UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
(Exact name of registrant as specified in its charter)
Virginia 04-2985890
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties, at cost:
Land $ 4,208 $ 4,208
Building and improvements 14,157 14,153
-------- --------
18,365 18,361
Less accumulated depreciation (3,685) (3,395)
-------- --------
14,680 14,966
Investments in unconsolidated joint
ventures, at equity 14,543 15,154
Cash and cash equivalents 4,161 3,439
Escrowed cash 19 -
Accrued interest and other receivables 24 119
Accounts receivable - affiliates 7 7
Prepaid expenses 2 7
Deferred expenses, net 171 193
------- ---------
$33,607 $33,885
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and deferred interest $11,639 $11,255
Accounts payable and accrued expenses 101 75
Accrued real estate taxes 37 13
Tenant security deposits 14 14
Advances from consolidated ventures 328 198
Partners' capital 21,488 22,330
-------- --------
$33,607 $33,885
======= =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 596 $ 536 $ 1,159 $ 1,087
Interest income 51 68 98 131
----- ----- ------- -------
647 604 1,257 1,218
Expenses:
Interest expense 304 540 599 1,010
Property operating expenses 103 113 234 228
Real estate taxes 38 38 75 77
General and administrative 90 92 174 167
Depreciation and amortization 160 149 294 282
----- ----- ------- -------
695 932 1,376 1,764
---- ----- ------- -------
Operating loss (48) (328) (119) (546)
Partnership's share of unconsolidated
ventures' income (losses) (91) 559 (213) 694
----- ----- ------ ------
Net income (loss) $ (139) $ 231 $ (332) $ 148
====== ======= ======= =======
Net income (loss) per
Limited Partnership Unit $ (2.73) $ 4.53 $ (6.50) $ 2.90
======= ====== ======= =======
Cash distributions per
Limited Partnership Unit $ 5.00 $ 5.00 $10.00 $10.00
======= ======= ====== ======
The above per Limited Partnership Unit information is based upon the 50,468
Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1995 $(208) $23,629
Cash distributions (5) (505)
Net income 2 147
------ --------
Balance at September 30, 1995 $(211) $23,271
===== =======
Balance at March 31, 1996 $(218) $22,548
Cash distributions (5) (505)
Net loss (4) (328)
----- -------
Balance at September 30, 1996 $(227) $21,715
===== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ (332) $ 148
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Partnership's share of unconsolidated
ventures' income (losses) 213 (694)
Depreciation and amortization 294 282
Amortization of deferred loan costs 21 16
Interest expense on zero coupon loans 403 888
Changes in assets and liabilities:
Accrued interest and other receivables 95 (360)
Prepaid expenses 5 (1)
Deferred expense (3) -
Accounts payable and accrued expenses 26 42
Accrued real estate taxes 24 -
Tenant security deposits - 4
Advances from consolidated ventures 130 152
------- -------
Total adjustments 1,208 329
------- -------
Net cash provided by operating activities 876 477
------- -------
Cash flows from investing activities:
Additional investments in unconsolidated
joint ventures - (224)
Net additions to escrowed cash (19) -
Additions to operating investment properties (4) (14)
Distributions from unconsolidated joint
ventures 398 1,307
-------- --------
Net cash provided by investing activities 375 1,069
-------- --------
Cash flows from financing activities:
Cash distributions to partners (510) (510)
Payment of deferred financing costs - (192)
Payments of principal on notes payable (19) -
-------- ---------
Net cash used in financing activities (529) (702)
-------- ---------
Net increase in cash and cash equivalents 722 844
Cash and cash equivalents, beginning of period 3,439 3,824
-------- --------
Cash and cash equivalents, end of period $ 4,161 $ 4,668
======= =======
Cash paid during the period for interest $ 175 $ -
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization
The accompanying financial statements, footnotes, and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended March 31, 1996.
In the opinion of management, the accompanying financial statements, which
have not been audited, reflect all adjustments necessary to present fairly the
results for the interim period. All of the accounting adjustments reflected in
the accompanying interim financial statements are of a normal recurring
nature.
