U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1995
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: 0-17881
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
Virginia 04-2985890
(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
January 4, 1988, as supplemented
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
1995 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-3
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-33
PART I
ITEM 1. BUSINESS
PaineWebber Equity Partners Three Limited Partnership (the "Partnership") is
a limited partnership formed in May 1987 under the Uniform Limited Partnership
Act of the State of Virginia to invest in a diversified portfolio of existing,
newly-constructed or to-be-built income-producing operating properties such as
apartments, shopping centers, hotels, office buildings and industrial
buildings. The Partnership sold approximately $50,468,000 in Limited
Partnership Units, at $1,000 per Unit, from January 4, 1988 to September 1, 1989
pursuant to a Registration Statement on Form S-11 filed under the Securities Act
of 1933 (Registration No. 33-14489). Limited Partners will not be required to
make any additional capital contributions.
As of March 31, 1995, the Partnership owned, through joint venture
partnerships, interests in the operating properties set forth in the following
table:
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
DeVargas Center Joint Venture retail 4/19/88 Fee ownership of land
DeVargas Mall shopping and improvements
Santa Fe, New Mexico center on (through joint venture)
18.3 acres
with 248,000
net leasable
square feet
Portland Pacific Associates thirteen 9/20/88 Fee ownership of land
Two one-, two- and improvements
Willow Grove Apartments and three- (through joint venture)
Beaverton, Oregon story
apartment
buildings
on 6.2 acres
with 119 units
Richmond Paragon Partnership six-story 9/26/88 Fee ownership of land
One Paragon Place Office office and improvements
Building building (through joint venture)
Richmond, Virginia on 8.2
acres with
146,614 net
leasable
square feet
Colony Plaza General retail 1/18/90 Fee ownership of land
Partnership shopping and improvements
Colony Plaza Shopping Center center on (through joint venture)
Augusta, Georgia 33.33 acres
with 216,712
net leasable
square feet
(1)See Notes to the Financial Statements filed with this Annual Report for
descriptions of the agreements through which the Partnership has acquired
these operating investment properties.
The Partnership's investment objectives are to invest the proceeds raised
from the offering of limited partnership units in a diversified portfolio of
income-producing properties in order to:
(i) preserve and protect the Limited Partners' capital,
(ii) provide the Limited Partners with quarterly cash distributions, a
portion of which will be sheltered from current federal income tax
liability, and
(iii) achieve long-term capital appreciation in the value of the
Partnership's investment properties.
Through March 31, 1995, the Limited Partners have received cumulative cash
distributions of approximately $20,210,000. Quarterly distributions were paid
at the rate of 8% per annum on invested capital from inception through the
quarter ended September 30, 1991. The distributions were reduced to 5% per
annum effective for the quarter ended December 31, 1991 and were paid at that
rate through the quarter ended June 30, 1994. Effective for the quarter ended
September 30, 1994, the distribution rate was reduced to 2% per annum. A
substantial portion of the distributions paid to date has been sheltered from
current federal income tax liability. In addition, the Partnership retains an
ownership interest in all four of its original investment properties.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of the
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their liquidation, which
cannot presently be determined. While real estate values for commercial office
buildings and retail shopping centers have generally stabilized over the past 12
to 24 months, the current market values of the Partnership's commercial office
building and two retail shopping centers are estimated to be below their
acquisition prices due to the residual effects of the overbuilding which
occurred in the late 1980's and, in the case of the office building, the trend
toward corporate downsizing and restructurings which occurred in the wake of the
last national recession. The market for multi-family residential properties
throughout the country continued to show signs of improvement during fiscal
1995, as the ongoing absence of significant new construction activity further
improved upon the supply and demand characteristics facing existing properties.
Management believes that overall real estate market conditions will improve
further in the near term. With respect to the Partnership's office building and
shopping center investments, it remains to be seen whether conditions will
improve sufficiently during the current market cycle to bring the market values
back to or above the amounts of the Partnership's original investments.
Management's plans are presently to hold the majority of the investment
properties for long-term investment purposes and to direct the management of the
operations of the properties to maximize their long-term values.
All of the Partnership's investment properties are located in real estate
markets in which they face significant competition for the revenues they
generate. 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 local single family home market for prospective
tenants. Despite this competition, the lack of significant new construction of
multi-family housing over the past 2-to-3 years has allowed the oversupply which
existed in most markets to be absorbed, with the result being a gradual
improvement in occupancy levels and effective rental rates and a corresponding
increase in property values. The Partnership's shopping centers and office
building investments also compete for long-term commercial tenants with numerous
projects of similar type generally on the basis of price, location and tenant
improvement allowances.
The Partnership has no property investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment, therefore presentation of information about industry segments is not
applicable.
The Partnership has no employees; it has however, entered into an advisory
agreement with PaineWebber Properties Incorporated (PWPI), which is responsible
for the day-to-day operations of the Partnership. PWPI is a wholly-owned
subsidiary of PaineWebber Incorporated (PWI), a wholly-owned subsidiary of
PaineWebber Group Inc. (PaineWebber). The managing general partner of the
Partnership is Third Equity Partners,
Inc. (the `Managing General Partner''), a wholly owned subsidiary of PWI. The
associate general partners of the Partnership (the `Associate General
Partners') are PaineWebber Partnerships, Inc., a wholly owned subsidiary of
PaineWebber and Properties Associates 1988 L.P., a Virginia limited partnership.
The general partner of Properties Associates 1988, L.P. is PAM Inc., a wholly
owned subsidiary of PWPI. The officers of PaineWebber Partnerships, Inc. and
PAM Inc. are also officers of the Managing General Partner.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner are set forth in Items 11 and 13 below to which
reference is hereby made for a description of such terms and transactions.
ITEM 2. PROPERTIES
The Partnership has acquired interests in four operating properties through
joint venture partnerships. These joint venture partnerships and the related
properties are referred to under Item 1 above to which reference is made for the
name, location and description of the properties.
Occupancy figures for each fiscal quarter during 1995, along with an average
for the year, are presented below for each property:
Percent Occupied At
Fiscal
1995
6/30/94 9/30/94 12/31/94 3/31/95 Average
DeVargas Mall 85% 84% 86% 90% 86%
Willow Grove Apartments 97% 97% 97% 95% 97%
One Paragon Place 96% 98% 98% 99% 98%
Colony Plaza Shopping Center 96% 96% 96% 96% 96%
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, 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 Equity Partners, Inc. and Properties
Associates 1988, L.P. (`PA1988''), which are 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 alleges
that, in connection with the sale of interests in PaineWebber Equity Partners
Three Limited Partnership, PaineWebber, Third Equity Partners, Inc. and PA1988
(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
purport to be suing on behalf of all persons who invested in PaineWebber Equity
Partners Three Limited Partnership, also allege that following the sale of the
partnership interests, PaineWebber, Third Equity Partners, Inc. and PA1988
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Third Equity
Partners, Inc. and PA1988 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
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
seek treble damages under RICO. The defendants' time to move against or answer
the complaint has not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual
obligations, under certain circumstances the Partnership may be required to
indemnify Third Equity Partners, Inc., PA1988 and their affiliates for costs and
liabilities in connection with this litigation. The General Partners intend to
vigorously contest the allegations of the action, and believe that the action
will be resolved without material adverse effect on the Partnership's financial
statements, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED
SECURITY HOLDER MATTERS
At March 31, 1995, there were 3,793 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for the Units will develop. The Managing General Partner
will not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Limited Partners during fiscal 1995.
ITEM 6. SELECTED FINANCIAL DATA
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
FOR THE YEARS ENDED MARCH 31, 1995, 1994, 1993, 1992 AND 1991
(IN THOUSANDS EXCEPT FOR PER UNIT DATA)
Years ended March 31,
1995 1994 1993 1992 1991
[S] [C] [C] [C] [C] [C]
Revenues $ 1,450 $ 1,273 $ 1,309 $ 1,362 $ 1,289
Operating loss $(1,420) $(1,378) $(1,284) $ (1,085) $ (989)
Partnership's share of
unconsolidated ventures'
income $ 593 $ 222 $ 658 $ 1,241 $ 1,410
Net income (loss) $ (827) $(1,156) $ (626) $ 156 $ 421
Net income (loss) per
Limited Partnership
Unit $ (16.21) $ (22.66) $(12.27) $ 3.05 $ 8.26
Cash distributions per
Limited Partnership Unit $ 35.00 $ 50.00 $ 50.00 $ 72.50 $ 80.00
Total assets $40,333 $43,667 $45,673 $ 47,231 $49,800
Notes payable and
accrued interest $16,707 $17,304 $15,604 $ 14,024 $12,647
The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
Annual Report.
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 50,468 Limited Partnership Units outstanding during each
year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership offered Units of Limited Partnership Interests to the public
from January 1988 to September 1989 pursuant to a Registration Statement filed
under the Securities Act of 1933. The offering raised gross proceeds of
approximately $50,468,000. The Partnership also received $10,500,000 from the
proceeds of zero coupon loans, as discussed further below and in Note 6 to the
accompanying financial statements. The loan proceeds, net of financing expenses
of $352,000, were used to pay offering and organization costs, acquisition fees,
and acquisition-related expenses of the Partnership, in addition to financing a
portion of the Partnership's cash reserves. The Partnership originally invested
approximately $49,041,000 (net of acquisition fees of $2,523,000) in four
operating investment properties through joint venture partnerships. As of March
31, 1995, the Partnership retained its ownership interest in all four of these
properties, which consist of two retail shopping centers, one office building,
and one multi-family apartment complex. During fiscal 1995, management
continued negotiations with the lenders of
the Partnership's zero coupon loans as part of an overall strategy to refinance
these loans, which were originally incurred to finance the Partnership's public
offering costs. This strategy is aimed at preventing the further accumulation
of accrued interest by replacing the outstanding obligations with conventional
financing which would require the payment of interest and principal on a current
basis. As a result of this expected additional debt service, there will be a
reduction in current cash flows from the properties to the Partnership. In
addition, there is an ongoing need to use a portion of the earnings from the
operating properties to fund planned capital work at the Partnership's three
commercial properties. This work includes capital enhancements, tenant
improvements and leasing commissions at each of these properties. As previously
reported, the reduction in cash flows from the properties, combined with the
aforementioned capital needs, resulted in the reduction of the quarterly
distribution rate from 5% per annum to 2% beginning with the payment made on
November 15, 1994 for the quarter ended September 30, 1994. Distributions are
expected to continue to be paid at a rate of 2% throughout fiscal 1996, unless
actual results of operations, economic conditions or other factors differ
substantially from the assumptions used in setting the planned distribution
rate.
During the fourth quarter of fiscal 1995, the Partnership closed on the
first of the three required refinancing transactions involving the zero coupon
loans. In March 1995, the zero coupon loan secured by the Willow Grove
Apartments, which had an outstanding balance of $2,473,000, was repaid in full
from the proceeds of a new $3,600,000 loan to the Willow Grove joint venture.
The new mortgage loan is secured by the Willow Grove Apartments, bears interest
at a rate of 9.59% and requires monthly principal and interest payments of
approximately $32,000 through maturity, in March 2002. Excess refinancing
proceeds of approximately $1,050,000 were distributed to the Partnership and
were added to the balance of cash reserves. In order to facilitate this
refinancing transaction, in January 1995 the Partnership paid the Willow Grove
co-venturer $233,000 to buy-out its joint venture interest. The Willow Grove
joint venture agreement restricted the Partnership's ability to refinance the
property's zero coupon loan with debt in excess of $2.5 million without the co-
venture partner's consent, which it had been unwilling to grant. The
Partnership desired to employ the additional borrowing capacity of the Willow
Grove asset in order to secure the funds necessary to complete the One Paragon
Place refinancing discussed further below. In addition to affording the
Partnership the flexibility to proceed with its refinancing plans, the buyout of
the co-venturer's interest gives the Partnership complete control over the
venture's operations and eventual disposition decisions with respect to the
operating investment property. The former co-venture partner has been retained
in a property management capacity under a contract which is cancellable for any
reason upon 30 days' written notice from the Partnership. The Willow Grove
Apartments averaged 97% occupancy during fiscal 1995. In addition, with an
overall market vacancy factor of only 4%, the use of rental concessions in the
Beaverton area (a suburb of Portland, Oregon) has diminished. As a result,
effective rental rates have increased slightly. Management expects further
improvement in such market conditions in the near term.
