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, 1999
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 04-2985890
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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 Part IV
January 4, 1988, as supplemented
Current Report on Form 8-K
of Registrant dated August 13, 1998 Part IV
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
1999 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-3
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 7A Market Risk Disclosures II-7
Item 8 Financial Statements and Supplementary Data II-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
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-2
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-39
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-6 of
this Form 10-K.
PART I
Item 1. Business
PaineWebber Equity Partners Three Limited Partnership (the "Partnership")
is a limited partnership formed in May 1987 under the Uniform Limited
Partnership Act of the State of Virginia to invest in a diversified portfolio of
existing, newly-constructed or to-be-built income-producing operating properties
such as apartments, shopping centers, hotels, office buildings and industrial
buildings. The Partnership sold approximately $50,468,000 in Limited Partnership
Units, at $1,000 per Unit, from January 4, 1988 to September 1, 1989 pursuant to
a Registration Statement on Form S-11 filed under the Securities Act of 1933
(Registration No. 33-14489). Limited Partners will not be required to make any
additional capital contributions.
As of March 31, 1999, 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
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, to an unrelated
third party 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.
On August 13, 1998, Portland Pacific Associates Two, a joint venture in
the Partnership had an interest, sold the property known as the Willow Grove
Apartments, located in Beaverton, Oregon. The Willow Grove property was sold 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 approximately $168,000 and closing proration
adjustments of approximately $95,000.
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, 1999, the Limited Partners had received cumulative cash
distributions of approximately $35,854,000, or $738 per original $1,000
investment for the Partnership's earliest investors. Of the total cash
distributions to date, $510 reflects distributions from operations and $228
reflects the return of capital from the following sale transactions: $160 from
the sale of the One Paragon Place property, which was distributed to the Limited
Partners in February 1998, and $68 from the sale of the Willow Grove Apartments,
which was distributed to the Limited Partners in August 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 changed from 2.5% to
1.75% on a Limited Partner's remaining capital account. The annual distribution
rate was adjusted beginning with the payment made on August 14, 1998, for the
quarter ended 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 two out of its four original
investment properties.
As of March 31, 1999, the Partnership's portfolio of real estate
investments consists of two retail shopping centers. Management is currently
focusing on potential disposition strategies for the two remaining investments.
As discussed further in Item 7, the Partnership is currently in default of the
mortgage loan secured by the Colony Plaza Shopping Center. At the present time
it appears likely that the Partnership will have to relinquish its ownership of
the property to the mortgage holder along with the majority of the cash flow
generated by the property during the default period, in order to satisfy the
obligation to the lender. Although no assurances can be given, it is currently
contemplated that dispositions of the Partnership's remaining assets could be
completed by the end of calendar year 1999.
Both of the Partnership's remaining investment properties are located in
real estate markets in which they face significant competition for the revenues
they generate. The Partnership's shopping centers 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, 1999, the Partnership had interests in two 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.
<PAGE>
Occupancy figures for each fiscal quarter during 1999, along with an
average for the year, are presented below for each property in which the
Partnership had an interest during fiscal 1999.
Percent Occupied At
----------------------------------------------
Fiscal
1999
6/30/98 9/30/98 12/31/98 3/31/99 Average
------- ------- -------- ------- -------
DeVargas Mall 90% 90% 91% 91% 91%
Colony Plaza Shopping Center 52% 52% 52% 52% 52%
Willow Grove Apartments (1) 92% N/A N/A N/A N/A
(1) As discussed further in Item 1, the Willow Grove Apartments was sold on
August 13, 1998.
Item 3. Legal Proceedings
The Partnership is not subject to any 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, 1999, there were 3,225 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.
Reference is made to Item 6 below for a discussion made to the Limited
Partners during fiscal 1999.
