UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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
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(Exact name of registrant as specified in its charter)
Virginia 04-2995890
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- ---------- -------------------
Prospectus of registrant dated Parts II and IV
January 4, 1988, as supplemented
Current Report on Form 8-K Part IV
of registrant dated January 30, 1998
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
1998 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-9
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-40
<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-7 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, 1998, the Partnership owned, through joint venture
partnerships, interests in the operating properties set forth in the following
table:
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- ---------------------------- ---- ----------- ---------------------
<S> <C> <C> <C>
DeVargas Center Joint Venture retail 4/19/88 Fee ownership of land and
DeVargas Mall shopping improvements (through joint
Santa Fe, New Mexico center on venture)
18.3 acres
with 248,000
net leasable
square feet
Portland Pacific Associates Two thirteen 9/20/88 Fee ownership of land and
Willow Grove Apartments one-, two- improvements (through joint
Beaverton, Oregon and three- venture)
story
apartment
buildings
on 6.2 acres
with 119 units
Colony Plaza General retail 1/18/90 Fee ownership of land and
Partnership shopping improvements (through joint
Colony Plaza Shopping Center center on venture)
Augusta, Georgia 33.33 acres
with 216,712
net leasable
square feet
</TABLE>
(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 originally owned interests in four operating investment
properties. On January 30, 1998, Richmond Paragon Partnership, a joint venture
in which the Partnership had in interest, sold the property known as the One
Paragon Place Office Building, located in Richmond, Virginia, for $16.5 million.
The sale generated net proceeds of approximately $8.1 million after the
assumption of the outstanding first mortgage loan of approximately $8.5 million,
the release of certain lender escrow accounts totalling approximately $555,000,
closing costs of approximately $400,000 and closing proration adjustments of
approximately $100,000. The Partnership received 100% of the net proceeds in
accordance with the terms of the joint venture agreement.
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, 1998, the Limited Partners had received cumulative cash
distributions of approximately $31,565,000, or $653 per original $1,000
investment for the Partnership's earliest investors. Of the total cash
distributions to date, $493 reflects distributions from operations and $160
reflects the return of capital from the sale of the One Paragon Place property
which was distributed to the Limited Partners in February 1998. 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. With the sale of One Paragon Place on January
30, 1998, the Partnership's earnings rate decreased because of the reduction in
cash flow to the Partnership. The annualized earnings rate will change from 2.5%
to 1.75% on a Limited Partner's remaining capital account of $840 per original
$1,000 investment. The annual distribution rate will be adjusted beginning with
the payment to be made on August 14, 1998, for the quarter ending June 30, 1998.
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 three out of its four 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 and one multi-family
apartment complex. 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 1998 although estimated market values
in some markets appear 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 complex competes with numerous projects of similar type
generally on the basis of price and amenities. Apartment properties in all
markets also compete with the local single family home market for prospective
tenants. The continued availability of low interest rates on home mortgage loans
has increased the level of this competition over the past few years. However,
the impact of the competition from the single-family home market has generally
been offset by a significant increase in the funds available in the capital
markets for investment in real estate and by the lack of significant new
construction activity in the multi-family apartment market over most of this
period. Over the past two years, development activity for multi-family
properties in many markets has escalated significantly. The Partnership's
shopping centers 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 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
At March 31, 1998, the Partnership had interests in three 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 1998, along with an
average for the year, are presented below for each property in which the
Partnership had an interest during fiscal 1998.
Percent Occupied At
---------------------------------------------
Fiscal
1998
6/30/97 9/30/97 12/31/97 3/31/98 Average
------- ------- -------- ------- -------
DeVargas Mall 95% 83% 84% 82% 86%
Willow Grove Apartments 95% 97% 96% 94% 96%
Colony Plaza Shopping Center 31% 31% 32% 32% 32%
One Paragon Place (1) 94% 92% 91% N/A 92%
(1) As discussed further in Item 1, the One Paragon Place Office Building was
sold on January 30, 1998.
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 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 had been delayed pending the
resolution of an appeal of the settlement agreement by two of the plaintiff
class members. In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement over the objections of the two 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 during fiscal 1998.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management believes that the resolution of
these matters will not 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, 1998, there were 3,355 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. Upon request, the Managing
General Partner will endeavor to assist a Unitholder desiring to transfer his
Units and may utilize the services of PWI in this regard. The price to be paid
for the Units will be subject to negotiation by the Unitholder. The Managing
General Partner will not redeem or repurchase Units.
The Partnership had a Distribution Reinvestment Plan designed to enable
Unitholders to have their distributions from the Partnership invested in
additional Units of the Partnership. The Distribution Reinvestment Plan was
discontinued during fiscal 1998. 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 1998.
Item 6. Selected Financial Data
<TABLE>
PaineWebber Equity Partners Three Limited Partnership
For the years ended March 31, 1998, 1997, 1996, 1995 and 1994
(in thousands except for per Unit data)
Years ended March 31,
-------------------------------------------------
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 2,513 $ 2,595 $ 2,478 $ 1,450 $ 1,273
Operating loss $ (1,996) (1) $ (110) $ (654) $(1,420) $(1,378)
Partnership's share of unconsolidated
ventures' income (losses) $ (555) $ (361) $ 581 $ 593 $ 222
Partnership's share of gain
on sale of operating investment
property $ 2,465 - - - -
Net loss $ (86) $ (471) $ (73) $ (827) $(1,156)
Per Limited Partnership Unit:
Net loss $ (1.69) $ (9.23) $ (1.42) $(16.21) $(22.66)
Cash distributions from operations $ 25.00 $ 20.00 $ 20.00 $ 35.00 $ 50.00
Cash distributions from capital
transactions $ 160.00 - - - -
Total assets $ 25,101 $33,205 $33,885 $40,333 $43,667
Notes payable and accrued interest $ 13,432 $12,043 $11,255 $16,707 $17,304
</TABLE>
(1)The Partnership's operating loss for the year ended March 31, 1998
included an impairment loss of $1,204,000 related to the operating
investment property owned by the consolidated Colony Plaza joint
venture. See Note 2 to the accompanying financial statements for a
further discussion of this write-down.
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, 1998, the Partnership retained its
ownership interest in three out of these four properties, which consist of two
retail shopping centers and one multi-family apartment complex.
As previously reported, the market environment for suburban office
properties in Richmond, Virginia is marked by near-full occupancy levels and
rising rental rates which could justify significant levels of new construction.
The Partnership had been monitoring the development activity in the Richmond
office market and exploring potential sale opportunities for the One Paragon
Place Office Building, in which it had a joint venture interest. During the
quarter ended September 30, 1997, management concluded that it was an
appropriate time to sell the property and a number of regional and national real
estate brokers were interviewed as candidates to market the property for sale.
Management selected a national real estate broker which began its marketing
efforts in October 1997. The property was marketed extensively and sale packages
were distributed to national, regional, and local prospective purchasers. As a
result of these marketing efforts, several offers were received from prospective
buyers. During the quarter ended December 31, 1997, the Partnership negotiated a
purchase and sale agreement with one of these prospective buyers. The sale
closed on January 30, 1998. The sale price was $16,500,000, which compared
favorably with the 1997 year-end valuation of $16,000,000. The Partnership
received net proceeds of approximately $8,055,000 in connection with the sale
after the release of certain lender escrow accounts totalling approximately
$555,000, the assumption of the outstanding mortgage loan secured by the
property of approximately $8,500,000, closing costs of approximately $400,000
and closing proration adjustments of approximately $100,000.
As a result of the sale of One Paragon Place, a Special Distribution of
$160 per original $1,000 investment was made on February 13, 1998 to the Limited
Partners of record as of January 30, 1998. This Special Capital Distribution
represented the net proceeds from the sale of One Paragon Place as rounded up to
the nearest dollar per original $1,000 investment. With the sale of One Paragon
Place, the Partnership's earnings rate will decrease because of the reduction in
cash flow to the Partnership. The annualized earnings rate will change from 2.5%
to 1.75% on a Limited Partner's remaining capital account of $840 per original
$1,000 investment. The annual distribution rate will be adjusted beginning with
the payment to be made on August 14, 1998 for the quarter ending June 30, 1998.
In light of the continued strength in the national real estate market with
respect to multi-family apartment properties and the current liquidity in the
capital markets for investment in real estate in general, management believes
that this may be the opportune time to sell the Partnership's portfolio of
properties. As a result, management is currently focusing on potential
disposition strategies for the remaining investments in the Partnership's
portfolio. Although there are no assurances, it is currently contemplated that
sales of the Partnership's remaining assets could be completed within the next
2-to-3 years. The multi-family apartment property in which the Partnership has
an interest continues to experience strong occupancy levels and increasing
rental rates. As discussed further below, marketing efforts for the sale of the
Willow Grove Apartments commenced subsequent to year-end. With regard to the two
remaining retail properties, management believes that higher net sale prices can
be achieved for the Colony Plaza and DeVargas Mall properties by holding these
assets over the near term while the local markets improve and currently vacant
space is re-leased. In addition, as discussed further below, the Partnership
must resolve the current default status of the zero coupon loan secured by
Colony Plaza prior to implementing a disposition strategy for this asset.