2. Related Party Transactions
Included in general and administrative expenses for the six-month periods
ended September 30, 1996 and 1995 is $41,000 and $50,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for the six months ended
September 30, 1996 and 1995 is $7,000 and $6,000, respectively, representing
fees earned by Mitchell Hutchins Institutional Investors, Inc. for managing
the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
As of September 30, 1996, the Partnership has investments in two
unconsolidated joint venture partnerships which own operating properties as
more fully described in the Partnership's Annual Report. The unconsolidated
joint ventures are accounted for by using the equity method because the
Partnership does not have a voting control interest in these ventures. Under
the equity method, the assets, liabilities, revenues and expenses of the joint
ventures do not appear in the Partnership's financial statements. Instead, the
investments are carried at cost adjusted for the Partnership's share of each
venture's earnings, losses and distributions. The Partnership reports its
share of unconsolidated joint venture earnings or losses three months in
arrears.
<PAGE>
Summarized operations of the unconsolidated joint ventures, for the periods
indicated, are as follows:
Condensed Combined Summary of Operations
For the three and six months ended June 30, 1996 and 1995
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 1,027 $ 1,617 $2,059 $2,742
Interest and other income 12 3 21 5
------- ------- ------ ------
1,039 1,620 2,080 2,747
Expenses:
Property operating expenses 405 440 822 810
Real estate taxes 44 52 87 101
Interest expense 250 74 499 145
Depreciation and amortization 429 463 862 925
-------- -------- ------ -------
1,128 1,029 2,270 1,981
-------- -------- ------ -------
Net income (loss) $ (89) $ 591 $ (190) $ 766
======== ======== ====== =======
Net income (loss):
Partnership's share of
combined income (losses) $ (86) $ 564 $ (203) $ 704
Co-venturers' share of
combined income (losses) (3) 27 13 62
--------- -------- ------ -------
$ (89) $ 591 $ (190) $ 766
========= ======== ====== =======
Reconciliation of Partnership's Share of Operations
For the three and six months ended June 30, 1996 and 1995 (in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Partnership's share of operations,
as shown above $ (86) $ 564 $ (203) $ 704
Amortization of excess basis (5) (5) (10) (10)
--------- --------- ------- -------
Partnership's share of
unconsolidated ventures'
income (losses) $ (91) $ 559 $ (213) $ 694
========= ======== ======= =======
4. Operating Investment Properties
At September 30, 1996, the Partnership has investments in two consolidated
joint venture partnerships which own operating investment properties. The
consolidated ventures have December 31 year-ends for both tax and financial
reporting purposes. Accordingly, the Partnership's policy is to report the
financial position, results of operations and cash flows of these ventures
on a three-month lag. All material transactions between the Partnership and
these 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.
As discussed in the Partnership's Annual Report, the Partnership owns a
controlling interest in the Colony Plaza General Partnership, which was
formed to acquire and operate the Colony Plaza Shopping Center located in
Augusta, Georgia. The shopping center, which consists of approximately
217,000 square feet of leasable retail space, was acquired by the joint
venture on January 18, 1990.
On January 27, 1995, the Partnership purchased 99% of its co-venture
partner's interest in Portland Pacific Associates Two for $233,000. The
remaining 1% interest of the co-venturer was assigned to Third Equity
Partners, Inc., 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. Portland Pacific Associates
Two owns the Willow Grove Apartments, a 119-unit complex located in
Beaverton, Oregon.
The following is a combined summary of property operating expenses for the
consolidated joint ventures for the three and six months ended June 30, 1996
and 1995 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
Common area maintenance $ 27 $ 36 $ 62 $ 62
Utilities 21 18 43 36
Management fees 26 21 47 42
Administrative and other 29 38 82 88
----- ----- ----- -----
$ 103 $ 113 $ 234 $ 228
===== ===== ===== =====
5. Notes payable
Notes payable and deferred interest at September 30, 1996 and March 31, 1996
consist of the following (in thousands):
September 30 March 31
------------ --------
10.5% nonrecourse loan payable
by the Partnership to a finance
company, which is secured by the
Colony Plaza operating investment
property. All interest and principal
is due at maturity, on December 29,
1996. Interest is compounded
semi-annually. Accrued interest at
September 30, 1996 and March 31, 1996
amounted to $4,033 and $3,630,
respectively. The fair value of the
mortgage note approximated its
carrying value at September 30, 1996
and March 31, 1996. See discussion
below. $ 8,083 $ 7,680
9.59% nonrecourse loan payable
by the consolidated Portland Pacific
Associates Two to a finance company,
which is secured by the Willow Grove
operating investment property. The
note requires monthly principal and
interest payments of $32 from April
1995 through maturity in March 2002.
