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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to_____ .
Commission File Number: 0-17881
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 marketvalue 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 Parts II and IV
January 4, 1988, as supplemented
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
1997 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-5
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-8
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-8
PART III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial
Owners and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-48
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-6 of
this Form 10-K.
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, 1997, 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
Location Size of Interest Type of 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 9/26/8 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
<PAGE>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- -------- ---- ----------- ---------------------
Colony Plaza General retail 1/18/90 Fee ownership of land
Partnership shopping and improvements
Colony Plaza Shopping Center center on (through joint venture)
Augusta, Georgia 33.33 acres
with 216,712
net leasable
square feet
(1) See Notes to the Financial Statements filed with this Annual Report for
descriptions of the agreements through which the Partnership has acquired
these operating investment properties.
The Partnership's investment objectives are to invest the proceeds raised
from the offering of limited partnership units in a diversified portfolio of
income-producing properties in order to:
(i) preserve and protect the Limited Partners' capital,
(ii) provide the Limited Partners with quarterly cash distributions, a
portion of which will be sheltered from current federal income tax
liability, and
(iii) achieve long-term capital appreciation in the value of the
Partnership's investment properties.
Through March 31, 1997, the Limited Partners had received cumulative cash
distributions of approximately $22,228,000, or $468 per original $1,000
investment for the Partnership's earliest investors. 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 with the quarter ended
September 30, 1994 and through the quarter ended December 31, 1996, cash
distributions were paid at a rate of 2% per annum on invested capital. Effective
for the quarter ended March 31, 1997, the distribution rate was increased to
2.5% per annum. A substantial portion of the distributions paid to date has been
sheltered from current federal income tax liability. In addition, the
Partnership retains an ownership interest in all four of its original investment
properties.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final liquidation of the
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their liquidation, which
cannot presently be determined. 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 begun to recover after several years
of depressed conditions, such values, for the most part, remain below the levels
which existed in the mid-1980's, which is when the Partnership's properties were
acquired. Such conditions are due, in part, 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 are being adversely impacted by the effects
of overbuilding and consolidations among retailers which have resulted in an
oversupply of space and by the generally flat rate of growth in retail sales.
The market for multi-family residential properties in most markets throughout
the country remained strong during fiscal 1997 although estimated market values
in some markets appeared to have plateaued as a result of the increase in
development activity referred to below. Management is currently focusing on
potential disposition strategies for the investments in its portfolio. Although
no assurances can be given, it is currently contemplated that sales of the
Partnership's remaining assets could be completed within the next 2- to- 3
years.
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 complexes compete 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 generally
been offset by the lack of significant new construction activity in the
multi-family apartment market over most of this period. In the past 12 months,
development activity for multi-family properties in many markets has escalated
significantly. The Partnership's shopping centers and office building 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 real 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 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 1997, along with an average
for the year, are presented below for each property:
Percent Occupied At
-----------------------------------------------
Fiscal
1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ------- -------
DeVargas Mall 89% 92% 92% 92% 91%
Willow Grove Apartments 95% 94% 97% 95% 95%
One Paragon Place 99% 99% 99% 98% 99%
Colony Plaza Shopping Center 98% 57% 33% 31% 55%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments and REIT Stocks,
including those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"),
among others, by allegedly dissatisfied partnership investors. In March 1995,
after the actions were consolidated under the title In re PaineWebber Limited
Partnership Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Third 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 alleged
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
purported to be suing on behalf of all persons who invested in PaineWebber
Equity Partners Three Limited Partnership, also alleged 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 alleged that PaineWebber, Third Equity
Partners, Inc. and PA1988 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In 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 plaintiffs'
purchases of various limited partnership interests, including those offered by
the Partnership. The complaint was very similar to the Abbate action described
above and sought compensatory damages of $3.4 million plus punitive damages
against PaineWebber. In September 1996, the court dismissed many of the
plaintiffs' claims in both the Abbate and Bandrowski actions as barred by
applicable securities arbitration regulations. Mediation with respect to the
Abbate and Bandrowski actions was held in December 1996. As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached which
provided for the complete resolution of both actions. Final releases and
dismissals with regard to these actions were received subsequent to March 31,
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1997, there were 3,501 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.
The Partnership has a Distribution Reinvestment Plan designed to enable
Unitholders to have their distributions from the Partnership invested in
additional Units of the Partnership. The terms of the Plan are outlined in
detail in the Prospectus, a copy of which Prospectus, as supplemented, is
incorporated herein by reference.
Reference is made to Item 6 below for a discussion made to the Limited
Partners during fiscal 1997.
Item 6. Selected Financial Data
PaineWebber Equity Partners Three Limited Partnershi
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands except for per Unit data)
Years ended March 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 2,595 $ 2,478 $ 1,450 $ 1,273 $ 1,309
Operating loss $ (110) $ (654) $(1,420) $(1,378) $(1,284)
Partnership's share of
unconsolidated
ventures' income
(losses $ (361) $ 581 $ 593 $ 222 $ 658
Net loss $ (471) $ (73) $ (827) $(1,156) $ (626)
Net loss per Limited
Partnership Unit $ (9.23) $ (1.42) $(16.21) $(22.66) $(12.27)
Cash distributions per
Limited Partnership
Unit $ 20.00 $ 20.00 $ 35.00 $ 50.00 $ 50.00
Total assets $33,205 $33,885 $40,333 $43,667 $45,673
Notes payable and
accrued interest $12,043 $11,255 $16,707 $17,304 $15,604
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 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
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered 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 during the
initial acquisition period 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, 1997, 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.
As previously reported, the Partnership's zero coupon loan which is secured
by the Colony Plaza Shopping Center matured on December 28, 1996, at which time
approximately $8,290,000 became due. Although the Partnership did not make the
scheduled payment upon maturity, no formal default notices have been issued by
the lender to date. Negotiations have been ongoing with the lender for the past
six months regarding a possible extension and modification agreement for the
existing loan. Such negotiations have been complicated by the leasing status of
the Colony Plaza property. As of March 31, 1997, the Colony Plaza Shopping
Center in Augusta, Georgia was 97% leased. Physical occupancy, however, had
declined to 31%. 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 has adversely affected the Partnership's
ability to retain existing tenants and to lease vacant space at the center. In
addition, Food Max, the Center's 47,990 square foot grocery store tenant, closed
its store on December 1, 1996. However, another grocery store chain, Food Lion,
has entered into a sublease agreement with Food Max to open Food Lion stores in
several former Food Max locations, including the store at Colony Plaza.