At March 31, 1995, the zero coupon loan secured by the Colony Plaza
shopping center had an outstanding balance of $6,933,000. The loan is scheduled
to mature in December of 1996, at which time approximately $8,290,000 would be
due. Management is presently in discussions with various lenders to refinance
the Colony Plaza note payable. At the same time, management has been working
with Wal-Mart on the logistics of a possible expansion of its store at Colony
Plaza. During fiscal 1995, management learned that the cost of completing
construction for the expansion was more than Wal-Mart had originally budgeted.
Concerns over these estimated construction costs resulted in delays in the
decision to proceed with the original expansion concept, which involved an
increase in the size of the Wal-Mart store from its current 82,000 square feet
to 120,000 square feet. Management has been working with Wal-Mart to review
various alternatives to the original expansion plan, including the possibility
of an expansion of the current store to a "superstore" configuration. Over the
past 3 to 4 years, Wal-Mart has significantly changed its prototype store
concept, requiring larger stores with additional expansion space to accommodate
increasing per store sales volume. More recently, Wal-Mart has begun building
"superstores", which contain up to 200,000 square feet and include a grocery
store component in addition to a Wal-Mart discount store. This practice
reflects a broader trend among many retailers to emphasize larger properties and
to close smaller, more marginal stores. Under the lease terms of the center's
existing grocery tenant, the Partnership would need to obtain this tenant's
consent to permit the opening of an additional grocery operation at the shopping
center. Since a Wal-Mart superstore would compete directly with the existing
grocery's operation, this tenant has expressed initial reluctance to grant such
consent. Moreover, subsequent to year-end, management has learned that Wal-
Mart's preference appears to be to construct a superstore at another identified
site in the Augusta market and to vacate Colony Plaza upon the completion of
construction. In the event that Wal-Mart proceeds with such plans, the
construction of a new superstore is not likely to be completed until sometime in
calendar 1997. In the event Wal-Mart does vacate the center, it would remain
obligated to pay rent and its share of operating expenses through the term of
its lease, which expires in March 2009. However, the loss of the center's
principal anchor tenant would likely adversely affect the Partnership's ability
to retain existing tenants and to lease vacant space at the center. Since the
loan-to-value ratio of the debt to be refinanced on Colony Plaza is relatively
high, the status of the Wal-Mart anchor store at the center could be critical to
the refinancing efforts. Nonetheless, the Partnership is moving forward with
its refinancing efforts in an attempt to take advantage of the favorable current
interest rate environment. Management remains cautiously optimistic that the
recent strong operating performance of the center and the favorable local market
characteristics will enable the Partnership to refinance the zero coupon loan
obligation despite the uncertainty regarding Wal-Mart's future tenancy at Colony
Plaza.
The Partnership has been in negotiations with the existing lender on the
zero coupon loan secured by One Paragon Place regarding conversion of this note
to a conventional current-pay loan and is also seeking possible replacement
financing. Management has requested from the lender a four-year extension of
the maturity date and terms which would include a reduced rate of interest on
the balance of the loan going forward. Both the Partnership's modification
proposal or any refinancing transaction would require a paydown of approximately
$1.3 million on the outstanding debt balance in order to satisfy lender loan-to-
value ratio requirements. The Partnership has sufficient funds to make such a
principal paydown as a result of the Willow Grove refinancing transaction
described above. The zero coupon loan secured by the One Paragon Place Office
Building, in the initial principal amount of $5,000,000, had an outstanding
balance as of March 31, 1995 of approximately $9,774,000 and is scheduled to
mature in November of 1995, at which time approximately $10,386,000 would be
due. Management expects to close on a loan modification or refinancing
transaction by the second quarter of fiscal 1996. One Paragon Place averaged
98% occupancy for fiscal 1995. The suburban Richmond, Virginia office market
continues to strengthen with high occupancy levels and improving rental rates as
a result of the absence of significant new construction. Rental income from One
Paragon Place increased by 5% over the previous fiscal year. As part of an
ongoing maintenance program, the property's management team completed a number
of capital improvements including recarpeting several floors during fiscal 1995.
Over the next year, management expects to spend approximately $82,000 to
continue capital improvements as well as to pay for certain possible tenant
improvements and leasing commissions on the small remaining vacant space. In
addition, subsequent to year-end one of the property's major tenants negotiated
a buyout of its lease obligation with respect to approximately one-half of its
current space of approximately 53,000 square feet. Under the terms of the
buyout agreement, the tenant will pay a current market rental rate on its
remaining 27,000 square feet through the remainder of its lease term, which runs
through July 1998. In addition, the tenant agreed to continue to pay rent
through May 1995 on the 26,000 square feet of vacated space and will pay a lump
sum of $500,000 to the joint venture, which should be sufficient to cover the
expected costs of re-leasing the space. Since annual market rental rates are
presently above this tenant's former lease rate by approximately $2 per square
foot, overall cash flow from the property will increase once replacement tenants
are secured. Management expects to be able to re-lease this space quickly given
the property's favorable competitive position in this strengthening market.
As further discussed in Note 5 to the accompanying financial statements, in
January 1995 the Lessee of the Colony Plaza master lease agreement entered into
a settlement agreement with the Partnership which terminated the master lease
agreement. At the time of the purchase of the operating investment property,
the Partnership entered into a master lease agreement with the seller of the
operating property and certain other affiliates of the co-venturer (the
"Guarantors"). Under the terms of the master lease, the Guarantors guaranteed
for a period of three years from the date that the shopping center achieved a
specified occupancy level that aggregate net cash flow from all non-anchor
tenants would not be less than the aggregate pro-forma net cash flow from non-
anchor tenants projected at time of the purchase. During 1991, the Lessee
defaulted on its obligation under the master lease and the Partnership received
an amount of cash collateral to apply to future obligations. The remaining
balance of the cash collateral was exhausted in January 1992. Through December
31, 1994, no other amounts had been received toward the Lessee's obligation
under the master lease, resulting in an outstanding balance due of approximately
$618,000. The January 1995 settlement agreement terminated the master lease
effective December 31, 1994. The original termination date of the master lease
agreement was to have been February 27, 1997. In accordance with the settlement
agreement, on January 27, 1995 the Partnership received a cash payment of
approximately $348,000 toward the outstanding obligation of $618,000 discussed
above. In addition, the Partnership received a promissory note from the Lessee
in the amount of $160,000 which will accrue interest at 8.5% and is due December
31, 1997. The Lessee also assigned its rights to certain future development and
leasing fees which will be credited against the outstanding balance of the
promissory note if earned. The remaining master lease obligation, after the
cash payment and the promissory note, was forgiven under the terms of the
settlement agreement.
The DeVargas Mall experienced a positive trend in occupancy during the
second half of fiscal 1995, ending the year at 90% after dropping to a low of
84% as of the end of the second quarter. However, a tenant occupying
approximately 16,000 square feet plans to vacate the Mall in early fiscal 1996.
During the upcoming year the DeVargas joint venture has budgeted approximately
$777,000 for capital items primarily related to tenant improvements and leasing
costs which might be required if the venture is successful in obtaining tenants
to lease the majority of the available space at the Mall. There are two
significant lease proposals currently pending with regard to the available
space, one for 30,000 square feet and another for 20,000 square feet, which, if
successfully executed, would accomplish management's leasing objectives and
effectively bring the Mall to full occupancy. Over the past 2 years, management
has been successful in altering the tenant roster at the Mall to obtain a more
complementary mix of retailers. Funding of the required tenant improvements
would likely be accomplished by means of additional advances under the lines of
credit provided by the Partnership's co-venture partner. To date, the co-
venturer has provided financing in the amount of approximately $3 million to
fund prior expansion and leasing costs. The venture pays interest on such
advances at the rate of prime plus 1%.
During fiscal 1995, the Partnership received distributions totaling
approximately $3,791,000 from its four operating investment properties
(including approximately $1,402,000 from the consolidated joint venture).
Theseproperty distributions represent the primary source of future liquidity
for the
Partnership prior to the sales or refinancings of its operating investment
properties. The Partnership's sources of liquidity are expected to be
sufficient to meet its needs on a both short-term and long-term basis. At March
31, 1995, the Partnership and its consolidated joint venture had available cash
and cash equivalents of approximately $3,824,000. These funds will be utilized
for the working capital requirements of the Partnership, distributions to
partners, refinancing expenses related to the Partnership's zero coupon loans
and to fund capital enhancements and tenant improvements for the operating
investment properties, if necessary, in accordance with the respective joint
venture agreements.
RESULTS OF OPERATIONS
1995 Compared to 1994
The Partnership reported a net loss of $827,000 for the year ended March 31,
1995, as compared to a net loss of $1,156,000 for the prior year. The decrease
in net loss can be primarily attributed to an increase in rental revenues from
the consolidated Colony Plaza joint venture and an increase in the Partnership's
share of unconsolidated ventures' income. The increase in rental revenues at
Colony Plaza, of $129,000, was mainly due to the full 12 month effect of the
leasing gains achieved at the center during the prior year. Colony Plaza began
calendar 1993 with an occupancy level of 91%. Occupancy had increased to 96%
by the beginning of calendar 1994 and remained at 96% throughout the year. An
increase in interest expense of $165,000 offset the increase in Colony Plaza
revenues and caused an increase in the Partnership's operating loss of
approximately $42,000 for fiscal 1995. Interest expense on the Partnership's
zero coupon loans continued to increase in fiscal 1995 due to the effects of the
semi-annual compounding. As discussed further above, management is involved in
refinancing negotiations at the present time and expects that overall interest
costs will be lowered upon the completion of the contemplated transactions.
The Partnership's share of unconsolidated ventures' income increased by
$371,000 over fiscal 1994. Improved operating results at the Willow Grove
Apartments and the One Paragon Place Office Building contributed significantly
to this favorable change. The increased occupancy and rental rates during the
year at both properties were the primary contributors to the $419,000 increase
in combined rental revenues for calendar 1994. In addition, the calendar 1993
results reflected a $236,000 loss on disposal of tenant improvements from the
One Paragon Place joint venture due to certain tenants vacating the property
prior to their lease expirations. No such losses were reported for calendar
1994. Although revenues at DeVargas Mall did increase slightly over the past
year, the increase in expenses more than off set the revenue gains contributing
to a lower net income in fiscal 1995. Interest expense showed the sharpest rise
over fiscal 1994 as a result of the higher outstanding balances on the joint
venture's line of credit borrowings referred to above. Borrowings under the
lines of credit from the co-venturer for calendar 1994 totalled approximately $1
million, which was used to fund costs associated with tenant improvements and
leasing expenses at the property. Depreciation expense at the DeVargas Mall and
the One Paragon Office Building also increased as a result of the significant
property and tenant improvements that have taken place over the past two years.
1994 Compared to 1993
The Partnership's net loss increased by $530,000 for the year ended March
31, 1994 when compared to fiscal 1993. This change was the result of a decline
in the Partnership's share of unconsolidated ventures' income coupled with an
increase in the operating loss of the Partnership.
The increase in the Partnership's operating loss of $93,000 was mainly the
result of an increase in interest expense on the Partnership's zero coupon loans
combined with a decrease in revenues. Interest expense on the Partnership's
zero coupon loans increased by $120,000 for the year ended March 31, 1994 due to
the semi-annual compounding effect referred to above. Revenues decreased due to
a decline in rental revenues at the Colony Plaza Shopping Center and a decrease
in interest income due to lower average cash balances and interest rates in
fiscal 1994. Rental revenues decreased slightly at Colony Plaza, despite an
increase in occupancy, due to a small decline in market rental rates.
Nonetheless, the property's tenant roster stabilized during fiscal 1994, as
evidenced by the decline in bad debt expense. In fact, revenues net of bad debt
expense actually increased when compared to fiscal 1993. An increase in
Partnership general and administrative expenses also contributed to the increase
in operating loss in fiscal 1994. General and administrative expenses increased
by approximately $31,000, mainly due to certain costs incurred in connection
with an independent valuation of the Partnership's operating properties which
was commissioned in conjunction with management's ongoing refinancing efforts.