The fair value of the mortgage note
approximated its carrying value at
June 30, 1996 and December 31, 1995.
3,556 3,575
------- -------
$11,639 $11,255
======= =======
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 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. 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. A refinancing or modification transaction could require a
sizable principal paydown by the Partnership in order to reduce the
loan-to-value ratio of the mortgage note payable. 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.
6. Contingencies
As discussed in detail in the Partnership's Annual Report for the year ended
March 31, 1996, the Partnership is involved in certain legal actions. At the
present time, the Managing General Partner is unable to determine what impact,
if any, the resolution of these matters may have on the Partnership's financial
statements, taken as a whole.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As previously reported, Wal-Mart closed its 82,000 square foot store at
Colony Plaza in July 1996 to open a "Supercenter" store at a new location in the
Augusta market. Although Wal-Mart will remain obligated to pay rent and its
share of operating expenses at Colony Plaza through the term of its lease, which
expires in March 2009, 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. To date, one 6,000 square foot tenant has exercised a co-tenancy
clause in its lease which allowed it to close its store because of the Wal-Mart
vacancy. Unless the Wal-Mart space is re-leased within twelve months, this
tenant will only be required to pay its share of common area maintenance, taxes
and insurance during this twelve-month period, after which it can cancel its
entire lease obligation, which expires in January 1998, upon 30 days' written
notice. Five other tenants, comprising 12,900 square feet, or 6% of the Center's
leasable area, have lease clauses which permit them to terminate their leases if
the anchor space is not re-leased within a specified time frame. Two of these
tenants also have the right to pay a specified percentage of sales revenues as
base rent while the anchor tenant space remains vacant. Reported tenant sales
results for August and September have declined significantly. In addition,
several other tenants have requested rental abatements as a result of the
Wal-Mart vacancy. During the first quarter of fiscal 1997, the Partnership hired
new property management and leasing agents to oversee this period of
restabilization for the Colony Plaza property. The new leasing agents have
already entered into preliminary discussions with a number of potential
replacement anchor tenants for the Wal-Mart space.
As discussed further in the Annual Report, management continues to focus its
efforts on refinancing the Partnership's remaining zero coupon loan which is
secured by the Colony Plaza shopping center. This loan, which had an outstanding
balance of $8,083,000 at September 30, 1996, is scheduled to mature in December
1996, at which time approximately $8,290,000 would be due. 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. The anchor tenant
vacancy at Colony Plaza will make obtaining new financing very difficult.
Accordingly, management is currently focusing its efforts on negotiations with
the existing first mortgage lender. As a result of the Wal-Mart vacancy, any
refinancing or modification transaction could require a sizable principal
paydown by the Partnership to reduce the loan-to-value ratio of the mortgage
note payable. If a restructuring or refinancing of the current mortgage loan
cannot be accomplished by the schedule maturity date, the lender could choose to
initiate foreclosure proceedings. The eventual outcome of this situation is
uncertain at the present time.
As previously reported, on November 16, 1995 the Partnership refinanced
the zero coupon loan secured by the One Paragon Place Office Building, which had
a principal balance of $10.4 million, with a new loan issued in the name of the
joint venture which owns the property. The new loan 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 approximately $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
contributed the funds required to complete this refinancing transaction. One
Paragon Place was 99% occupied at September 30, 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. As a
result of the strong market conditions, the level of new construction activity
in the Richmond area has increased 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 September 30, 1996, the property's leasing
team signed a lease renewal with a tenant occupying 3,090 square feet at an
average rental rate that was 6% higher than the rate paid under the tenant's old
lease. During the next 15 months, leases comprising 25% of One Paragon Place's
leasable area will be up for renewal. With current market rental rates higher
than rates on the leases up for renewal, management expects revenues at the
property to increase as new leases or renewals are signed.