Initially, Food Lion planned to open its new store at Colony Plaza in the summer
of 1997. Food Lion now reports that it may take as long as eight months to
secure municipal approvals and to build their prototype store. As a result, the
store may not be ready to open until January 1998. The property's management and
leasing team reports that with the announcement that Food Lion will open at
Colony Plaza, a number of shop tenants in the local market have expressed
interest in leasing space in the Center. Additionally, the leasing team reports
that two shop tenants in the Center have expressed an interest in expanding
their existing stores. 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 decisions
by Wal-Mart and Food Max to close their stores have weakened the sales volumes
of many of the Center's tenants, which in some cases has affected their ability
to meet their rent obligations. 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 in the second quarter of fiscal
1997 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. In addition, during the fourth quarter of
fiscal 1997 two shop tenants with leases representing 4,600 square feet closed
their stores. 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. Because the opening of a Food
Lion grocery store would significantly improve customer traffic levels at the
Center, the leasing team is working closely with Food Lion to achieve the
earliest possible opening date for the new store.
As a result of the current leasing status of the Colony Plaza property,
obtaining a new loan to refinance the outstanding debt is not practical, and the
existing lender is concerned that its first mortgage position could be impaired
in the event that the occupancy level at the property cannot be re-stabilized.
Accordingly, the recent negotiations with the lender have focused on a potential
agreement that would give the Partnership a stated period of less than two years
to re-lease all or some portion of the Wal-Mart space at Colony Plaza. If the
Partnership were successful in re-leasing the space within the required time
frame, then the Partnership would be entitled to execute a long-term extension
of the existing mortgage loan pursuant to certain previously agreed upon terms.
If the Partnership were not able to re-lease the space within the required time
frame, then the lender would be entitled to initiate foreclosure proceedings on
the property. Any such agreement with the lender remains subject to final
negotiation and the execution of definitive modification agreements. During this
negotiation period, penalty interest is accruing on the outstanding principal
balance at 15% per annum in accordance with the loan agreement. If no agreement
can be reached regarding a modification of the current mortgage loan, the lender
could choose to initiate foreclosure proceedings during fiscal 1998. The
eventual outcome of this situation cannot be determined 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 March 31, 1997. 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. Current speculative office construction consists
of 5 buildings, comprising 450,000 square feet, of which nearly 50% is
pre-leased. In addition, 5 buildings comprising 300,000 square feet have been
proposed for future development. 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. Subsequent to the end
of the fourth quarter of fiscal 1997, the property's leasing team signed a
five-year renewal with a national credit tenant. This tenant occupies 20,148
square feet, representing 14% of the property's leasable area, and will pay
approximately 17% more in annual rental payments than was due during the initial
lease term. Over the balance of calendar year 1997, six tenants with leases
representing 10% of the building's leasable area will be up for renewal. Since
market rental rates are significantly higher than the rates paid by existing
tenants at One Paragon Place, it is expected that revenues will continue to
increase as new leases or renewals are signed over the balance of calendar 1997
and in calendar 1998 when 32% of the building's leasable area comes up for
renewal. Given the current strength of the Richmond office market, the
Partnership may have a favorable opportunity to sell the One Paragon Place
Office Building 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 March 31, 1997. As previously
reported, 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 a
national drug store chain to fill a vacant 16,000 square foot mini-anchor space
at the mall. During the fourth quarter of fiscal 1997, the property's leasing
team signed a lease for a 5,404 square foot store with the U.S. Post Office.
This space is being remodeled and is scheduled to open in August 1997. In
addition, a 1,032 square foot tenant closed its store at the Center but is
obligated to pay rent through the expiration of its lease in 1999. The
property's leasing team has begun preliminary expansion negotiations with two
national credit tenants. Funding of the required tenant improvements for the
fiscal 1997 leasing activity referred to above has been accomplished by means of
additional advances under the lines of credit provided by the Partnership's
co-venture partner. As of year-end, the co-venture partner had two outstanding
lines of credit with the DeVargas joint venture which permitted the venture to
borrow up to an aggregate amount of $5,553,000. The first note, which allowed
the venture to borrow up to $5,000,000, bore interest at the greater of prime
plus 1.5% or 10% per annum and was due to mature in June 1997. The second note,
which allowed the venture to borrow up to $553,000, bore interest at prime plus
1% and was scheduled to mature in November 2002. The outstanding borrowings
under both lines of credit totalled $4,214,000 as of December 31, 1996.
Subsequent to year-end, in June 1997, the Partnership and the co-venturer
reached an agreement to consolidate the two lines of credit into one loan and to
modify the terms. The new loan, which allows the venture to borrow up to
$5,000,000, bears interest at the greater of the prime rate or 9% per annum and
is due to mature on June 1, 1998.
The average occupancy level for the fourth quarter of fiscal 1997 at the
Willow Grove Apartments in Beaverton, Oregon was 95%, compared to 97% for the
prior quarter. The property is performing slightly better than the competition
in its local market where the average occupancy level was 93%. The property's
leasing team raised rental rates by 4% on both new and renewal leases effective
March 1, 1997, which is the first increase in one year. In addition, the use of
rental concessions at Willow Grove is minimal even though recently constructed
competing properties are currently offering a variety of rental concessions
during their lease-up phases. As previously reported, while long-term prospects
for the Portland apartment market are good, new apartment construction has
softened market conditions during fiscal 1997. Most of this new construction is
located farther out to the west of Willow Grove, between 5 and 15 miles away.
However, there is one property currently in lease-up in the local market. Phase
one of this two-phase property contains 288 units and was 75% leased as of March
31, 1997. Phase two, which will include an additional 150 units, is under
construction. Lease up on this phase will begin in late summer. While this new
property offers more amenities, its effective rental rates are comparable to
those at Willow Grove. Once both phases of this property are substantially
leased, the property's rental rates would be expected to increase. While Willow
Grove may be affected by these competitive pressures in the near term, overall
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. Management will continue to evaluate market
conditions to determine the optimum timing for the disposition of this property.
At March 31, 1997, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $4,615,000. 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
1997 Compared to 1996
- ---------------------
The Partnership reported a net loss of $471,000 for the year ended March 31,
1997, as compared to a net loss of $73,000 in fiscal 1996. This unfavorable
change of $398,000 in the Partnership's net operating results is attributable to
a decline in the Partnership's share of unconsolidated ventures' operations of
$942,000, which was partially offset by a decrease of $544,000 in the
Partnership's operating loss. A portion of the change in both the Partnership's
operating loss and the Partnership's share of unconsolidated ventures'
operations is due to a change in the entity reporting the interest expense for
the borrowing secured by the One Paragon Place Office Building which occurred
during fiscal 1996. As discussed further above, 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 remainder of the
unfavorable change in the Partnership's share of unconsolidated ventures'
operations is primarily attributable to declines in revenues at both the
DeVargas and One Paragon Place joint ventures in the current year. The One
Paragon Place joint venture received $500,000 from a lease termination agreement
during calendar 1995, which caused the venture's total revenues to decline by
$296,000 for calendar 1996. Rental revenues at DeVargas decreased by $221,000
mainly due to temporary declines in occupancy at the property during calendar
1996 which were the result of certain planned lease terminations, tenant
relocations and new lease signings aimed at improving the overall tenant mix.