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. The Partnership has been engaged in negotiations
with the lender regarding a possible extension and modification agreement since
the time of the loan's maturity. Such negotiations have been complicated by the
leasing status of the Colony Plaza property. As of March 31, 1998, the Colony
Plaza Shopping Center in Augusta, Georgia was 93% leased and 32% occupied.
Colony Plaza had an average occupancy level of 32% for fiscal 1998 as compared
to an average of 55% for the prior year. 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. Subsequent to
year-end, Food Lion opened its store at Colony Plaza after spending a
significant amount of its own funds to refit the former Food Max premises for
Food Lion's new prototype store in this market. In anticipation of Food Lion's
grand opening, the property's management team had the center repainted with a
new color scheme. Based on initial responses from shoppers, these changes are
expected to enhance the appeal of the Center. The leasing team believes that,
with the opening of the Food Lion store and the accompanying increase in the
number of shoppers visiting the Center, interest in leasing the available small
shop areas will improve. Efforts also continue to try to obtain a replacement
anchor tenant or tenants for the former Wal-Mart space. During the remainder of
calendar year 1998, leases with three tenants occupying a total of 8,500 square
feet, or approximately 4% of the Center's total leasable area, come up for
renewal. The property's leasing team expects these tenants to renew their
leases.
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 and pay only its share of common area
maintenance, taxes, and insurance because of the Wal-Mart vacancy. During the
quarter ended June 30, 1997, this tenant notified the Partnership that it would
be exercising its right to terminate its lease during the quarter ended December
31, 1997 due to the Wal-Mart vacancy. 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. As a result
of the lack of success to date in obtaining a replacement anchor tenant or
tenants for the Wal-Mart space, the Partnership recorded an impairment loss in
fiscal 1998 in the amount of $1,204,000 to write down the carrying value of the
Colony Plaza operating investment property to management's estimate of its
current fair value.
As a result of the current leasing status of the Colony Plaza property,
the stability of the Center's future rental income is uncertain, which may
result in the Partnership being unable to negotiate an economically viable
refinancing agreement with the current lender or to refinance the current loan
balance with a new third-party financing source. Any restructuring or
refinancing transaction is likely to require a significant cash payment by the
Partnership in order to reduce the outstanding obligation to the lender in light
of the current loan-to-value ratio. During the negotiation period, penalty
interest is accruing on the outstanding principal balance at 15% per annum in
accordance with the loan agreement. If the Partnership is unable to successfully
restructure or refinance the current mortgage loan, management expects that the
lender will likely choose to initiate foreclosure proceedings. The eventual
outcome of this situation cannot be determined at the present time.
The DeVargas Mall was 82% leased and occupied as of March 31, 1998. During
fiscal 1998, the DeVargas property had an average occupancy level of 86%, as
compared to an average of 91% for the prior year. As previously reported,
Montgomery Ward closed its store that abuts DeVargas Mall as part of a Chapter
11 bankruptcy filing made last summer and had undertaken plans to sell its store
and the related land. During the fourth quarter of fiscal 1998, a major grocery
chain which is a 39,000 square foot anchor tenant at DeVargas Mall purchased the
former Montgomery Ward location and plans to relocate to the Montgomery Ward
site. The grocery tenant plans to demolish the existing Montgomery Ward building
and replace it with their new 55,000 square foot prototypical Super Store. The
DeVargas property was unable to accommodate this tenant's expansion plans for a
55,000 square foot store at their current location. Nonetheless, the property's
leasing and management team expects that the additional destination shopper
traffic from this new prototype store will generate new leasing opportunities at
the DeVargas Mall that will protect and enhance the property's value.
As previously reported, a 27,023 square foot soft goods anchor tenant at
DeVargas Mall, representing 11% of the Center's leasable area, closed its store
in July 1997. This tenant's lease expired on January 31, 1997 and it had
continued leasing its store on an month-to-month basis. As interest in Santa Fe
from national anchor tenants continues to increase, the property's leasing team
has had substantive lease negotiations with two of these national tenants and
expects that one of these prospective tenants will sign a lease for this vacant
anchor space. The planned grocery tenant relocation discussed above is expected
to result in a unified center because the Montgomery Ward and DeVargas
properties have cross-easements. It is also expected to have a positive impact
on the long-term value of the DeVargas Mall because the changes should increase
upscale shopper traffic to the Center, add an additional national retailer to
the current tenant mix once the 27,000 square foot space referred to above is
re-leased, and allow for the future re-leasing of retail spaces at higher rents
than the rents paid by former tenants. During the remainder of calendar year
1998, eleven leases representing a total of 25,000 square feet, or approximately
10% of the Center's total leasable area, come up for renewal. Funding for
required tenant improvements for the leasing activity at DeVargas has been
accomplished by means of advances under certain lines of credit provided by the
Partnership's co-venture partner. As of March 31, 1997, 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
March 31, 1997. 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 allowed the venture to borrow up to $5,000,000, bore
interest at the greater of the prime rate or 9% per annum and was due to mature
on June 1, 1998. Subsequent to year-end, on May 26, 1998, the venture executed a
renewal and extension of the loan. Under the terms of the renewal and extension,
the venture may borrow up to $6,500,000 at a rate equal to the lesser of 9% per
annum or the prime rate, and the maturity date was extended to June 1, 1999.
The average occupancy level for the year ended March 31, 1998 at the
Willow Grove Apartments in Beaverton, Oregon was 96%, compared to 95% for the
prior year. These occupancy levels continue to compare favorably to similar
Class A quality properties in the local market which includes approximately
2,500 units built in the last three years and located within 4-to-6 miles of the
property. As of March 31, 1998, the average monthly rental rate at Willow Grove
was $697 per apartment unit which is an increase of 8.7% over the average
monthly rent a year ago. The property's leasing team reports that the number of
building permits for apartments in the Beaverton market in 1997 was down
significantly from 1996 and 1995. As new development appears to be slowing and
most new construction is located farther out to the west of Willow Grove,
between 5 and 15 miles away, the local apartment market is expected to record
strong occupancy levels and moderate rental rate growth in the near term. As
previously reported, a light rail station, which is located within walking
distance of Willow Grove Apartments, is expected to open this Fall. The light
rail line is now operating on a test basis. With strong local market conditions
and the pending opening of the rail station, the Partnership believes it is a
good time to sell the Willow Grove property. During the fourth quarter of fiscal
1998, the Partnership initiated discussions with area real estate brokerage
firms and solicited marketing proposals from several of these firms. After
reviewing their respective proposals and conducting interviews, the Partnership
selected a national brokerage firm that is a leading seller of apartment
properties. Sales materials have been prepared, and an extensive marketing
campaign began subsequent to year-end, in late May 1998. While there are no
assurances that a sale transaction will be completed, the Partnership hopes to
complete the sale of Willow Grove during calendar 1998.
At March 31, 1998, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $5,746,000. These funds
will be utilized for the working capital requirements of the Partnership,
distributions to partners, refinancing costs and debt service payments related
to the Partnership's remaining zero coupon loan, if necessary under the terms of
the original zero coupon loan agreement or any future modification thereof, 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.
As noted above, the Partnership expects to be liquidated within the next
2- to -3 years. Notwithstanding this, the Partnership believes that it has made
all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership reported a net loss of $86,000 for the year ended March 31,
1998, as compared to a net loss of $471,000 in fiscal 1997. This favorable
change of $385,000 in the Partnership's net operating results is primarily due
to the $2,465,000 recognized as the Partnership's share of the gain from the
sale of the One Paragon Place Office Building on January 30, 1998, as discussed
further above. The Partnership's share of the gain recognized on the sale of One
Paragon Place was partially offset by an increase in the Partnership's operating
loss of $1,886,000 and an increase in the Partnership's share of unconsolidated
ventures' losses of $194,000. The Partnership's operating loss increased
primarily as a result of an impairment loss of $1,204,000 recognized on the
Colony Plaza operating property in fiscal 1998 and an increase in interest
expense of $591,000 related to the accrual of default interest on the Colony
Plaza debt obligation, as discussed further above. A decline in rental income
and expense reimbursements from the consolidated joint ventures of $202,000 when
compared to the prior year also contributed to the increase in the Partnership's
operating loss in fiscal 1997. Rental income and expense reimbursements
decreased at the consolidated Colony Plaza property due to a reduction in shop
space occupancy related to the anchor tenant vacancies discussed further above.