Item 6. Selected Financial Data
<TABLE>
PaineWebber Equity Partners Three Limited Partnership
For the years ended March 31, 1999, 1998, 1997, 1996 and 1995
(in thousands except for per Unit data)
Years ended March 31,
------------------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 2,309 $ 2,513 $ 2,595 $ 2,478 $ 1,450
Operating loss $ (862) $ (1,996) (1) $ (110) $ (654) $(1,420)
Partnership's share
of unconsolidated
ventures' income
(losses) $ 281 $ (555) $ (361) $ 581 $ 593
Gain on sale of
operating investment
property $ 3,469 - - - -
Partnership's share
of gain on sale of
unconsolidated
operating investment
property - $ 2,465 - - -
Net income (loss) $ 2,888 $ (86) $ (471) $ (73) $ (827)
Per Limited
Partnership Unit:
Net income (loss) $ 56.63 $ (1.69) $ (9.23) $ (1.42) $(16.21)
Cash distributions
from operations $ 16.99 $ 25.00 $ 20.00 $ 20.00 $ 35.00
Cash distributions
from capital
transactions $ 68.00 $ 160.00 - - -
Notes payable and
accrued interest $11,486 $ 13,432 $12,043 $11,255 $16,707
Total assets $21,781 $ 25,101 $33,205 $33,885 $40,333
</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 income (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, 1999, the Partnership retained its
ownership interest in two out of these four properties, both of which are retail
shopping centers.
In light of the continued strength in the national real estate market and
the current liquidity in the capital markets for investment in real estate in
general, management believes that this is an 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. 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
continues to work with the property leasing and management team at DeVargas Mall
on its efforts to improve occupancy levels and enhance the market position of
this property. Despite similar efforts for the Colony Plaza Shopping Center, the
Partnership has been unable to improve the market value of this property. As a
result and as noted below, it is highly likely that the lender will pursue
foreclosure proceedings. Although there are no assurances, it is currently
contemplated that the disposition of the Partnership's remaining assets could be
completed before the end of calendar year 1999. The disposition of the two
remaining real estate investments would be followed by the liquidation of the
Partnership.
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, a 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 $168,000 and closing
proration adjustments of approximately $95,000. 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.
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 diligently pursuing a
restructuring of the first mortgage loan secured by Colony Plaza Shopping Center
and has continued to focus on completing negotiations with the lender. Such
negotiations have been complicated by the leasing status of the Colony Plaza
property. As of March 31, 1999, the Colony Plaza Shopping Center in Augusta,
Georgia was 89% leased and 52% occupied, which compares with 93% and 32%
respectively, as of the end of 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. 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, in April 1998, Food Lion opened its
store at Colony Plaza in the former Food Max premises after spending a
significant amount of its own funds for its new prototype store in this market.
While the Food Max store has been replaced by Food Lion, the Partnership has
been unable to secure major new leases for the former Wal-Mart space. In
addition, another major tenant, Goody's, had a May 31, 1999 lease expiration and
plan to vacate their 35,200 square feet of space at Colony Plaza subsequent to
year-end to relocate to a newly constructed store at another site in the market
area. Goody's new store will not be ready for occupancy until July 1999, so the
tenant has negotiated a month-to-month renewal of their lease but is expected to
vacate by July 31, 1999. As a result, the stability of the Center's future
rental income remains uncertain, which does not allow the Partnership 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. The fair market value of the property at its current leasing level is
substantially below the amount of the accrued interest and principal owed to the
mortgage lender. Consequently, on March 24, 1999, the Partnership notified the
lender that it was prepared to either transfer ownership title for Colony Plaza
Shopping Center to the lender in lieu of a foreclosure action or to assist the
lender in a sale of the property to a third party. At the present time, the
Partnership is actively negotiating a settlement agreement with the lender
whereby the Partnership would relinquish its ownership of the property to the
mortgage holder, along with the majority of the cash flow generated by the
property since the December 1996 maturity date (approximately $2 million), in
order to satisfy the obligation to the lender.