The DeVargas Mall was 92% leased as of September 30, 1996. As previously
reported in the Annual Report, during the fourth quarter of fiscal 1996
management signed a lease with a national department store retailer which took
occupancy of 27,910 square feet at DeVargas during the quarter ended September
30, 1996. 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. During the quarter ended September 30, 1996, lease negotiations were
finalized with 16,000 square foot national drug store chain to fill a vacant
mini-anchor space at the Mall. Funding of the required tenant improvements for
the 27,910 and 16,000 square foot leases referred to above will be accomplished
by means of additional advances under the lines of credit provided by the
Partnership's co-venture partner.
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 are being adversely impacted 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, the markets for
sales of multi-family properties in the Pacific Northwest in general and in the
Portland, Oregon area in particular have been strong over the past twelve months
and remain favorable at the present time despite the addition of new properties
to the market supply and an increase in the use of concessions by existing
property owners in response to the new competition. Market conditions are
expected to remain strong in the near term due to the region's history of
healthy employment gains and the resurgence in the growth of the high technology
industries. Accordingly, management is currently analyzing whether a near-term
sale of the Willow Grove property which is the Partnership's smallest
investment, at 10% of the original investment portfolio, would be in the best
interests of the Limited Partners. Management's hold versus sell decisions will
continue to be based on an assessment of the best expected overall returns to
the Limited Partners.
At September 30, 1996, the Partnership and its consolidated joint venture
had available cash and cash equivalents of approximately $4,161,000. These funds
will be utilized for the working capital requirements of the Partnership,
distributions to partners, refinancing costs 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. The source of future
liquidity and distributions to the partners is expected to be from cash
generated by the Partnership's income-producing properties and from the proceeds
received from the sale or refinancing of such properties. Such sources of
liquidity are expected to be sufficient to meet the Partnership's needs on both
a short-term and long-term basis.
Results of Operations
Three months ended September 30, 1996
The Partnership reported a net loss of $139,000 for the three months ended
September 30, 1996, as compared to net income of $231,000 for the same period in
the prior year. This unfavorable change of $370,000 in the Partnership's net
operating results is due to an unfavorable change in the Partnership's share of
unconsolidated ventures' operations of $650,000, which was partially offset by a
decrease in the Partnership's operating loss of $280,000. The unfavorable change
in the Partnerships share of unconsolidated ventures' operations, as well as the
decrease in the Partnership's operating loss, are primarily attributable to the
change in the entity reporting the interest expense associated with the
borrowing secured by the One Paragon Place Office Building. As discussed further
above and in the Annual Report, the zero coupon loan secured by the One Paragon
Place Office Building, originally issued in the name of the Partnership, was
refinanced with the proceeds of a new loan obtained by the One Paragon Place
joint venture. This refinancing transaction increased the interest expense at
the unconsolidated joint venture while at the same time decreasing the
Partnership's interest expense. The unfavorable change in the Partnership's
share of unconsolidated ventures' operations prior to the effect of the interest
expense associated with the One Paragon Place loan was $476,000. The major
portion of this unfavorable change is attributable to a decrease in rental
revenues at both One Paragon Place and DeVargas. During fiscal 1996, the One
Paragon Place joint venture received $500,000 in connection with a lease
termination agreement with a significant tenant which is included in rental
revenue in the prior year. Rental revenues decreased at DeVargas for the current
three-month period due to a decrease in the property's average occupancy level.
The Partnership's operating loss, prior to the effect of the change in the
entity reporting the interest on the loan secured by One Paragon Place,
decreased by $16,000 for the current three-month period primarily due to an
increase in rental revenues and a decrease in property operating expenses from
the consolidated joint ventures. Rental revenues increased slightly at Colony
Plaza due to an increase in the average leased space in the current fiscal year.