The Partnership's share of unconsolidated ventures' income decreased by
approximately $437,000 when compared to the year ended March 31, 1993. A large
portion of this decline was the result of a decrease in combined rental
revenues. At the One Paragon Place Office Building, rental revenues were lower
during fiscal 1994 partly due to the full twelve-month effect of a number of
lease rollovers that were renewed at market rents during fiscal 1993. As of
fiscal 1993 market rents had declined significantly in the Richmond market since
the time of the property's acquisition. The large decrease in revenues at One
Paragon Place was partially offset by an increase in rental revenues at both the
Willow Grove Apartments and DeVargas Mall. In addition, combined operating
expenses increased for the year ended March 31, 1994 due to generally higher
repairs and maintenance expenses. Also, depreciation expense increased mainly
due to charges related to tenant improvement costs capitalized at the One
Paragon Place joint venture during fiscal 1994 and 1993.
1993 Compared to 1992
For the year ended March 31, 1993, the Partnership reported a net loss of
$626,000, as compared to net income of $156,000 in fiscal 1992. This
unfavorable change in the Partnership's net operating results was caused
primarily by a decrease in the Partnership's share of unconsolidated ventures'
income as well as an increase in the operating loss of the Partnership.
The Partnership's operating loss increased by $199,000 in fiscal 1993 when
compared to fiscal 1992. This increase was primarily the result of an increase
of $202,000 in interest expense on the Partnership's outstanding zero coupon
loans. Interest expense on the Partnership's zero coupon loans increased due to
the aforementioned semi-annual compounding effect. The net operating results of
the Partnership's consolidated joint venture, Colony Plaza General Partnership,
remained relatively unchanged compared to fiscal 1992.
The Partnership's share of unconsolidated ventures' income declined by
$582,000 in fiscal 1993 when compared to fiscal 1992. The major portion of this
decrease was the result of the non-cash write-off of certain capitalized tenant
improvements at the One Paragon Place Office Building. A loss of $476,000 was
recorded on these improvements in fiscal 1993, which were replaced during the
year. Another portion of the decrease in unconsolidated ventures' income can be
attributed to an increase in depreciation expense at the DeVargas Center Joint
Venture. Depreciation expense increased at DeVargas due to the expansion of the
Mall's movie cinema in fiscal 1993.
Inflation
The Partnership completed its seventh full year of operations in fiscal
1995. 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. Some of the
existing leases with tenants at the Partnership's three commercial investment
properties contain rental escalation and/or expense reimbursement clauses based
on increases in tenant sales or property operating expenses. Rental rates at
the Partnership's one residential investment property can be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases, which
are short-term in nature, 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.
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. PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
The Managing General Partner of the Partnership is Third Equity Partners,
Inc., a Delaware corporation, which is a wholly owned subsidiary of PaineWebber
Group Inc. ("PaineWebber"). The Associate General Partners of the Partnership
are PaineWebber Partnerships, Inc., a wholly owned subsidiary of PaineWebber and
Properties Associates 1988 L.P., a Virginia limited partnership. The general
partner of Properties Associates 1988, L.P. is PAM Inc., a wholly owned
subsidiary of PaineWebber Properties Incorporated ("PWPI"). The officers of
PaineWebber Partnerships, Inc. and PAM Inc. are also officers of the Managing
General Partner. The Managing General Partner has overall authority and
responsibility for the Partnership's operations.
(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
Lawrence A. Cohen President and Chief Executive
Officer 41 5/15/91
Albert Pratt Director 84 2/27/87 *
J. Richard Sipes Director 48 6/9/94
Walter V. Arnold Senior Vice President and
Chief Financial Officer 47 2/27/87 *
James A. Snyder Senior Vice President 49 7/6/92
John B. Watts III Senior Vice President 42 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 52 2/27/87 *
Timothy J. Medlock Vice President and Treasurer 33 6/1/88
Thomas W. Boland Vice President 32 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 or
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. The business experience of each of the directors and principal
executive officers of the Managing General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of PWPI, which he
joined in January 1989. He is also a member of the Board of Directors and the
Investment Committee of PWPI. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty Partners where he was responsible for origination and
structuring of real estate investment programs and for managing national broker-
dealer relationships. He is a member of the New York Bar and is a Certified
Public Accountant.
Albert Pratt is a Director of the Managing General Partner, a Consultant of
PWI and a general partner of the Associate General Partner. Mr. Pratt joined
PWI as Counsel in 1946 and since that time has held a number of positions
including Director of both the Investment Banking Division and the International
Division, Senior Vice President and Vice Chairman of PWI and Chairman of
PaineWebber International, Inc.
J. Richard Sipes is a Director of the Managing General Partner and a Director
of the Adviser. Mr. Sipes is an Executive Vice President at PaineWebber. He
joined the firm in 1978 and has served in various capacities within the Retail
Sales and Marketing Division. Before assuming his current position as Director
of Retail Underwriting and Trading in 1990, he was a Branch Manager, Regional
Manager, Branch System and Marketing Manager for a PaineWebber subsidiary,
Manager of Branch Administration and Director of Retail Products and Trading.
Mr. Sipes holds a B.S. in Psychology from Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and Senior Vice President and Chief Financial
Officer of PWPI, 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.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President and Member of the Investment Committee of the
Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously
as an officer of PWPI from July 1980 to August 1987. From January 1991 to July
1992, Mr. Snyder was with the Resolution Trust Corporation where he served as
the Vice President of Asset Sales prior to re-joining PWPI. From February 1989
to October 1990, he was President of Kan Am Investors, Inc., a real estate
investment company. During the period August 1987 to February 1989, Mr. Snyder
was Executive Vice President and Chief Financial Officer of Southeast Regional
Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser which he joined in June 1988.
Mr.Watts has had over 16 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of PWPI, 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 Vice President and Treasurer of PWPI, 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 PWPI, 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 was 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, 1995, 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 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 paid cash distributions to the Limited Partners on a
quarterly basis at a rate of 8% per annum on invested capital from inception
through the quarter ended September 30, 1991 and at a rate of 5% per annum on
invested capital from October 1, 1991 to June 30, 1994. Starting July 1, 1994
cash distributions have been paid at a rate of 2% per annum on invested capital.
However, the Partnership's Limited Partnership Units are not actively traded on
any organized exchange and, accordingly, no accurate price information exists
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 and PaineWebber Partnerships, Inc. is owned by
PaineWebber. Properties Associates 1988 L.P. is a Virginia limited partnership,
certain limited partners of which are also officers of 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) The directors and officers of the Managing General Partner do not
directly own any Units of limited partnership interest of the Partnership. No
director or officer of the Managing General Partner or PaineWebber Partnerships,
Inc., nor any limited partner of Properties Associates 1988, L.P., possesses a
right to acquire beneficial ownership of Units of limited partnership interest
of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The General Partners of the Partnership are Third Equity Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber"), PaineWebber Partnerships, Inc. and Properties Associates
1988 L.P. PaineWebber Partnerships, Inc. is also a wholly owned subsidiary of
PaineWebber and Properties Associates 1988, L.P. is a Virginia limited
partnership.
The general partner of Properties Associates 1988, L.P. is PAM
Inc., a wholly owned subsidiary of PaineWebber Properties Incorporated ("PWPI").
The officers of PaineWebber Partnerships, Inc. and PAM Inc. are also officers of
the Managing General Partner. Affiliates of the General Partners will receive
fees and compensation determined on an agreed-upon basis, in consideration of
various services performed in connection with the sale of the Units and the
acquisition, management, financing and disposition of Partnership properties.
The Managing General Partner and its affiliates are reimbursed for their direct
expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's operating
property investments.
In connection with the acquisition of properties, PWPI received acquisition
fees totalling 5% of the gross proceeds from the sale of Partnership Units.
PWPI earned acquisition fees totalling approximately $2,523,000. Acquisition
fees have been capitalized as part of the cost of the investment on the
accompanying balance sheet.
All distributable cash, as defined, for each fiscal year shall first be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have received an amount equal to an
8% noncumulative annual return on their adjusted capital contributions through
December 31, 1989 and 7.5% on the adjusted capital contributions thereafter.
The General Partners will then receive distributions until they have received an
amount equal to 1.01% of all distributions to all partners and PWPI has received
Asset Management Fees equal to 3.99% of all distributions to all partners. The
balance will be distributed 95% to the Limited Partners, 1.01% to the General
Partners and 3.99% to PWPI as its Asset Management Fee. Asset Management Fees
are recorded as an expense on the Partnership's statement of operations, while
the distributions to the General Partners and the Limited Partners are recorded
as reductions to their respective capital accounts on the balance sheet. All
sale or refinancing proceeds shall be distributed in varying proportions to the
Limited and General Partners, as specified in the Partnership Agreement.
Taxable income (other than from capital transactions) in each taxable year
will be allocated to the Limited Partners and the General Partners in proportion
to the amounts of distributable cash distributed to them in, or with respect to,
that year. If there are no distributions of distributable cash, then taxable
income shall be allocated 98.94802625% to the Limited Partners and 1.0519375% to
the General Partners. All tax losses (other than from capital transactions)
will be allocated 98.94802625% to the Limited Partners and 1.0519375% to the
General Partners. Taxable income or tax loss arising from a sale or refinancing
of investment properties shall be allocated to the Limited Partners and the
General Partners in proportion to the amounts of sale or refinancing proceeds to
which they are entitled; provided that the General Partners shall be allocated
at least 1% of taxable income, gain, loss, deduction or credit arising from a
sale or refinancing. If there are no sale or refinancing proceeds, tax loss or
taxable income from a sale or refinancing shall be allocated 99% to the Limited
Partners and 1% to the General Partner. 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.
PWPI has specific management responsibilities; to administer day-to-day
operations of the Partnership, and to report periodically the performance of the
Partnership to the Managing General Partner. PWPI is paid an asset management
fee, as described above, for services rendered. As a result of a reduction in
the distributions to the Limited Partners in fiscal 1992, PWPI has not earned
any asset management fees since May of 1991. In connection with the sale of
each property, PWPI may receive a disposition fee as calculated per the terms of
the Partnership Agreement. 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, 1995 is $102,000, 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 $6,000 (included in general and administrative expenses) for managing the
Partnership's cash assets for the year ended March 31, 1995. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
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 on the accompanying index to exhibits at page IV-3
are filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1995.
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER EQUITY PARTNERS
THREE LIMITED PARTNERSHIP
By: Third Equity Partners, Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
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 23, 1995
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/ Albert Pratt Date: June 23, 1995
Albert Pratt
Director
By: /s/ J. Richard Sipes Date: June 23, 1995
J. Richard Sipes
Director
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(3)
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
(3) and (4)Prospectus of the Partnership Filed with the Commission
dated January 4, 1988, as pursuant to Rule 424(c)
supplemented, with particular and incorporated herein
reference to the Restated by 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
statements and amendments thereto 15(d) of the Securities
of the registrant together with all Act of 1934 and incorporated
such contracts filed as exhibits of herein by reference.
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 the fiscal
year 1995 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 Part I
of this Report Page I-1, to
which reference is hereby made.
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(1) AND (2) AND ITEM 14(D)
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1995 and 1994 F-5
Consolidated statements of operations for the years ended
March 31, 1995, 1994 and 1993 F-6
Consolidated statements of changes in partners' capital (deficit)
for the years ended March 31, 1995, 1994 and 1993 F-7
Consolidated statements of cash flows for the years ended
March 31, 1995, 1994 and 1993 F-8
Notes to consolidated financial statements F-9
Schedule III - Real Estate and Accumulated Depreciation F-20
COMBINED JOINT VENTURES OF PAINEWEBBER EQUITY PARTNERS THREE LIMITED
PARTNERSHIP:
Reports of independent auditors F-21
Combined balance sheets as of December 31, 1994 and 1993 F-23
Combined statements of operations for the years ended
December 31, 1994, 1993 and 1992 F-24
Combined statements of changes in venturers' capital for the
years ended December 31, 1994, 1993 and 1992 F-25
Combined statements of cash flows for the years ended
December 31, 1994, 1993 and 1992 F-26
Notes to combined financial statements F-27
Schedule III - Real Estate and Accumulated Depreciation F-33
Other schedules have been omitted since the required information is not
present or 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.