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 in the current year primarily due to an increase in rental revenues
from the consolidated joint ventures. Rental revenues increased slightly at
Colony Plaza due to an increase in the average leased space in the current 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 December 31,
1996, which is prior to the date of some of the vacancies and rental abatements
which occurred following the closing of Wal-Mart's store at the Center. As
discussed further above, revenues from the non-anchor spaces at Colony Plaza are
expected to decline significantly in future periods, until the Wal-Mart space is
re-leased. At the Willow Grove joint venture rental income increased slightly as
well mainly due to an increase in average rental rates.
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 was 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 in the notes to the
accompanying financial statements, 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 fiscal 1996. The Partnership's share of unconsolidated
ventures' income in fiscal 1995 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 fiscal 1996 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 its major tenants during calendar 1995.
Rental income from One Paragon Place, excluding the lease termination fee,
decreased slightly due to a decline in average occupancy which reflected 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, 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 fiscal 1996, 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 fiscal 1996 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 fiscal
1996 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. 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 calendar 1995.
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 the venture's 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. 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.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the markets. In many markets across the country, development of new
multi-family properties has surged in the past 12 months. Existing apartment
properties in such markets have generally experienced increased vacancy levels,
declines in effective rental rates and, in some cases, declines in estimated
market values as a result of the increased competition. The commercial office
segment has begun to experience limited new development activity in selected
areas after several years of virtually no new supply being added to the market.
The retail segment of the real estate market is currently suffering from an
oversupply of space in many markets resulting from overbuilding in recent years
and the trend of consolidations and bankruptcies among retailers prompted by the
generally flat rate of growth in overall retail sales. There are no assurances
that these competitive pressures will not adversely affect the operations and/or
market values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of the remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such properties at the time of their final dispositions. Demand by
buyers of multi-family apartment, office and retail properties is affected by
many factors, including the size, quality, age, condition and location of the
subject property, the quality and stability of the tenant roster, the terms of
any long-term leases, potential environmental liability concerns, the liquidity
in the debt and equity markets for asset acquisitions, the general level of
market interest rates and the general and local economic climates.
INFLATION
- ---------
The Partnership completed its ninth full year of operations in fiscal 1997.
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 resulting from
inflation. As noted above, the Colony Plaza Shopping Center presently has a
significant amount of unleased space. During a period of significant inflation,
increased operating expenses attributable to space which remained unleased at
such time would not be recoverable and would adversely affect the Partnership's
net cash flow.
<PAGE>
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
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 2/27/87 *
David F. Brooks First Vice President and
Assistant Treasurer 54 2/27/87 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors 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:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher previously
worked for a major law firm in New York City. He has a J.D. from Harvard Law
School, an M.B.A. from Harvard Graduate School of Business Administration and
an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and 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.
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, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The 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 with the
quarter ended September 30, 1994 and through the quarter ended December 31,
1996, cash distributions were paid at a rate of 2% per annum on invested
capital. Effective for the quarter ended March 31, 1997, the distribution rate
was increased to 2.5% per annum. 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
would be recorded as an expense on the Partnership's statements 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. 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.
All sale or refinancing proceeds shall be distributed in varying proportions
to the Limited and General Partners, as specified in the Partnership Agreement.
In connection with the sale of each property, PWPI may receive a disposition fee
as calculated per the terms of 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.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended March 31, 1997 is $90,000, 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 $12,000 (included in general and administrative expenses) for managing the
Partnership's cash assets for the year ended March 31, 1997. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of 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 1997.
(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/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President
Dated: June 30, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Bruce J. Rubin Date: June 30, 1997
--------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 30, 1997
--------------------------- -------------
Terrence E. Fancher
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 the Commission
dated January 4, 1988, as pursuant to Rule 424(c)
supplemented, with particular and incorporated herein
reference to the Restated by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with Act of 1934 and incorporated
all such contracts filed as herein by reference.
exhibits of previously filed Forms
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal
year 1997 has been sent
to the Limited Partners. An
Annual Report will be sent
to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of 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-3
Consolidated balance sheets as of March 31, 1997 and 1996 F-6
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995 F-7
Consolidated statements of changes in partners' capital
(deficit) for the years ended March 31, 1997, 1996 and 1995 F-8
Consolidated statements of cash flows for the years ended
March 31, 1997, 1996 and 1995 F-9
Notes to consolidated financial statements F-10
Schedule III - Real Estate and Accumulated Depreciation F-24
1996 and 1995 Combined Joint Ventures of PaineWebber Equity Partners Three
Limited Partnership:
Reports of independent auditors F-25
Combined balance sheets as of December 31, 1996 and 1995 F-27
Combined statements of operations and changes in venturers'
capital for the years ended December 31, 1996 and 1995 F-28
Combined statements of cash flows for the years ended
December 31, 1996 and 1995 F-29
Notes to combined financial statements F-30
Schedule III - Real Estate and Accumulated Depreciation F-35
1994 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 and 1993 and 1992 F-39
Combined statements of changes in venturers' capital
for the years ended December 31, 1994, 1993 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, 1997 and 1996, and the
related consolidated statements of operations, changes in partners' capital
(deficit), and cash flows for each of the three years in the period ended March
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits. We
did not audit the financial statements of the Colony Plaza General Partnership
(a consolidated venture) as of December 31, 1995 and for each of the two years
in the period ended December 31, 1995, which statements reflect total assets of
$10,799,000 as of December 31, 1995 and total revenues of $1,491,000 and
$1,373,000, respectively, for each of the two years in the period 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
Colony Plaza General Partnership as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995, is based solely on the report of
other auditors. The financial statements of the DeVargas Center Joint Venture
(an unconsolidated joint venture) have been audited by other auditors whose
report has been furnished to us; insofar as our opinion on the consolidated
financial statements relates to data included for the DeVargas Center Joint
Venture, it is based solely on their report. In the consolidated financial
statements, the Partnership's investment in the DeVargas Center Joint Venture is
stated at $7,176,000 and $7,755,000, respectively, at March 31, 1997 and March
31, 1996, and the Partnership's equity in the net income of the DeVargas Center
Joint Venture is stated at $251,000, $324,000 and $286,000, respectively, for
each of the three years in the period ended March 31, 1997.
