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, 1996
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
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
1996 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-48
<PAGE>
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, 1996, 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
Two thirteen 9/20/88 Fee ownership of land
Willow Grove Apartments one-, two- and improvements
Beaverton, Oregon and three- (through joint venture)
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
<PAGE>
(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, 1996, the Limited Partners have received cumulative cash
distributions of approximately $21,219,000. 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. Starting July 1, 1994, cash
distributions have been paid at a rate of 2% per annum on invested capital. 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. The Partnership's portfolio of real estate
investments consists of two retail shopping centers, one commercial office
building and one multi-family apartment complex. While market values for
commercial office buildings have generally stabilized over the past two years,
such values continue to be depressed due to the residual effects of the
overbuilding which occurred in the late 1980's and the trend toward corporate
downsizing and restructurings which occurred in the wake of the last national
recession. In addition, at the present time real estate values for retail
shopping centers in certain markets have begun to be affected by the effects of
overbuilding and consolidations among retailers which have resulted in an
oversupply of space. The market for multi-family residential properties in most
markets throughout the country continued its trend of gradual improvement during
fiscal 1996, as the ongoing absence of significant new construction activity
further improved upon the supply and demand characteristics facing existing
properties. 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. The continued availability of low interest rates on home mortgage loans
has increased the level of this competition over the past few years. However,
the impact of the competition from the single-family home market has been offset
by the lack of significant new construction activity in the multi-family
apartment market over this period. 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 1996, along with an average
for the year, are presented below for each property:
Percent Occupied At
---------------------------------------------
Fiscal
1996
6/30/95 9/30/95 12/31/95 3/31/96 Average
------- -------- -------- ------ -------
DeVargas Mall 90% 90% 89% 89% 90%
Willow Grove Apartments 95% 96% 97% 95% 96%
One Paragon Place 90% 90% 98% 98% 94%
Colony Plaza Shopping Center 97% 98% 98% 98% 98%
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 the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions 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.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in PaineWebber Equity Partners
Three Limited Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
The eventual outcome of this litigation and the potential impact, if any, on the
Partnership's unitholders cannot be determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint is substantially similar to the
complaint in the Abbate action described above, and seeks compensatory damages
of $3.4 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the Managing General Partner cannot estimate the impact, if
any, of the potential indemnification claims on the Partnership's financial
statements, taken as a whole. Accordingly, no provision for any liability which
could result from the eventual outcome of these matters has been made in the
accompanying financial statements of the Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1996, there were 3,644 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 1996.
Item 6. Selected Financial Data
PaineWebber Equity Partners Three Limited Partnership For the years
ended March 31, 1996, 1995, 1994, 1993 and 1992
(in thousands except for per Unit data)
Years ended March 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 2,478 $ 1,450 $ 1,273 $ 1,309 $ 1,362
Operating loss $ (654) $(1,420) $(1,378) $(1,284) $ (1,085)
Partnership's share of
unconsolidated ventures'
income $ 581 $ 593 $ 222 $ 658 $ 1,241
Net income (loss) $ (73) $ (827) $(1,156) $ (626) $ 156
Net income (loss) per
Limited Partnership Unit $ (1.42) $ (16.21) $(22.66) $(12.27) $ 3.05
Cash distributions per
Limited Partnership Unit $ 20.00 $ 35.00 $ 50.00 $ 50.00 $ 72.50
Total assets $ 33,885 $ 40,333 $ 43,667 $ 45,673 $ 47,231
Notes payable and
accrued interest $ 11,255 $ 16,707 $ 17,304 $ 15,604 $ 14,024
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.
<PAGE>
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, 1996, 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 1996, management continued its efforts to refinance the
Partnership's zero coupon loans, which were originally incurred to finance the
Partnership's public offering costs, in order to prevent the further
accumulation of accrued interest by replacing the zero coupon obligations with
conventional financing which requires the payment of interest and principal on a
current basis. As previously reported, 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 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.
On November 16, 1995, the Partnership finalized a new loan agreement to
refinance the zero coupon loan secured by the One Paragon Place Office Building
which had a principal balance of $10.4 million at the time of the refinancing.
The new loan secured by the One Paragon Place Office Building was issued in the
name of the joint venture which owns the property, had an initial principal
balance of $8,750,000, bears interest at a rate of 8% per annum and requires
monthly principal and interest payments of $68,000. The loan, which is recorded
on the books of the unconsolidated joint venture, is scheduled to mature on
December 10, 2002. The refinancing transaction required a paydown of
approximately $1.6 million on the outstanding debt balance in order to satisfy
the lender's loan-to-value ratio requirements. The Partnership had sufficient
funds to make such a principal paydown as a result of the Willow Grove
refinancing transaction described above. One Paragon Place was 98% occupied at
March 31, 1996. The suburban Richmond, Virginia office market continues to
strengthen with high occupancy levels and improving rental rates as a result of
steady job and population growth and the absence of significant new
construction. Recently, the level of new construction activity has increased
somewhat with a number of build-to-suit and speculative buildings in the process
of being completed. Nonetheless, the market is projected to remain strong in the
near term, and One Paragon Place is expected to compete favorably against both
existing and new properties in its submarket. During the quarter ended June 30,
1995, one of the major tenants of the One Paragon Place Office Building
negotiated a buyout of its lease obligation with respect to over one-half of its
prior space of approximately 53,000 square feet, which represented 36% of the
building's leasable area. Under the terms of the buyout agreement, the tenant
agreed to pay a current market rental rate on its remaining 22,000 square feet
through the remainder of its lease term, which runs through July 1998. In
addition, the tenant agreed to pay rent through May 1995 on the 31,000 square
feet of vacated space and paid a lump sum of $500,000 to the joint venture on
July 20, 1995, which has been used to cover the costs of re-leasing the space to
three new tenants under lease agreements signed during the second and third
quarters of fiscal 1996. As a result of the strengthening market conditions
discussed above, on a combined basis the three new leases generate substantially
higher effective rents than the prior tenant was required to pay.