REPORT OF INDEPENDENT AUDITORS
To The Partners
PaineWebber Equity Partners Three Limited Partnership:
We have audited the accompanying consolidated balance sheets of
PaineWebber Equity Partners Three Limited Partnership as of March 31,
1995 and 1994, 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, 1995. These financial
statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial
statements of the DeVargas Center Joint Venture (DeVargas) (an
unconsolidated venture) or the Colony Plaza General Partnership
(Colony Plaza) (a consolidated venture). The Partnership's
financial statements reflect the Partnership's equity investment in
DeVargas and the total assets of Colony Plaza on a combined basis of
$20,064,000 and $21,110,000 at March 31, 1995 and 1994, respectively,
and the Partnership's equity in DeVargas' net income and Colony's
net income on a combined basis of $1,011,000, $968,000 and $835,000
for the years ended March 31, 1995, 1994 and 1993, respectively.
Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to data
included for DeVargas and Colony Plaza, is based solely on the reports
of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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, and the reports
of the other auditors, provide a reasonable basis for our opinion.
As more fully described in Note 6, mortgage debt secured by the
operating investment property owned by Richmond Paragon Partnership
(a joint venture investee) is scheduled to mature in November 1995.
In our opinion, based on our audits and the reports of the other
auditors, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
PaineWebber Equity Partners Three Limited Partnership at March 31,
1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1995 in
conformity with generally accepted accounting principles. Also, in
our opinion, based on our audits and the report of the other
auditors, 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 28, 1995
DELOITTE & TOUCHE LLP
Suite 2300
333 Clay Street
Houston, Texas 77002-4196
INDEPENDENT AUDITORS' REPORT
DeVargas Center Joint Venture:
We have audited the accompanying balance sheets of DeVargas Center
Joint Venture (the "Joint Venture") as of December 31, 1994 and 1993,
and the related statements of income, venturers' capital and cash flows
for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Joint Venture's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion such financial statements present fairly, in all
material respects, the financial position of the Joint Venture at
December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
February 22, 1995
PRICE WATERHOUSE LLP
160 Federal Street
Boston, MA 02110
REPORT OF INDEPENDENT ACCOUNTANTS
To the
Partners of Colony Plaza General Partnership
In our opinion, the accompanying balance sheets and the related
statements of operations, of changes in partners' capital and of cash flows
present fairly, in all material respects, the financial position of Colony
Plaza General Partnership (the "Partnership") at December 31, 1994 and 1993,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Partnership's management; our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audits 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion expressed above.
Our audits were conducted for the purpose of forming an opinion on
the basic financial statements taken as a whole. The Schedule of Distributable
Funds is presented for purposes of additional analysis and is not a required
part of the basic financial statements. Such information has been subjected
to the auditing procedures applied in the audits of the basis financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/S/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
February 3, 1995
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and 1994
(In Thousands, except for per Unit data)
ASSETS
1995 1994
Operating investment property, at cost:
Land $ 3,720 $ 3,720
Building and improvements 9,446 9,785
13,166 13,505
Less accumulated depreciation (1,811) (1,443)
11,355 12,062
Investments in unconsolidated joint
ventures, at equity 24,930 29,936
Cash and cash equivalents 3,824 1,501
Accrued interest and other receivables (net of
allowance for doubtful accounts of $1 and
$49 in 1995 and 1994, respectively) 64 38
Accounts receivable - affiliates 7 7
Prepaid expenses 7 7
Deferred expenses (net of accumulated
amortization of $358 and $305
in 1995 and 1994, respectively) 146 116
$40,333 $43,667
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and accrued interest $16,707 $17,304
Accounts payable and accrued expenses 38 30
Tenant security deposits 9 9
Advances from consolidated ventures 158 292
Total liabilities 16,912 17,635
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 1 10
Cumulative cash distributions (210) (192)
Limited Partners ($1,000 per unit;
50,468 Units issued):
Capital contributions, net of offering costs 43,669 43,669
Cumulative net income 170 988
Cumulative cash distributions (20,210) (18,444)
Total partners' capital 23,421 26,032
$40,333 $43,667
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1995, 1993 and 1993
(In Thousands, except for per Unit data)
1995 1994 1993
REVENUES:
Rental income and expense reimbursements $1,347 $1,218 $1,240
Interest income 103 55 69
1,450 1,273 1,309
EXPENSES:
Interest expense 1,921 1,756 1,644
Property operating expenses 140 128 117
Bad debt expense 21 13 79
Real estate taxes 71 69 70
General and administrative 342 310 279
Depreciation and amortization 375 375 404
2,870 2,651 2,593
Operating loss (1,420) (1,378) (1,284)
Partnership's share of unconsolidated
ventures' income 593 222 658
NET LOSS $ (827) $(1,156) $ (626)
Net loss per
Limited Partnership Unit $(16.21) $(22.66) $(12.27)
Cash distributions per
Limited Partnership Unit $ 35.00 $ 50.00 $ 50.00
The above per Limited Partnership Unit information is based upon the 50,468
Limited Partnership Units outstanding during each year.
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended March 31, 1995, 1994 and 1993
(In Thousands)
General Limited
Partners Partners Total
Balance at March 31, 1992 $(110) $33,022 $32,912
Cash distributions (26) (2,523) (2,549)
Net loss (7) (619) (626)
BALANCE AT MARCH 31, 1993 (143) 29,880 29,737
Cash distributions (26) (2,523) (2,549)
Net loss (12) (1,144) (1,156)
BALANCE AT MARCH 31, 1994 (181) 26,213 26,032
Cash distributions (18) (1,766) (1,784)
Net loss (9) (818) (827)
BALANCE AT MARCH 31, 1995 $(208) $23,629 $23,421
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1995 1994 1993
Cash flows from operating activities:
Net loss $ (827) $ (1,156) $ (626)
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Partnership's share of
unconsolidated ventures' income (593) (222) (658)
Depreciation and amortization 375 375 404
Interest expense 1,921 1,756 1,644
Changes in assets and liabilities:
Restricted cash - - 2
Accrued interest and other receivables (26) 10 26
Accounts receivable - affiliates - - (7)
Deferred expenses (10) (12) (15)
Accounts payable - affiliates - (56) 5
Accounts payable and accrued expenses 8 (64) 19
Other payable - - (2)
Tenant security deposits - 9 -
Advances from consolidated ventures (134) 109 15
Total adjustments 1,541 1,905 1,433
Net cash provided by
operating activities 714 749 807
Cash flows from investing activities:
Additional investments in unconsolidated
joint ventures (342) (666) (661)
Additions to operating investment property (9) (75) (34)
Receipt of master lease payments 348 - 2
Distributions from unconsolidated
joint ventures 5,941 2,027 2,437
Net cash provided by
investing activities 5,938 1,286 1,744
Cash flows from financing activities:
Cash distributions to partners (1,784) (2,549) (2,549)
Deferred loan expenses (73) - -
Repayment of principal and
interest on note payable (2,472) - -
Net cash used for financing
activities (4,329) (2,549) (2,549)
Net increase (decrease) in cash and
cash equivalents 2,323 (514) 2
Cash and cash equivalents, beginning of year 1,501 2,015 2,013
Cash and cash equivalents, end of year $ 3,824 $ 1,501 $ 2,015
Cash paid during the year for interest $ 1,022 $ - $ -
See accompanying notes.
1. Organization
PaineWebber Equity Partners Three Limited Partnership (the "Partnership")
is a limited partnership organized pursuant to the laws of the State of
Virginia in May 1987 for the purpose of investing in a diversified portfolio
of existing, newly-constructed or to-be-built income-producing real
properties. The Partnership authorized the issuance of Partnership Units
(the "Units") at $1,000 per Unit, of which 50,468 were subscribed and issued
between January 1988 and September 1989.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the Partnership's investment
in three unconsolidated joint venture partnerships each of which owns an
operating property. The Partnership accounts for its investments in the
unconsolidated joint ventures using the equity method because the
Partnership does not have majority voting control. Under the equity method
the ventures are carried at cost adjusted for the Partnership's share of the
ventures' earnings or losses and distributions. All of the unconsolidated
joint venture partnerships are required to maintain their accounting records
on a calendar year basis for income tax reporting purposes. As a result,
the Partnership recognizes its share of the earnings or losses from the
unconsolidated joint ventures based on financial information which is three
months in arrears to that of the Partnership. See Note 4 for a description
of the unconsolidated joint venture partnerships.
Operating investment property at March 31, 1995 and 1994 represents the
real estate assets of the Colony Plaza General Partnership (see Note 5), a
joint venture in which the Partnership has a controlling interest. For
financial reporting purposes the joint venture is consolidated with the
Partnership. The joint venture has a December 31 year-end for tax and
financial reporting purposes. As a result, the Partnership also reports the
results of the consolidated joint venture based on financial information of
the venture which is three months in arrears to that of the Partnership.
All material transactions between the Partnership and the joint venture have
been eliminated upon consolidation, except for lag-period cash transfers.
Such lag period cash transfers are accounted for as advances from
consolidated ventures on the accompanying balance sheet.
The Partnership has reviewed FAS No. 121 ``Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of''which is
effective for financial statements for years beginning after December 15,
1995, and believes this new pronouncement will not have a material effect on
the Partnership's financial statements.
The operating investment property of the consolidated joint venture is
carried at the lower of cost, reduced by certain guaranteed master lease
payments (see Note 5) and accumulated depreciation, or net realizable value.
The net realizable value of a property held for long-term investment
purposes is measured by the recoverability of the Partnership's investment
through expected future cash flows on an undiscounted basis, which may
exceed the property's current market value. The net realizable value of a
property held for sale approximates its current market value, as determined
on a discounted cash flow basis. The operating investment property was
considered to be held for long-term investment purposes as of March 31, 1995
and 1994. Depreciation expense is computed using the straight-line method
over an estimated useful life of forty years for the building. Depreciation
expense for the improvements and personal property is calculated using the
150% declining balance and straight-line methods, with a half year
convention in the year of acquisition and disposition, over estimated useful
lives of 20 and 12 years, respectively. Costs and fees (including the
acquisition fee paid to PWPI) related to the acquisition of the property
have been capitalized and are included in the cost of the operating
investment property. Minor maintenance and repair expenses are charged to
expense. Major improvements are capitalized. Tenant improvements are
capitalized and amortized over the term of the respective lease agreements.
Deferred expenses include legal fees of $49,000 incurred in connection
with the organization of the Partnership. These expenses have been fully
amortized using the straight-line method over a sixty-month term. As of
March 31, 1995 and 1994, deferred expenses also include costs associated
with the notes payable described in Note 6 of $425,000 and $352,000,
respectively, and leasing commissions associated with the operating
investment property of $30,000 and $20,000, respectively. Deferred loan
costs are being amortized using the straight-line method over the respective
terms of the notes payable. Such amortization expense is included in
interest expense on the accompanying statements of operations. Leasing
commissions are amortized using the straight-line method over the term of
the lease, generally 3 - 5 years.
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. The liability for income
taxes is that of the individual partners rather than the Partnership.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Third Equity Partners, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber"), PaineWebber Partnerships, Inc. and Properties
Associates 1988 L.P. PaineWebber Partnerships, Inc. is also a wholly owned
subsidiary of PaineWebber and Properties Associates 1988, L.P. is a Virginia
limited partnership. The general partner of Properties Associates 1988,
L.P. is PAM Inc., a wholly owned subsidiary of PaineWebber Properties
Incorporated ("PWPI"). The officers of PaineWebber Partnerships, Inc. and
PAM Inc. are also officers of the Managing General Partner. Affiliates of
the General Partners will receive fees and compensation determined on an
agreed-upon basis, in consideration of various services performed in
connection with the sale of the Units and the acquisition, management,
financing and disposition of Partnership properties. The Managing General
Partner and its affiliates are reimbursed for their direct expenses relating
to the offering of Units, the administration of the Partnership and the
acquisition and operations of the Partnership's real property investments.
