UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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
(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
December 31, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- --------
Operating investment properties, at cost:
Land $ 4,208 $ 4,208
Buildings and improvements 14,153 14,153
--------- --------
18,361 18,361
Less accumulated depreciation (3,811) (3,395)
--------- --------
14,550 14,966
Investments in unconsolidated joint ventures,
at equity 14,342 15,154
Cash and cash equivalents 4,195 3,439
Accrued interest and other receivables 31 119
Accounts receivable - affiliates 7 7
Prepaid expenses 43 7
Deferred expenses, net 157 193
---------- --------
$ 33,325 $ 33,885
========== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and deferred interest $ 11,836 $ 11,255
Accounts payable and accrued expenses 71 75
Accrued real estate taxes - 13
Tenant security deposits 15 14
Advances from consolidated ventures 108 198
Partners' capital 21,295 22,330
---------- --------
$ 33,325 $ 33,885
========== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 615 $ 549 $ 1,774 $ 1,636
Interest income 56 58 154 189
------ ----- ------- -------
671 607 1,928 1,825
Expenses:
Interest expense 302 365 901 1,376
Property operating expenses 114 113 348 340
Real estate taxes 37 41 112 117
General and administrative 45 88 219 255
Depreciation and amortization 136 104 430 386
------ ----- ------- -------
634 711 2,010 2,474
------ ----- ------- -------
Operating income (loss) 37 (104) (82) (649)
Partnership's share of unconsolidated
ventures' income (losses) 25 (10) (188) 684
------ ------ ------- -------
Net income (loss) $ 62 $ (114) $ (270) $ 35
====== ====== ======= =======
Net income (loss) per
Limited Partnership Unit $1.21 $(2.23) $ (5.29) $ 0.69
===== ====== ======= =======
Cash distributions per
Limited Partnership Unit $5.00 $ 5.00 $15.00 $ 15.00
===== ======= ====== =======
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 nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1995 $(208) $23,629
Cash distributions (8) (757)
Net income - 35
----- -------
Balance at December 31, 1995 $(216) $22,907
===== =======
Balance at March 31, 1996 $(218) $22,548
Cash distributions (8) (757)
Net loss (3) (267)
----- -------
Balance at December 31, 1996 $(229) $21,524
===== =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ (270) $ 35
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Partnership's share of unconsolidated
ventures' income (losses) 188 (684)
Depreciation and amortization 430 386
Amortization of deferred loan costs 29 23
Interest expense on zero coupon loans 610 1,159
Changes in assets and liabilities:
Accrued interest and other receivables 88 (9)
Prepaid expenses (18) (16)
Deferred expenses (7) -
Accounts payable and accrued expenses (4) 78
Accrued real estate taxes (31) -
Tenant security deposits 1 4
Advances from consolidated ventures (90) 121
------ -----
Total adjustments 1,196 1,062
------ -----
Net cash provided by operating activities 926 1,097
------ -----
Cash flows from investing activities:
Additional investments in unconsolidated
joint ventures - (279)
Additions to operating investment properties - (20)
Distributions from unconsolidated joint ventures 624 9,818
------ -----
Net cash provided by investing activities 624 9,519
------ -----
Cash flows from financing activities:
Cash distributions to partners (765) (765)
Payment of deferred financing costs - (134)
Payments of principal on notes payable (29) (10,398)
------ -----
Net cash used in financing activities (794) (11,297)
------ -----
Net increase (decrease) in cash and cash equivalents 756 (681)
Cash and cash equivalents, beginning of period 3,439 3,824
------ -----
Cash and cash equivalents, end of period $4,195 $3,143
====== ======
Cash paid during the period for interest $ 262 $ 194
====== =====
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes, and discussion should be
read in conjunction with the financial statements and footnotes 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.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1996 and March 31, 1996
and revenues and expenses for each of the three- and nine-month periods
ended December 31, 1996 and 1995. Actual results could differ from the
estimates and assumptions used.