At March 31, 1996, the zero coupon loan secured by the Colony Plaza
shopping center had an outstanding balance of $7,680,000. The loan is scheduled
to mature in December of 1996, at which time approximately $8,290,000 would be
due. As previously reported, in the first quarter of fiscal 1996 the Partnership
learned that Wal-Mart had made plans to build a "Supercenter" store at a new
location in the Augusta market and to vacate its 82,000 square foot store at
Colony Plaza upon the completion of construction. Wal-Mart recently announced
that they will close their Colony Plaza store in July 1996. When Wal-Mart does
vacate the center, it will 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 will likely adversely
affect the Partnership's ability to retain existing tenants and to lease vacant
space at the center unless a strong replacement anchor tenant is obtained.
Subsequent to year-end, the Partnership hired new property management and
leasing agents to oversee this period of restabilization for the Colony Plaza
property. The property's new leasing team has begun to contact potential
replacement tenants to initiate discussions regarding the Wal-Mart space at
Colony Plaza. Funds for any anchor tenant leasing activity and a possible
repositioning of the shopping center which might be part of any re-tenanting
strategy would, for the most part, be expected to come from a negotiated buyout
by Wal-Mart of its remaining lease obligation. The new property management team
is also actively working with the existing tenants to attempt to ensure that
these tenants will sign renewals when their current leases expire. While the
status of the pending Wal-Mart relocation at Colony Plaza will make completing a
refinancing transaction more difficult, management continues to pursue its
refinancing plans. Management is currently investigating possible alternative
financing sources to repay the outstanding debt obligation. The Partnership also
intends to pursue discussions with the existing lender regarding possible
modification and extension options.
The DeVargas Mall had an average occupancy level of 90% for fiscal 1996, an
increase from an average occupancy level of 86% for fiscal 1995. During the
fourth quarter of fiscal 1996, management signed a lease with a national
department store retailer which will occupy 27,910 square feet at DeVargas, or
approximately 11% of the property's leasable area. To accommodate this new
anchor tenant, leases with two tenants totalling 7,007 square feet were
terminated and two additional tenants totalling 12,388 square feet were
relocated and downsized to spaces totalling 5,741 square feet. Currently, there
are two lease proposals pending with regard to space which is currently
available and space that will become available over the next year, for
approximately 20,000 square feet and 10,000 square feet, respectively. These
leases, if successfully executed, would accomplish management's leasing
objectives and 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 for the 27,910 square foot lease referred to above and for any
significant new leases will 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 currently pays
interest on such advances at the rate of prime plus 1% per annum.
The Partnership has no current plans to market any of its operating
investment properties for sale. While the estimated market value of the One
Paragon Place Office Building has stabilized over the past two years, it remains
significantly below the acquisition price paid by the Partnership due to the
residual effects of the overbuilding which occurred in the late 1980's and the
trend toward corporate downsizing and restructurings which occurred in the wake
of the last national recession. While the local market conditions in Richmond
are strengthening, as discussed further above, it remains to be seen whether
office building values will fully recover to their levels of the late 1980's
within the Partnership's remaining holding period. In addition, at the present
time real estate values for retail shopping centers in certain markets have
begun to be affected by the effects of overbuilding and consolidations among
retailers which have resulted in an oversupply of space. As a result of the
current leasing status of the Partnership's two retail properties, as discussed
further above, management believes that the values of both properties might be
significantly enhanced in the near term if the Partnership is successful in
stabilizing the respective tenant rosters. With respect to the Partnership's
apartment property, while the market for sales of multi-family properties in
most markets has been strong over the past two years, the Willow Grove property
is the Partnership's smallest investment, at 10% of the original investment
portfolio, and it generates a stable cash flow which contributes to the payment
of the Partnership's operating costs and operating cash flow distributions. As a
result, the Partnership will most likely delay any active sales efforts for
Willow Grove until conditions become more favorable for potential dispositions
of the three commercial properties. Management's hold versus sell decisions will
continue to be based on an assessment of the best expected overall returns to
the Limited Partners.
During fiscal 1996, the Partnership received distributions from operating
cash flow totalling approximately $3,231,000 from its four investment properties
(including approximately $1,262,000 from the consolidated joint ventures). These
property 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 both a short-term and long-term basis. At March 31, 1996,
the Partnership and its consolidated joint venture had available cash and cash
equivalents of approximately $3,439,000. These funds will be utilized for the
working capital requirements of the Partnership, distributions to partners,
refinancing expenses related to the Partnership's remaining zero coupon loan 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
1996 Compared to 1995
The Partnership reported a net loss of $73,000 for the year ended March 31,
1996, as compared to a net loss of $827,000 for fiscal 1995. This decrease in
the Partnership's net loss is attributable to a decrease in the Partnership's
operating loss of $766,000, which was partially offset by a decrease in the
Partnership's share of unconsolidated ventures' income of $12,000. The
Partnership's operating results in fiscal 1996 include the consolidated results
of the Willow Grove joint venture. As discussed further above, the Partnership
assumed control over the affairs of the joint venture which owns the Willow
Grove property as a result of the purchase of 99% of the co-venture partner's
interest and the assignment of its remaining interest to Third Equity Partners,
Inc., the Managing General Partner of the Partnership. As a result, the fiscal
1996 financial statements reflect the presentation of the Willow Grove joint
venture on a consolidated basis, whereas the fiscal 1995 financial statements
reflect the Partnership's investment in Willow Grove under the equity method of
accounting.
The Partnership's share of unconsolidated ventures' income decreased due to
this change in the basis of presentation of the operating results of the Willow
Grove joint venture in the current year. The Partnership's share of
unconsolidated ventures' income in the prior year includes $286,000 attributable
to the Willow Grove joint venture. The Partnership's share of unconsolidated
ventures' income excluding Willow Grove increased by $274,000 in the current
year mainly due to increases in revenues at both DeVargas Mall and the One
Paragon Place Office Building which were partially offset by an increase in
interest expense. DeVargas Mall's revenues increased, in spite of an occupancy
level which averaged 90% for both calendar 1995 and 1994, due to increases in
minimum rent, percentage rents and common area maintenance and utility
reimbursements. One Paragon Place revenues increased as a direct result of the
receipt of $500,000 for the lease termination from one of it's major tenants
during the year, as discussed further above. Rental income from One Paragon
Place, excluding the lease termination fee, decreased slightly due to a decline
in average occupancy which reflects the temporary vacancy caused by the
downsizing of this major tenant which occurred in the second quarter of calendar
1995. Occupancy at One Paragon Place averaged 94% for calendar 1995 as compared
to 98% for calendar 1994. However, as noted above, by the end of fiscal 1996 the
vacant space had been re-leased bringing the occupancy back up to 98%. Interest
expense recognized by the unconsolidated joint ventures increased by $179,000
for calendar 1995, primarily due to the new loan obtained by the One Paragon
Place joint venture in the current year, as more fully discussed above, and a
combination of increases in the variable interest rate and additional borrowings
at the DeVargas joint venture to pay for tenant improvement and capital
enhancement work at the property.