In connection with the acquisition of properties, PWPI received
acquisition fees totalling 5% of the gross proceeds from the sale of
Partnership Units. PWPI earned acquisition fees totalling approximately
$2,523,000. Acquisition fees have been capitalized as part of the cost of
the investment on the accompanying balance sheet.
All distributable cash, as defined, for each fiscal year shall first be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to
the General Partners until the Limited Partners have received an amount
equal to an 8% noncumulative annual return on their adjusted capital
contributions through December 31, 1989 and 7.5% of the adjusted capital
contributions thereafter. The General Partners will then receive
distributions until they have received an amount equal to 1.01% of all
distributions to all partners and PWPI has received Asset Management Fees
equal to 3.99% of all distributions to all partners. The balance will be
distributed 95% to the Limited Partners, 1.01% to the General Partners and
3.99% to PWPI as its Asset Management Fee. Asset Management Fees are
recorded as an expense on the Partnership's statement of operations, while
the distributions to the General Partners and the Limited Partners are
recorded as reductions to their respective capital accounts on the balance
sheet. All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Taxable income (other than from capital transactions) in each taxable year
will be allocated to the Limited Partners and the General Partners in
proportion to the amounts of distributable cash distributed to them in, or
with respect to, that year. If there are no distributions of distributable
cash, then taxable income shall be allocated 98.94802625% to the Limited
Partners and 1.0519375% to the General Partners. All tax losses (other
than from capital transactions) will be allocated 98.94802625% to the
Limited Partners and 1.0519375% to the General Partners. Taxable income or
tax loss arising from a sale or refinancing of investment properties shall
be allocated to the Limited Partners and the General Partners in proportion
to the amounts of sale or refinancing proceeds to which they are entitled;
provided that the General Partners shall be allocated at least 1% of taxable
income, gain, loss, deduction or credit arising from a sale or refinancing.
If there are no sale or refinancing proceeds, tax loss or taxable income
from a sale or refinancing shall be allocated 99% to the Limited Partners
and 1% to the General Partner. 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.
PWPI has specific management responsibilities; to administer day-to-day
operations of the Partnership, and to report periodically the performance of
the Partnership to the Managing General Partner. PWPI is paid an asset
management fee, as described above, for services rendered. As a result of a
reduction in the distributions to the Limited Partners in fiscal 1992, PWPI
has not earned any asset management fees since May of 1991. In connection
with the sale of each property, PWPI may receive a disposition fee as
calculated per the terms of the Partnership Agreement.
Included in general and administrative expenses for the years ended March
31, 1995, 1994 and 1993 is $102,000, $105,000 and $120,000, 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 $6,000, $4,000 and $6,000 (included in general and
administrative expenses) for managing the Partnership's cash assets for the
years ended March 31, 1995, 1994 and 1993, respectively.
4. Investments in Unconsolidated Joint Venture Partnerships
The Partnership has investments in three unconsolidated joint ventures
which are accounted for on the equity method in the Partnership's financial
statements. As discussed in Note 2, these joint ventures report their
operations on a calendar year.
Condensed combined financial statements of these joint ventures, for the
periods indicated, are as follows.
CONDENSED COMBINED BALANCE SHEETS
December 31, 1994 and 1993
(in thousands)
Assets
1994 1993
Current assets $ 667 $ 528
Operating investment property, net 32,639 33,770
Other assets 882 798
$34,188 $35,096
Liabilities and Venturers' Capital
Current liabilities $ 416 $ 610
Other liabilities 2,951 1,890
Partnership's share of combined
venturers' capital 28,149 29,746
Co-venturers' share of combined
venturers' capital 2,672 2,850
$34,188 $35,096
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the years ended December 31, 1994, 1993 and 1992
(in thousands)
1994 1993 1992
Rental revenues and expense
recoveries $ 5,195 $ 4,776 $ 5,139
Interest and other income 12 17 14
5,207 4,793 5,153
Property operating expenses 1,508 1,414 1,336
Depreciation and amortization 2,101 1,866 1,798
Real estate taxes 252 299 306
Administrative and other 411 444 400
Interest expense 213 124 74
Loss on disposal - 236 476
4,485 4,383 4,390
Net income $ 722 $ 410 $ 763
Net income:
Partnership's share of
combined income $ 613 $ 242 $ 678
Co-venturers' share of
combined income 109 168 85
$ 722 $ 410 $ 763
Reconciliation of Partnership's Investment
March 31, 1995 and 1994
(in thousands)
1995 1994
Partnership's share of capital at
December 31, as shown above $28,149 $29,746
Excess basis due to investment in ventures (1) 472 492
Timing differences (2) (3,691) (302)
Investments in unconsolidated
joint ventures, at equity at March 31 $24,930 $29,936
(1)At March 31, 1995 and 1994, the Partnership's investment exceeds its share
of the joint venture capital accounts by $472,000 and $492,000,
respectively. This amount, which represents expenses incurred by the
Partnership in connection with acquiring its joint venture interests, is
being amortized on a straight-line basis over the estimated useful life of
the related investment properties.
(2)The timing differences between the Partnership's share of venturers' capital
and its investments in joint ventures consist of capital contributions made
to the joint ventures and cash distributions received from joint ventures
during the period from January 1 to March 31 in each year. These
differences result from the lag in reporting period discussed in Note 2.
The majority of the timing difference in fiscal 1995 can be attributed to a
cash distribution from the Willow Grove joint venture in the net amount of
$3,522,000 from the March 1995 refinancing transaction discussed further
below and in Note 6.
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
Partnership's share of
operations, as shown above $ 613 $ 242 $ 678
Amortization of excess basis (20) (20) (20)
Partnership's share of
unconsolidated ventures' income $ 593 $ 222 $ 658
Investments in unconsolidated joint ventures, at equity is the Partnership's
net investment in the joint venture partnerships. These joint ventures are
subject to partnership agreements which determine the distribution of available
funds, the disposition of the ventures' assets and the rights of the partners,
regardless of the Partnership's percentage ownership interest in the venture.
Substantially all of the Partnership's investments in these joint ventures are
restricted as to distributions.
Investments in unconsolidated joint ventures, at equity on the balance sheet
at March 31, is comprised of the following unconsolidated joint venture
investments (in thousands):
1995 1994
DeVargas Center Joint Venture $ 8,314 $ 8,910
Portland Pacific Associates Two 524 3,958
Richmond Paragon Partnership 16,092 17,068
$24,930 $29,936
The cash distributions received from the Partnership's unconsolidated joint
venture investments during fiscal 1995, 1994 and 1993 are as follows (in
thousands):
1995 1994 1993
DeVargas Center Joint Venture $ 867 $ 864 $ 864
Portland Pacific Associates Two 3,972 345 338
Richmond Paragon Partnership 1,102 818 1,235
$ 5,941 $ 2,027 $ 2,437
A description of the ventures' properties and the terms of the joint venture
agreements are summarized as follows:
DeVargas Center Joint Venture
On April 19, 1988 the Partnership acquired an interest in DeVargas Center
Joint Venture (the "joint venture"), a Texas Joint Venture organized in
accordance with a joint venture agreement between the Partnership and
WRI/DeVargas Inc. (the "co-venturer"). The joint venture was organized to own
and operate the DeVargas Mall, an existing retail shopping mall located in Santa
Fe, New Mexico. The property consists of approximately 248,000 net rentable
square feet on approximately 18.3 acres of land. The aggregate cash investment
by the Partnership for its investment was $11,354,960 (including an acquisition
fee of $505,000 paid to PWPI and certain closing costs of $49,960). The
Partnership's co-venture partner is an affiliate of Weingarten Realty Investors.
Per the terms of the joint venture agreement, net cash flow from operations
of the joint venture will be distributed in the following order of priority:
(1) the Partnership and co-venturer will each be repaid accrued interest and
principal on any optional loans made to the joint venture, (2) the Partnership
will receive a cumulative preference return payable each quarter, of 8% annual
simple interest on its capital contribution of $10,800,000, (3) the co-venturer
will receive a cumulative return of 8% annual simple interest on its capital
contribution of $3,285,000, (4) thereafter, any remainder will be distributed
50% to the Partnership and 50% to the co-venturer.
Proceeds from the sale or refinancing of the property will be distributed in
the following order of priority: (1) the Partnership will receive the aggregate
amount of its cumulative 8% annual preferred return not previously paid, (2) the
co-venturer will receive its unpaid 8% cumulative preference (3) the Partnership
will receive an amount equal to the Partnership's net investment, (4) the co-
venturer will receive an amount equal to the co-venturer's net investment (5)
the Partnership and co-venturer will each receive proceeds equal to 10% of their
capital contributions, (6) thereafter, any remaining proceeds will be
distributed 50% to the Partnership and 50% to the co-venturer.
Taxable income from operations will be allocated to the Partnership and co-
venturer in the same proportion as cash distributions with any remaining income
being allocated 50% to the Partnership and 50% to the co-venturer. Tax losses
from operations will be allocated to the Partnership and co-venturer to the
extent of and in the ratio of their positive capital balances with any remaining
losses being allocated 50% to the Partnership and 50% to the co-venturer. Net
income or loss for financial reporting purposes has been allocated in accordance
with the allocations of taxable income or tax loss.
The joint venture has entered into a management contract and a leasing
contract with an affiliate of the co-venturer which is cancellable at the option
of the Partnership upon the occurrence of certain events. The annual management
fee is 4% of gross rents collected and a 4% commission on any new leases.
The co-venturer has issued two nonrecourse promissory notes to the joint
venture to finance the leasing and operations of the Mall. The first note dated
January 1990 allows the joint venture to borrow up to $3,000,000 to fund capital
costs associated with leasing of the shopping center. The second note dated
December 1992 allows the joint venture to borrow up to $553,000 to fund capital
costs associated with an expansion and additional leasing of the shopping
center. Both notes bear interest at 1% above the floating prime rate
established by Texas Commerce Bank National Association. Outstanding accrued
interest on the first note is due and payable on a monthly basis with the
principal due January 1996. Principal payments of $4,608 and accrued interest
on the second note is due and payable on a monthly basis, with the remaining
accrued interest and principal due November 2002. As of December 31, 1994, the
principal balances of the notes payable to the co-venturer aggregated
$2,951,000.
Portland Pacific Associates Two
On September 20, 1988 the Partnership acquired an interest in Portland
Pacific Associates Two, the general partnership formed to own and operate Willow
Grove Apartments, a 119-unit apartment complex situated on 6.2 acres of land in
Beaverton, Oregon. The aggregate cash investment by the Partnership for its
investment was $5,068,167 (including an acquisition fee of $252,000 paid to PWPI
and certain closing costs of $16,167). The Partnership's original co-venture
partner was an affiliate of Pacific Union Investment Company.
On January 27, 1995, the Partnership purchased 99% of the co-venture
partner's interest in the joint venture for $233,000. The remaining 1% interest
of the co-venturer was assigned to Third Equity Partners, Inc. (`TEP''), the
Managing General Partner of the Partnership, in return for a release from any
further obligations or duties called for under the terms of the joint venture
agreement. As a result, the Partnership has assumed full control over the
affairs of the joint venture. Because this transaction was completed after the
joint venture's year-end, the change in control will not be reflected in the
presentation of the Partnership's financial statements until the first quarter
of fiscal 1996. For fiscal 1995, the venture continues to be accounted for
under the equity method. In fiscal 1996, the assets, liabilities, results of
operations and cash flows of the joint venture will be presented on a
consolidated basis in the financial statements of the Partnership.
The Amended and Restated Joint Venture Agreement provides that net cash flow
(as defined) shall be distributed in the following order of priority: (i)
First, to the Partnership until the Partnership has received a cumulative non-
compounded return of 10% on its net investment of $4,800,000 plus any additional
contributions made; (ii) Second, any remaining net cash flow shall be
distributed to the partners in proportion to their venture interests (99% to the
Partnership and 1% to TEP).