The impairment loss, the increase in interest expense, and the decrease in
rental income and expense reimbursements were partially offset by an increase in
interest and other income of $120,000 in the current year. Interest and other
income increased due to interest earned on the proceeds from the sale of One
Paragon Place, which were temporarily invested pending the special distribution
to the Limited Partners which was made in February 1998, and due to an increase
in the Partnership's cash reserve balances.
The increase in the Partnership's share of unconsolidated ventures' losses
was mainly due to the inclusion of the net loss from the One Paragon Place joint
venture for January 1998 in the current year results. The joint venture's
operating results for January 1998 included the write-off of $543,000 in
deferred financing costs prior to the sale of the property. In addition,
increases in interest and depreciation expense of $84,000 and $119,000,
respectively, at the DeVargas joint venture also contributed to the increase in
the Partnership's share of ventures' losses in the current year. Interest
expense increased as a result of an increase in the average outstanding
principal balance of the capital and tenant improvement loan payable by the
DeVargas joint venture. Depreciation expense increased due to fiscal 1997 and
1998 improvements being placed into service. The impact of the write-off of
deferred fees at One Paragon Place and the increase in interest and depreciation
expense at DeVargas was partially offset by an increase in combined rental
income. Revenues were higher at One Paragon Place as a result of an increase in
rental rates on new leases signed over the past year. Rental revenues at
DeVargas Mall increased by $372,000 as a result of the addition of two new
tenants during the second half of fiscal 1997.
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 was 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 was 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. 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 was primarily
attributable to declines in revenues at both the DeVargas and One Paragon Place
joint ventures during fiscal 1997. 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 during fiscal 1997 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 during fiscal 1997.
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 were for the period ended December 31,
1996, which was 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. 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 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.
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 increased significantly over the past two years.
Existing apartment properties in such markets could be expected to experience
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 retail segment of the real estate market continues to suffer 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 DeVargas Mall
through a joint venture partnership could adversely impact the timing of the
Partnership's planned disposition of that asset and the amount of proceeds
received from such a disposition. It is possible that the Partnership's
co-venture partner 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 agreement, 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. In the
case of the Willow Grove and Colony Plaza properties, the other joint venture
interest is held by the Managing General Partner of the Partnership as a result
of certain prior assignment transactions. No such conflicts should exist on
these investments.
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 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 existing debt
structure, 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 tenth full year of operations in fiscal
1998. 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 two 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, both the DeVargas Mall and the Colony Plaza Shopping
Center presently have 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
<PAGE>
affect the Partnership's net cash flow.
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 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 50 2/27/87 *
David F. Brooks First Vice President and
Assistant Treasurer 55 2/27/87 *
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President and Controller 35 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.
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 and Controller of the Managing
General Partner and a Vice President and Controller 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, 1998, 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 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. With the sale
of the One Paragon Place property in January 1998, the Partnership's annualized
earnings rate will change from 2.5% to 1.75% on a Limited Partner's remaining
capital account of $840 per original $1,000 investment. The annual distribution
rate will be adjusted beginning with the payment to be made on August 14, 1998,
for the quarter ending June 30, 1998. 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, 1998 is $94,000, 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 $20,000 (included in general and administrative expenses) for managing the
Partnership's cash assets for the year ended March 31, 1998. 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) A Current Report on Form 8-K dated January 30, 1998 was filed
during the last quarter of fiscal 1998 to report the sale of the
One Paragon Place Office Building and is hereby incorporated
herein by reference.
(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 and Controller
Dated: June 26, 1998
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 26, 1998
--------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 26, 1998
--------------------------- ---------------
Terrence E. Fancher
Director
<PAGE>
<TABLE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
----------- ----------------------- -------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated January 4, 1988, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Amended and
Restated Certificate and
Agreement of Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant
filed as exhibits to registration to Section 13 or 15(d) of the
statements and amendments thereto Securities Act of 1934 and
of the registrant together with incorporated herein by reference.
all such contracts filed as
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
1998 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 1 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.
</TABLE>
<PAGE>
<TABLE>
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
<CAPTION>
Reference
---------
<S> <C>
PaineWebber Equity Partners Three Limited Partnership:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1998 and 1997 F-5
Consolidated statements of operations for the years ended March 31,
1998, 1997 and 1996 F-6
Consolidated statements of changes in partners' capital (deficit)
for the years ended March 31, 1998, 1997 and 1996 F-7
Consolidated statements of cash flows for the years ended March 31, 1998,
1997 and 1996 F-8
Notes to consolidated financial statements F-9
Schedule III - Real Estate and Accumulated Depreciation F-23
DeVargas Center Joint Venture:
Report of independent auditors F-24
Balance sheets as of December 31, 1997 and 1996 F-25
Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-26
Statements of changes in partners' capital for the years ended December 31,
1997, 1996 and 1995 F-27
Statements of cash flows for the years ended December 31, 1997, 1996 and
1995 F-28
Notes to financial statements F-29
Richmond Paragon Partnership:
Report of independent auditors F-32
Balance sheets as of December 31, 1997 and 1996 F-33
Statements of income for the years ended December 31, 1997, 1996 and 1995 F-34
Statements of venturers' capital for the years ended December 31, 1997,
1996 and 1995 F-35
Statements of cash flows for the years ended December 31, 1997, 1996 and
1995 F-36
Notes to financial statements F-37
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.
</TABLE>
<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, 1998 and 1997, 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, 1998. 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 Colony Plaza General Partnership (a
consolidated venture) as of December 31, 1995 and for the year then ended, which
statements reflect total revenue of $1,491,000 for the year ended December 31,
1995. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Colony Plaza General Partnership for the year ended December 31, 1995, is based
solely on the report of other auditors. The financial statements of the DeVargas
Center Joint Venture (an unconsolidated 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 $6,513,000 and $7,176,000, respectively, at March 31, 1998
and March 31, 1997, and the Partnership's equity in the net income of the
DeVargas Center Joint Venture is stated at $274,000, $251,000, and $324,000,
respectively for each of the three years in the period ended March 31, 1998.
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 reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, based on our audits and the reports
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 12, 1998
<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, 1997 and 1996, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
March 22, 1998, except for Note 7,
as to which the date is May 28, 1998
<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, 1998 and 1997
(In thousands, except for per Unit data)
ASSETS
1998 1997
---- ----
Operating investment properties, at cost:
Land $ 3,769 $ 4,208
Building and improvements 12,926 14,153
---------- ---------
16,695 18,361
Less accumulated depreciation (4,061) (3,893)
---------- ---------
12,634 14,468
Investments in unconsolidated joint ventures,
at equity 6,513 13,881
Cash and cash equivalents 5,746 4,615
Accrued interest and other receivables 97 101
Prepaid expenses 7 7
Deferred expenses (net of accumulated
amortization of $101 and $63
in 1998 and 1997, respectively) 104 133
---------- ---------
$ 25,101 $ 33,205
========== =========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and accrued interest, including
amounts in default $ 13,432 $ 12,043
Accounts payable and accrued expenses 140 100
Tenant security deposits 10 14
Accrued real estate taxes 13 14
Advances from consolidated ventures 103 195
---------- ---------
Total liabilities 13,698 12,366
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net loss (6) (5)
Cumulative cash distributions (243) (230)
Limited Partners ($1,000 per unit; 50,468
Units issued):
Capital contributions, net of offering costs 43,669 43,669
Cumulative net loss (453) (368)
Cumulative cash distributions (31,565) (22,228)
---------- ---------
Total partners' capital 11,403 20,839
---------- ---------
$ 25,101 $ 33,205
========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1998, 1997 and 1996
(In thousands, except for per Unit data)
1998 1997 1996
---- ---- ----
Revenues:
Rental income and expense reimbursements $2,178 $2,380 $2,242
Interest and other income 335 215 236
------ ------ ------
2,513 2,595 2,478
Expenses:
Loss on impairment of operating
investment property 1,204 - -
Interest expense 1,793 1,202 1,677
Depreciation expense 493 498 501
Property operating expenses 541 520 476
Real estate taxes 163 155 153
General and administrative 301 314 325
Amortization expense 14 16 -
------ ------ ------
4,509 2,705 3,132
------ ------ ------
Operating loss (1,996) (110) (654)
Partnership's share of unconsolidated
ventures' income (losses) (555) (361) 581
Partnership's share of gain on sale of
operating investment property 2,465 - -
------ ------ ------
Net loss $ (86) $ (471) $ (73)
====== ====== ======
Net loss per Limited
Partnership Unit $(1.69) $(9.23) $(1.42)
====== ====== ======
Cash distributions per Limited
Partnership Unit $185.00 $20.00 $20.00
======= ====== ======
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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (13) (9,337) (9,350)
Net loss (1) (85) (86)
----- ------- -------
Balance at March 31, 1998 $(248) $11,651 $11,403
===== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (86) $ (471) $ (73)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Loss on impairment of operating investment property 1,204 - -
Depreciation and amortization 507 514 501
Amortization of deferred loan costs 24 34 48
Interest expense on zero coupon loans 1,432 827 1,355
Partnership's share of gain on sale of
operating investment property (2,465) - -
Partnership's share of unconsolidated
ventures' income (losses) 555 361 (581)
Changes in assets and liabilities:
Accrued interest and other receivables 4 18 (98)
Accounts receivable - affiliates - 7 -
Deferred expenses - 18 16
Accounts payable and accrued expenses 40 25 19
Accrued real estate taxes (1) 1 (1)
Deferred rental revenue - - 3
Tenant security deposits (4) - 5
Advances from consolidated ventures (92) (3) (78)
-------- ------- -------
Total adjustments 1,204 1,802 1,189
-------- ------- -------
Net cash provided by operating activities 1,118 1,331 1,116
-------- ------- -------
Cash flows from investing activities:
Additional investments in unconsolidated
joint ventures - - (183)
Additions to operating investment properties (3) - (15)
Receipt of master lease payments 140 - 1
Payment of leasing commissions (9) (8) -
Distributions from unconsolidated joint ventures 9,278 912 10,016
-------- ------- -------
Net cash provided by investing activities 9,406 904 9,819
-------- ------- -------
Cash flows from financing activities:
Cash distributions to partners (9,350) (1,020) (1,018)
Payments of principal and
interest on notes payable (43) (39) (10,407)
-------- ------- -------
Net cash used in financing activities (9,393) (1,059) (11,425)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,131 1,176 (490)
Cash and cash equivalents, beginning of year 4,615 3,439 3,929
-------- ------- -------
Cash and cash equivalents, end of year $ 5,746 $ 4,615 $ 3,439
======== ======= ========
Cash paid during the year for interest $ 337 $ 343 $ 5,635
======== ======= ========
</TABLE>
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
Notes to 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, 1998, the Partnership retained its
ownership interest in three of these properties, which consist of two retail
shopping centers and one multi-family apartment complex. On January 30, 1998,
Richmond Paragon Partnership, a joint venture in which the Partnership had an
interest, sold its operating investment property, the One Paragon Place Office
Building, to an unrelated third party (see Note 4). The Partnership is currently
focusing on potential disposition strategies for the remaining 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, 1998 and 1997 and revenues and expenses for each
of the three years in the period ended March 31, 1998. Actual results could
differ from the estimates and assumptions used.