The DeVargas Mall, a 248,000 square foot retail center located in Santa
Fe, New Mexico, was 92% leased and 91% occupied as of March 31, 1999. During
fiscal 1999, the DeVargas property had an average occupancy level of 91%, as
compared to an average of 86% for the prior year. The property's leasing team is
actively negotiating with an existing tenant that occupies approximately 16,300
square feet to expand its space by a total of 7,500 square feet. In order to
accommodate this expansion, it would be necessary to relocate several tenants to
other locations within the Mall. These relocations and the increase in leasing
activity are all part of an effort to improve the quality of the tenant mix at
DeVargas Mall. As previously reported, 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 of fiscal 1999, a lease was signed with one of these
prospective tenants, Office Depot, to 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 store opened for
business in December 1998. During the next 12 months, thirteen leases
representing a total of approximately 23,195 square feet, or approximately 9.5%
of the Mall's total rentable area, come up for renewal. The property's leasing
team is working with these tenants on renewals of their leases.
As previously reported, Albertson's, a major grocery chain that currently
operates a 39,000 square foot grocery store at DeVargas Mall, acquired the
Montgomery Ward site which abuts DeVargas Mall. Albertson's planned expansion to
build their new 55,000 square foot prototypical Super Store is expected to have
a positive impact on the long-term value of DeVargas Mall. The leasing changes
noted above should increase destination shopper traffic to the Mall. Also, an
additional retailer is expected to be added to the current tenant mix once the
former Albertson's space is re-leased. The Partnership and its co-venture
partner, which must both agree regarding any major decisions, are currently
discussing the appropriate timing for the marketing and sale of the DeVargas
property.
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. In June 1997, the
Partnership and the co-venturer reached an agreement to consolidate the 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. The loan had an outstanding balance of $4,984,000 as
of December 31, 1998. On April 15, 1999, the venture executed an additional
extension of the loan. The maturity date was extended to June 1, 2000 under
identical terms.
At March 31, 1999, the Partnership and its consolidated joint venture had
available cash and cash equivalents of approximately $6,895,000. Such cash
includes the cash flow from the operations of the Colony Plaza property since
the date of the December 1996 debt maturity. As discussed further above,
approximately $2 million of this cash is expected to be transferred to the
Colony Plaza mortgage lender as part of the settlement of that debt obligation.
The remaining balance of the cash and cash equivalents will be utilized for the
working capital requirements of the Partnership, distributions to partners, 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 by the end of
calendar 1999. 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
1999 Compared to 1998
- ---------------------
The Partnership reported net income of $2,888,000 for the year ended March
31, 1999, as compared to a net loss of $86,000 for the prior year. This
favorable change of $2,974,000 in the Partnership's net operating results was
primarily due to the gain realized from the sale of the Willow Grove Apartments
in fiscal 1999. As noted above, the consolidated Willow Grove operating
investment property was sold on August 13, 1998, and the Partnership recorded a
gain of $3,469,000 on the sale, which exceeded the $2,465,000 gain on the sale
of the One Paragon Place Office Building in the prior year. In addition, the
Partnership's operating loss decreased by $1,134,000. The decrease in the
Partnership's operating loss was primarily the result of the impairment loss of
$1,204,000 recognized on the Colony Plaza operating property in fiscal 1998, as
discussed further above. In addition, interest and other income increased by
$104,000 primarily 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. The
decrease in impairment loss and the increase in interest and other income were
partially offset by an increase of $92,000 in interest expense related to the
Colony Plaza debt obligation, which is accruing interest at a default rate of
15%, compounded semi-annually. In addition, rental income and expense
reimbursements decreased by $308,000 due to the sale of the consolidated Willow
Grove Apartments on August 13, 1998.
A favorable change of $836,000 in the Partnership's share of
unconsolidated ventures' income (losses) also contributed to the Partnership's
improved net operating results for the current year. 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.