Under the terms of the Amended and Restated Joint Venture Agreement, taxable
income from operations in each year shall be allocated first to the Partnership
until the Partnership has been allocated an amount equal to a 10% cumulative
non-compounded return on the Partnership's net investment plus any additional
contributions. Any remaining taxable income shall be allocated 99% to the
Partnership and 1% to TEP. All tax losses from operations shall be allocated
99% to the Partnership and 1% to TEP. Allocations of income or loss for
financial accounting purposes have been made in accordance with the allocations
of taxable income or tax loss.
Net profits and losses arising from a capital transaction shall be allocated
among the venture partners under the specific provisions of the Amended and
Restated Joint Venture Agreement. Any net proceeds available to the venture,
arising from the sale, refinancing or other disposition of the property, after
the payment of all obligations to the mortgage lenders and the repayment of
certain advances from the Partnership shall be distributed to the venture
partners in proportion to their positive capital account balances after the
allocation of all gains or losses.
If additional cash is required in connection with the operation of the Joint
Venture, the venture partners shall contribute such required funds in
proportionate amounts as may be determined by the venture partners at such time.
In March 1995, the joint venture obtained a $3,600,000 mortgage note
payable, secured by the Willow Grove Apartments, which bears interest at 9.59%.
Principal and interest payments of $31,678 are due monthly through March of 2002
at which time the entire unpaid balance of principal and interest is due. The
loan was issued to the joint venture and, accordingly, is recorded on the
venture's books. The net proceeds from the financing transaction of
approximately $3,522,000 were remitted to the Partnership as a distribution.
The Partnership used $2,473,000 to pay off an outstanding note payable which
encumbered the property (see Note 6). The remaining proceeds were added to the
Partnership's cash reserves.
The Partnership originally entered into a Management Agreement with an
affiliate of the former co-venturer which was cancellable at the option of the
Partnership upon the occurrence of certain events. The annual management fee
was equal to 5% of gross rents collected. The former co-venture partner has
been retained in a property management capacity for the same annual fee under a
contract which is cancellable for any reason upon 30 days' written notice from
the Partnership.
Richmond Paragon Partnership
On September 26, 1988, the Partnership acquired an interest in Richmond
Paragon Partnership, a Virginia general partnership that owns and operates One
Paragon Place, a six-story office building located on approximately 8.2 acres of
land in Richmond, Virginia with 146,614 square feet of net leasable area. The
Partnership is a general partner in the joint venture. The aggregate cash
investment by the Partnership for its investment was $21,108,383 (including an
acquisition fee of $1,031,000 paid to PWPI and certain closing costs of
$42,447). The Partnership's co-venture partner is an affiliate of The Paragon
Group. The property is encumbered by a mortgage loan with an outstanding
balance of $9,774,000 as of March 31, 1995. Such mortgage loan is scheduled to
mature in November 1995 (see Note 6).
Per the terms of the joint venture agreement, net cash flow from operations
of the joint venture is to be distributed as follows: (1) the Partnership shall
receive a cumulative annual preferred return payable monthly equal to 9.0% on
the Partnership's Net Investment of $20,000,000 ("the Partnership's Preferred
Return"), (2) the Partnership and the co-venturer will receive a return equal to
the prime rate of interest plus 1% on any additional capital contributions, as
defined, and (3) any additional net cash flow will be distributed 75% to the
Partnership and 25% to the co-venturer.
Taxable income from operations will be allocated in accordance with the net
cash flow distributions described above. Tax losses from operations will be
allocated to the Partnership and the co-venturer in proportion to their
respective positive capital accounts up to the sum of such positive capital
accounts and thereafter 75% to the Partnership and 25% to the co-venturer.
5. Operating investment property
The Partnership owns a controlling interest in the Colony Plaza General
Partnership, described below, and therefore presents the assets, liabilities,
and results of operations of this joint venture on a consolidated basis in its
financial statements. Colony Plaza General Partnership was formed to acquire
and operate Colony Plaza Shopping Center located in Augusta, Georgia. The
shopping center is a 217,000 square foot complex which was acquired by the
Partnership on January 18, 1990. Wyatt Ventures, Inc. ("Co-Venturer") and the
Partnership are the partners of Colony Plaza General Partnership. The
Partnership has a 99% ownership interest in the General Partnership and the Co-
Venturer has a 1% ownership interest in the General Partnership. The
Partnership purchased the operating investment property for $13,889,890
(including an acquisition fee paid to PWPI of $653,000 and $176,890 of closing
costs) from Wyatt Development Company, an affiliate of the Co-Venturer. The
property is encumbered by a mortgage loan with an outstanding balance of
$6,933,000 as of March 31, 1995 (see Note 6).
Taxable income from operations (other than gains resulting from sale or
disposition of the property) shall be allocated to the Partnership and the Co-
Venturer to the extent of cash distributions paid to the partners for a given
fiscal year and in the same ratio as those distribution payments. In the event
that there are no distributable funds, taxable income will be allocated 99% to
the Partnership and 1% to the Co-Venturer. Tax losses from the operations of
the shopping center (other than from sale or disposition) shall be allocated
each fiscal year between the Partnership and the Co-Venturer to the extent of
and in the ratio of the positive balances in their respective capital accounts.
Any remaining losses will be allocated 99% to the Partnership and 1% to the Co-
Venturer. Net income or loss for financial reporting purposes will be allocated
in accordance with the allocations of taxable income or tax loss.
Allocation of gains and losses from sales or dispositions of the property
will be allocated to the partners based on formulas set forth in the Partnership
Agreement.
Distributable funds and net proceeds from sale or refinancing is to be
distributed as follows: (1) to repay interest and principal on optional loans;
(2) 100% to the Partnership until it has earned a 9.55% per annum cumulative
preferred return on the Partnership's net investment of $13,060,000; (3) to the
Partnership until it has received distributable funds of $13,713,000 and (4) the
remaining balance 99% to the Partnership and 1% to the Co-Venturer. The
Partnership's Preferred Return is treated as a distribution and is recorded as a
reduction to the partner's capital account on the accompanying financial
statements. As of December 31, 1994, the cumulative preferred return payable to
the Partnership was $930,500.
If additional cash is required for any reason in connection with operations
of the Joint Venture, it may be provided by either the Partnership or the Co-
Venturer as optional loans. If both parties choose to make option loans to the
Venture, they will be in the same ratio as ownership interest, 99:1. The rate of
interest on such loans shall equal the rate announced by the First National Bank
of Boston as its prime rate plus 1%, but not in excess of the maximum rate of
interest permitted by applicable law. As of December 31, 1994, no optional
loans had been made by the venturers.
At the time of the purchase of the operating investment property, the
Partnership entered into a master lease agreement with the seller of the
operating property and certain other affiliates of WVI (the "Guarantors").
Under the terms of the master lease, the Guarantors guaranteed for a period of
three years from the date that the shopping center achieved a specified
occupancy level that aggregate net cash flow from all non-anchor tenants would
not be less than the aggregate pro-forma net cash flow from non-anchor tenants
projected at time of the purchase. During 1991, the Lessee defaulted on its
obligation under the master lease and the Partnership received an amount of cash
collateral to apply to future obligations. The remaining balance of the cash
collateral was exhausted in January 1992. Through December 31, 1994, no other
amounts had been received toward the Lessee's obligation under the master lease,
resulting in an outstanding balance due of approximately $618,000. In January
1995, the Lessee entered into a settlement agreement with the Partnership which
terminated the master lease agreement effective December 31, 1994. The original
termination date of the master lease agreement was to have been February 27,
1997. In accordance with the settlement agreement, on January 27, 1995 the
Partnership received a cash payment of approximately $348,000 toward the
outstanding obligation of $618,000 discussed above. In addition, the
Partnership received a promissory note from the Lessee in the amount of $160,000
which will accrue interest at 8.5% and is due December 31, 1997. The Lessee
also assigned its rights to certain future development and leasing fees which
will be credited against the outstanding balance of the promissory note if
earned. The remaining master lease obligation, after the cash payment and the
promissory note, was forgiven under the terms of the settlement agreement.
Master lease income is recorded as a reduction of the carrying value of the
operating property on the accompanying balance sheet. Accordingly, the joint
venture will record any payments under the note when received as a reduction in
the property's carrying value.
The following is a summary of property operating expenses for the years
ended December 31, 1994, 1993 and 1992 (in thousands):
1994 1993 1992
Common area maintenance $ 42 $ 46 $ 34
Utilities 13 13 14
Insurance 17 17 10
Management fees 40 33 31
Professional fees 14 14 13
Administrative and other 14 5 15
$ 140 $ 128 $ 117
6. Notes payable
Notes payable and accrued interest on the books of the Partnership at March
31, 1995 and 1994 consist of the following (in thousands):
1995 1994
10.72% nonrecourse loan payable to an
insurance company, which is secured by the
One Paragon Place operating investment
property. All interest and principal is due
at maturity, on November 23, 1995. Interest
is compounded semi-annually. Accrued
interest at March 31, 1995 and 1994 amounted
to $4,774 and $3,805, respectively. See
discussion below. $ 9,774 $ 8,805
10.5% nonrecourse loan payable to a finance
company, which is secured by the Colony Plaza
operating investment property. All interest
and principal is due at maturity, on December
29, 1996. Interest is compounded semi-
annually. Accrued interest at March 31, 1995
and 1994 amounted to $2,883 and $2,208,
respectively. 6,933 6,258
10.5% nonrecourse loan payable to a finance
company, which was secured by the Willow
Grove operating investment property. The
note had a term of seven years and bore
interest at 10.5% per annum compounded semi-
annually. Interest and principal totalling
$2,968 was to be due and payable by the
Partnership at maturity, on December 29,
1996. Accrued interest through March 31,
1994 amounted to $791. See discussion below. - 2,241
$16,707 $17,304
The Partnership is currently in negotiations with the existing lender on the
note secured by One Paragon Place regarding conversion of this note to a
conventional current-pay loan and is also seeking possible replacement
financing. Management is requesting from the lender a four-year extension of
the maturity date and terms which would include a reduced rate of interest on
the balance of the loan going forward. Both the Partnership's modification
proposal or any refinancing transaction would require a paydown of approximately
$1 million on the outstanding debt balance in order to satisfy lender loan-to-
value ratio requirements. The Partnership has sufficient funds to make such a
principal paydown, however no firm commitments exist as of the date of this
report to refinance the outstanding debt obligation or extend the maturity date
beyond November 1995. This situation raises substantial doubt about the ability
of the One Paragon Place joint venture to continue as a going concern. The
financial statements of the venture do not include any adjustments that might
result from the outcome of this uncertainty. The total assets, total
liabilities, gross revenues and total expenses of the One Paragon Place joint
venture included in the 1994 condensed combined balance sheet and summary of
operations in Note 4 are $16,447,000, $91,000, $1,970,000 and $1,911,000,
respectively.
The loan secured by the Willow Grove Apartments was repaid in full in March
1995 from the proceeds of a new first mortgage loan issued to the Willow Grove
joint venture and secured by the venture's operating investment property. Such
loan, in the initial principal amount of $3,600,000, bears interest at 9.59% and
requires monthly principal and interest payments of $31,679 from April 1995
through maturity in March 2002. The loan was issued directly to the joint
venture and, accordingly the liability is reflected on the venture's books. The
net proceeds from the financing transaction were distributed to the Partnership.
The portion of the proceeds that was not used to repay the prior first mortgage
loan on Willow Grove was added to the Partnership's cash reserves.
7. Rental revenues
The Colony Plaza General Partnership derives rental income from leasing
shopping center space. All of Colony Plaza's leasing agreements are operating
leases expiring in one to twenty years. Base rental income of $1,212,000,
$1,109,000 and $1,123,000 was earned during the years ended December 31, 1994,
1993 and 1992, respectively. The following is a schedule of minimum future
lease payments from noncancellable operating leases as of December 31, 1994 (in
thousands):
Years ending December 31:
1995 $1,205
1996 $1,112
1997 $1,010
1998 $ 892
1999 $ 739
Thereafter $5,842
Total minimum future lease payments do not include percentage rentals due
under certain leases, which are based upon lessees' sales volumes. No
percentage rentals have been earned to date. Tenant leases also require lessees
to pay all or a portion of real estate taxes, insurance and common area costs.
