UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 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
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 04-2985890
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties, at cost:
Land $ 3,281 $ 3,769
Building and improvements 8,241 12,926
--------- ---------
11,522 16,695
Less accumulated depreciation (2,610) (4,061)
--------- ---------
8,912 12,634
Investments in unconsolidated ventures, at equity 6,204 6,513
Cash and cash equivalents 6,223 5,746
Accrued interest and other receivables 78 97
Prepaid expenses - 7
Deferred expenses, net 8 104
--------- ---------
$ 21,425 $ 25,101
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and deferred interest,
including amounts in default $ 10,685 $ 13,432
Accounts payable and accrued expenses 41 140
Tenant security deposits 10 10
Accrued real estate taxes 42 13
Advances from consolidated ventures 167 103
Partners' capital 10,480 11,403
--------- ---------
$ 21,425 $ 25,101
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental income and expense
reimbursements $ 565 $ 545 $ 1,107 $ 1,137
Interest and other income 117 73 202 141
------ ------ ------- -------
682 618 1,309 1,278
Expenses:
Interest expense 526 420 975 818
Property operating expenses 225 123 335 231
Real estate taxes 57 37 97 77
General and administrative 80 75 134 122
Depreciation and
amortization 228 128 348 255
------ ------ ------- -------
1,116 783 1,889 1,503
------ ------ ------- -------
Operating loss (434) (165) (580) (225)
Gain on sale of operating
investment property 3,469 - 3,469 -
Partnership's share of
unconsolidated ventures'
income (losses) 75 (62) 125 (53)
------ ------ ------- -------
Net income (loss) $3,110 $ (227) $ 3,014 $ (278)
====== ====== ======= =======
Net income (loss) per Limited
Partnership Unit $60.97 $(4.45) $ 59.09 $ (5.45)
====== ====== ======= =======
Cash distributions per
Limited Partnership Unit $71.68 $ 6.25 $ 77.93 $ 12.50
====== ====== ====== =======
The above per Limited Partnership Unit information is based upon the
50,468 Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (234) $ 21,073
Cash distributions (6) (631)
Net loss (3) (275)
------ --------
Balance at September 30, 1997 $ (243) $ 20,167
====== ========
Balance at March 31, 1998 $ (248) $ 11,651
Cash distributions (5) (3,932)
Net income 32 2,982
------ --------
Balance at September 30, 1998 $ (221) $ 10,701
====== ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and sixmonths ended September 30, 1998 and 1997 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 3,014 $ (278)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Partnership's share of unconsolidated
ventures' income (losses) (125) 53
Gain on sale of operating investment
property (3,469) -
Depreciation and amortization 348 255
Amortization of deferred loan costs - 5
Interest expense on zero coupon loan 745 645
Changes in assets and liabilities:
Accrued interest and other receivables 19 (45)
Prepaid expenses 7 (13)
Deferred expenses (2) (6)
Accounts payable and accrued expenses (99) (21)
Accrued real estate taxes 29 23
Tenant security deposits - 6
Advances from consolidated ventures 64 (26)
------- --------
Total adjustments (2,483) 876
------- --------
Net cash provided by operating activities 531 598
------- --------
Cash flows from investing activities:
Net proceeds from sale of operating
investment property 6,957 -
Distributions from unconsolidated joint
ventures 434 534
Additions to operating investment properties (16) (2)
Receipt of master lease payment - 140
------- --------
Net cash provided by investment 7,375 672
------- --------
Cash flows from financing activities:
Cash distributions to partners (3,937) (637)
Payments of principal on notes payable (3,492) (21)
------- --------
Net cash used in financing activities (7,429) (658)
------- --------
Net increase in cash and cash equivalents 477 612
Cash and cash equivalents, beginning of period 5,746 4,615
------- --------
Cash and cash equivalents, end of period $ 6,223 $ 5,227
======= ========
Cash paid during the period for interest $ 230 $ 173
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes, and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended March 31, 1998. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature. The results of operations
for the six months ended September 30, 1997 have been revised from what was
previously reported due to the retroactive reflection of an adjustment recorded
in the fourth quarter of fiscal 1998.