The One Paragon Place joint venture had a net operating loss of $812,000 during
fiscal 1998. In addition, the Partnership's share of unconsolidated venture's
income from the DeVargas Center increased by $24,000 primarily due to a decrease
in repairs and maintenance expense during fiscal 1999.
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 was 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. 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 fiscal 1997 also contributed to the increase in the Partnership's
operating loss in fiscal 1998. 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 during fiscal 1998. 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 fiscal 1998 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 during fiscal 1998. 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 during fiscal 1998. 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.
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. 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 Colony Plaza property, 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 this investment.
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 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 eleventh full year of operations in fiscal
1999. 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. Most 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. 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
affect the Partnership's net cash flow.
Item 7A. Market Risk Disclosures
As discussed further in the notes to the accompanying financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents and mortgage notes payable. The cash equivalents are invested
exclusively in short-term money market instruments and the long-term debt
consists exclusively of fixed rate obligations. The Partnership does not invest
in derivative financial instruments or engage in hedging transactions. In light
of these facts, and due to the Partnership's expected liquidation by the end of
calendar year 1999, management does not believe that the Partnership's financial
instruments have any material exposure to market risk factors.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Third Equity Partners,
Inc., a Delaware corporation, which is a wholly owned subsidiary of PaineWebber
Group, Inc. ("PaineWebber"). The Associate General Partners of the Partnership
are PaineWebber Partnerships, Inc., a wholly owned subsidiary of PaineWebber and
Properties Associates 1988, L.P., a Virginia limited partnership. The general
partner of Properties Associates 1988, L.P. is PAM Inc., a wholly owned
subsidiary of PaineWebber Properties Incorporated ("PWPI"). The officers of
PaineWebber Partnerships, Inc. and PAM Inc. are also officers of the Managing
General Partner. The Managing General Partner has overall authority and
responsibility for the Partnership's operations.
(a) and (b) The names and ages of the directors and principal executive officers
of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 39 8/22/96
Terrence E. Fancher Director 45 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 51 2/27/87 *
David F. Brooks First Vice President and
Assistant Treasurer 56 2/27/87 *
Thomas W. Boland Vice President and Controller 36 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.
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, 1999, 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 changed from 2.5% to 1.75% on a Limited Partner's remaining
capital account. The annual distribution rate was adjusted beginning with the
payment made on August 14, 1998, for the quarter ended 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 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% 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, 1999 is $97,000, 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 $11,000 (included in general and administrative expenses) for managing the
Partnership's cash assets for the year ended March 31, 1999. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this Report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
(3) Exhibits:
The exhibits on the accompanying index to exhibits at page
IV-3 are filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1999.
(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 28, 1999
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 28, 1999
--------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 28, 1999
--------------------------- -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
<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 pursuant
dated January 4, 1988, as to Rule 424(c) and incorporated
supplemented, with particular herein by reference.
reference to the 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 all incorporated herein by reference.