The Partnership's operating loss decreased mainly due to a combination of a
decrease in interest expense and the inclusion in the current year of the
operations of the Willow Grove joint venture. Interest expense recognized by the
Partnership and its consolidated joint ventures decreased by $244,000 in the
current year due to the refinancing and payoff of the zero coupon loans secured
by Willow Grove and One Paragon Place in the fourth quarter of fiscal 1995 and
the third quarter of fiscal 1996, respectively, as more fully discussed above.
Operations of the Willow Grove joint venture, excluding interest expense,
remained relatively unchanged from calendar 1994 as a slight increase in rental
revenues was offset by increases in administrative and marketing costs. An
increase in interest income and an increase in net income from the Colony Plaza
joint venture also contributed to the favorable change in operating loss for
fiscal 1996. Interest income increased by $133,000 as a result of higher average
outstanding cash balances combined with an increase in average interest rates.
Net income from Colony Plaza increased by $93,000 mainly due to an increase in
revenues and decreases in depreciation charges and bad debt expense. Rental
income and expense reimbursements from Colony Plaza increased by 2.5% due to an
increase in average occupancy from 96% for calendar 1994 to 97% for calendar
1995. The venture's depreciation charges declined because certain fixtures and
equipment became fully depreciated in the current year.
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 in fiscal 1994. 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 fiscal 1994. 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.
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 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 calendar 1993, an
increase in expenses more than offset the revenue gains contributing to a lower
net income in calendar 1994. Interest expense showed the sharpest rise over
calendar 1993 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 took place in both 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 during fiscal 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 fiscal 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 calendar 1993
partly due to the full twelve-month effect of a number of lease rollovers that
were renewed at market rents during calendar 1992. As of calendar 1992, 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 calendar 1993 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 both
years.
Inflation
The Partnership completed its eighth full year of operations in fiscal 1996.
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.
<PAGE>
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 42 5/15/91
Albert Pratt Director 85 2/27/87 *
J. Richard Sipes Director 49 6/9/94
Walter V. Arnold Senior Vice President and Chief
Financial Officer 48 2/27/87 *
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 43 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 53 2/27/87 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 33 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.
<PAGE>
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 17 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, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
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, 1996 is $99,000, 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 $7,000
(included in general and administrative expenses) for managing the Partnership's
cash assets for the year ended March 31, 1996. 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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this Report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
(3) Exhibits:
The exhibits 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 1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER 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 28, 1996
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 28, 1996
--------------------------- -------------
Albert Pratt
Director
By: /s/ J. Richard Sipes Date: June 28, 1996
--------------------------- ---------------
J. Richard Sipes
Director
<PAGE>
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 theCommission
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 Act of 1934 and
all such contracts filed incorporated herein by
as exhibits of previously filed reference.
Forms 8-K and Forms 10-K are
hereby incorporated herein
by reference.
(13) Annual Report to Limited No Annual Report for
Partners the fiscal year 1996 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.
(27) Financial Data Schedule Filed as the last page of
EDGAR submission following
the Financial Statements
and Financial Statement
Schedule required by
Item 14.
<PAGE>
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, 1996 and 1995 F-6
Consolidated statements of operations for the years
ended March 31, 1996, 1995 and 1994 F-7
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1996,
1995 and 1994 F-8
Consolidated statements of cash flows for the years
ended March 31, 1996,1995 and 1994 F-9
Notes to consolidated financial statements F-10
Schedule III - Real Estate and Accumulated Depreciation F-24
1995 Combined Joint Ventures of PaineWebber Equity Partners Three Limited
Partnership:
Reports of independent auditors F-25
Combined balance sheet as of December 31, 1995 F-27
Combined statement of operations and statement
of changes in venturers' capital for the year
ended December 31, 1995 F-28
Combined statement of cash flows for the year ended
December 31, 1995 F-29
Notes to combined financial statements F-30
Schedule III - Real Estate and Accumulated Depreciation F-35
1994 and 1993 Combined Joint Ventures of PaineWebber Equity
Partners Three Limited Partnership:
Reports of independent auditors F-36
Combined balance sheets as of December 31, 1994 and 1993 F-38
Combined statements of operations for the years ended
December 31, 1994, 1993 and 1992 F-39
Combined statements of changes in venturers' capital for
the years ended December 31, 1994, 1994 and 1992 F-40
<PAGE>
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
(continued)
Reference
Combined statements of cash flows for the years ended
December 31, 1994, 1993 and 1992 F-41
Notes to combined financial statements F-42
Schedule III - Real Estate and Accumulated Depreciation F-48
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.