At March 31, 1998, the accompanying financial statements include the
Partnership's investment in one unconsolidated joint venture partnership (two at
March 31, 1997). 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. 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 and for a discussion of the significant lag-period sale
transaction which occurred during fiscal 1998.
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 is presented on a consolidated basis in the
accompanying financial statements. 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. During fiscal 1998, the independent appraisal of the
Colony Plaza operating investment property indicated that certain operating
assets, consisting of land and improvements and building and improvements, were
impaired. In accordance with SFAS No. 121, the consolidated Colony Plaza joint
venture recorded a reduction in the net carrying value of such assets amounting
to $1,204,000 relating to the land and improvements ($439,000), building and
improvements ($1,090,000) and related accumulated depreciation ($325,000).
Depreciation expense is generally computed using the straight-line method
over the estimated useful life of the operating investment properties, generally
five years for the furniture and equipment and forty years for the buildings and
improvements. 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, 1998 and 1997, 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, which approximates the effective
interest 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, 1998 and 1997 due to the
short-term maturities of these instruments. 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, except in the case of
the Colony Plaza debt which is currently in default (see Note 6).
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, 1998, 1997 and 1996 is $94,000, $90,000 and $99,000, 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 $20,000, $12,000 and $7,000 (included in general and administrative expenses)
for managing the Partnership's cash assets for the years ended March 31, 1998,
1997 and 1996, respectively.
4. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
As of March 31, 1998, the Partnership had an investment in one
unconsolidated joint venture, (two at March 31, 1997). The investments in
unconsolidated joint ventures are accounted for on the equity method in the
Partnership's financial statements. As discussed in Note 2, the unconsolidated
joint ventures report their operations on a calendar year. As discussed further
below, on January 30, 1998, a joint venture in which the Partnership had an
interest, Richmond Paragon Partnership, sold its operating investment property,
the One Paragon Place Office Building, to an unrelated third party. Due to the
Partnership's policy of accounting for significant lag-period transaction in the
period in which they occur, the gain on this transaction was recognized in
fiscal 1998. Accordingly, in addition to the operations of the One Paragon Place
joint venture for the twelve months ended December 31, 1997, the Partnership's
share of ventures' losses in fiscal 1998 also reflects the Partnership`s share
of One Paragon Place operations for the period from January 1, 1998 through the
date of sale. Such operations in calendar 1998 reflected total revenues of
$158,000 and total expenses of $671,000 for a net loss of $513,000.
Condensed combined financial statements of these joint ventures, for the
periods indicated, are as follows. As a result of the transaction described
above, the condensed balance sheet as of December 31, 1997 includes only the
accounts of the DeVargas Center joint venture. The condensed combined statement
of operations for the year ended December 31, 1997 includes the results of the
DeVargas Center joint venture for calendar 1997 and the results of the One
Paragon Place joint venture for the thirteen months from January 1, 1997 through
the date of the sale on January 30, 1998.
<PAGE>
Condensed Combined Balance Sheets
December 31, 1997 and 1996
(in thousands)
Assets
1997 1996
---- ----
Current assets $ 709 $ 1,165
Operating investment property, net 12,413 27,489
Other assets 631 1,009
--------- --------
$ 13,753 $ 29,663
========= ========
Liabilities and Venturers' Capital
Current liabilities $ 466 $ 559
Other liabilities 4,610 12,725
Partnership's share of combined venturers'
capital 6,359 13,731
Co-venturers' share of combined venturers'
capital 2,318 2,648
--------- --------
$ 13,753 $ 29,663
========= ========
Reconciliation of Partnership's Investment
March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
Partnership's share of capital at
December 31, as shown above $ 6,359 $13,731
Excess basis due to investment in venture,
net (1) 370 419
Timing differences (2) (216) (269)
-------- -------
Investments in unconsolidated joint
ventures, at equity, at March 31 $ 6,513 $13,881
======== =======
(1)At March 31, 1998 and 1997, the Partnership's investment exceeds its
share of the joint venture capital accounts by $370,000 and $419,000,
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>
Condensed Combined Summary of Operations
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 4,877 $ 4,198 $ 4,237
Interest and other income 42 22 500
------- ------- -------
4,919 4,220 4,737
Expenses:
Property operating expenses 1,562 1,362 1,364
Depreciation and amortization 2,246 1,635 1,767
Real estate taxes 171 131 173
Administrative and other 325 298 345
Interest expense 1,151 1,037 383
------- ------- -------
5,455 4,463 4,032
------- ------- -------
Operating income (loss) (536) (243) 705
Gain on sale of operating investment
property 2,337 - -
------- ------- -------
Net income (loss) $ 1,801 $ (243) $ 705
======= ======= =======
Net income (loss):
Partnership's share of combined
income (loss) $ 1,959 $ (341) $ 600
Co-venturers' share of combined
income (loss) (158) 98 105
------- ------- -------
$ 1,801 $ (243) $ 705
======= ======= =======
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Partnership's share of operations,
as shown above $ 1,959 $ (341) $ 600
Amortization of excess basis (49) (20) (19)
-------- ------- -------
Partnership's share of unconsolidated
ventures' net income (loss) $ 1,910 $ (361) $ 581
======== ======= ======
The Partnership's share of the unconsolidated ventures' net income (loss)
is presented as follows in the consolidated statements of operations (in
thousands):
1998 1997 1996
---- ---- ----
Partnership's share of unconsolidated
ventures' income (losses) $ (555) $ (361) $ 581
Partnership's share of gain on sale
of operating investment property 2,465 - -
--------- -------- --------
$ 1,910 $ (361) $ 581
========= ======== ========
Investments in unconsolidated joint ventures, at equity, is the
Partnership's net investment in the joint venture partnerships. These joint
ventures are subject to partnership agreements which determine the distribution
of available funds, the disposition of the ventures' assets and the rights of
the partners, regardless of the Partnership's percentage ownership interest in
the venture. As a result, substantially all of the Partnership's investments in
these joint ventures are restricted as to distributions.