As discussed further in the notes to the financial statements, the Partnership
reports it's share of ventures' operations on a three-month lag. As a result the
reported results for Colony Plaza are for the period ended June 30,1996, which
is prior to the date that Wal-Mart vacated the Center. As discussed further
above, revenues from Colony Plaza are expected to decline significantly in
future periods, until the Wal-Mart space is re-leased as a result of the impact
of the Wal-Mart vacancy on the leasing of the remainder to the Center.
Six months ended September 30, 1996
The Partnership reported a net loss of $332,000 for the quarter ended
September 30, 1996, as compared to net income of $148,000 for the same period in
the prior year. This unfavorable change of $480,000 in the Partnership's net
operating results is due to an unfavorable change in the Partnership's share of
unconsolidated ventures' operations of $907,000, which was partially offset by a
decrease in the Partnership's operating loss of $427,000. The unfavorable change
in the Partnership's share of unconsolidated ventures' operations, as well as
the decrease in the Partnership's operating loss, are primarily attributable to
the change in the entity reporting the interest expense associated with the
borrowing secured by the One Paragon Place Office Building, as discussed further
above. The unfavorable change in the Partnership's share of unconsolidated
ventures' operations prior to the effect of the interest expense associated with
the One Paragon Place loan was $558,000. The major portion of this unfavorable
change is attributable to a decrease in rental revenues at both One Paragon
Place and DeVargas. During fiscal 1996, the One Paragon Place joint venture
received $500,000 in connection with a lease termination agreement with a
significant tenant, which is included in rental revenue in the prior year.
Rental revenues decreased at DeVargas for the current six-month period due to a
decrease in the property's average occupancy level.
The Partnership's operating loss, prior to the effect of the change in the
entity reporting the interest on the loan secured by One Paragon Place,
increased by $97,000 for the current six-month period primarily due to a
decrease in interest income and an increase in interest expense attributable to
the Willow Grove mortgage loan obtained in March 1995. Interest income on
Partnership cash reserves declined due to a lower average cash balance as a
result of the cash reserves used to complete the One Paragon Place refinancing
transaction in the third quarter of fiscal 1996.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As discussed in the prior quarterly and annual reports, 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 70 limited
partnership investments, including those offered by the Partnership. The
lawsuits were brought against PaineWebber Incorporated and Paine Webber Group
Inc. (together "PaineWebber"), among others, by allegedly dissatisfied
partnership investors. In March 1995, after the actions were consolidated under
the title In re PaineWebber Limited Partnership Litigation, the plaintiffs
amended their complaint to assert claims against a variety of other defendants,
including Third Equity Partners, Inc. and Properties Associates 1988, L.P.
("PA1988"), which are General Partners of the Partnership and affiliates of
PaineWebber. On May 30, 1995, the court certified class action treatment of the
claims asserted in the litigation.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement is scheduled to continue in November 1996.
With regard to the Abbate action described in the Annual Report on Form
10-K for the year ended March 31, 1996, in September 1996 the court dismissed
many of the plaintiffs' claims as barred by the applicable statutes of
limitations. The eventual outcome of this litigation and the potential impact,
if any, on the Partnership's unitholders remains undeterminable at the present
time.
The status of the other litigation involving the Partnership and its
General Partners remains unchanged from the description provided in the
Partnership's Annual Report on Form 10-K for the year ended March 31, 1996.
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 the litigation
discussed above. However, PaineWebber has agreed not to seek indemnificaiton for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. 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.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
By: Third Equity Partners, Inc.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the six months ended Sept 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 4,161
<SECURITIES> 0
<RECEIVABLES> 31
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,213
<PP&E> 32,908
<DEPRECIATION> 3,685
<TOTAL-ASSETS> 33,607
<CURRENT-LIABILITIES> 8,563
<BONDS> 3,556
0
0
<COMMON> 0
<OTHER-SE> 21,488
<TOTAL-LIABILITY-AND-EQUITY> 33,607
<SALES> 0
<TOTAL-REVENUES> 1,257
<CGS> 0
<TOTAL-COSTS> 777
<OTHER-EXPENSES> 213
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599
<INCOME-PRETAX> (332)
<INCOME-TAX> 0
<INCOME-CONTINUING> (332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (332)
<EPS-PRIMARY> (6.50)
<EPS-DILUTED> (6.50)
</TABLE>