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 report 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended March 31, 1997,
in conformity with generally accepted accounting principles. Also, in our
opinion, based on our audits and the report of the other auditors, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ERNST & YOUNG LLP
-------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 26, 1997
<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, 1996 and 1995, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
------------------------
DELOITTE & TOUCHE LLP
June 26, 1997
<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, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
1997 1996
---- ----
Operating investment properties, at cost:
Land $ 4,208 $ 4,208
Building and improvements 14,153 14,153
--------- ---------
18,361 18,361
Less accumulated depreciation (3,893) (3,395)
--------- ---------
14,468 14,966
Investments in unconsolidated joint ventures,
at equity 13,881 15,154
Cash and cash equivalents 4,615 3,439
Accrued interest and other receivables 101 119
Accounts receivable - affiliates - 7
Prepaid expenses 7 7
Deferred expenses (net of accumulated
amortization of $63 and $427
in 1997 and 1996, respectively) 133 193
--------- ---------
$ 33,205 $ 33,885
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and accrued interest, including
amounts in default $ 12,043 $ 11,255
Accounts payable and accrued expenses 98 75
Tenant security deposits 14 14
Accrued real estate taxes 14 13
Advances from consolidated ventures 195 198
Other liabilities 2 -
--------- ---------
Total liabilities 12,366 11,555
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income (loss) (5) -
Cumulative cash distributions (230) (219)
Limited Partners ($1,000 per unit; 50,468
Units issued):
Capital contributions, net of offering costs 43,669 43,669
Cumulative net income (loss) (368) 98
Cumulative cash distributions (22,228) (21,219)
--------- ---------
Total partners' capital 20,839 22,330
--------- ---------
$ 33,205 $ 33,885
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1997, 1996 and 1995
(In thousands, except for per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Rental income and expense reimbursements $2,380 $2,242 $ 1,347
Interest income 215 236 103
------ ------ -------
2,595 2,478 1,450
Expenses:
Interest expense 1,202 1,677 1,921
Depreciation expense 498 501 368
Property operating expenses 520 476 140
Bad debt expense - - 21
Real estate taxes 155 153 71
General and administrative 314 325 342
Amortization expense 16 - 7
------ ------ -------
2,705 3,132 2,870
------ ------ -------
Operating loss (110) (654) (1,420)
Partnership's share of unconsolidated
ventures' income (losses) (361) 581 593
------ ------ -------
Net loss $ (471) $ (73) $ (827)
====== ====== =======
Net loss per Limited Partnership Unit $(9.23) $(1.42) $(16.21)
====== ====== =======
Cash distributions per Limited
Partnership Unit $20.00 $20.00 $ 35.00
====== ====== =======
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, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (11) (1,009) (1,020)
Net loss (5) (466) (471)
------ ------- -------
Balance at March 31, 1997 $(234) $21,073 $20,839
===== ======= =======
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss $ (471) $ (73) $ (827)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Partnership's share of unconsolidated
ventures' income (losses) 361 (581) (593)
Depreciation and amortization 514 501 375
Amortization of deferred loan costs 34 48 -
Interest expense on zero coupon loans 827 1,355 1,921
Changes in assets and liabilities:
Accrued interest and other receivables 18 (98) (26)
Accounts receivable - affiliates 7 - -
Deferred expenses 18 16 (10)
Accounts payable and accrued expenses 23 19 8
Accrued real estate taxes 1 (1) -
Deferred rental revenue - 3 -
Tenant security deposits - 5 -
Advances from consolidated ventures (3) (78) (134)
Other liabilities 2 - -
-------- ------ --------
Total adjustments 1,802 1,189 1,541
-------- ------ --------
Net cash provided by operating
activities 1,331 1,116 714
-------- ------ --------
Cash flows from investing activities:
Additional investments in unconsolidated
joint ventures - (183) (342)
Additions to operating investment
properties - (15) (9)
Receipt of master lease payments - 1 348
Payment of lease commissions (8) - -
Distributions from unconsolidated
joint ventures 912 10,016 5,941
-------- ------ --------
Net cash provided by investing
activities 904 9,819 5,938
-------- ------ --------
Cash flows from financing activities:
Cash distributions to partners (1,020) (1,018) (1,784)
Payment of deferred financing costs - - (73)
Payments of principal and
interest on notes payable (39) (10,407) (2,472)
-------- ------- --------
Net cash used in financing
activities (1,059) (11,425) (4,329)
-------- ------- --------
Net increase (decrease) in cash and
cash equivalents 1,176 (490) 2,323
Cash and cash equivalents,
beginning of year 3,439 3,929 1,501
-------- ------ --------
Cash and cash equivalents, end of year $ 4,615 $3,439 $ 3,824
======== ====== ========
Cash paid during the year for interest $ 343 $5,635 $ 1,022
======== ====== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
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 Units, representing
capital contributions of $50,468,000, were subscribed and issued between
January 1988 and September 1989. The Partnership also received $10,500,000
during the initial acquisition period from the proceeds of zero coupon
loans, as discussed 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, 1997, 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. The Partnership is currently focusing on
potential disposition strategies for the investments in its portfolio.
Although no assurances can be given, it is currently contemplated that sales
of the Partnership's remaining assets could be completed within the next
2-to-3 years.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of March 31, 1997 and 1996 and revenues
and expenses for each of the three years in the period ended March 31, 1997.
Actual results could differ from the estimates and assumptions used.
At March 31, 1997, the accompanying financial statements include the
Partnership's investments in two unconsolidated joint venture partnerships
each of which owns an operating property. The Partnership accounts for its
investments in the unconsolidated joint ventures using the equity method
because the Partnership does not have majority voting control in the
ventures. 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 discussed further 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. Prior to fiscal 1996, this venture was accounted for on the
equity method. The Partnership also has a controlling interest in Colony
Plaza General Partnership which it acquired in fiscal 1990. As a result,
this joint venture is presented on a consolidated basis in the accompanying
financial statements. The consolidated joint ventures have December 31
year-ends 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 operating investment properties owned by the consolidated joint
ventures are carried at cost, net of accumulated depreciation and certain
guaranteed master lease payments (see Note 5), or an amount less than cost
if indicators of impairment are present in accordance with statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets carrying amount. The Partnership generally assesses
indicators of impairment by a review of independent appraisal reports on
each operating investment property. Such appraisals make use of a
combination of certain generally accepted valuation techniques, including
direct capitalization, discounted cash flows and comparable sales analysis.
SFAS No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of.
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.
As of March 31, 1997 and 1996, deferred expenses include costs associated
with the notes payable described in Note 6 and leasing commissions
associated with the Colony Plaza operating investment property. 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, escrowed cash, bonds payable and mortgage
notes payable appearing on the accompanying consolidated balance sheets
represent financial instruments for purposes of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." The carrying amounts of cash and cash equivalents and escrowed
cash approximate their fair values as of March 31, 1997 and 1996 due to the
short-term maturities of these instruments. It is not practicable for
management to estimate the fair value of the bonds payable without incurring
excessive costs due to the unique nature of such obligations. The fair value
of mortgage notes payable 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 investments on the accompanying balance sheets.