<PAGE>
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, 1996 and 1995, 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, 1996. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the 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 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 $18,867,000 and $20,064,000 at March 31,
1996 and 1995, respectively, and the Partnership's equity in DeVargas' net
income and Colony's net income on a combined basis of $1,143,000, $1,011,000 and
$968,000 for the years ended March 31, 1996, 1995 and 1994, 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 other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of 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, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended March 31, 1996 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 LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 19, 1996
<PAGE>
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, 1995 and 1994, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
February 22, 1996
<PAGE>
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, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, 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.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 6 to the
financial statements, the Partnership's operating investment property is
encumbered by a note payable which matures on December 29, 1996, at which time
the entire note will become payable. Management is currently negotiating with
the lender regarding an extension of this loan and is also pursing alternative
financing sources. If the refinancing or extension of this loan is not
accomplished by the stated maturity date, the lender could choose to initiate
foreclosure proceedings. This matter raises substantial doubt about the
Partnership's ability to continue as a going concern. Management's plans in
regard to this matter are described in Note 6. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
February 1, 1996
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995
(In thousands, except for per Unit data)
ASSETS
1996 1995
---- ----
Operating investment properties, at cost:
Land $ 4,208 $ 3,720
Building and improvements 14,153 9,446
---------- ----------
18,361 13,166
Less accumulated depreciation (3,395) (1,811)
---------- ----------
14,966 11,355
Investments in unconsolidated joint ventures,
at equity 15,154 24,930
Cash and cash equivalents 3,439 3,824
Accrued interest and other receivables 119 64
Accounts receivable - affiliates 7 7
Prepaid expenses 7 7
Deferred expenses (net of accumulated
amortization of $427 and $358
in 1996 and 1995, respectively) 193 146
---------- ----------
$33,885 $40,333
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and accrued interest $11,255 $16,707
Accounts payable and accrued expenses 75 38
Tenant security deposits 14 9
Advances from consolidated ventures 198 158
Accrued real estate taxes 13 -
------------ -------------
Total liabilities 11,555 16,912
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income - 1
Cumulative cash distributions (219) (210)
Limited Partners ($1,000 per unit; 50,468 Units issued):
Capital contributions, net of offering costs 43,669 43,669
Cumulative net income 98 170
Cumulative cash distributions (21,219) (20,210)
--------- --------
Total partners' capital 22,330 23,421
-------- --------
$33,885 $40,333
======= =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended
March 31, 1996, 1995 and 1994
(In thousands, except for per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense reimbursements $2,242 $1,347 $1,218
Interest income 236 103 55
-------- -------- ---------
2,478 1,450 1,273
Expenses:
Interest expense 1,677 1,921 1,756
Depreciation and amortization 501 375 375
Property operating expenses 476 140 128
Bad debt expense - 21 13
Real estate taxes 153 71 69
General and administrative 325 342 310
----------- --------- ---------
3,132 2,870 2,651
---------- ------- -------
Operating loss (654) (1,420) (1,378)
Partnership's share of unconsolidated
ventures' income 581 593 222
----------- ---------- ---------
Net loss $ (73) $ (827) $(1,156)
========== ======== =======
Net loss per Limited Partnership Unit $ (1.42) $(16.21) $(22.66)
======== ======= ========
Cash distributions per Limited Partnership
Unit $ 20.00 $ 35.00 $ 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.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the
years ended March 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
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
Cash distributions (9) (1,009) (1,018)
Net loss (1) (72) (73)
-------- --------- -----------
Balance at March 31, 1996 $(218) $22,548 $22,330
===== ======= =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended
March 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (73) $ (827) $ (1,156)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Partnership's share of unconsolidated
ventures' income (581) (593) (222)
Depreciation and amortization 501 375 375
Amortization of deferred loan costs 48 - -
Interest expense on zero coupon loans 1,355 1,921 1,756
Changes in assets and liabilities:
Accrued interest and other receivables (98) (26) 10
Deferred expenses 16 (10) (12)
Accounts payable and accrued expenses 19 8 (64)
Accrued real estate expenses (1) - -
Deferred rental revenue 3 - -
Tenant security deposits 5 - 9
Advances from consolidated ventures (78) (134) 109
Accounts payable - affiliates - - (56)
------------------------- ----------
Total adjustments 1,189 1,541 1,905
Net cash provided by operating
activities 1,116 714 749
Cash flows from investing activities:
Additional investments in unconsolidated
joint ventures (183) (342) (666)
Additions to operating investment properties (15) (9) (75)
Receipt of master lease payments 1 348 -
Distributions from unconsolidated joint
ventures 10,016 5,941 2,027
------------------ -------
Net cash provided by investing
activities 9,819 5,938 1,286
Cash flows from financing activities:
Cash distributions to partners (1,018) (1,784) (2,549)
Payment of deferred financing costs - (73) -
Payments of principal and
interest on notes payable (10,407) (2,472) -
--------- -------- -----------
Net cash used in financing activities (11,425) (4,329) (2,549)
Net increase (decrease) in cash and cash
equivalents (490) 2,323 (514)
Cash and cash equivalents, beginning of year:
Partnership 3,824 1,501 2,015
Portland Pacific Associates Two 105 - -
-----------------------------------
3,929 1,501 2,015
---------- --------- -------
Cash and cash equivalents, end of year $ 3,439 $ 3,824 $ 1,501
========= ======== =======
Cash paid during the year for interest $ 5,635 $ 1,022 $ -
========= ======== ===========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of March 31, 1996 and 1995 and revenues
and expenses for each of the three years in the period ended March 31, 1996.
Actual results could differ from the estimates and assumptions used.
At March 31, 1996, the accompanying financial statements include the
Partnership's investment in two unconsolidated joint venture partnerships
(three at March 31, 1995) 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.
As further discussed in Note 5, in January 1995, the Partnership acquired
99% of the co-venturer's interest in Portland Pacific Associates Two in
return for a cash payment of approximately $233,000. The remaining 1% of the
co-venture partner's interest was assigned to Third Equity Partners, Inc.,
the Managing General Partner of the Partnership. As a result of this
transaction, the Partnership acquired control over the operations of the
joint venture. Accordingly, this joint venture has been presented on a
consolidated basis in the Partnership's financial statements beginning in
fiscal 1996.
Operating investment properties at March 31, 1996 represents the real
estate assets of Colony Plaza General Partnership and Portland Pacific
Associates Two (only Colony Plaza at March 31, 1995), joint ventures in
which the Partnership has a controlling interest. For financial reporting
purposes the joint ventures are consolidated with the Partnership. The joint
ventures have a December 31 year-end for tax and financial reporting
purposes. As a result, the Partnership also reports the results of the
consolidated joint ventures based on financial information of the ventures
which is three months in arrears to that of the Partnership. All material
transactions between the Partnership and the joint ventures 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 sheets.