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 September 30, 1998 and March 31, 1998 and revenues and
expenses for each of the three-and six- month periods ended September 30, 1998
and 1997. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Included in general and administrative expenses for both of the six-month
periods ended September 30, 1998 and 1997 is $47,000, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the six-month
periods ended September 30, 1998 and 1997 is $4,000 and $9,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
As of September 30, 1998, the Partnership had an investments in one
unconsolidated joint venture partnership (two at September 30, 1997) which owns
an operating property as more fully described in the Partnership's Annual
Report. The unconsolidated joint venture is accounted for by using the equity
method because the Partnership does not have a voting control interest in this
venture. Under the equity method, the assets, liabilities, revenues and expenses
of the joint ventures do not appear in the Partnership's financial statements.
Instead, the investment is carried at cost adjusted for the Partnership's share
of the venture's earnings, losses and distributions. The Partnership reports its
share of unconsolidated joint venture earnings or losses three months in
arrears. On January 30, 1998, the Richmond Paragon Partnership, which owned the
One Paragon Place Office Building, sold its operating investment property to an
unrelated third party for $16,500,000. 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 the One
Paragon Place Office Building, a Special Distribution of $160 per original
$1,000 investment was made on February 13, 1998 to Limited Partners of record as
of January 30, 1998.
Summarized operations of the remaining unconsolidated joint venture,
DeVargas Center Joint Venture, for the three and six months ended June 30, 1998
and for DeVargas Center Joint Venture and Richmond Paragon Partnership for the
three and six months ended June 30, 1997, are as follows:
<PAGE>
Condensed Combined Summary of Operations
For the three and six months ended June 30, 1998 and 1997
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 643 $ 1,130 $1,275 $2,339
Interest and other income 1 11 1 26
------- ------- ------ ------
644 1,141 1,276 2,365
Expenses:
Property operating expenses 231 424 447 878
Real estate taxes 10 35 19 72
Interest expense 104 282 206 560
Depreciation and amortization 202 439 404 877
------- ------- ------ ------
547 1,180 1,076 2,387
------- ------- ------ ------
Net income (loss) $ 97 $ (39) $ 200 $ (22)
======= ======= ====== ======
Net income (loss):
Partnership's share of
combined income (loss) $ 78 $ (57) $ 132 $ (43)
Co-venturers' share of
combined income (loss) 19 18 68 21
------- ------- ------ ------
$ 97 $ (39) $ 200 $ (22)
======= ======= ====== ======
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1998 and 1997 (in
thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Partnership's share of
operations, as shown
above $ 78 $ (57) $ 132 $ (43)
Amortization of excess
basis (3) (5) (7) (10)
------- -------- ------ -------
Partnership's share of
unconsolidated ventures'
income (losses) $ 75 $ (62) $ 125 $ (53)
======= ======= ====== =======
<PAGE>
4. Operating Investment Properties
-------------------------------
As of September 30, 1998, the Partnership has an investment in one
consolidated joint venture partnership (two at March 31, 1998) which owns an
operating investment property as more fully described in the Partnership's
Annual Report. The consolidated venture has a December 31 year-end for both tax
and financial reporting purposes. Accordingly, the Partnership's policy is to
report the financial position, results of operations and cash flows of this
venture on a three-month lag. All material transactions between the Partnership
and this joint venture have been eliminated upon consolidation, except for
lag-period cash transfers. Such lag period cash transfers are accounted for as
advances from consolidated ventures on the accompanying balance sheets.
As discussed in the Partnership's Annual Report, the Partnership owns a
controlling interest in the Colony Plaza General Partnership, which was formed
to acquire and operate the Colony Plaza Shopping Center located in Augusta,
Georgia. The shopping center, which consists of approximately 217,000 square
feet of leasable retail space, was acquired by the joint venture on January 18,
1990. See Note 5 for a discussion of the current default status of the first
mortgage loan secured by the Colony Plaza property.
On January 27, 1995, the Partnership purchased 99% of its co-venture
partner's interest in Portland Pacific Associates Two for $233,000. The
remaining 1% interest of the co-venturer was assigned to Third Equity Partners,
Inc., the Managing General Partner of the Partnership, in return for a release
from any further obligations or duties called for under the terms of the joint
venture agreement. As a result, the Partnership assumed control over the affairs
of the joint venture. Portland Pacific Associates Two owned the Willow Grove
Apartments, a 119-unit complex located in Beaverton, Oregon.
On August 13, 1998, Portland Pacific Associates Two, sold the property
known as the Willow Grove Apartments to an unrelated third party for $7,137,000.