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 would be
recorded as an expense on the Partnership's statements 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
sheets. 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.
All sale or refinancing proceeds shall be distributed in varying
proportions to the Limited and General Partners, as specified in the
Partnership Agreement. In connection with the sale of each property, PWPI
may receive a disposition fee as calculated per the terms of 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.
Included in general and administrative expenses for the years ended March
31, 1997, 1996 and 1995 is $90,000, $99,000 and $102,000, 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 $12,000, $7,000 and $6,000 (included in general and
administrative expenses) for managing the Partnership's cash assets for the
years ended March 31, 1997, 1996 and 1995, respectively.
4. Investments in Unconsolidated Joint Venture Partnerships
As of March 31, 1997 and 1996, the Partnership had 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.
<PAGE>
Condensed combined financial statements of these joint ventures, for the
periods indicated, are as follows.
Condensed Combined Balance Sheets
December 31, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 1,165 $ 1,014
Operating investment property, net 27,489 27,447
Other assets 1,009 1,077
------- -------
$29,663 $29,538
======= =======
Liabilities and Venturers' Capital
Current liabilities $ 559 $ 402
Other liabilities 12,725 11,654
Partnership's share of combined venturers' capital 13,731 14,943
Co-venturers' share of combined venturers' capital 2,648 2,539
-------- -------
$29,663 $29,538
======= =======
Condensed Combined Summary of Operations
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 4,198 $ 4,237 $ 5,195
Interest and other income 22 500 12
------- ------- -------
4,220 4,737 5,207
Expenses:
Property operating expenses 1,362 1,364 1,508
Depreciation and amortization 1,635 1,767 2,101
Real estate taxes 131 173 252
Administrative and other 298 345 411
Interest expense 1,037 383 213
------- ------- -------
4,463 4,032 4,485
------- ------- -------
Net income (loss) $ (243) $ 705 $ 722
======= ======= =======
Net income (loss):
Partnership's share of combined
income (loss) $ (341) $ 600 $ 613
Co-venturers' share of combined
income (loss) 98 105 109
------- ------- -------
$ (243) $ 705 $ 722
======= ======= =======
Reconciliation of Partnership's Investment
March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Partnership's share of capital at
December 31, as shown above $13,731 $14,943
Excess basis due to investment in ventures (1) 419 439
Timing differences (2) (269) (228)
------- -------
Investments in unconsolidated joint ventures,
at equity, at March 31 $13,881 $15,154
======= =======
(1) At March 31, 1997 and 1996, the Partnership's investment exceeds its share
of the joint venture capital accounts by $419,000 and $439,000,
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.
<PAGE>
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Partnership's share of operations,
as shown above $ (341) $ 600 $ 613
Amortization of excess basis (20) (19) (20)
------- -------- -------
Partnership's share of unconsolidated
ventures' income (losses) $ (361) $ 581 $ 593
======= ======== =======
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.
Investments in unconsolidated joint ventures, at equity, on the accompanying
balance sheets at March 31, 1997 and 1996 is comprised of the following equity
method carrying values (in thousands):
1997 1996
---- ----
DeVargas Center Joint Venture $ 7,176 $ 7,755
Richmond Paragon Partnership 6,705 7,399
------- --------
$13,881 $15,154
======= =======
The cash distributions received from the Partnership's unconsolidated joint
venture investments during fiscal 1997, 1996 and 1995 are as follows (in
thousands):
1997 1996 1995
---- ---- ----
DeVargas Center Joint Venture $ 812 $ 864 $ 867
Portland Pacific Associates Two - - 3,972
Richmond Paragon Partnership 100 9,152 1,102
-------- ------- -------
$ 912 $10,016 $ 5,941
======== ======= =======
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.
As of December 31, 1996, the co-venture partner had two outstanding lines of
credit with the DeVargas joint venture which permitted the venture to borrow up
to an aggregate amount of $5,553,000. The first note, which allowed the venture
to borrow up to $5,000,000, bore interest at the greater of prime plus 1.5% or
10% per annum and was due to mature in June 1997. The second note, which allowed
the venture to borrow up to $553,000, bore interest at prime plus 1% and was
scheduled to mature in November 2002. The outstanding borrowings under both
lines of credit totalled $4,214,000 as of December 31, 1996. The proceeds from
these notes have been utilized to fund capital costs associated with leasing and
operating the DeVargas Mall. Subsequent to year-end, in June 1997, the
Partnership and the co-venturer reached an agreement to consolidate the two
lines of credit into one loan and to modify the terms. The new loan, which
allows the venture to borrow up to $5,000,000, bears interest at the greater of
the prime rate or 9% per annum and is due to mature on June 1, 1998.
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, 1997 and 1996, the Partnership's balance sheets include two
operating investment properties: 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
has held a controlling interest in Colony Plaza General Partnership since its
inception in fiscal 1990. The Partnership's policy is to report the operations
of these consolidated joint ventures on a three-month lag.
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 $8,508,000 as of March 31, 1997. This mortgage loan matured on December 29,
1996. Management is currently negotiating with the existing lender regarding an
extension and modification of the outstanding first mortgage loan. During this
negotiation period, penalty interest is accruing on the outstanding principal
balance at 15.0% per annum in accordance with the loan agreement. If the
refinancing or extension of this loan is not 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 eventual outcome of this situation cannot be determined at the
present time (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, 1996, the cumulative preferred return payable to
the Partnership was $714,000.
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, 1996,
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).
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, 1996, 1995 and 1994. The calendar 1996 and 1995 amounts
include both the Colony Plaza and Willow Grove operations, whereas the calendar
1994 amounts reflect only Colony Plaza (in thousands):
1996 1995 1994
---- ---- ----
Repairs and maintenance $ 140 $ 142 $ 42
Utilities 85 79 13
Management fees 94 83 40
Professional fees 41 58 14
Administrative and other 160 114 31
------ ------ -----
$ 520 $ 476 $ 140
====== ====== =====
6. Notes payable
Notes payable and accrued interest on the books of the Partnership at March
31, 1997 and 1996 consist of the following (in thousands):
1997 1996
---- ----
10.5% nonrecourse loan payable to a
finance company, which is secured
by the Colony Plaza operating
investment property. Interest is
compounded semi-annually. All
interest and principal was due at
maturity, on December 29, 1996 (see
discussion below). $ 8,508 $ 7,680
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. The fair
value of the mortgage note
approximated its carrying value at
December 31, 1996 and 1995. See
discussion below. 3,535 3,575
------- -------
$12,043 $11,255
======= =======
The borrowing secured by Colony Plaza matured on December 29, 1996, at which
time total principal and accrued interest of $8,290,190 was due and payable. Due
to the short-term maturity of this debt obligation, the fair value of this
mortgage note approximated its carrying value as of March 31, 1997 and 1996.