During the year ended December 31, 1994, base rental income of approximately
$839,000 (69% of total base rental income) was received from the three anchor
tenants of the operating property, as detailed below.
Rental Percent of Total
Anchor tenant Income earned Rental income
Wal-Mart Stores, Inc. $ 336,000 27%
Piggly Wiggly, d/b/a Foodmax $ 288,000 24%
Goody's Family Clothes, Inc. $ 215,000 18%
No other tenant accounted for more than 10% of rental income during the
year.
8. Contingencies
The Partnership is involved in certain legal actions. The Managing General
Partner believes these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.
9. Subsequent Event
On May 15, 1995 the Partnership distributed $252,332 to the Limited Partners
and $2,549 to the General Partners for the quarter ended March 31, 1995.
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
MARCH 31, 1995
(IN THOUSANDS)
Life on Which
Initial Cost to Costs Depreciation
Consolidated Capitalized Gross Amount at Which Carried at in Latest
Joint Venture (Removed) End of Year Income
Buildings & Subsequent to Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Acquisition Land Improvements Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping
Center
Augusta,
Georgia $6,259 $3,720 $10,170 $ (724) $3,720 $9,446 $13,166 $1,811 1989 1/18/90 12-40 yrs.
Notes
(A) The aggregate cost of real estate owned at December 31, 1994 for Federal income tax purposes is approximately $13,431,000.
(B) See Note 6 to the accompanying financial statements for a description of the terms of the debt encumbering the property.
(C) Reconciliation of real estate owned:
1995 1994 1993
Balance at beginning of period $ 13,504 $13,430 $13,398
Acquisition and improvements 10 74 34
Reduction of basis due to
master lease payments received (348) - (2)
Balance at end of period $ 13,166 $13,504 $13,430
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 1,443 $ 1,073 $ 669
Depreciation expense 368 370 404
Balance at end of period $ 1,811 $ 1,443 $ 1,073
(E) Included in Costs Capitalized (Removed) Subsequent to Acquisition are certain master lease payments received that are recorded
as reductions in the cost basis of the property for financial reporting purposes. See Note 5 of Notes to Financial Statements
for a further description of these payments.
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners Three Limited Partnership:
We have audited the combined balance sheets of the Combined Joint Ventures
of PaineWebber Equity Partners Three Limited Partnership as of December 31, 1994
and 1993, and the related combined statements of operations, changes in
venturers' capital and cash flows for each of the three years in the period
ended December 31, 1994. 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 did not audit the financial statements of
DeVargas Center Joint Venture, which statements reflect 39% of the combined
total assets of the Combined Joint Ventures of PaineWebber Equity Partners Three
Limited Partnership at December 31, 1994 and 1993, and 46%, 49% and 42% of the
combined revenues of the Combined Joint Ventures of PaineWebber Equity Partners
Three Limited Partnership for the years ended December 31, 1994, 1993 and 1992,
respectively. Those statements were audited by other auditors, whose report has
been furnished to us, and our opinion, insofar as it relates to data included
for DeVargas Center Joint Venture, is based solely on the report of the other
auditors.
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, and the report of other auditors, provide a
reasonable basis for our opinion.
As more fully described in Note 6, mortgage debt secured by the Richmond
Paragon Partnership's operating investment property is scheduled to mature in
November 1995.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Combined Joint Ventures of PaineWebber
Equity Partners Three Limited Partnership at December 31, 1994 and 1993, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the report of other auditors, 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
February 22, 1995
DELOITTE & TOUCHE LLP
Suite 2300
333 Clay Street
Houston, Texas 77002-4196
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of DeVargas Center Joint
`Joint Venture'') as of December 31, 1994 and 1993, and the
We conducted our audits in accordance with generally accepted auditing
In our opinion such financial statements present fairly, in all material
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1994 and 1993
(In Thousands)
ASSETS
1994 1993
Current assets:
Cash and cash equivalents $ 493 $ 329
Escrowed cash 54 19
Accounts receivable and prepaid expenses 120 180
Total current assets 667 528
Operating investment properties, at cost:
Land 7,223 7,223
Buildings and improvements 33,082 32,175
Furniture and equipment 2,794 2,655
Construction in progress 24 213
43,123 42,266
Less accumulated depreciation (10,484) (8,496)
32,639 33,770
Deferred rents receivable 442 371
Deferred expenses and other assets,
net of accumulated amortization of
$514 and $401 in 1994 and 1993 440 427
$34,188 $35,096
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 59 $ 68
Accounts payable - affiliates 95 256
Real estate taxes payable 14 14
Distributions payable to partners 96 120
Advances from partners 92 92
Other current liabilities 60 60
Total current liabilities 416 610
Notes payable - affiliate 2,951 1,890
Venturers' capital 30,821 32,596
$34,188 $35,096
See accompanying notes.
COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31, 1994, 1993 and 1992
(In Thousands)
1994 1993 1992
REVENUES:
Rental income and expense recoveries $ 5,195 $ 4,776 $ 5,139
Interest and other income 12 17 14
5,207 4,793 5,153
EXPENSES:
Depreciation and amortization 2,101 1,866 1,798
Real estate taxes 252 299 306
Interest expense 213 124 74
Management fees 209 179 206
Utilities 286 282 266
Repairs and maintenance 1,013 953 864
Administrative and other 411 444 400
Loss on disposal - 236 476
4,485 4,383 4,390
NET INCOME $ 722 $ 410 $ 763
See accompanying notes.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN VENTURERS' CAPITAL
For the years ended December 31, 1994, 1993 and 1992
(In Thousands)
PaineWebber
Equity Partners
Three Limited
Partnership Co-Venturers Total
Balance at December 31, 1991 $32,008 $ 3,225 $35,233
Capital contributions 717 - 717
Cash distributions (2,428) (255) (2,683)
Net income 679 84 763
BALANCE AT DECEMBER 31, 1992 30,976 3,054 34,030
Capital contributions 560 - 560
Cash distributions (2,033) (371) (2,404)
Net income 243 167 410
BALANCE AT DECEMBER 31, 1993 29,746 2,850 32,596
Capital contributions 184 - 184
Cash distributions (2,394) (287) (2,681)
Net income 613 109 722
BALANCE AT DECEMBER 31, 1994 $ 28,149 $ 2,672 $30,821
See accompanying notes.
COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1994 1993 1992
Cash flows from operating activities:
Net income $ 722 $ 410 $ 763
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,101 1,866 1,798
Loss on disposal of equipment - 236 476
Changes in assets and liabilities:
Accounts receivable and prepaid expenses 60 (54) (13)
Deferred rents receivable (71) 228 (201)
Deferred expenses and other assets (135) (175) (214)
Accounts payable and accrued liabilities (9) (31) (129)
Accounts payable - affiliates (161) (20) 3
Real estate taxes payable - (4) 1
Other current liabilities - (1) (40)
Total adjustments 1,785 2,045 1,681
Net cash provided by
operating activities 2,507 2,455 2,444
Cash flows from investing activities:
Escrowed cash (35) (5) 40
Collection of note receivable 9 1 -
Additions to operating
investment properties (857) (1,077) (1,516)
Net cash used in
investing activities (883) (1,081) (1,476)
Cash flows from financing activities:
Proceeds from capital contributions 184 560 717
Proceeds from issuance of notes
payable to affiliate 1,061 382 973
Advances from partners - 1 254
Retirement of debt - (60) -
Debt costs incurred - - (2)
Cash distributed to venturers (2,705) (2,427) (2,648)
Net cash used in
financing activities (1,460) (1,544) (706)
Net increase (decrease) in cash
and cash equivalents 164 (170) 262
Cash and cash equivalents
at beginning of year 329 499 237
Cash and cash equivalents
at end of year $ 493 $ 329 $ 499
Cash paid during the year for interest $ 201 $ 124 $ 66
See accompanying notes.
1. Summary of significant accounting policies
Organization
The accompanying financial statements of the Combined Joint Ventures of
PaineWebber Equity Partners Three Limited Partnership (Combined Joint
Ventures) include the accounts of DeVargas Center Joint Venture (DeVargas),
a Virginia limited partnership; Portland Pacific Associates Two (Willow
Grove Apartments), a California general partnership; and Richmond Paragon
Partnership (One Paragon Place), a Virginia general partnership.
The financial statements of the Combined Joint Ventures have been prepared
based on the periods that PaineWebber Equity Partners Three Limited
Partnership (PWEP3) has held an interest in the individual Joint Ventures.
The dates of PWEP3's acquisition of interests in the Joint Ventures are as
follows:
Date of Acquisition
Joint Venture of Interest
DeVargas Center April 18, 1988
Portland Pacific Associates Two September 20, 1988
Richmond Paragon Partnership September 26, 1988
Basis of Presentation
The financial statements of the joint ventures are presented in a combined
format due to the nature of the relationship between each of the Joint
Ventures and PWEP3.
Operating investment properties
The operating investment properties are carried at the lower of cost,
reduced by accumulated depreciation, or net realizable value. The net
realizable value of a property held for long-term investment purposes is
measured by the recoverability of the investment from expected future cash
flows on an undiscounted basis, which may exceed the property's current
market value. The net realizable value of a property held for sale
approximates its market value. All of the operating investment properties
owned by the Combined Joint Ventures were considered to be held for long-
term investment purposes as of December 31, 1994 and 1993.
Depreciation is generally computed using the straight-line method based on
the estimated useful life of the buildings, improvements and furniture and
equipment, generally five to forty years. Certain of the furniture and
equipment is depreciated over seven and five years, respectively, using the
double-declining balance method. Repairs and maintenance are charged to
expense. Major replacements are capitalized, and the replaced asset and
accumulated depreciation are removed from the accounts. The Combined Joint
Ventures recognized losses of $236,755 on disposals of building improvements
which were replaced during the year ended December 31, 1993. "Mandatory
Payments" from the co-venture partner in Richmond Paragon Partnership to pay
PWEP3's preferred distribution or to cover operating deficits are not
reimbursable to the co-venturer and are treated as reductions to the cost
basis of the operating investment property. Mandatory payments amounted to
$174,157 through the end of the guaranty period.
The Combined Joint Ventures have reviewed FAS No. 121 `Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of''
which is effective for financial statements for years beginning after
December 15, 1995, and believes this new pronouncement will not have a
material effect on the Combined Joint Ventures' financial statements.
Deferred expenses
Deferred expenses include capitalized guaranty fees, organization costs,
lease costs and loan expenses. Guaranty fees and organization costs have
been amortized using the straight-line method over three and five years,
respectively. Deferred leasing costs and loan expenses are generally
amortized on a straight-line basis over the term of the leases and the term
of the loans, respectively.
Cash and cash equivalents
For purposes of the statement of cash flows, the Combined Joint Ventures
consider all highly liquid investments with original maturity dates of 90
days or less to be cash equivalents.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Revenue recognition
Rental revenue is recognized on a straight-line basis over the life of the
related lease agreements for the commercial properties owned by DeVargas
Center Joint Venture and Richmond Paragon Partnership. Deferred rents
receivable of $442,000 and $371,000 at December 31, 1994 and 1993,
respectively, represent the difference between the revenue recorded on the
straight-line method and the payments made in accordance with the lease
agreements.
Income tax matters
No provision for income taxes has been provided because the tax effects of
the Joint Ventures are reportable by the individual partners.
Escrow accounts
Certain Joint Venture Agreements provide that PWEP3 can direct the property
manager to establish and periodically fund escrow cash accounts for payment
of real estate taxes and insurance premiums. As of December 31, 1994, no
such direction has been given to the property managers.
Capital reserve
The One Paragon Place Joint Venture Agreement provides that a reserve for
future capital expenditures be established and administered by the Manager
of the property. The Joint Venture is to pay periodically into the capital
reserve an agreed upon amount (as defined) as funds are available after
paying all expenses and PWEP3's preferred distribution during the guaranty
period. As of December 31, 1994, no amounts were required to be paid into
the capital reserve.