The Partnership received net proceeds of approximately $3,406,000 in connection
with the sale after the assumption of the outstanding mortgage loan secured by
the property of approximately $3,468,000, closing costs of $180,000 and closing
proration adjustments of $83,000. As a result of the sale of the Willow Grove
Apartments, a Special Distribution of $68 per original $1,000 investment was
made on August 25, 1998 to the Limited Partners of record as of August 13, 1998.
In accordance with the Partnership's policy to recognize significant lag period
transactions in the period in which they occur, the Partnership accelerated the
recognition of the operating results of Portland Pacific Associates Two during
the quarter ended September 30, 1998 and recorded a gain of $3,469,000 on the
sale of the Willow Grove operating investment property.
The following combined summary of property operating expenses for the
three and six months ended June 30, 1998 (in thousands) includes the expenses of
the Colony Plaza Shopping Center through June 30, 1998 and the expenses of the
Willow Grove Apartments through the date of the sale on August 13, 1998. The
combined property operating expenses for the three and six months ended June 30,
1997 include expenses for the two consolidated joint ventures.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Common area maintenance $ 49 $ 23 $ 74 $ 53
Utilities 30 22 51 43
Management fees 26 23 48 45
Administrative and other 120 55 162 90
------- ------ ------ ------
$ 225 $ 123 $ 335 $ 231
======= ====== ====== ======
<PAGE>
5. Notes payable
-------------
Notes payable and deferred interest at September 30, 1998 and March 31,
1998 consist of the following (in thousands):
September 30 March 31
------------ --------
10.5% nonrecourse loan payable by
the Partnership to a finance
company, which is secured by the
Colony Plaza operating investment
property. All interest and
principal was due at maturity, on
December 29, 1996. Interest is
compounded semi-annually. It is not
practicable for management to
estimate the fair value of this
mortgage note payable due to its
current default status (see
discussion below). $ 10,685 $ 9,940
9.59% nonrecourse loan payable by
the consolidated Portland Pacific
Associates Two to a finance company
which is secured by the Willow
Grove operating investment
property. The note requires monthly
principal and interest payments of
$32 from April 1995 through
maturity in March 2002. The fair
value of the mortgage note
approximated its carrying value at
December 31, 1997. As discussed
further in Note 4, the Willow Grove
property was sold on August 13,
1998, and the mortgage loan was
assumed by the buyer. - 3,492
-------- -------
$ 10,685 $13,432
======== =======
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. 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, 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
original 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.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
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 in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended March 31, 1998 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
- -------------------------------
As discussed further in the Annual Report, as a result of the sale of the
One Paragon Place Office Building on January 30, 1998, a Special Distribution of
$160 per original $1,000 investment was made on February 13, 1998 to 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 decreased because of a reduction in cash
flow to the Partnership. The annualized earnings rate changed from 2.5% to 1.75%
beginning with the payment made on August 14, 1998 for the quarter ended 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 remaining properties in the
Partnership's portfolio. As a result, management has been 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 by the end of
calendar year 1999. As discussed further below, marketing efforts for the sale
of the Willow Grove Apartments commenced during the quarter ended June 30, 1998,
and the sale of the property closed during the quarter ended September 30, 1998.
With regard to the two remaining retail properties, management is currently
working with each property's leasing and management team to develop and
implement programs that will protect and enhance value and maximize cash flow at
each property. 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.
On August 13, 1998, Portland Pacific Associates Two sold the Willow Grove
Apartments, located in Beaverton, Oregon, to an unrelated third party for
$7,137,000. 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
were prepared, and an extensive marketing campaign began in May 1998. As a
result of those efforts, ten offers to purchase Willow Grove were received. The
prospective purchasers were then requested to submit best and final offers. Four
of the prospective buyers submitted best and final offers. After completing an
evaluation of these offers and the relative strength of the prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
negotiated with an unrelated third-party prospective buyer and signed on July 3,
1998. After the prospective buyer completed its due diligence work, the sale
transaction was completed on August 13, 1998. The Partnership received net
proceeds of approximately $3,406,000 in connection with the sale after the
assumption of the outstanding mortgage loan secured by the property of
approximately $3,468,000, closing costs of approximately $180,000 and closing
proration adjustments of approximately $83,000. As a result of the sale of the
Willow Grove Apartments, a Special Distribution of $68 per original $1,000
investment was made on August 25, 1998 to the Limited Partners of record as of
August 13, 1998. This Special Capital Distribution represents the net proceeds
from the sale of Willow Grove as rounded up to the nearest dollar per original
$1,000 investment.