Management is currently negotiating with the existing lender regarding an
extension and modification of the outstanding first mortgage loan. However, due
to the substantial vacancy at the property, as discussed further in Note 7, the
prospects for such negotiations are uncertain at the present time. During this
negotiation period, penalty interest is accruing on the outstanding principal
balance at 15.0% per annum in accordance with the loan agreement. If the
refinancing or extension of this loan is not 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. The total
assets, total liabilities, gross revenues and total expenses of the Colony Plaza
joint venture included in the accompanying fiscal 1997 consolidated balance
sheet and statement of operations total approximately $10,799,000, $40,838,
$1,493,000 and $599,000, respectively.
In March 1995, Portland Pacific Associates Two obtained a $3,600,000
mortgage note payable, secured by the Willow Grove Apartments. 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, 1996 and 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.
Scheduled maturities of long-term debt for the next five years and
thereafter are as follows (in thousands):
Years ended December 31
1997 $ 8,551
1998 48
1999 52
2000 58
2001 63
Thereafter 3,271
--------
$ 12,043
========
7. Rental revenues
The Colony Plaza General Partnership has operating leases with tenants
which provide for fixed minimum rents and reimbursement of certain operating
costs. Rental revenue is recognized on a straight-line basis over the life of
the related lease agreements, in which the revenue recognition method takes into
consideration scheduled rent increases offered as an inducement to lease the
property. The following is a schedule of minimum future lease payments from
noncancellable operating leases as of December 31, 1996 (in thousands):
Years ending December 31:
1997 $ 1,139
1998 963
1999 773
2000 658
2001 627
Thereafter 4,595
--------
$ 8,755
========
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, 1996, base rental income of
approximately $838,000 (65% 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 26%
Piggly Wiggly, d/b/a Foodmax $ 288,000 22%
Goody's Family Clothes, Inc. $ 214,000 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. The Wal-Mart store at Colony Plaza, which
comprises 38% of the property's net leasable area, was 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. In addition, Food Max, the
Center's 47,900 square foot grocery store tenant, closed its store on December
1, 1996. However, another grocery store chain, Food Lion, has entered into a
sublease agreement with Food Max to open a Food Lion store in the former Food
Max location at Colony Plaza. Initially, Food Lion planned to open its new store
at Colony Plaza in the summer of 1997. Food Lion now reports that it may take as
long as eight months to secure municipal approvals and complete their store
improvements. As a result, the store is not expected to be ready to open until
January 1998. While the Colony Plaza property was 97% leased as of March 31,
1997, its physical occupancy level had declined to 31% as a result of the
Wal-Mart and Food Max store closings, along with several shop space tenants that
have vacated the property subsequent to the Wal-Mart move. Management is
currently working to identify potential replacement tenants for the Wal-Mart
space at Colony Plaza. Obtaining a suitable replacement anchor tenant or tenants
for the Wal-Mart space will be critical to the Partnership's ability to retain
its other existing tenants and lease vacant space at the shopping center. 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 and REIT Stocks,
including those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"),
among others, by allegedly dissatisfied partnership investors. In March 1995,
after the actions were consolidated under the title In re PaineWebber Limited
Partnership Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Third 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 alleged
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
purported to be suing on behalf of all persons who invested in PaineWebber
Equity Partners Three Limited Partnership, also alleged 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 alleged that PaineWebber, Third Equity
Partners, Inc. and PA1988 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In 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 plaintiffs'
purchases of various limited partnership interests, including those offered by
the Partnership. The complaint was very similar to the Abbate action described
above and sought compensatory damages of $3.4 million plus punitive damages
against PaineWebber. In September 1996, the court dismissed many of the
plaintiffs' claims in both the Abbate and Bandrowski actions as barred by
applicable securities arbitration regulations. Mediation with respect to the
Abbate and Bandrowski actions was held in December 1996. As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached which
provided for the complete resolution of both actions. Final releases and
dismissals with regard to these actions were received subsequent to March 31,
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
9. Subsequent Event
On May 15, 1997, the Partnership distributed $315,000 to the Limited
Partners and $3,000 to the General Partners for the quarter ended March 31,
1997.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1997
(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,
GA $8,508 $3,720 $10,170 $ (710) $3,720 $ 9,460 $13,180 $2,448 1989 1/18/90 12-40 yrs.
Apartment
Complex
Beaverton,
OR 3,535 475 4,025 681 488 4,693 5,181 1,445 1987 9/20/88 5-27.5 yrs.
------- ----- ------ ------ ------ ------- ------- ------
$12,043 $4,195 $14,195 $ (29) $4,208 $14,153 $18,361 $3,893
======= ====== ======= ====== ====== ======= ======= ======
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 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 $ 18,361 $ 13,166 $ 13,504
Consolidation of joint venture - 5,181 -
Additions and improvements - 15 10
Reduction of basis due to
master lease payments received - (1) (348)
-------- -------- --------
Balance at end of period $ 18,361 $ 18,361 $ 13,166
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 3,395 $ 1,811 $ 1,443
Consolidation of joint venture - 1,083 -
Depreciation expense 498 501 368
--------- -------- --------
Balance at end of period $ 3,893 $ 3,395 $ 1,811
======== ======== ========
(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 sheets of the 1996 and
1995 Combined Joint Ventures of PaineWebber Equity Partners Three Limited
Partnership as of December 31, 1996 and 1995, and the related combined
statements of operations and changes in venturers' capital, and cash flows for
the years then ended. 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
audit. We did not audit the financial statements of DeVargas Center Joint
Venture, which statements reflect 47% and 45% of the combined total assets of
the 1996 and 1995 Combined Joint Ventures of PaineWebber Equity Partners Three
Limited Partnership at December 31, 1996 and 1995, respectively, and 53% and 51%
of the combined revenues of the 1996 and 1995 Combined Joint Ventures of
PaineWebber Equity Partners Three Limited Partnership for the years then ended.
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 the 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.