2. Related Party Transactions
Included in general and administrative expenses for the nine-month periods
ended December 31, 1996 and 1995 is $65,000 and $74,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for the nine months
ended December 31, 1996 and 1995 is $12,000 and $7,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
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 nine months ended September 30, 1996 and 1995
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental revenues and
expense recoveries $ 1,124 $ 1,058 $ 3,183 $ 3,799
Interest and other income 6 1 27 7
------- ------- ------- -------
1,130 1,059 3,210 3,806
Expenses:
Property operating expenses 356 466 1,178 1,276
Real estate taxes 24 46 111 147
Interest expense 291 74 790 219
Depreciation and amortization 429 454 1,291 1,379
-------- ------- ------- -------
1,100 1,040 3,370 3,021
-------- ------- ------- -------
Net income (loss) $ 30 $ 19 $ (160) $ 785
======== ======= ======= =======
Net income (loss):
Partnership's share of
combined income (losses) $ 30 $ (5) $ (173) $ 699
Co-venturers' share of
combined income (losses) - 24 13 86
-------- ------- ------- -------
$ 30 $ 19 $ (160) $ 785
======== ======= ======= ========
Reconciliation of Partnership's Share of Operations
For the three and nine months ended September 30, 1996 and 1995 (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Partnership's share of operations,
as shown above $ 30 $ (5) $ (173) $ 699
Amortization of excess basis (5) (5) (15) (15)
------ ----- ------- ------
Partnership's share of
unconsolidated ventures'
income (losses) $ 25 $ (10) $ (188) $ 684
====== ===== ======= ======
4. Operating Investment Properties
The Partnership has investments in two consolidated joint venture
partnerships which own operating investment properties as more fully
described in the Partnership's Annual Report. 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 nine months ended September 30,
1996 and 1995 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Common area maintenance $ 31 $ 27 $ 93 $ 88
Utilities 22 22 65 59
Management fees 21 20 68 62
Administrative and other 40 44 122 131
------ ----- ------ ------
$ 114 $ 113 $ 348 $ 340
====== ===== ====== ======
5. Notes payable
Notes payable and deferred interest at December 31, 1996 and March 31, 1996
consist of the following (in thousands):
December 31 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 was due at maturity, on
December 29, 1996. Interest is
compounded semi-annually. Accrued
interest at December 31, 1996 and
March 31, 1996 amounted to $4,240
and $3,630, respectively. It is not
practicable for management to
estimate the fair value of this
mortgage note payable due to its
current default status (see
discussion below). $ 8,290 $ 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
September 30, 1996. 3,546 3,575
------- -------
$11,836 $11,255
======= =======
The borrowing secured by Colony Plaza was scheduled to mature on December
29, 1996, at which time total principal and accrued interest of $8,290,190 was
due and payable. Although the Partnership did not make its scheduled payment
upon maturity, no formal default notices have been issued to date and management
continues to negotiate 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 cannot be accomplished,
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.
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.
6. Contingencies
As discussed in more detail in the 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 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 matured on December 28,
1996, at which time approximately $8,290,000 became due. Although the
Partnership did not make its scheduled payment upon maturity, no formal default
notices have been issued to date and management continues to negotiate 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.
As of December 31, 1996, the Colony Plaza Shopping Center in Augusta,
Georgia remained 98% leased. Physical occupancy, however, declined from 57% to
33%. As previously reported, Wal-Mart closed its 82,000 square foot store at
Colony Plaza in the second quarter of fiscal 1997 to open a "Supercenter" store
at a new location in the Augusta market. Although Wal-Mart remains 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. Food Max, the Center's 47,990 square foot
grocery store tenant, closed on December 1, 1996, and a 2,400 square foot small
shop tenant also closed during the quarter. However, subsequent to the end of
the quarter the Food Lion grocery store chain entered into an agreement with
Food Max to open Food Lion stores in several former Food Max locations,
including Colony Plaza. After Food Lion completes a remodeling of the former
Food Max space, its new store will open in the summer of 1997. As with Wal-Mart,
and in keeping with the lease provisions, Food Max will remain obligated to pay
rent and its share of operating expenses through the end of its lease term in
June 2009.
The anchor tenant vacancies at Colony Plaza will make obtaining new
financing very difficult. Wal-Mart's and Food Max's decisions to close their
stores at the center are weakening the other tenant's sales volumes which may
affect their ability to meet rent obligations. Food Lion's replacement of Food
Max will partially mitigate this situation. In certain other cases, the Wal-Mart
store closing will enable tenants to exercise provisions in their leases that
will permit them to terminate leases or convert the rental rate to a percentage
of sales. 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. 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.
As a result of the current leasing status of the Colony Plaza property,
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, 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 98% leased at December 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. 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 current quarter, an existing tenant leased an additional
4,716 square feet, replacing a 5,634 square foot lease which expires next
quarter. The balance of 918 square feet remains available for lease. During the
third fiscal quarter, the leasing team also executed lease renewals with three
tenants totalling 7,000 square feet, or 4.8% of the building's rentable area.
Leases comprising 29% of One Paragon Place's rentable area will be up for
renewal during calendar 1997. Given the current strength of the Richmond office
market, management expects to be able to renew or re-lease this space at higher
rental rates. These market conditions may also result in the Partnership having
a favorable opportunity to sell One Paragon Place in the near term. Management's
hold versus sell decisions with respect to One Paragon Place will be based on an
assessment of the impact on the expected total returns to the Limited Partners.
