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets carrying
amount. SFAS No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of.
Depreciation expense is computed using the straight-line method over an
estimated useful life of thirty years for buildings and improvements and
five years for furniture and fixtures. Acquisition fees have been
capitalized and are included in the cost of the operating investment
properties.
Deferred expenses
-----------------
Deferred expenses relate to costs associated with certain debt
refinancing. Deferred financing costs are amortized using the straight-line
method over the respective terms of the loans. The amortization of such fees
is included in interest expense on the accompanying statements of
operations.
Cash and cash equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand, cash deposited with banks and certificates of deposit
with original maturities of three months or less.
Income tax matters
------------------
The Joint Venture is not a taxable entity and the results of its
operations are included in the tax returns of the partners. Accordingly, no
income tax provision is reflected in the accompanying financial statements.
<PAGE>
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash and cash equivalents and escrow deposits
approximates their fair value due to the short-term maturities of these
instruments. The fair value of the Joint Venture's long-term debt is
estimated using a discounted cash flow analysis, based on the current market
rate of similar types of borrowing arrangements. It is not practicable for
management to estimate the fair value of Venturer loans without incurring
excessive costs due to the unique nature of such obligations.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. The Joint Venture Agreement
The joint venture agreement provides that the Partnership will receive
from available cash flow (after payment of any interest on operating loans
by the parties to the joint venture) an annual, cumulative preferred base
return, payable monthly, of 8% of the Partnership's net investment.
Thereafter any remaining cash flow shall be distributed 70% to the
Partnership and 30% to the Co-Venturer. The Partnership's cumulative
preference returns in arrears were approximately $2,039,000 and $1,853,000
at December 31, 1996 and 1995, respectively.
After the end of each month during the year in which the Partnership
has not received its cumulative preference return, the Co-Venturer shall
distribute to the Partnership the lesser of (a) the excess, if any, of the
Partnership's cumulative preference return over the aggregate amount of net
cash flow previously distributed to the Partnership during the year or (b)
any net cash flow distributed to the Co-Venturer during the year.
Net income and net loss from operations shall be allocated in any year
in the same proportions as actual cash distributions, provided that the
Co-Venturer shall not be allocated less than 30% of the net income or net
loss after the Partnership has received cumulative losses equal to
$4,086,250. The Partnership was allocated cumulative losses equal to this
threshold during 1990. Additionally, the Co-Venturer shall not be allocated
net income in excess of cash distributions distributed to it during any
year.
Upon sale or refinancing, proceeds shall be distributed in the
following order of priority (after payment of mortgage debt and other
indebtedness of the Joint Venture): 1) the Partnership and the Co-Venturer
shall receive any amounts due for operating loans or additional cash
contributions; 2) the Partnership shall receive $2,685,250 plus certain
closing costs incurred; 3) the Partnership shall receive the aggregate
amount of its cumulative annual preference return not previously
distributed; 4) the Co-Venturer shall receive any accrued interest and
principal on mandatory loans (as described below); 5) the manager of the
complex, an affiliate of the Co-Venturer, shall receive any subordinated
management fees. Any remaining proceeds shall be distributed 70% to the
Partnership and 30% to the Co-Venturer.
The Co-Venturer guaranteed payment of all operating expenses and debt
service plus a $3,000 annual return to the Partnership from the date of
closing through December 31, 1987 (the Guaranty Period). The Joint Venture
received payments aggregating $347,290 during the Guaranty Period. Such
amounts have been recorded as a reduction of the basis of the operating
property for financial reporting purposes. The Co-Venturer was required to
make mandatory loans to the joint venture to pay all operating expenses and
debt service plus a $3,000 annual return to the Partnership for the
twelve-month period following the Guaranty Period. Mandatory loans totalling
$130,211 have been made by the Co-Venturer. Such loans bear interest at 1%
above the prime lending rate. The Co-Venturer was paid a fee of $288,000 in
consideration for its agreement to provide the guaranty and make the
mandatory loans. After the mandatory loan period, if additional cash is
required in connection with the Joint Venture, it may be provided by the
Partnership and the Co-Venturer as loans (evidenced by operating notes) to
the Joint Venture (see Note 3). Such loans are to be provided 70% by the
Partnership and 30% by the Co-Venturer and would bear interest at the prime
rate. In the event that a partner fails to make its respective share of a
loan, the other partner may make the loan to the Joint Venture for the
defaulting partner's share at twice the prime rate.