In our opinion, based on our audits and the report of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the 1996 and 1995 Combined Joint
Ventures of PaineWebber Equity Partners Three Limited Partnership at December
31, 1996 and 1995, and the combined results of their operations and their cash
flows for the years 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 LLP
--------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 26, 1997
<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, 1996 and 1995, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
June 26, 1997
<PAGE>
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
ASSETS
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 355 $ 436
Escrowed cash 690 506
Accounts receivable and prepaid expenses 120 72
-------- --------
Total current assets 1,165 1,014
Operating investment properties, at cost:
Land 6,764 6,748
Buildings and improvements 30,364 28,854
Furniture and equipment 2,850 2,850
Construction in progress 10 26
-------- --------
39,988 38,478
Less accumulated depreciation (12,499) (11,031)
-------- --------
27,489 27,447
Deferred rents receivable 310 401
Deferred expenses and other assets,
net of accumulated amortization of $812
($645 in 1995) 699 676
------- --------
$29,663 $ 29,538
======= ========
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 123 $ 133
Accounts payable - affiliates 172 55
Accrued interest payable - -
Current portion of mortgage note 124 114
Other current liabilities 140 100
-------- --------
Total current liabilities 559 402
Notes payable - affiliate 4,214 3,018
Mortgage note payable 8,511 8,636
Venturers' capital 16,379 17,482
-------- --------
$ 29,663 $ 29,538
======== ========
See accompanying notes.
<PAGE>
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND
CHANGES IN VENTURERS' CAPITAL
For the years ended December 31, 1996 and 1995
(In thousands)
1996 1995
---- ----
Revenues:
Rental income and expense recoveries $ 4,198 $ 4,237
Interest and other income 22 500
-------- ---------
4,220 4,737
Expenses:
Depreciation and amortization 1,635 1,767
Real estate taxes 131 173
Interest expense 1,037 383
Management fees 169 183
Utilities 240 240
Repairs and maintenance 953 941
Administrative and other 298 345
-------- ---------
4,463 4,032
Net income (loss) (243) 705
Contributions from venturers 11 189
Distributions to venturers (871) (10,425)
Venturers' capital, beginning of year 17,482 27,013
-------- ---------
Venturers' capital, end of year $ 16,379 $ 17,482
======== ========
See accompanying notes.
<PAGE>
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ (243) $ 705
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,635 1,767
Interest funded by PWEP3 - 3
Changes in assets and liabilities:
Escrowed cash (184) (27)
Accounts receivable and prepaid expenses (48) 41
Deferred rents receivable 91 41
Deferred expenses and other assets (190) (73)
Accounts payable and accrued liabilities (10) 25
Accounts payable - affiliates 117 (24)
Interest payable - 41
Other current liabilities 40 44
-------- -------
Total adjustments 1,451 1,838
-------- -------
Net cash provided by operating activities 1,208 2,543
Cash flows from investing activities:
Additions to operating investment properties (1,510) (322)
-------- -------
Net cash used in investing activities (1,510) (322)
Cash flows from financing activities:
Proceeds from capital contributions 11 186
Proceeds from issuance of notes payable to affiliate 1,251 123
Principal payments on notes payable to affiliate (115) (55)
Principal payments on notes payable (55) -
Cash distributed to venturers (871) (2,427)
-------- -------
Net cash provided by (used in)
financing activities 221 (2,173)
-------- -------
Net (decrease) increase in cash and cash equivalents (81) 48
Cash and cash equivalents at beginning of year 436 388
-------- -------
Cash and cash equivalents at end of year $ 355 $ 436
======== =======
Cash paid during the year for interest $ 1,027 $ 338
======== =======
See accompanying notes.
<PAGE>
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Organization
The accompanying financial statements of the 1996 and 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, 1996 and 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
2. Summary of significant accounting policies
Use of estimates
----------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1996 and 1995 and
revenues and expenses for each of the years then ended. Actual results could
differ from the estimates and assumptions used.
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.
Operating investment properties
-------------------------------
Operating investment properties are stated at cost, net of accumulated
depreciation, or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets carrying
amount. SFAS No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of.
Depreciation 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 $310,000 at December 31, 1996 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,
1996, no such direction has been given to the property managers. Escrowed
cash at December 31, 1996 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, 1996, no amounts were required to be paid into
the capital reserve.
Fair value of financial instruments
-----------------------------------
The carrying amounts of cash and cash equivalents and escrowed funds
approximate their respective fair values at December 31, 1996 and 1995 due
to the short-term maturities of such instruments. Where practicable, the
fair value of long-term debt is estimated using discounted cash flow
analysis, based on the current market rates for similar types of borrowing
arrangements.
Reclassifications
-----------------
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
<PAGE>
3. 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.
4. 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, 1996 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.
5. Notes payable - affiliate
As of December 31, 1996 and 1995, the co-venture partner of the DeVargas
joint venture had two outstanding lines of credit with the venture which
permitted the venture to borrow up to an aggregate amount of $5,553,000. The
first note, which allowed the venture to borrow up to $5,000,000, bore
interest at the greater of prime plus 1.5% or 10% per annum and was due to
mature in June 1997. The second note, which allowed the venture to borrow up
to $553,000, bore interest at prime plus 1% and was scheduled to mature in
November 2002. The outstanding borrowings under both lines of credit
totalled $4,214,000 and $3,018,000 as of December 31, 1996 and 1995,
respectively. The proceeds from these notes have been utilized to fund
capital costs associated with leasing and operating the DeVargas Mall.
Subsequent to year-end, in June 1997, PWEP3 and the co-venturer reached an
agreement to consolidate the two lines of credit into one loan and to modify
the terms. The new loan, which allows the venture to borrow up to
$5,000,000, bears interest at the greater of the prime rate or 9% per annum
and is due to mature on June 1, 1998.
6. 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):
1997 $ 124
1998 134
1999 146
2000 158
2001 171
Thereafter 7,902
--------
$ 8,635
========
<PAGE>
7. Leases
Future minimum rental revenues to be received by the DeVargas Mall and
One Paragon Place joint ventures on noncancellable operating leases are as
follows (in thousands):
Year ended December 31:
1997 $ 3,309
1998 2,689
1999 1,932
2000 1,393
2001 1,086
Thereafter 5,351
--------
$ 15,760
========
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 $753,000 in 1996.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
1996 AND 1995 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Combined Subsequent to Gross Amount at Which Carried at in Latest
Joint Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping
Center
Santa Fe,
NM $4,214 $4,052 $ 6,669 $7,470 $4,052 $14,139 $18,191 $ 5,053 1972 4/19/88 5-40 yrs.
Office
Building
Richmond,
VA 8,635 2,719 18,349 729 2,712 19,085 21,797 7,446 1987 9/26/88 7-31.5 yrs.
------ ------ ------- ------- ------ ------- ------- -------
Totals $12,849 $6,771 $25,018 $ 8,199 $6,764 $33,224 $39,988 $12,499
======= ====== ======= ======= ====== ======= ======= =======
Notes
- -----
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $41,060,000.