The DeVargas Mall was 92% leased as of December 31, 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. Improvements to the new drug store tenant's space
are nearly completed and the tenant is expected to open in early spring. Funding
of the required tenant improvements for the 27,910 and 16,000 square foot leases
referred to above have been accomplished by means of additional advances under
the lines of credit provided by the Partnership's co-venture partner.
With respect to the Partnership's apartment property, the market for
multi-family properties in the Pacific Northwest in general and in the Portland,
Oregon area in particular has been strong over the past year and long-term
prospects remain favorable. However, at the present time the addition of new
properties to the market supply has resulted in an increase in the use of
concessions by existing property owners in response to the new competition which
has lowered effective rental rates. Market conditions are expected to stabilize
over the next year due to the region's history of healthy employment gains and
the resurgence in the growth of the high technology industries.
At December 31, 1996, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $4,195,000. 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, if necessary, and to fund capital enhancements and
tenant improvements for the operating investment properties 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 December 31, 1996
- ------------------------------------
The Partnership reported net income of $62,000 for the three months ended
December 31, 1996, as compared to a net loss of $114,000 for the same period in
the prior year. This favorable change of $176,000 in the Partnership's net
operating results is due to an improvement in the Partnership's share of
unconsolidated ventures' operations of $35,000 and a favorable change in the
Partnership's operating income (loss) of $141,000. A portion of the change in
the Partnerships share of unconsolidated ventures' operations, as well as a
portion of the change in the Partnership's operating income (loss), are
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 in November 1995. This refinancing
transaction increased the interest expense at the unconsolidated joint venture
while at the same time decreasing the Partnership's interest expense. The
favorable 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 $208,000. The major portion of this favorable change is
attributable to an increase in rental revenues at One Paragon Place. Rental
revenues increased at One Paragon Place for the current three-month period due
to a 9% increase in the property's average occupancy level and an increase in
average rental rates when compared to the same period in the prior year.
The Partnership's operating income (loss), prior to the effect of the
change in the entity reporting the interest on the loan secured by One Paragon
Place, improved by $16,000 for the current three-month period primarily due to
an increase in rental revenues from the consolidated joint ventures and a
decrease in general and administrative expenses. 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 September 30, 1996, which is prior to the date of some of the
vacancies and rental abatements which occurred following Wal-Mart's departure
from 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. General and administrative expenses declined by $43,000 for the three
months ended December 31, 1996 mainly due to a reduction in certain required
professional services. The favorable changes in operating income (loss) were
partially offset by an increase in depreciation and amortization expense.
Nine months ended December 31, 1996
- -----------------------------------
The Partnership reported a net loss of $270,000 for the nine months ended
December 31, 1996, as compared to net income of $35,000 for the same period in
the prior year. This unfavorable change of $305,000 in the Partnership's net
operating results is due to a decline in the Partnership's share of
unconsolidated ventures' operations of $872,000, which was partially offset by a
decrease in the Partnership's operating loss of $567,000. 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 $320,000. 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 nine-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 $41,000 for the current nine-month period primarily due to
increases in interest expense and depreciation and amortization charges which
were partially offset by an increase in rental income from the consolidated
joint ventures. Interest expense (excluding the One Paragon Place loan)
increased by $74,000 due to interest attributable to the Willow Grove mortgage
loan obtained in March 1995. Deprecation and amortization expense increased by
$44,000 for the current nine-month period. Rental income increased by $138,000
primarily due to increases in the average rental rates at Willow Grove and an
increase in the average leased area at Colony Plaza. As discussed further above,
the Colony Plaza results in the current year reflect operations through
September 30, 1996 which is prior to the date of some of the vacancies and
rental abatements which have occurred in the wake of Wal-Mart's departure from
the shopping center.
<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 was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
With regard to the Abbate and Bandrowski actions 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 applicable
securities arbitration regulations. Mediation with respect to both actions was
held in December 1996. As a result of such mediation, a tentative settlement
between PaineWebber and the plaintiffs was reached which would provide for
complete resolution of such actions. PaineWebber anticipates that releases and
dismissals with regard to these actions will be received by February 1997.
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 indemnification 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 General Partners
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: February 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 4,195
<SECURITIES> 0
<RECEIVABLES> 38
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,276
<PP&E> 32,703
<DEPRECIATION> 3,811
<TOTAL-ASSETS> 33,325
<CURRENT-LIABILITIES> 8,484
<BONDS> 3,546
0
0
<COMMON> 0
<OTHER-SE> 21,295
<TOTAL-LIABILITY-AND-EQUITY> 33,325
<SALES> 0
<TOTAL-REVENUES> 1,928
<CGS> 0
<TOTAL-COSTS> 1,109
<OTHER-EXPENSES> 188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 901
<INCOME-PRETAX> (270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (270)
<EPS-PRIMARY> (5.29)
<EPS-DILUTED> (5.29)
</TABLE>