The consolidated operating investment properties are 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, 1996 and 1995.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" ("Statement 121"), which requires
impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. Statement 121 is effective for
financial statements for years beginning after December 15, 1995. The
Partnership will adopt Statement 121 in fiscal 1997 and, based on current
circumstances, does not believe the adoption will have a material effect on
results of operations or financial position.
Depreciation expense is generally computed using the straight-line method
over an estimated useful life of the buildings, improvements and furniture
and equipment, generally five to forty years. Certain of the improvements
and furniture and equipment is depreciated using either the double-declining
balance or 150% declining balance and straight-line methods over estimated
useful lives of five to twenty years. 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, 1996 and 1995, deferred expenses also include costs associated
with the notes payable described in Note 6 of $500,000 and $425,000,
respectively, and leasing commissions associated with the Colony Plaza
operating investment property of $42,000 and $30,000, 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.
The cash and cash equivalents, accounts receivable and all liabilities
appearing on the accompanying consolidated balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
With the exception of notes payable and accrued interest, the carrying
amount of these assets and liabilities approximates their fair value due to
the short-term maturities of these instruments. The fair value of notes
payable and accrued interest is estimated using discounted cash flow
analysis, based on the current market rates for similar types of borrowing
arrangements.
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, 1996, 1995 and 1994 is $99,000, $102,000 and $105,000, 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 $7,000, $6,000 and $4,000 (included in general and
administrative expenses) for managing the Partnership's cash assets for the
years ended March 31, 1996, 1995 and 1994, respectively.
4. Investments in Unconsolidated Joint Venture Partnerships
The Partnership has investments in two unconsolidated joint ventures,
(three at March 31, 1995), which are accounted for on the equity method in
the Partnership's financial statements. As discussed further in Note 5,
during the second quarter of fiscal 1996, the Partnership obtained control
over the affairs of Portland Pacific Associates Two which owns the Willow
Grove Apartments. Accordingly, the joint venture is presented on a
consolidated basis beginning in fiscal 1996. As discussed in Note 2, the
unconsolidated 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, 1995 and 1994
(in thousands)
Assets
1995 1994
Current assets $ 589 $ 667
Operating investment property, net 27,447 32,639
Other assets 1,502 882
--------- ----------
$29,538 $34,188
======= =======
Liabilities and Venturers' Capital
Current liabilities $ 402 $ 416
Other liabilities 11,654 2,951
Partnership's share of combined venturers' capital 14,943 28,149
Co-venturers' share of combined venturers' capital 2,539 2,672
--------- ---------
$29,538 $34,188
======= =======
Condensed Combined Summary of Operations For the years ended
December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 4,237 $ 5,195 $ 4,776
Interest and other income 500 12 17
--------- ---------- ----------
4,737 5,207 4,793
Expenses:
Property operating expenses 1,364 1,508 1,414
Depreciation and amortization 1,767 2,101 1,866
Real estate taxes 173 252 299
Administrative and other 345 411 444
Interest expense 383 213 124
Loss on disposal - - 236
---------- -------- --------
4,032 4,485 4,383
--------- -------- --------
Net income $ 705 $ 722 $ 410
========= ========= =========
1995 1994 1993
---- ---- ----
Net income:
Partnership's share of
combined income $ 600 $ 613 $ 242
Co-venturers' share of
combined income 105 109 168
-------- -------- --------
$ 705 $ 722 $ 410
======== ======== ========
Reconciliation of Partnership's Investment
March 31, 1996 and 1995
(in thousands)
1996 1995
Partnership's share of capital at December 31,
as shown above $14,943 $28,149
Excess basis due to investment in ventures (1) 439 472
Timing differences (2) (228) (3,691)
-------- --------
Investments in unconsolidated joint ventures,
at equity at March 31 $15,154 $24,930
======= =======
(1) At March 31, 1996 and 1995, the Partnership's investment exceeds its share
of the joint venture capital accounts by $439,000 and $472,000,
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 Portland Pacific Associates Two 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, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Partnership's share of operations,
as shown above $ 600 $ 613 $ 242
Amortization of excess basis (19) (20) (20)
--------- -------- ---------
Partnership's share of unconsolidated
ventures' income $ 581 $ 593 $ 222
======= ======= =======
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. As
a result, substantially all of the Partnership's investments in these joint
ventures are restricted as to distributions.
<PAGE>
Investments in unconsolidated joint ventures, at equity on the balance sheet
at March 31, is comprised of the following equity method carrying values (in
thousands):
1996 1995
DeVargas Center Joint Venture $ 7,755 $ 8,314
Portland Pacific Associates Two - 524
Richmond Paragon Partnership 7,399 16,092
--------- --------
$15,154 $24,930
The cash distributions received from the Partnership's unconsolidated joint
venture investments during fiscal 1996, 1995 and 1994 are as follows (in
thousands):
1996 1995 1994
---- ---- ----
DeVargas Center Joint Venture $ 864 $ 867 $ 864
Portland Pacific Associates Two - 3,972 345
Richmond Paragon Partnership 9,152 1,102 818
--------- -------- ---------
$10,016 $ 5,941 $ 2,027
======= ======= =======
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 was originally due January 1996, it was refinanced and is now due
January 1997, allows the joint venture to borrow up to $5,000,000 to fund
capital costs associated with leasing of the shopping center. The second note,
dated November 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 1997. 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, 1995, the
principal balances of the notes payable to the co-venturer aggregated
$3,018,000.
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. On November 16, 1995, a zero coupon loan issued in the name of the
Partnership and secured by a mortgage on One Paragon Place was refinanced with
the proceeds of a seven-year $8,750,000 loan issued in the name of the
unconsolidated Richmond Paragon Partnership (see Note 6). The net proceeds of
the loan issued to the joint venture in fiscal 1996 were distributed to the
Partnership.
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 properties
At March 31, 1996, the Partnership's balance sheet includes two operating
investment properties (one at March 31, 1995); Colony Plaza Shopping Center,
owned by Colony Plaza General Partnership and Willow Grove Apartments, owned by
Portland Pacific Associates Two. On January 27, 1995, the Partnership purchased
99% of the co-venture partner's interest in Portland Pacific Associates Two for
$233,000. As a result, the Partnership assumed control over the affairs of the
joint venture. Accordingly, beginning in fiscal 1996, the financial position and
the results of operations of the Willow Grove joint venture are presented on a
consolidated basis in the Partnership's financial statements. The Partnership's
policy is to report the operations of these consolidated joint ventures on a
three-month lag.