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 September 30, 1998, the Colony Plaza
Shopping Center in Augusta, Georgia was 90% leased and 52% occupied. 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. 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. 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, subsequently entered into a sublease agreement with Food Max
to open Food Lion stores in several former Food Max locations, including Colony
Plaza. During the quarter ended June 30, 1998, 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. The
increase in occupancy from the opening of the Food Lion store was partially
offset when two tenants with a total of 4,200 square feet closed their stores
and one tenant leasing 1,600 square feet moved from the Center when its lease
expired during the first quarter. Notwithstanding these store closings, the
property's leasing team is confident 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 spaces will improve. During
the quarter ended September 30, 1998, one tenant representing 3,000 square feet
renewed its lease. Currently, the property's leasing team is in discussions with
a prospective tenant interested in leasing approximately 6,000 square feet, and
negotiations are continuing with the U.S. Postal Service for 26,000 square feet.
Over the next year, five leases representing a total of 44,800 square feet will
expire. The largest of the five, Goody's, has a May 1999 lease expiration and
represents 35,200 square feet of this total. During the quarter ended September
30, 1998, management became aware that Goody's has committed to move its store
to a new location in the Augusta market. The property's leasing team is
discussing lease renewals with the other four tenants and has begun to look for
replacement tenants for the Goody's space.
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 original 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 90% leased as of September 30, 1998, unchanged from
the end of the prior quarter. Four tenants occupying a total of 8,248 square
feet renewed their leases during the quarter ended September 30, 1998. In
addition, two tenants occupying 4,132 square feet moved from the Mall and the
space was leased to two new tenants. Subsequent to the quarter end, one tenant
representing 477 square feet renewed its lease and one tenant signed a new lease
for 1,395 square feet. The property's leasing team had been negotiating with two
prospective tenants for the 27,023 square feet formerly occupied by a soft goods
anchor tenant that closed its store in July 1997. During the first quarter, a
lease was signed with one of these prospective tenants, Office Depot, which will
occupy 29,615 square feet. To provide for the larger Office Depot store size
requirements, one tenant formerly occupying 15,000 square feet downsized its
operations by approximately 10,000 square feet and relocated to another area
within the Mall. The Office Depot space is currently under construction and is
expected to be ready for occupancy by the end of the calendar year. During the
next 12 months, eight leases representing a total of approximately 21,000 square
feet, or approximately 8.5% of the Mall's total rentable area, come up for
renewal. The property's leasing team expects most of these tenants to renew
their leases. 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 which is expected to open
in the fall of 1999. 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 planned grocery tenant relocation will result in a
unified center because the Montgomery Ward and DeVargas properties have
cross-easements, and it is also expected to have a positive impact on the
long-term value of the DeVargas Mall because the changes should result in
additional destination shopper traffic to the Mall, add an additional retailer
to the current tenant mix once the grocery tenant's space is re-leased, and
allow for the future re-leasing of retail spaces at higher rents than the rates
paid by former tenants. The property's leasing team will work with the grocery
tenant to secure a new tenant to occupy its space when they close their store in
the fall of 1999. 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. At the
beginning of fiscal 1998, 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. 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. 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.
At September 30, 1998, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $6,223,000. 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
one to two 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
Three Months Ended September 30, 1998
- -------------------------------------
As noted above, the consolidated Willow Grove operating investment
property was sold on August 13, 1998. In accordance with the Partnership's
policy to recognize significant lag period transactions in the period in which
they occur, the Partnership accelerated the recognition of the operating results
of Portland Pacific Associates Two during the quarter ended September 30, 1998
and recorded a gain of $3,469,000 on the sale of the Willow Grove property. The
Partnership reported net income of $3,110,000 for the three months ended
September 30, 1998, as compared to a net loss of $227,000 for the same period in
the prior year. This favorable change of $3,337,000 in the Partnership's net
operating results is primarily due to the gain from the sale of the Willow Grove
Apartments. The gain recognized on the sale of Willow Grove was partially offset
by an increase in the Partnership's operating loss of $269,000 and a favorable
change in the Partnership's share of unconsolidated ventures' operating results
of $137,000. The increase in the Partnership's operating loss was primarily the
result of a decrease in rental income and expense reimbursements from the
consolidated Colony Plaza property and an increase in interest expense related
to the Colony Plaza debt obligation, which is accruing interest at a default
rate of 15%, as discussed further above. The decrease in rental income and
expense reimbursements at Colony Plaza was primarily due to a reduction in shop
space occupancy compared to the same period in the prior year related to the
anchor tenant vacancies discussed further above. The decrease in rental income
and expense reimbursements and the increase in interest expense were partially
offset by an increase in interest income earned on the Partnership's cash
reserves. Interest income increased partly due to interest earned on the
proceeds from the sale of the Willow Grove Apartments, which were temporarily
invested pending the special distribution to the Limited Partners which was made
on August 25, 1998. In addition, the inclusion of the net loss from the
consolidated Willow Grove joint venture through August 13, 1998 increased the
Partnership's operating loss for the current three-month period.