The joint venture has entered into a property management contract with
an affiliate of the Co-Venturer, cancellable at the option of the joint
venture upon the occurrence of certain events. The management fee is equal
to 5% of the gross receipts, as defined.
<PAGE>
3. Venturer loans
Venturer loans consist of the following (in thousands):
1996 1995
---- ----
Deficit loans, payable to the Co-Venturer,
interest at 1% over prime (9.25% at
December 31, 1996) $ 130 $ 130
Operating loan, payable to the Co-Venturer,
interest at prime (8.25% at December 31, 1996) 26 26
Operating loan, payable to the Partnership, interest
at prime (8.25% at December 31, 1996) 61 -
Operating loan, payable to the Co-Venturer,
repaid during 1996 - 61
------ ---------
$ 217 $ 217
====== =========
Repayment of the above loans (and accrued interest) is limited to net
cash flow and capital proceeds, as defined. Unpaid interest on partner loans
at December 31, 1996 and 1995 totalled approximately $176,000 and $153,000,
respectively. Interest on the $61,000 operating loan payable to the
Co-Venturer, the principal of which was repaid during 1996, totalling
$64,000 at December 31, 1996, is first in priority for payment from net cash
flow available for distribution.
4. Long-term debt
Long-term debt was refinanced September 14, 1995 and consists of a 7.5%
nonrecourse mortgage note secured by the operating investment property and
an assignment of rents and leases. The mortgage is payable in monthly
installments, including principal and interest, of $57,336 through October
1, 2002, at which time the final principal installment of $7,540,598 plus
any unpaid accrued interest is due. In addition, the property submits
monthly escrow deposits of $8,531 for tax escrow. Debt refinancing costs of
$32,725 and $130,298 were capitalized during 1996 and 1995, respectively.
The fair value of the mortgage note payable approximated its carrying value
as of December 31, 1996.
The scheduled annual principal payments to retire the long-term debt
are as follows (in thousands):
1997 $ 82
1998 89
1999 96
2000 103
2001 111
Thereafter 7,630
-------
$ 8,111
=======
<PAGE>
<TABLE>
<CAPTION>
Schedule III - Real Estate and Accumulated Depreciation
ST. LOUIS WOODCHASE ASSOCIATES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
Costs
Capitalized Life on Which
(Removed) Depreciation
Initial Cost to Subsequent to Gross Amount at Which Carried at in Latest
Partnership Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
- - ----------- ------------ ---- ------------ ------------ ---- ------------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Woodchase
Apartments
St. Louis,
MO $ 8,111 $1,013 $9,924 $1,264 $983 $11,218 $12,201 $ 4,515 1985 12/31/85 5 - 30 yrs.
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $12,260.
(B) See Note 4 of Notes to Financial Statements for a description of the debt encumbering the property.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 11,935 $ 11,784 $ 11,730
Acquisitions and improvements 266 151 54
-------- -------- --------
Balance at end of period $ 12,201 $ 11,935 $ 11,784
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 4,113 $ 3,752 $ 3,410
Depreciation expense 402 361 342
--------- --------- ----------
Balance at end of period $ 4,515 $ 4,113 $ 3,752
========= ========= ==========
(E) Costs capitalized subsequent to acquisition are net of certain guaranty payments from the co-venturer (see Note 2).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended March 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,112
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,112
<PP&E> 86
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,198
<CURRENT-LIABILITIES> 26
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,172
<TOTAL-LIABILITY-AND-EQUITY> 1,198
<SALES> 0
<TOTAL-REVENUES> 5,045
<CGS> 0
<TOTAL-COSTS> 1,241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 558
<INCOME-PRETAX> 3,246
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,246
<DISCONTINUED> 0
<EXTRAORDINARY> 1,265
<CHANGES> 0
<NET-INCOME> 4,511
<EPS-PRIMARY> 167.01
<EPS-DILUTED> 167.01
</TABLE>