<PAGE>
Colony Plaza General Partnership
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 $7,680,000 as of March 31, 1996. This mortgage loan is
scheduled to mature on December 29, 1996 (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, 1995, the cumulative preferred return payable to
the Partnership was $684,500.
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, 1995,
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 accrues 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.
Portland Pacific Associates Two
On September 20, 1988, the Partnership acquired an interest in Portland
Pacific Associates Two, a 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% of the
co-venture partner's interest 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 assumed control over the
affairs of the joint venture. Because this transaction was completed after the
joint venture's year-end, the change in control was not reflected in the
presentation of the Partnership's financial statements until the first quarter
of fiscal 1996. Accordingly, beginning in fiscal 1996, the financial position
and results of operations of the venture are presented on a consolidated basis
in the Partnership's financial statements. Prior to fiscal 1996, the
Partnership's investment in the joint venture was accounted for on the equity
method (see Note 4).
In connection with the consolidation of Portland Pacific Associates Two
into the Partnership's financial statements, the following assets and
liabilities (in thousands) of the joint venture at January 1, 1995 were recorded
in the Partnership's balance sheet at April 1, 1995 (see Note 2).
Operating investment property, net $ 4,116
Cash 105
Accounts receivable and prepaid expenses 10
Deferred expenses 98
Accounts payable and accrued expenses (16)
Accrued real estate taxes (14)
Organization costs payable to PWEP3 (16)
Advances from consolidated venture (140)
Loans from partners (19)
Long term debt (3,600)
---------
Investment in Portland Pacific Associates Two,
at equity, at April 1, 1995 $ 524
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.
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.
The following is a combined summary of property operating expenses for the
years ended December 31, 1995, 1994 and 1993. The calendar 1995 amounts include
both the Colony Plaza and Willow Grove operations, whereas the calendar 1994 and
1993 amounts reflect only Colony Plaza (in thousands):
1995 1994 1993
---- ---- ----
Common area maintenance $ 136 $ 42 $ 46
Utilities 79 13 13
Insurance 34 17 17
Management fees 83 40 33
Professional fees 48 14 14
Administrative and other 87 14 5
------- ------- --------
$ 467 $ 140 $ 128
===== ===== =====
6. Notes payable
Notes payable and accrued interest on the books of the Partnership at March
31, 1996 and 1995 consist of the following (in thousands):
1996 1995
---- ----
10.72% nonrecourse loan payable to
an insurance company, was secured
by the One Paragon Place operating
investment property. All interest
and principal was due at maturity,
on November 23, 1995. Interest was
compounded semi-annually. Accrued
interest at March 31, 1995 amounted
to $4,774. See discussion of
refinancing below. $ - $ 9,774
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 (see
discussion below). Interest is
compounded semi-annually. Accrued
interest at March 31, 1996 and 1995
amounted to $3,630 and $2,883,
respectively. 7,680 6,933
9.59% nonrecourse loan payable to a
finance company, which is secured
by the Willow Grove operating
investment property. The note,
issued to Portland Pacific
Associates Two, requires monthly
principal and interest payments of
$32 from April 1995 through
maturity in March 2002. See
discussion below. 3,575 -
------- -------
$11,255 $16,707
======= =======
In March 1995, Portland Pacific Associates Two 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 $32,000 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 consolidated venture's books. The net proceeds from the
financing transaction of approximately $3,522,000 were remitted to the
Partnership as a distribution in fiscal 1995. The Partnership used $2,473,000 to
pay off an outstanding note payable which encumbered the property. The remaining
proceeds were added to the Partnership's cash reserves. As of December 31, 1995,
the fair value of this mortgage note payable approximated its carrying value.
On November 16, 1995, the zero coupon loan issued in the name of the
Partnership and secured by a mortgage on One Paragon Place was refinanced with
proceeds of a seven-year $8,750,000 loan from a new lender issued in the name of
the unconsolidated Richmond Paragon Partnership. The zero coupon loan had an
outstanding balance of approximately $10.4 million at the time of the
refinancing. Additional funds required to complete the refinancing transaction
were contributed from the Partnership's cash reserves. The new note is secured
by a first mortgage on the One Paragon Place Office Building and is recorded on
the books of the unconsolidated joint venture. The new loan bears interest at 8%
per annum and requires monthly principal and interest payments of $68,000
through maturity, on December 10, 2002. The Partnership has indemnified the
Richmond Paragon Partnership and the related co-venture partner against all
liabilities, claims and expenses associated with this borrowing. The net
proceeds of this loan, in the amount of approximately $8,059,000, was recorded
as a distribution to the Partnership from the unconsolidated joint venture in
fiscal 1996.
The borrowing secured by Colony Plaza is scheduled to mature on December 29,
1996, at which time total principal and accrued interest of $8,290,190 will be
due and payable. Due to the short-term maturity of this debt obligation, as of
December 31, 1995 the fair value of this mortgage note approximated its carrying
value. Management is currently negotiating with the existing lender regarding a
potential extension and modification of the outstanding first mortgage loan. In
addition, management is also pursuing possible alternative financing sources. If
the refinancing or extension of this loan is not accomplished by the stated
maturity date, the lender could choose to initiate foreclosure proceedings.
Under such circumstances, the Partnership may be unable to hold this investment
and recover the carrying value. The financial statements of the Partnership have
been prepared on a going concern basis which assumes the realization of assets
and the ability to refinance the existing debt. These financial statements 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 Colony Plaza joint venture included in the accompanying fiscal
1996 consolidated balance sheet and statement of operations total approximately
$11,111,000, $28,820, $1,375,000 and $537,000, respectively.