<PAGE>
Investments in unconsolidated joint ventures, at equity, on the
accompanying balance sheets at March 31, 1998 and 1997 is comprised of the
following equity method carrying values (in thousands):
1998 1997
---- ----
DeVargas Center Joint Venture $ 6,513 $ 7,176
Richmond Paragon Partnership - 6,705
-------- -------
$ 6,513 $13,881
======== =======
The cash distributions received from the Partnership's unconsolidated
joint venture investments during fiscal 1998, 1997 and 1996 are as follows (in
thousands):
1998 1997 1996
---- ---- ----
DeVargas Center Joint Venture $ 928 $ 812 $ 864
Richmond Paragon Partnership 8,350 100 9,152
-------- -------- -------
$ 9,278 $ 912 $10,016
======== ======== =======
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. 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 allowed the venture to borrow up to
$5,000,000, bore interest at the greater of the prime rate or 9% per annum and
was due to mature on June 1, 1998. The loan had an outstanding balance of
$4,610,000 at December 31, 1997. Subsequent to year-end, on May 26, 1998 the
venture executed a renewal and extension of the loan. Under the terms of the
renewal and extension, the venture may borrow up to $6,500,000 at a rate equal
to the lesser of 9% per annum or the prime rate, and the maturity date was
extended to June 1, 1999.
Richmond Paragon Partnership
----------------------------
On September 26, 1988, the Partnership acquired an interest in Richmond
Paragon Partnership, a Virginia general partnership that owned and operated 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 was 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.
During fiscal 1998, the Partnership had been monitoring the development
activity in the Richmond office market and exploring potential sale
opportunities for One Paragon Place. During the quarter ended September 30,1997,
management concluded that it was an appropriate time to sell the property and
selected a national real estate broker to market the property for sale. As part
of the marketing process, several offers were received from prospective buyers.
During the quarter ended December 31, 1997, the Partnership negotiated a
purchase and sale agreement with one of these prospective buyers. On January 30,
1998, the One Paragon Place Office Building was sold to this unrelated third
party for $16,500,000. The joint venture received net proceeds of approximately
$8,055,000 in connection with the sale after the release of certain lender
escrow accounts totalling approximately $555,000, the assumption of the
outstanding mortgage loan secured by the property of approximately $8,500,000,
closing costs of approximately $400,000 and closing proration adjustments of
approximately $100,000. The Partnership was entitled to 100% of the net proceeds
of this sale transaction in accordance with the terms of the joint venture
agreement. On February 13, 1998, the Partnership made a special capital
distribution of One Paragon Place sale proceeds totalling approximately
$8,075,000, or $160 per original $1,000 investment, to Unitholders of record as
of January 30, 1998.
Per the terms of the joint venture agreement, net cash flow from
operations of the joint venture was to be distributed as follows: (1) the
Partnership was to 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 were
to 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 was to be distributed 75% to the Partnership and 25% to the co-venturer.
Taxable income from operations was allocated in accordance with the net
cash flow distributions described above. Tax losses from operations were
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, 1998 and 1997, 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. ("WVI") and the Partnership were the original
partners of Colony Plaza General Partnership. Effective August 28, 1997, an
amendment to the joint venture agreement was entered into by the Partnership,
WVI and Third Equity Partners, Inc. to reflect the withdrawal of WVI from the
joint venture and the admission of Third Equity Partners, Inc., the Managing
General Partner of the Partnership. In accordance with the Assignment and
Assumption of General Partnership Interests, effective as of August 28, 1997,
WVI assigned all their rights, title and interest in the Partnership to Third
Equity Partners, Inc. in conjunction with the amendment to the joint venture
agreement. 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 WVI.
The property is encumbered by a mortgage loan with an outstanding balance
of $9,408,000 as of March 31, 1998. This mortgage loan matured on December 29,
1996. Management has been engaged in negotiations with the existing lender
regarding an extension and modification of the outstanding first mortgage loan
since the time of the loan maturity. 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, 1997, the cumulative preferred return payable to
the Partnership was $744,000.
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 optional 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, 1997,
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 accrued interest
at 8.5% and was due December 31, 1997. The Lessee also assigned its rights to
certain future development and leasing fees which were to 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. A second amendment to the
settlement agreement was made effective as of August 28, 1997 in which the
Guarantors paid the Partnership $140,000 in full satisfaction of the promissory
note referred to above. Master lease income is recorded as a reduction of the
carrying value of the operating property in the period in which it was received
on the accompanying balance sheets.
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.
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
Colony Plaza and Willow Grove joint ventures for the years ended December 31,
1997, 1996 and 1995 (in thousands):
1997 1996 1995
---- ---- ----
Repairs and maintenance $ 154 $ 140 $ 142
Utilities 103 85 79
Management fees 92 94 83
Professional fees 43 41 58
Administrative and other 149 160 114
------ ------ ------
$ 541 $ 520 $ 476
====== ====== ======
6. Notes payable
-------------
Notes payable and accrued interest on the books of the Partnership at
March 31, 1998 and 1997 consist of the following (in thousands):
1998 1997
---- ----
10.5% nonrecourse loan payable to a
finance company, which is secured
by the Colony Plaza operating
investment property and an
assignment of rents from all leases
on the property. Interest is
compounded semi-annually. All
interest and principal was due at
maturity, on December 29, 1996 (see
discussion of default status
below). $ 9,940 $ 8,508
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, 1997 and 1996. 3,492 3,535
------- -------
$13,432 $12,043
======= =======
The borrowing secured by Colony Plaza, which is a legal obligation of the
Partnership and not of the Colony Plaza joint venture, matured on December 29,
1996, at which time total principal and accrued interest of $8,290,190 was due
and payable. The fair value of this mortgage note approximates its carrying
value as of December 31, 1997. Management has been engaged in negotiations with
the existing lender regarding an extension and modification of the outstanding
first mortgage loan since the time of the loan maturity. 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 1998 consolidated balance
sheet and statement of operations total approximately $9,055,000, $51,065,
$1,280,000 and $1,817,000, respectively.
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
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 was secured
by a first mortgage on the One Paragon Place Office Building and was recorded on
the books of the unconsolidated joint venture. The new loan bore interest at 8%
per annum and requires monthly principal and interest payments of $68,000
through maturity, on December 10, 2002. The Partnership had 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. As discussed in Note 4, the Richmond Paragon Partnership sold the
One Paragon Place Office Building on January 30, 1998 and the outstanding first
mortgage loan was assumed by the buyer in connection with the sale.
Scheduled maturities of long-term debt for the next five years are as
follows (in thousands):
Years ended December 31
1998 $ 9,456
1999 52
2000 58
2001 63
2002 3,271
-------
$12,900
=======
<PAGE>
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, 1997 (in thousands):
Years ending December 31:
1998 $ 1,060
1999 890
2000 729
2001 627
2002 624
Thereafter 3,971
-------
$ 7,901
=======
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, 1997, base rental income of
approximately $839,000 (75% 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 30%
Piggly Wiggly, d/b/a Foodmax $ 288,000 26%
Goody's Family Clothes, Inc. $ 214,000 19%
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. Subsequent to March 31, 1998, Food Lion opened its
store at the Colony Plaza Shopping Center. While the Colony Plaza property was
93% leased as of March 31, 1998, its physical occupancy level had declined to
32% 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. As a result of the lack of success to date in obtaining a
replacement anchor tenant or tenants for the Wal-Mart space, the Partnership
recorded an impairment loss in fiscal 1998 to write down the carrying value of
the operating investment property to management's estimate of its fair value
(see Note 2).
8. Subsequent Event
----------------
On May 15, 1998, the Partnership distributed $315,000 to the Limited
Partners and $3,000 to the General Partners for the quarter ended March 31,
1998.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1998
(In thousands)
<CAPTION>
Life on Which
Initial Cost to Costs Depreciation
Consolidated Capitalized Gross Amount at Which Carried at in Latest
Joint Venture (Removed) End of Year Income
Buildings & Subsequent to Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Acquisition Land Improvements Total Depreciation Construction Acquired is Computed
- ------------ ------------ ---- ------------ ----------- ---- ------------ ----- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shopping
Center
Augusta,
Georgia $ 9,940 $3,720 $10,170 $(2,378) $3,281 $ 8,231 $11,512 $2,453 1989 1/18/90 12-40 yrs.
Apartment
Complex
Beaverton, OR 3,492 475 4,025 683 488 4,695 5,183 1,608 1987 9/20/88 5-27.5 yrs.
------- ------ ------- ------- ------ ------- ------- -------
$13,432 $4,195 $14,195 $(1,695) $3,769 $12,926 $16,695 $4,061
======= ====== ======= ======= ====== ======= ======= ======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $18,133.