Escrowed Cash
Escrowed cash consists primarily of tenants security deposits.
2. Joint Ventures
See Note 4 to the financial statements of PWEP3 included in this Annual
Report for a more detailed description of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below:
a. DeVargas Center Joint Venture
The joint venture owns and operates the DeVargas Mall consisting of an
existing retail shopping mall located in Santa Fe, New Mexico. The
property consists of approximately 248,000 net rentable square feet on
approximately 18.3 acres of land.
b. Portland Pacific Associates Two
The partnership owns and operates Willow Grove Apartments, a 119-unit
apartment complex located on 6.2 acres of land in Beaverton, Oregon.
c. Richmond Paragon Partnership
The partnership owns and operates One Paragon Place, a six-story office
building located on approximately 8.2 acres of land in Richmond,
Virginia, with 146,614 square feet of net leasable area.
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
The agreements generally provide that net income (other than those
resulting from sales or other dispositions of the projects) will be
allocated to PWEP3 in the same proportions as actual cash distributions from
operations (as defined in the Joint Venture Agreements). The agreement in
the Portland Pacific Associates Two partnership provides for the allocation
of net income or loss after specific allocation of interest expense on
partnership advances. Losses are generally allocated to the partners in
proportion to their ownership interests or positive capital account
balances.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated according to the formulas provided in the Joint Venture
Agreements.
Distributions
Distributable funds from DeVargas are determined quarterly and distributed
in the following priority: (1) repayment of any accrued interest and
principal on loans; (2) a cumulative return of 8% annual simple interest on
PWEP3's capital contribution of $10,800,000; (3) a cumulative return of 8%
annual simple interest on the co-venturer's capital contribution of
$2,700,000 ($3,285,000 subsequent to September 25, 1990) and (4) the
remaining distributable funds shall be distributed 50% to PWEP3 and 50% to
the co-venturer.
The Portland Pacific agreement provides that net cash flow available for
distribution, as defined, is allocated first to PWEP3 until it has received
its preferred return, as defined, which is cumulative to the extent of the
then-current fiscal year. PWEP3's preferred return is 9% simple interest on
its Net Investment of $4,800,000 for the three-year period commencing on
September 20, 1988 (the "Guaranty Period"), 9.50% on its Net Investment for
the fourth year, and 10% on its Net Investment thereafter. Second, 50% is
be distributed to PWEP3 to pay any accrued preference, and 37.5% to PWEP3
and 12.5% to the co-venturer. Then, of the remaining net cash flow, 50% is
to be distributed to the property manager to pay any unpaid subordinated
management fees, and 37.5% to PWEP3 and 12.5% to the co-venturer. See the
discussion in Note 8 regarding the subsequent transfer of partnership
interest which will affect these distribution priorities in 1995.
The Richmond Paragon Joint Venture Agreement provides that PWEP3 will
receive from net cash flow cumulative preferred distributions, payable
monthly, equivalent to 9% per annum on its net investment of $20,000,000
through and until the termination and dissolution of the Partnership. Any
remaining net cash flow is to be distributed first to the partners as a
return equal to the prime rate of interest plus 1% on any additional capital
contributions made to fund current cash needs of the joint venture and then
is to be distributed 75% to PWEP3 and 25% to the co-venturer. The joint
venture agreement further provided that during the first three years of
operations (the guaranty period), if cash flow was insufficient to cover
operating deficits and to pay PWEP3's preferred distribution, the co-venture
was required to pay to the joint venture such amounts as were necessary to
fund such operating deficits and provide for the payment of PWEP3's
preferred distribution. Payments made by the co-venturer under these
provisions are called "mandatory payments" (see Note 1). The guaranty
period expired in September 1991.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
3. Related Party Transactions
Management fees
The joint ventures entered into management contracts with affiliates of
the co-venturers which are cancellable at the option of PWEP3 upon the
occurrence of certain events. The management fees generally range from 4 to
5% of gross rents collected.
Accounts payable - affiliates
Accounts payable - affiliates at December 31, 1994 and 1993 consist
primarily of accrued interest on notes payable to the co-venturer in the
DeVargas joint venture (see Note 4), organization costs payable to PWEP3, and
management fees and reimbursements payable to the property managers.
Charges from Portland Pacific Co-Venturer
Accounting fees of $3,849, $8,043 and $7,609 were paid or owed to the co-
venture partner of the Portland Pacific joint venture in 1994, 1993 and
1992, respectively.
4. Notes payable - affiliate
A promissory note payable to the co-venture partner of the DeVargas Center
Joint Venture, dated January 25, 1990, allows the Joint Venture to borrow up
to $3,000,000 and bears interest at 1% above the floating prime rate
established by Texas Commerce Bank National Association (9.5% at December
31, 1994). Outstanding accrued interest is due and payable on a monthly
basis, and the principal is due on January 25, 1996. The outstanding
principal balance of this note was $2,513,013 and $1,549,765 at December 31,
1994 and 1993, respectively. A second promissory note payable to the
DeVargas co-venturer due November 2002 allows the joint venture to borrow up
to $553,000 and also bears interest at 1% above the prime rate. The
outstanding principal balance of this note, which was issued in November
1992, was $437,792 and $340,902 at December 31, 1994 and 1993 respectively.
Principal payments of $4,608 and accrued interest are due and payable on a
monthly basis, beginning December 1992. The proceeds from these notes have
been utilized to fund capital costs associated with leasing and operating
the DeVargas Mall.
5. Advances from partners
Advances from partners at December 31, 1994 includes amounts payable to
the partners of Portland Pacific Associates Two in the amounts of $73,182
for PWEP3 and $18,295 for the co-venturer. The advances bear a preferred
return accounted for as interest at the rate then applicable to the PWEP3
Preference return (10% for each of the three years in the period ended
December 31, 1994). Interest expense related to these advances was $9,148,
$9,148 and $4,089 for the years ended December 31, 1994, 1993 and 1992,
respectively. This interest expense has been specifically allocated to each
partner in the statement of changes in venturers' capital. Payments of
interest totalling $9,148, $9,148 and $3,312 were made during 1994, 1993 and
1992, respectively. The advances are payable out of cash flow available for
distribution, if any.
6. Encumbrances on operating investment properties
As allowed under a provision of the Portland Pacific Partnership
Agreement, PWEP3 borrowed funds that were secured by a deed of trust and the
assignment of leases on the operating investment property of the Portland
Pacific general partnership. At December 31, 1994, the amount outstanding
on this borrowing was $2,183,000. The borrowing accrued interest at 10.5%
annually, with the accrued interest being added to the principal balance.
The borrowing was scheduled to mature in December 1996, at which time total
principal and accrued interest of $2,968,000 was to become due and payable
by PWEP3. In March 1995, this borrowing was repaid in full through a
$3,600,000 loan made directly to Portland Pacific Associates Two. Such loan
is secured by a first mortgage on the venture's operating investment
property, bears interest at 9.59% per annum, and requires monthly principal
and interest payments of $31,679 from April 1995 through maturity in March
2002. The proceeds of this financing transaction were distributed to PWEP3
per the agreement of the partners.
PWEP3 also borrowed funds, under a provision in the joint venture
agreement, secured by a deed of trust and the assignment of leases on the
operating investment property of the Richmond Paragon General Partnership.
The borrowing accrues interest at 10.72% annually with the accrued interest
being added to the principal balance. The borrowing matures in November of
1995, at which time total principal and accrued interest of approximately
$10,386,000 becomes due and payable by PWEP3. At December 31, 1994, the
amount outstanding on this borrowing was $9,480,000. PWEP3 is currently in
negotiations with the existing lender on the note secured by One Paragon
Place regarding conversion of this note to a conventional current-pay loan
and is also seeking possible replacement financing. Management of PWEP3 is
requesting from the lender a four-year extension of the maturity date and
terms which would include a reduced rate of interest on the balance of the
loan going forward. Both the modification proposal or any refinancing
transaction would require a paydown of approximately $1 million on the
outstanding debt balance in order to satisfy lender loan-to-value ratio
requirements. PWEP3 has sufficient funds to make such a principal paydown,
however no firm commitments exist as of the date of this report to refinance
the outstanding debt obligation or extend the maturity date beyond November
1995. This situation raises substantial doubt about the ability of the One
Paragon Place joint venture to continue as a going concern. The financial
statements of the venture do not include any adjustments that might result
from the outcome of this uncertainty. The total assets, total liabilities,
gross revenues and total expenses of the One Paragon Place joint venture
included in the 1994 combined balance sheet and statement of operations
$16,447,000, $91,000, $1,970,000 and $1,911,000, respectively.
The borrowings described above are direct obligations of PWEP3 and,
accordingly, do not appear in the accompanying financial statements.
7. Leases
Minimum rental revenues to be recognized by the DeVargas Mall and One
Paragon Place joint ventures on the straight-line basis in the future on
noncancellable operating leases are as follows (in thousands):
Year ended December 31:
1995 $ 3,462
1996 3,420
1997 2,711
1998 1,889
1999 926
Thereafter 6,049
$ 18,457
The future minimum lease payments do not include estimates for contingent
rentals due under the terms of certain leases at the DeVargas Mall. Such
contingent rentals aggregated $898,000, $937,000 and $791,000 in 1994, 1993
and 1992, respectively.
8. Subsequent Events
In January 1995, PWEP3 acquired 99% of the co-venturer's interest in
Portland Pacific Associates Two in return for a cash payment of
approximately $233,000. Such cash consideration included repayment in full
of the advances from the co-venturer described in Note 5. The remaining 1%
of co-venturer's interest was assigned to Third Equity Partners, Inc., an
affiliate of PWEP3, in return for a release from any further obligations or
duties called for under the terms of the joint venture agreement. As a
result of this transaction, the original co-venturer no longer has any
equity interest in the joint venture. Pacific Union Property Services, an
affiliate of the original co-venturer, continues to manage the property
pursuant to a management contract which is cancellable upon 30 days' written
notice.
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
(IN THOUSANDS)
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Combined Subsequent to Gross Amount at Which Carried at in Latest
Joint Ventures 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>
Shopping Center
Santa Fe, NM $ 2,951 $4,052 $ 6,669 $5,961 $4,052 $12,630 $16,682 $ 3,727 1972 4/19/88 5-40 yrs.
Office Building
Richmond, VA 8,579 2,719 18,349 413 2,696 18,785 21,481 5,668 1987 9/26/88 7-31.5 yrs.
Apartment Complex
Beaverton, OR 2,183 475 4,025 460 475 4,485 4,960 1,089 1987 9/20/88 5-27.5 yrs.
Totals $13,713 $ 7,246 $29,043 $ 6,834 $7,223 $35,900 $43,123 $10,484
Notes
(A) The aggregate cost of real estate owned at December 31, 1994 for Federal income tax purposes is approximately $44,182,000.
(B) See Note 4 and 6 to the accompanying financial statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1994 1993 1992
Balance at beginning of period $42,266 $ 41,617 $40,688
Increase due to additions 857 1,077 1,516
Write-offs due to disposals - (428) (587)
Balance at end of period $43,123 $42,266 $41,617
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 8,496 $ 6,761 $ 5,221
Depreciation expense 1,988 1,772 1,616
Write-offs due to disposals - (37) (76)
Balance at end of period $ 10,484 $ 8,496 $ 6,761
</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, 1995 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,824
<SECURITIES> 0
<RECEIVABLES> 72
<ALLOWANCES> (1)
<INVENTORY> 0
<CURRENT-ASSETS> 3,902
<PP&E> 38,096
<DEPRECIATION> (1,811)
<TOTAL-ASSETS> 40,333
<CURRENT-LIABILITIES> 205
<BONDS> 16,707
<COMMON> 0
0
0
<OTHER-SE> 23,421
<TOTAL-LIABILITY-AND-EQUITY> 40,333
<SALES> 0
<TOTAL-REVENUES> 2,043
<CGS> 0
<TOTAL-COSTS> 928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 1921
<INCOME-PRETAX> (827)
<INCOME-TAX> 0
<INCOME-CONTINUING> (827)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (827)
<EPS-PRIMARY> (16.21)
<EPS-DILUTED> (16.21)
</TABLE>