<PAGE>
Scheduled maturities of long-term debt for the next five years and
thereafter are as follows (in thousands):
Years ended December 31
1996 $7,719
1997 43
1998 48
1999 53
2000 58
Thereafter 3,334
$11,255
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
$1,235,000, $1,212,000 and $1,109,000 was earned during the years ended December
31, 1995, 1994 and 1993, respectively. The following is a schedule of minimum
future lease payments from noncancellable operating leases as of December 31,
1995 (in thousands):
Years ending December 31:
1996 $1,266
1997 $1,108
1998 $ 959
1999 $ 785
2000 $ 665
Thereafter $5,219
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, 1995, 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. No other
tenant accounted for more than 10% of rental income during the year.
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 23%
Goody's Family Clothes, Inc. $ 215,000 17%
During fiscal 1996, the principal anchor tenant of the Colony Plaza
Shopping Center, Wal-Mart Stores, Inc., gave notice of its intention to close
its store at Colony Plaza in order to open a Wal-Mart Supercenter at another
location in Augusta, Georgia. It is expected that the Wal-Mart store at Colony
Plaza, which comprises 38% of the property's net leasable area, will be vacated
in July 1996. Wal-Mart remains obligated to pay rent and its share of operating
expenses through the end of its lease term in March 2009. However, obtaining a
suitable replacement anchor tenant will be critical to the Partnership's ability
to retain its other existing tenants and lease vacant space at the shopping
center. Management is currently working to identify potential replacement
tenants for the Wal-Mart space at Colony Plaza. To the extent the Partnership is
unable to obtain a suitable replacement anchor tenant and retain or replace its
existing tenants, it is possible that the Partnership's estimate that it will
recover the carrying value of the operating investment property could change in
the future.
8. 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 the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions 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.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in PaineWebber Equity Partners
Three Limited Partnership.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
The eventual outcome of this litigation and the potential impact, if any, on the
Partnership's unitholders cannot be determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint is substantially similar to the
complaint in the Abbate action described above, and seeks compensatory damages
of $3.4 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the Managing General Partner cannot estimate the impact, if
any, of the potential indemnification claims on the Partnership's financial
statements, taken as a whole. Accordingly, no provision for any liability which
could result from the eventual outcome of these matters has been made in the
accompanying financial statements.
9. Subsequent Event
On May 15, 1996 the Partnership distributed $252,000 to the Limited
Partners and $2,500 to the General Partners for the quarter ended March 31,
1996.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1996
(In Thousands)
<CAPTION>
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 $7,680 $3,720 $10,170 $ (710) $3,720 $9,460 $13,180 $2,122 1989 1/18/90 12-40 yrs.
Apartment Complex
Beaverton, OR 3,575 475 4,025 681 488 4,693 5,181 1,273 1987 9/20/88 5-27.5 yrs.
------ ------ ------- ------- ------ ----- ------ -----
$11,255 $4,195 $14,195 $ (29) $4,208 $14,153 $18,361 $3,395
======= ====== ======= ======= ====== ======= ======= ======
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal
income tax purposes is approximately $18,272,000. (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:
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 13,166 $ 13,504 $13,430
Consolidation of joint venture 5,181 - -
Additions and improvements 15 10 74
Reduction of basis due to
master lease payments received (1) (348) -
------------- ---------- -------------
Balance at end of period $ 18,361 $ 13,166 $13,504
======== ======== =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 1,811 $ 1,443 $ 1,073
Consolidation of joint venture 1,083 - -
Depreciation expense 501 368 370
---------- ----------- ----------
Balance at end of period $ 3,395 $ 1,811 $ 1,443
======== ========= ========
(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>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners Three Limited Partnership:
We have audited the accompanying combined balance sheet of the 1995
Combined Joint Ventures of PaineWebber Equity Partners Three Limited Partnership
as of December 31, 1995, and the related combined statements of operations and
changes in venturers' capital, and cash flows for the year then ended. Our audit
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 audit. We did not audit the
financial statements of DeVargas Center Joint Venture, which statements reflect
45% of the combined total assets of the 1995 Combined Joint Ventures of
PaineWebber Equity Partners Three Limited Partnership at December 31, 1995 and
51% of the combined revenues of the 1995 Combined Joint Ventures of PaineWebber
Equity Partners Three Limited Partnership for the year ended December 31, 1995.
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 audit 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 audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the 1995 Combined Joint Ventures of
PaineWebber Equity Partners Three Limited Partnership at December 31, 1995, and
the combined results of their operations and their cash flows for the year then
ended 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, 1996
<PAGE>
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, 1995 and 1994, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
February 22, 1996
<PAGE>
1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED BALANCE SHEET
December 31, 1995
(In thousands)
ASSETS
1995
Current assets:
Cash and cash equivalents $ 436
Escrowed cash 81
Accounts receivable and prepaid expenses 72
-------------
Total current assets 589
Operating investment properties, at cost:
Land 6,748
Buildings and improvements 28,854
Furniture and equipment 2,850
Construction in progress 26
-------------
38,478
Less accumulated depreciation (11,031)
27,447
Deferred rents receivable 401
Deferred expenses and other assets,
net of accumulated amortization of $645 1,101
----------
$29,538
=======
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 92
Accounts payable - affiliates 55
Accrued interest payable 41
Current portion of mortgage note 114
Other current liabilities 100
----------
Total current liabilities 402
Notes payable - affiliate 3,018
Mortgage note payable 8,636
Venturers' capital 17,482
-------
$29,538
=======
See accompanying notes.
<PAGE>
1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS AND
CHANGES IN VENTURERS' CAPITAL
For the year ended December 31, 1995
(In thousands)
1995
Revenues:
Rental income and expense recoveries $ 4,237
Interest and other income 500
-----------
4,737
Expenses:
Depreciation and amortization 1,767
Real estate taxes 173
Interest expense 383
Management fees 183
Utilities 240
Repairs and maintenance 941
Administrative and other 345
----------
4,032
---------
Net income 705
Contributions from venturers 189
Distributions to venturers (10,425)
Venturers' capital, beginning of year 27,013
---------
Venturers' capital, end of year $ 17,482
========
See accompanying notes.