(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:
1997 1996 1995
---- ---- ----
Balance at beginning of period $18,361 $ 18,361 $ 13,166
Consolidation of joint venture - - 5,181
Additions and improvements 3 - 15
Reduction of basis due to
master lease payments received (140) - (1)
Write off due to permanent impairment
(see Note 2) (1,529) - -
------- -------- --------
Balance at end of period $16,695 $ 18,361 $ 18,361
======= ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 3,893 $ 3,395 $ 1,811
Consolidation of joint venture - - 1,083
Depreciation expense 493 498 501
Write off due to permanent impairment
(see Note 2) (325) - -
------- -------- --------
Balance at end of period $ 4,061 $ 3,893 $ 3,395
======= ======== ========
(E) Included in Costs Capitalized (Removed) Subsequent to Acquisition are an
impairment write-down on the shopping center property in fiscal 1998 (see
Note 2) and certain master lease payments received that are recorded as
reductions in the cost basis of the shopping center property for financial
reporting purposes (see Note 5).
</TABLE>
<PAGE>
DELOITTE & TOUCHE LLP
Suite 2300
333 Clay Street
Houston, Texas 77002-4196
INDEPENDENT AUDITORS' REPORT
To the Co-Venturers of
DeVargas Center Joint Venture:
We have audited the accompanying balance sheets of DeVargas Center Joint
Venture (the "Joint Venture") as of December 31, 1997 and 1996, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
---------------------
DELOITTE & TOUCHE LLP
March 22, 1998, except for Note 7,
as to which the date is May 28, 1998
<PAGE>
DEVARGAS CENTER JOINT VENTURE
BALANCE SHEETS
December 31, 1997 and 1996
(In thousands)
ASSETS
1997 1996
---- ----
PROPERTY:
Land $ 4,052 $ 4,052
Buildings and improvements 14,172 14,129
Construction-in-progress - 10
--------- ---------
Total 18,224 18,191
Less accumulated depreciation 5,811 5,054
--------- ---------
Property - net 12,413 13,137
CASH 677 217
ACCOUNTS RECEIVABLE, Net 32 96
ACCRUED RENT RECEIVABLES 217 183
UNAMORTIZED LEASE COSTS 399 311
OTHER ASSETS 15 17
--------- ---------
TOTAL $ 13,753 $ 13,961
========= =========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses:
Affiliates $ 331 $ 172
Other 44 64
Notes payable - affiliate 4,610 4,214
Rentals collected in advance 65 58
Tenants' security deposits 26 29
--------- ---------
Total liabilities 5,076 4,537
VENTURERS' CAPITAL 8,677 9,424
--------- ---------
TOTAL $ 13,753 $ 13,961
========= =========
See accompanying notes.
<PAGE>
DEVARGAS CENTER JOINT VENTURE
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
1997 1996 1995
---- ---- ----
REVENUES - Rentals $ 2,589 $ 2,218 $2,439
------- ------- ------
EXPENSES EXCLUSIVE OF DEPRECIATION AND
AMORTIZATION:
Repairs and maintenance 723 675 693
General and administrative 96 82 96
Management fees - Weingarten Realty
Management Company 99 84 90
Interest 425 341 292
Ad valorem taxes 38 19 59
Advertising and promotion 28 28 29
Insurance 34 37 34
------- ------- ------
Total 1,443 1,266 1,293
------- ------- ------
INCOME BEFORE DEPRECIATION AND
AMORTIZATION 1,146 952 1,146
DEPRECIATION AND AMORTIZATION 819 701 728
------- ------- ------
NET INCOME $ 327 $ 251 $ 418
======= ======= ======
See accompanying notes.
<PAGE>
<TABLE>
DEVARGAS CENTER JOINT VENTURE
STATEMENTS OF VENTURERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<CAPTION>
Weingarten PaineWebber
Realty Equity
Total Investors Partners
----- --------- --------
<S> <C> <C> <C>
VENTURERS' CAPITAL, JANUARY 1, 1995 $ 10,657 $ 2,577 $ 8,080
Distributions to Venturers (1,089) (244) (845)
Net income 418 94 324
--------- -------- --------
VENTURERS' CAPITAL, DECEMBER 31, 1995 9,986 2,427 7,559
Distributions to Venturer (824) - (824)
Contribution from Venturer 11 11 -
Net income 251 - 251
--------- -------- --------
VENTURERS' CAPITAL, DECEMBER 31, 1996 9,424 2,438 6,986
Distributions to Venturers (1,074) (173) (901)
Net income 327 53 274
--------- -------- --------
VENTURERS' CAPITAL, DECEMBER 31, 1997 $ 8,677 $ 2,318 $ 6,359
========= ======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
DEVARGAS CENTER JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 327 $ 251 $ 418
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 819 701 728
Net effect of changes in operating accounts 37 (82) 44
--------- ------- ------
Net cash provided by operating activities 1,183 870 1,190
--------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (44) (1,382) (130)
--------- ------- ------
Net cash used in investing activities (44) (1,382) (130)
--------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Venturers (1,074) (825) (1,089)
Contribution from Venturer - 11 -
Proceeds from notes payable - affiliate 418 1,251 123
Principal payments of notes payable - affiliate (23) (55) (55)
--------- ------- ------
Net cash provided by (used in)
financing activities (679) 382 (1,021)
--------- ------- ------
NET INCREASE (DECREASE) IN CASH 460 (130) 39
CASH AT BEGINNING OF YEAR 217 347 308
--------- ------- ------
CASH AT END OF YEAR $ 677 $ 217 $ 347
========= ======= ======
</TABLE>
See accompanying notes.
<PAGE>
DEVARGAS CENTER JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. NATURE OF JOINT VENTURE AND TERMS OF THE JOINT VENTURE AGREEMENT
----------------------------------------------------------------
DeVargas Center Joint Venture (the "Joint Venture") was organized April
18, 1988 by PaineWebber Equity Partners Three Limited Partnership ("PWEP"), a
Virginia limited partnership, and WRI/DeVargas, Inc., a Texas corporation.
Effective April 4, 1989, WRI/DeVargas, Inc., assigned its interest in the Joint
Venture to Weingarten Realty Investors ("WRI") (collectively, the "Venturers").
The business purpose of the Joint Venture includes, but is not limited to,
owning, refurbishing, operating, managing and leasing a shopping center located
in Santa Fe, New Mexico (the "Center"). The major tenants include a grocery
store, a movie theater, a clothing store and a cafeteria. The ownership
interests of WRI and PWEP in the Joint Venture total 23.32% and 76.68%,
respectively.
For financial reporting and federal income tax purposes, net income is
generally allocated to the Venturers in amounts equal to distributable funds (as
defined in the Joint Venture Agreement) received by each Venturer during the
period. In the event that net income exceeds such distributions, the remainder
will be allocated equally between the Venturers. Net losses are generally
allocated to the Venturers based on the ratio of each Venturer's positive
capital account balance to total Venturers' capital. Any excess of the net loss
over total Venturers' capital will be allocated equally between the Venturers.
With respect to any property contributed to the capital of the Joint
Venture, any income, gain, loss or deduction shall, for tax purposes, be
allocated between the Venturers so as to consider any variation between the
adjusted basis of such property of the Joint Venture, for federal income tax
purposes, and its initially agreed-upon contributed value.
Distributable funds, determined quarterly, are distributed according to
the following priority:
a) The repayment of any accrued interest and principal on loans.
b) A cumulative return of 8% annual simple interest on PWEP's capital
contribution of $10,800.00.
c) A cumulative return of 8% annual simple interest on WRI's capital
contribution of $3,285,000.
d) The division of remaining distributable funds: 50% to PWEP and 50% to WRI.
The contribution amounts used in the above formulas are subject to
adjustment in the event of sale, refinancing or other disposition of all or part
of the Center.
Weingarten Realty Management Company, a wholly owned subsidiary of WRI, is
the manager of the Center. The Joint Venture pays a management fee equal to 4%
of gross income and a leasing fee generally equal to 4% of net minimum rental,
less certain exclusions defined in the Joint Venture Agreement. The manager also
receives fees for performing certain other operating and administrative
functions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Property
--------
Property is carried at cost. Depreciation is computed using the
straight-line method of accounting based on estimated useful lives of 5 to 40
years. Repairs and maintenance are charged to expense as incurred.
Unamortized Lease and Loan Costs
--------------------------------
Unamortized lease and loan costs are amortized primarily on a
straight-line basis of the lives of leases and the term of the debt,
respectively.
Rental Revenue
--------------
Rental revenue is generally recognized on a straight-line basis over the
life of the lease. Contingent rentals (payments for taxes, insurance and
maintenance by the lessees and for an amount based on a percentage of the
tenants' sales) are estimated and accrued over the lease year.
<PAGE>
Income Taxes
------------
Income taxes are not provided because each Venturer reports its pro rata
share of taxable income or loss in its tax return.
Use of Estimates
----------------
The preparation of financial statements requires management to make use of
estimates and assumptions that affect the amounts reported in the financial
statements as well as certain disclosures. Actual results could differ from
these estimates.