(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:
1996 1995
---- ----
Balance at beginning of period $ 38,478 $38,164
Increase due to additions 1,510 322
Decrease due to disposals - (8)
--------- -------
Balance at end of period $ 39,988 $38,478
========= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 11,031 $ 9,395
Depreciation expense 1,468 1,636
--------- -------
Balance at end of period $ 12,499 $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
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 40% of the combined
total assets of the 1994 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 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
combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the 1994 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 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 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 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 COMBINED JOINT VENTURES OF
PAINE WEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1994 1993 1992
---- ---- ----
Cash flows from operating activities:
Net income $ 722 $ 410 $ 763
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,101 1,866 1,798
Loss on disposal of equipment - 236 476
Changes in assets and liabilities:
Accounts receivable and prepaid expenses 60 (54) (13)
Deferred rents receivable (71) 228 (201)
Deferred expenses and other assets (135) (175) (214)
Accounts payable and accrued liabilities (9) (31) (129)
Accounts payable - affiliates (161) (20) 3
Real estate taxes payable - (4) 1
Other current liabilities - (1) (40)
------ -------- --------
Total adjustments 1,785 2,045 1,681
------ -------- --------
Net cash provided by operating
activities 2,507 2,455 2,444
Cash flows from investing activities:
Escrowed cash (35) (5) 40
Collection of note receivable 9 1 -
Additions to operating investment
properties (857) (1,077) (1,516)
------ -------- --------
Net cash used in investing
activities (883) (1,081) (1,476)
Cash flows from financing activities:
Proceeds from capital contributions 184 560 717
Proceeds from issuance of notes payable
to affiliate 1,061 382 973
Advances from partners - 1 254
Retirement of debt - (60) -
Debt costs incurred - - (2)
Cash distributed to venturers (2,705) (2,427) (2,648)
------ -------- -------
Net cash used in financing
activities (1,460) (1,544) (706)
------ -------- -------
Net increase (decrease) in cash and
cash equivalents 164 (170) 262
Cash and cash equivalents at
beginning of year 329 499 237
------ ------- -------
Cash and cash equivalents at end of year $ 493 $ 329 $ 499
====== ======= =======
Cash paid during the year for interest $ 201 $ 124 $ 66
====== ======= =======
See accompanying notes.
<PAGE>
1994 COMBINED JOINT VENTURES OF
PAINE WEBBER 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.
<PAGE>
The Combined Joint Ventures have reviewed FAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of"
which is effective for financial statements for years beginning after
December 15, 1995, and believes this new pronouncement will not have a
material effect on the Combined Joint Ventures' financial statements.
Deferred expenses
-----------------
Deferred expenses include capitalized guaranty fees, organization costs,
lease costs and loan expenses. Guaranty fees and organization costs have
been amortized using the straight-line method over three and five years,
respectively. Deferred leasing costs and loan expenses are generally
amortized on a straight-line basis over the term of the leases and the term
of the loans, respectively.
Cash and cash equivalents
-------------------------
For purposes of the statement of cash flows, the Combined Joint Ventures
consider all highly liquid investments with original maturity dates of 90
days or less to be cash equivalents.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Revenue recognition
-------------------
Rental revenue is recognized on a straight-line basis over the life of the
related lease agreements for the commercial properties owned by DeVargas
Center Joint Venture and Richmond Paragon Partnership. Deferred rents
receivable of $442,000 and $371,000 at December 31, 1994 and 1993,
respectively, represent the difference between the revenue recorded on the
straight-line method and the payments made in accordance with the lease
agreements.
Income tax matters
------------------
No provision for income taxes has been provided because the tax effects of
the Joint Ventures are reportable by the individual partners.
Escrow accounts
---------------
Certain Joint Venture Agreements provide that PWEP3 can direct the
property manager to establish and periodically fund escrow cash accounts for
payment of real estate taxes and insurance premiums. As of December 31,
1994, no such direction has been given to the property managers.
Capital reserve
---------------
The One Paragon Place Joint Venture Agreement provides that a reserve for
future capital expenditures be established and administered by the Manager
of the property. The Joint Venture is to pay periodically into the capital
reserve an agreed upon amount (as defined) as funds are available after
paying all expenses and PWEP3's preferred distribution during the guaranty
period. As of December 31, 1994, no amounts were required to be paid into
the capital reserve.
Escrowed cash
-------------
Escrowed cash consists primarily of tenants security deposits.
<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 COMBINED JOINT VENTURES OF
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Combined Subsequent to Gross Amount at Which Carried at in Latest
Joint Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
----------- ------------ ---- ------------ ------------ ---- ----------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping
Center
Santa Fe,
NM $ 2,951 $4,052 $ 6,669 $ 5,961 $4,052 $12,630 $16,682 $ 3,727 1972 4/19/88 5-40 yrs.
Office
Building
Richmond,
VA 8,579 2,719 18,349 413 2,696 18,785 21,481 5,668 1987 9/26/88 7-31.5 yrs.
Apartment
Complex
Beaverton,
OR 2,183 475 4,025 460 475 4,485 4,960 1,089 1987 9/20/88 5-27.5 yrs.
------- ------- ------- ------- ------ ------- ------- -------
Totals $13,713 $7,246 $29,043 $ 6,834 $7,223 $35,900 $43,123 $10,484
======= ====== ======= ======= ====== ======= ======= =======
Notes
- -----
(A) The aggregate cost of real estate owned at December 31, 1994 for Federal income tax purposes is approximately $44,182,000.
(B) See Note 4 and 6 to the accompanying financial statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1994 1993 1992
---- ---- ----
Balance at beginning of period $42,266 $41,617 $40,688
Increase due to additions 857 1,077 1,516
Write-offs due to disposals - (428) (587)
------- ------- -------
Balance at end of period $43,123 $42,266 $41,617
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 8,496 $ 6,761 $ 5,221
Depreciation expense 1,988 1,772 1,616
Write-offs due to disposals - (37) (76)
------- -------- -------
Balance at end of period $10,484 $ 8,496 $ 6,761
======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended March 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,615
<SECURITIES> 0
<RECEIVABLES> 114
<ALLOWANCES> 13
<INVENTORY> 0
<CURRENT-ASSETS> 4,723
<PP&E> 32,242
<DEPRECIATION> 3,893
<TOTAL-ASSETS> 33,205
<CURRENT-LIABILITIES> 321
<BONDS> 12,043
0
0
<COMMON> 0
<OTHER-SE> 20,839
<TOTAL-LIABILITY-AND-EQUITY> 33,205
<SALES> 0
<TOTAL-REVENUES> 2,595
<CGS> 0
<TOTAL-COSTS> 1,503
<OTHER-EXPENSES> 361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,202
<INCOME-PRETAX> (471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (471)
<EPS-PRIMARY> (9.23)
<EPS-DILUTED> (9.23)
</TABLE>