<PAGE>
1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
For the years ended December 31, 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1995
Cash flows from operating activities:
Net income $ 705
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,767
Interest funded by PWEP3 3
Changes in assets and liabilities:
Escrowed cash (27)
Accounts receivable and prepaid expenses 41
Deferred rents receivable 41
Deferred expenses and other assets (73)
Accounts payable and accrued liabilities 25
Accounts payable - affiliates (24)
Interest payable 41
Other current liabilities 44
-----------
Total adjustments 1,838
----------
Net cash provided by operating activities 2,543
Cash flows from investing activities:
Additions to operating investment properties (322)
----------
Net cash used in investing activities (322)
Cash flows from financing activities:
Proceeds from capital contributions 186
Proceeds from issuance of notes payable to affiliate 123
Principal payments on notes payable to affiliate (55)
Cash distributed to venturers (2,427)
---------
Net cash used in financing activities (2,173)
--------
Net increase in cash and cash equivalents 48
Cash and cash equivalents at beginning of year 388
Cash and cash equivalents at end of year $ 436
=========
Cash paid during the year for interest $ 338
=========
See accompanying notes.
<PAGE>
1995 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Organization
The accompanying financial statements of the 1995 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 and Richmond Paragon Partnership (One Paragon
Place), a Virginia general partnership, for the year ended December 31,
1995.
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
Richmond Paragon Partnership September 26, 1988
Basis of Presentation and Use of Estimates
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities in the financial statements
and accompanying notes. Actual results could differ from the estimates and
assumptions used.
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. Both 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, 1995.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" ("Statement 121"), which requires
impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Combined Joint Ventures will adopt
Statement 121 in 1996 and, based on current circumstances, management does
not believe the effect of adoption will be material.
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. "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 $174,000
through the end of the guaranty period.
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.
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 $401,000 at December 31, 1995 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,
1995, no such direction has been given to the property managers. Escrowed
cash at December 31, 1995 consists primarily of tenants security deposits.
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, 1995, no amounts were required to be paid into
the capital reserve.
Fair value of financial instruments
The carrying amount of cash, tenant receivables and other current and
long-term liabilities approximates their respective fair values at December
31, 1995.
<PAGE>
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. 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). 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 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, 1995 consist primarily of
accrued interest on notes payable to the co-venturer in the DeVargas joint
venture (see Note 4) and management fees and reimbursements payable to the
property managers.
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 $5,000,000 and bears interest at 1% above the floating prime
rate established by Texas Commerce Bank National Association (9.5% at
December 31, 1995). Outstanding accrued interest is due and payable on a
monthly basis, and the principal, which was originally due on January 25,
1996, was extended and is now due on January 25, 1997. The outstanding
principal balance of this note was $2,636,000 at December 31, 1995. 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 $382,000 at December 31, 1995. 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. Mortgage note payable
On November 16, 1995, a zero coupon loan issued to PWEP3 and secured by a
first mortgage on the One Paragon Place operating property was refinanced
with proceeds of a seven-year $8,750,000 loan from a new lender issued in
the name of Richmond Paragon Partnership. The balance of the zero coupon
loan at the date of the refinancing was $10.4 million. Additional funds
required to complete the refinancing transaction were contributed by PWEP3.
The new note is secured by a first mortgage on the One Paragon Place Office
Building and is recorded on the books of the unconsolidated joint venture.
The new loan bears interest at 8% per annum and requires monthly principal
and interest payments of $68,000 through maturity, on December 10, 2002. The
Partnership has indemnified the Richmond Paragon Partnership and the related
co-venture partner against all liabilities, claims and expenses associated
with this borrowing. The net proceeds of this loan, in the amount of
$8,059,000, was recorded as a distribution to PWEP3 in 1995.
Scheduled maturities of the mortgage note payable for the next five years
and thereafter are as follows (in thousands):
1996 $ 114
1997 124
1998 134
1999 146
2000 158
Thereafter 8,074
------
$ 8,750
=======
<PAGE>
6. 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:
-----------------------
1996 $ 3,337
1997 2,629
1998 1,983
1999 1,273
2000 950
Thereafter 5,271
----------
$15,443
======
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 $910,000 in 1995.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
1995 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(In thousands)
<CAPTION>
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
Santa Fe, NM $ 3,018 $4,052 $ 6,669 $6,084 $4,052 $12,753 $16,805 $4,406 1972 4/19/88 5-40
yrs.
Office Building
Richmond, VA 8,750 2,719 18,349 605 2,696 18,977 21,673 6,625 1987 9/26/88 7-31.5 yrs.
------- ----- ------ ------- ------ ------- ------- ------
Totals $11,768 $6,771 $25,018 $ 6,689 $6,748 $31,730 $38,478 $11,031
======= ======= ======= ======= ====== ======= ======= =======
Notes
- -----
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal
income tax purposes is approximately $39,535. (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:
1995
Balance at beginning of period $38,164
Increase due to additions 322
Decrease due to disposals (8)
------------
Balance at end of period $38,478
=======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 9,395
Depreciation expense 1,636
----------
Balance at end of period $11,031
=======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Equity Partners Three Limited Partnership:
We have audited the accompanying combined balance sheets of the 1994 and
1993 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 1994 and 1993 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 1994 and 1993
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 1994 and 1993 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 LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 22, 1995
<PAGE>
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
<PAGE>
1994 AND 1993 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.
<PAGE>
1994 AND 1993 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.
<PAGE>
1994 AND 1993 COMBINED JOINT VENTURES OF
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.
<PAGE>
1994 AND 1993 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 equivalents164 (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.
<PAGE>
1994 AND 1993 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Organization
The accompanying financial statements of the 1994 and 1993 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
1994 AND 1993 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(In thousands)
<CAPTION>
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>
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, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3439
<SECURITIES> 0
<RECEIVABLES> 126
<ALLOWANCES> 1
<INVENTORY> 0
<CURRENT-ASSETS> 3572
<PP&E> 33515
<DEPRECIATION> 3395
<TOTAL-ASSETS> 33885
<CURRENT-LIABILITIES> 300
<BONDS> 11255
0
0
<COMMON> 0
<OTHER-SE> 22330
<TOTAL-LIABILITY-AND-EQUITY> 33885
<SALES> 0
<TOTAL-REVENUES> 3059
<CGS> 0
<TOTAL-COSTS> 1455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1677
<INCOME-PRETAX> (73)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73)
<EPS-PRIMARY> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