Concentration of Credit Risk
----------------------------
The Center contains various types of retailers located solely in Santa Fe,
New Mexico. The Center's credit risk is dependent primarily on the strength of
economy in and around Santa Fe, New Mexico.
3. RENTALS UNDER OPERATING LEASES
------------------------------
Minimum future rental income on noncancellable operating leases as of
December 31, 1997 is $1,664,128 in 1998; $1,468,833 in 1999; $1,393,089 in 2000;
$1,361,220 in 2001; $1,215,021 in 2002; and $7,473,503 thereafter. The future
minimum lease payments do not include estimates for contingent rentals. Such
contingent rentals aggregated $848,134 in 1997, $752,752 in 1996 and $909,922 in
1995.
4. DISTRIBUTIONS TO VENTURERS
--------------------------
As described in Note 1, the Joint Venture Agreement provides for the
preferential distribution of distributable funds to PWEP, which is cumulative
from year to year. Required distributions to WRI, after satisfaction of PWEP's
preference, are also cumulative. In accordance with the agreement, the Joint
Venture distributed $216,000 in January 1998 for amounts distributable at
December 31, 1997. To partially satisfy the preference requirement, PWEP
received the entire $216,000 payment resulting in a preferential distribution in
arrears of $426,624 to WRI as of December 31, 1997.
5. NOTES PAYABLE - AFFILIATE
-------------------------
At year-end, notes payable to WRI were as follows (in thousands):
1997 1996
---- ----
Promissory note, bearing interest
at the greater of prime rate plus 1
1/2% or 10% (10% at December 31,
1996), due June 1997 and
collateralized by property $ - $ 3,887
Promissory note, bearing interest
at prime rate plus 1% (9 1/4% at
December 31, 1996), due November
2002 and collateralized by property - 327
Promissory note, bearing interest
at prime with a floor of 9% (9% at
December 31, 1997), due June 1998
and collateralized by property 4,610 -
------ --------
Total $4,610 $ 4,214
====== ========
On June 1, 1997, the Joint Venture was issued a $5.0 million consolidated,
amended and restated promissory note (the "New Note") due June 1, 1998. The
balance of the New Note at issuance was $4,603,941. The New Note is a
combination of the promissory notes shown above with due dates in June 1997 and
November 2002. The principal balance of the New Note is payable at maturity, and
accrued interest is due and payable on a monthly basis. The New Note bears
interest at prime with a floor of nine percent, is collateralized by property of
the Joint Venture and allows the Joint Venture to fund capital costs associated
with leasing and operating the Center.
<PAGE>
6. CHANGES IN OPERATING ACCOUNTS
-----------------------------
The effect of changes in the operating accounts on cash flows from
operating activities is a follows (in thousands):
1997 1996 1995
---- ---- ----
Decrease (increase) in:
Accounts receivable $ 64 $ (36) $ 34
Accrued rent receivables (34) (44) (2)
Other assets (147) (150) (15)
Increase (decrease) in:
Accounts payable and accrued
expense 150 136 (12)
Other liabilities - primarily
rentals collected in advance 4 12 39
------ ------ ------
Net effect of changes in
operating accounts $ 37 $ (82) $ 44
====== ====== ======
Cash payments of interest totalled $425,227, $329,114 and $291,605 in
1997, 1996 and 1995, respectively.
7. SUBSEQUENT EVENT
----------------
On May 26, 1998, the First Renewal and Extension of Note and Mortgage was
executed. This amendment modified the New Note described in Note 5 as follows:
The maximum balance available for borrowing was increased from $5 million
to $6.5 million; The maturity date was extended to June 1, 1999; and The
interest rate was modified to the lesser of Chase Bank of Texas, N.A.'s
prime rate or nine percent.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Partners
Richmond Paragon Partnership
(A General Partnership)
We have audited the accompanying balance sheets of Richmond Paragon
Partnership (A General Partnership) as of December 31, 1997 and 1996, and the
related statements of operations, partners' capital, and cash flows for each of
the three years in the period ended December 31, 1997. 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 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Richmond Paragon Partnership
(A General Partnership) at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
February 13, 1998
<PAGE>
Richmond Paragon Partnership
(A General Partnership)
Balance Sheets
December 31
--------------------------
1997 1996
---- ----
Assets
Current assets:
Cash $ 29,458 $ 138,563
Escrowed cash 576,360 690,197
Receivable from tenants 30,997 15,062
Prepaid expenses 7,351 7,817
----------- -----------
Total current assets 644,166 851,639
Operating investment property, at cost:
Land - 2,711,879
Building and improvements - 16,234,883
Furniture, fixtures and equipment - 2,850,235
----------- -----------
- 21,796,997
Less accumulated depreciation - (7,445,613)
Net operating investment property - 14,351,384
Property held for sale 13,759,358 -
Deferred rents receivable 101,379 127,297
Other assets 444,107 370,594
----------- -----------
Total assets $14,949,010 $15,700,914
=========== ===========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable and accrued interest $ 67,460 $ 58,344
Tenants' security deposits 24,058 22,839
Deferred rental income 25,824 29,363
Current portion of mortgage notes
payable 134,351 124,055
----------- -----------
Total current liabilities 251,693 234,601
Mortgage notes payable 8,377,046 8,511,397
----------- -----------
Total liabilities 8,628,739 8,745,998
Partners' capital 6,320,271 6,954,916
----------- -----------
Total liabilities and partners'
capital $14,949,010 $15,700,914
=========== ===========
See accompanying notes.
<PAGE>
Richmond Paragon Partnership
(A General Partnership)
Statements of Operations
Year ended December 31
1997 1996 1995
---- ---- ----
Revenues:
Rental $2,132,349 $1,979,848 $1,797,985
Other 40,274 22,464 500,000
---------- ---------- ----------
2,172,623 2,002,312 2,297,985
Expenses:
Depreciation and amortization 933,316 934,033 1,038,457
Interest expense 685,526 696,269 90,999
Repairs and maintenance 309,915 277,256 248,359
Utilities 244,542 239,372 239,518
Real estate taxes 107,641 112,128 113,538
Management fees 85,963 84,931 92,866
General and administrative 96,955 75,998 102,151
Salaries and related costs 39,529 56,604 65,394
Insurance 19,080 20,191 19,660
---------- ---------- ----------
2,522,467 2,496,782 2,010,942
---------- ---------- ----------
Net income (loss) $ (349,844) $ (494,470) $ 287,043
========== ========== ==========
See accompanying notes.
<PAGE>
Richmond Paragon Partnership
(A General Partnership)
Statements of Partners' Capital
Richmond One Paine Webber
Paragon Equity
Place Partners
Associates Three Total
Limited Limited Partners'
Partnership Partnership Capital
----------- ----------- -------
Balance at December 31, 1994 $ 99,611 $16,256,413 $16,356,024
Net income (loss) 12,172 274,871 287,043
Contributions - 185,982 185,982
Distributions - (1,276,810) (1,276,810)
Net proceeds from financing transactions - (8,059,405) (8,059,405)
Interest payment made b PWEP3 - 2,935 2,935
---------- ----------- -----------
Balance at December 31, 1995 111,783 7,383,986 7,495,769
Net income (loss) 98,295 (592,765) (494,470)
Distributions - (46,383) (46,383)
---------- ----------- -----------
Balance at December 31, 1996 210,078 6,744,838 6,954,916
Net income (loss) 74,668 (424,512) (349,844)
Distributions - (284,801) (284,801)
---------- ----------- -----------
Balance at December 31, 1997 $ 284,746 $ 6,035,525 $ 6,320,271
========== =========== ===========
See accompanying notes.
<PAGE>
<TABLE>
Richmond Paragon Partnership
(A General Partnership)
Statements of Cash Flows
Year ended December 31
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income (loss) $(349,844) $(494,470) $ 287,043
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 933,316 934,033 1,038,457
Interest funded by PWEP3 - - 2,935
Changes in operating assets and liabilities:
Escrowed cash 113,837 (184,174) (27,070)
Receivable from tenants (15,935) (10,270) 8,102
Prepaid expenses 466 (290) (175)
Deferred rents receivable 25,918 135,041 43,565
Other assets (187,082) (39,600) (57,646)
Accounts payable and accrued interest 9,116 (33,754) 53,853
Tenants' security deposits 1,219 (1,869) 4,173
Deferred rental income (3,539) 29,363 -
--------- --------- -----------
Net cash provided by operating activities 527,472 334,010 1,353,237
--------- --------- -----------
Investing activity
Additions to operating investment property (227,721) (123,590) (191,824)
--------- --------- -----------
Net cash used in investing activity (227,721) (123,590) (191,824)
--------- --------- -----------
Financing activities
Principal payments on mortgage notes
payable (124,055) (114,548) -
Contributions by partner - - 185,982
Distributions to partner (284,801) (46,383) (1,338,214)
--------- --------- -----------
Net cash used in financing activities (408,856) (160,931) (1,152,232)
--------- --------- -----------
Net (decrease) increase in cash (109,105) 49,489 9,181
Cash at beginning of year 138,563 89,074 79,893
--------- --------- -----------
Cash at end of year $ 29,458 $ 138,563 $ 89,074
========= ========= ===========
</TABLE>
See accompanying notes.