The favorable change in the Partnership's share of unconsolidated
ventures' operating results was primarily due to the sale of the One Paragon
Place Office Building on January 30, 1998, as discussed further above. The One
Paragon Place joint venture had a net operating loss of $151,000 during the
prior three-month period. The Partnership's share of the net income from the
DeVargas joint venture declined by $35,000 for the current three-month period,
despite an overall increase in the venture's net income, due to the method of
allocating income in accordance with the joint venture agreement.
Six Months Ended September 30, 1998
- -----------------------------------
As noted above, the consolidated Willow Grove operating investment
property was sold on August 13, 1998. In accordance with the Partnership's
policy to recognize significant lag period transactions in the period in which
they occur, the Partnership accelerated the recognition of the operating results
of Portland Pacific Associates Two during the quarter ended September 30, 1998
and recorded a gain of $3,469,000 on the sale of the Willow Grove property. The
Partnership reported net income of $3,014,000 for the six months ended September
30, 1998, as compared to a net loss of $278,000 for the same period in the prior
year. This favorable change of $3,292,000 in the Partnership's net operating
results is primarily due to the gain from the sale of the Willow Grove
Apartments. The gain recognized on the sale of Willow Grove was partially offset
by an increase in the Partnership's operating loss of $355,000 and a favorable
change in the Partnership's share of unconsolidated ventures' operating results
of $178,000. The increase in the Partnership's operating loss was primarily the
result of a decrease in rental income and expense reimbursements from the
consolidated Colony Plaza property and an increase in interest expense related
to the Colony Plaza debt obligation, which is accruing interest at a default
rate of 15%, as discussed further above. The decrease in rental income and
expense reimbursements at Colony Plaza was primarily due to a reduction in shop
space occupancy compared to the same period in the prior year related to the
anchor tenant vacancies discussed further above. The decrease in rental income
and expense reimbursements and the increase in interest expense were partially
offset by an increase in interest income earned on the Partnership's cash
reserves. Interest income increased partly due to interest earned on the
proceeds from the sale of the Willow Grove Apartments, which were temporarily
invested pending the special distribution to the Limited Partners which was made
on August 25, 1998. In addition, the inclusion of the net loss from the
consolidated Willow Grove joint venture through August 13, 1998 increased the
Partnership's operating loss for the current six-month period.
The favorable change in the Partnership's share of unconsolidated
ventures' operating results was primarily due to the sale of the One Paragon
Place Office Building on January 30, 1998, as discussed further above. The One
Paragon Place joint venture had a net operating loss of $213,000 during the
prior six-month period. The Partnership's share of the net income from the
DeVargas joint venture declined by $38,000 for the current six-month period,
despite an overall increase in the venture's net income, due to the method of
allocating income in accordance with the joint venture agreement.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated August 13, 1998 was filed during the
current quarter to report the sale of the Willow Grove Apartments and is hereby
incorporated herein by reference.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
By: Third Equity Partners, Inc.
---------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: November 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 6,223
<SECURITIES> 0
<RECEIVABLES> 78
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,301
<PP&E> 17,726
<DEPRECIATION> 2,610
<TOTAL-ASSETS> 21,425
<CURRENT-LIABILITIES> 10,945
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,480
<TOTAL-LIABILITY-AND-EQUITY> 21,425
<SALES> 0
<TOTAL-REVENUES> 4,903
<CGS> 0
<TOTAL-COSTS> 914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 975
<INCOME-PRETAX> 3,014
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,014
<EPS-PRIMARY> 59.09
<EPS-DILUTED> 59.09
</TABLE>