<PAGE>
RICHMOND PARAGON PARTNERSHIP
Notes to Financial Statements
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
- ------------
Richmond Paragon Partnership (the Partnership) is a general partnership formed
on September 1, 1988, in accordance with the laws of the Commonwealth of
Virginia by Richmond One Paragon Place Associates Limited Partnership (Paragon)
and Paine Webber Equity Partners Three Limited Partnership (PWEP3) for the
purpose of acquiring and operating an office building (the operating investment
property) located in Richmond, Virginia. The operating investment property was
purchased on September 26, 1988. The operating investment property was sold in
January 1998 (see Note 3).
Partnership Allocations
- -----------------------
Pursuant to the partnership agreement, net income or loss will be allocated in
the following manner:
a. All deductions for depreciation shall be allocated to PWEP3.
b. Profits up to the amount of net cash flow distributable shall be allocated in
proportion to the amount of net cash flow distributed to each of the partners
during the year. Losses shall be allocated to the partners with positive
capital accounts (after taking into account the distributions of net cash
flow) in proportion to such positive capital accounts.
c. All other profits and losses shall be allocated 75% to PWEP3 and 25% to
Paragon.
The partnership 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. As of December 31, 1997 and 1996, there were
cumulative unpaid preferred distributions of $6,146,969 and $4,631,771,
respectively, none of which were accrued at December 31, 1997 or 1996. The
unaccrued portion of the cumulative preferred distribution will be paid to PWEP3
from available future cash flows. Any remaining net cash flow is to be
distributed first to the partners at a return equal to the prime rate of
interest plus 1% on any additional capital contributions made to fund current
cash needs of the Partnership, and then is to be distributed 75% to PWEP3 and
25% to Paragon.
Other allocations and distributions are as specified in the partnership
agreement.
Revenue Recognition
- -------------------
Rental revenue is recognized on a straight-line basis over the terms of the
related lease agreements. Deferred rents receivable represents the cumulative
difference between the revenue recorded on the straight-line method and payments
made in accordance with the lease agreements.
Operating Investment Property
- -----------------------------
The operating investment property is recorded at cost. Depreciation is computed
using the straight-line method over estimated useful lives ranging from 31.5
years for buildings to 3 to 10 years for other property. Minor repairs and
maintenance expenses are charged to operations when incurred, while major
renewals and betterments are capitalized (see Note 3).
Income Taxes
- ------------
The Partnership is not a taxable entity. The results of its operations are
reported on the tax returns of the individual partners and, accordingly, no
income taxes are reflected in the accompanying financial statements. Differences
in net income for financial reporting purposes and taxable income to be reported
by the partners arise principally from the useful lives and methods used to
depreciate operating investment property.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE>
2. Reserve for Capital Expenditures
--------------------------------
The partnership agreement provides that a reserve for future capital
expenditures be established and administered by an affiliate of Paragon,
Insignia Paragon Commercial Group (the Manager). The Partnership is to pay
periodically into the capital reserve an amount equal to 1% of gross rents (as
defined) as funds are available after paying all expenses and PWEP3's preferred
distribution during the guaranty period. As of December 31, 1997, no amounts
were required to be paid into the capital reserve.
3. Sale of the Operating Investment Property
-----------------------------------------
In December 1997, the Partnership entered into an agreement with an unrelated
party to sell the assets of the operating investment property for an aggregate
sales price of $16,500,000. Accordingly, the operating investment property was
designated as property held for sale on the accompanying December 31, 1997
balance sheet. The sale was consummated in January 1998.
4. Escrowed Cash
-------------
Escrowed cash consists of restricted cash in an escrow fund established under
the mortgage note payable as additional security for the loan, to provide for
the payment of tenant improvements and leasing commissions, tenant security
deposits, and amounts to fund the payment of real estate taxes.
5. Other Assets
------------
Other assets consist of deferred financing costs associated with the mortgage
note payable discussed in Note 6, which are being amortized on the straight-line
basis, which approximates the interest method, over the term of the mortgage
notes, and leasing commissions which are being amortized on a straight-line
basis over the terms of the respective leases (ranging from one to seven years).
Accumulated amortization at December 31, 1997 and 1996 amounted to $498,509 and
$384,940, respectively.
6. Mortgage Notes Payable
----------------------
In 1995, the Partnership obtained $8,750,000 in mortgage notes payable which
bear interest at 8% per annum. Principal and interest payments of $67,534 are
due monthly through December 10, 2002 at which time the entire unpaid balance of
principal and interest is due. PWEP3 has indemnified the Partnership and Paragon
against all losses, damages, liabilities, costs, fees, and expenses associated
with this borrowing.
Net proceeds of $8,059,405 from the mortgage notes payable were remitted
directly to PWEP3 in 1995.
The Partnership paid approximately $686,000, $698,000 and $47,000 in interest
expense during 1997, 1996, 1995,
respectively.
The mortgage notes payable are secured by a deed of trust on the operating
investment property and a collateral assignment of the Partnership's interest in
the leases.
As of December 31, 1997, maturities of the mortgage notes payable for the next
five years are approximately as follows:
1998 $ 134,351
1999 145,501
2000 157,580
2001 170,658
2002 7,903,307
----------
$8,511,397
==========
<PAGE>
7. Rental Revenue
--------------
The Partnership derives rental income from leasing space in the operating
investment property. All of the Partnership's leasing agreements are operating
leases with initial terms from one to seven years. As of December 31, 1997,
minimum future rentals on the noncancellable leases are approximately as
follows:
1998 $1,669,294
1999 1,289,997
2000 874,081
2001 656,962
2002 302,470
----------
$4,792,804
==========
Three tenant leases account for approximately 55% of the Partnership's minimum
future rentals at December 31, 1997. Future rents receivable from these tenants
totaled approximately $2,643,000 at December 31, 1997. Because such a large
portion of the property is leased to three tenants, the Partnership has a
concentration of credit risk. However, management believes that any possible
accounting loss resulting from the concentration would not be material as the
space could be re-leased if the current tenants failed to perform under their
obligations.
8. Related Party Transactions
--------------------------
The Partnership has entered into a property management agreement with the
Manager, cancelable at PWEP3's option upon the occurrence of certain events. The
management fee is equal to 4% of gross rents (as defined) and amounted to
$85,963, $84,931 and $92,866 in 1997, 1996 and 1995, respectively. Expenditures
of the Partnership are paid by the Manager and reimbursed by the Partnership.
The Partnership pays leasing commissions to a related company which provides
services for tenant enrollment. Leasing commissions incurred under this
agreement and included in other assets amounted to $121,779, $39,600 and $39,
639 in 1997, 1996 and 1995, respectively (see Note 4).
During 1988, as allowed under a provision of the Partnership Agreement, PWEP3
borrowed funds which were secured by a deed of trust and the assignment of
leases on the operating investment property of the Partnership. The borrowing
accrued interest at 10.72% annually, with the accrued interest being added to
the principal balance. In November 1995, this borrowing was repaid in full
through an $8,750,000 loan made directly to the Partnership (Note 5).
9. Noncash Financing Transaction
-----------------------------
The Partnership's noncash activities during 1995 are as follows:
Mortgage notes payable:
Amount remitted to PWEP3 $8,750,000
Financing costs paid by PWEP3 (690,595)
Interest paid by PWEP3 (2,935)
----------
Reduction in PWEP3 partners' capital $8,056,470
==========
There were no noncash activities during 1997 and 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the year ended March 31, 1998
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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,746
<SECURITIES> 0
<RECEIVABLES> 97
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,850
<PP&E> 23,208
<DEPRECIATION> 4,061
<TOTAL-ASSETS> 25,101
<CURRENT-LIABILITIES> 266
<BONDS> 13,432
0
0
<COMMON> 0
<OTHER-SE> 11,403
<TOTAL-LIABILITY-AND-EQUITY> 25,101
<SALES> 0
<TOTAL-REVENUES> 4,978
<CGS> 0
<TOTAL-COSTS> 1,512
<OTHER-EXPENSES> 555
<LOSS-PROVISION> 1,204
<INTEREST-EXPENSE> 1,793
<INCOME-PRETAX> (86)
<INCOME-TAX> 0
<INCOME-CONTINUING> (86)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