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
1999 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of Part I of his
Report Page I-1, to which eference
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>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
PaineWebber Equity Partners Three Limited Partnership:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1999 and 1998 F-4
Consolidated statements of operations for the years ended
March 31, 1999, 1998 and 1997 F-5
Consolidated statements of changes in partners' capital (deficit)
for the years ended March 31, 1999, 1998 and 1997 F-6
Consolidated statements of cash flows for the years ended
March 31, 1999, 1998 and 1997 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-22
DeVargas Center Joint Venture:
Report of independent auditors F-23
Balance sheets as of December 31, 1998 and 1997 F-24
Statements of operations for the years ended December 31, 1998,
1997 and 1996 F-25
Statements of changes in partners' capital for the years ended
December 31, 1998, 1997 and 1996 F-26
Statements of cash flows for the years ended December 31, 1998,
1997 and 1996 F-27
Notes to financial statements F-28
Richmond Paragon Partnership:
Report of independent auditors F-31
Balance sheets as of December 31, 1997 and 1996 F-32
Statements of income for the years ended December 31, 1997, 1996
and 1995 F-33
Statements of venturers' capital for the years ended December 31,
1997, 1996 and 1995 F-34
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-35
Notes to financial statements F-36
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Partners
PaineWebber Equity Partners Three Limited Partnership:
We have audited the accompanying consolidated balance sheets of PaineWebber
Equity Partners Three Limited Partnership as of March 31, 1999 and 1998, 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, 1999. 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. The
financial statements of the DeVargas Center Joint Venture (a joint venture in
which the Partnership has a 76.68% interest) 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 $5,930,000 and $6,513,000, respectively, at March 31, 1999
and March 31, 1998, and the Partnership's equity in the net income of the
DeVargas Center Joint Venture is stated at $298,000, $274,000 and $251,000,
respectively, for each of the three years in the period ended March 31, 1999.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, 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 18, 1999
<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, 1998 and 1997, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
March 5, 1999,
except for Note 7,
as to which the
date is June 1, 1999
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(In thousands, except for per Unit data)
ASSETS
1999 1998
---- ----
Operating investment properties, at cost:
Land $ 3,281 $ 3,769
Building and improvements 8,241 12,926
--------- ----------
11,522 16,695
Less accumulated depreciation (2,736) (4,061)
--------- ----------
8,786 12,634
Investment in unconsolidated joint venture, at equity 5,930 6,513
Cash and cash equivalents 6,895 5,746
Accrued interest and other receivables 159 97
Prepaid expenses 6 7
Deferred expenses (net of accumulated
amortization of $57 and $101
in 1999 and 1998, respectively) 5 104
--------- ----------
$ 21,781 $ 25,101
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable and accrued interest, including
amounts in default $ 11,486 $ 13,432
Accounts payable and accrued expenses 52 140
Tenant security deposits 10 10
Accrued real estate taxes - 13
Advances from consolidated ventures 240 103
--------- ----------
Total liabilities 11,788 13,698
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income (loss) 24 (6)
Cumulative cash distributions (252) (243)
Limited Partners ($1,000 per unit;
50,468 Units issued):
Capital contributions, net of offering costs 43,669 43,669
Cumulative net income (loss) 2,405 (453)
Cumulative cash distributions (35,854) (31,565)
--------- ----------
Total partners' capital 9,993 11,403
--------- ----------
$ 21,781 $ 25,101
========= ==========
See accompanying notes.
<PAGE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1999, 1998 and 1997
(In thousands, except for per Unit data)
1999 1998 1997
---- ---- ----
Revenues:
Rental income and expense reimbursements $1,870 $ 2,178 $2,380
Interest and other income 439 335 215
------ ------- ------
2,309 2,513 2,595
Expenses:
Loss on impairment of operating
investment property - 1,204 -
Interest expense 1,885 1,793 1,202
Depreciation expense 379 493 498
Property operating expenses 501 541 520
Real estate taxes 149 163 155
General and administrative 251 301 314
Amortization expense 6 14 16
------ ------- ------
3,171 4,509 2,705
------ ------- ------
Operating loss (862) (1,996) (110)
Gain on sale of operating investment
property 3,469 - -
Partnership's share of unconsolidated
ventures' income (losses) 281 (555) (361)
Partnership's share of gain on sale of
unconsolidated operating investment
property - 2,465 -
------ ------- ------
Net income (loss) $2,888 $ (86) $ (471)
====== ======= ======
Net income (loss) per Limited
Partnership Unit $56.63 $ (1.69) $(9.23)
====== ======= ======
Cash distributions per Limited
Partnership Unit $84.99 $185.00 $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, 1999, 1998 and 1997
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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
Cash distributions (9) (4,289) (4,298)
Net income 30 2,858 2,888
-------- -------- -------
Balance at March 31, 1999 $ (227) $10,220 $ 9,993
======== ======= =======
See accompanying notes.
<PAGE>
<TABLE>
PAINEWEBBER EQUITY PARTNERS THREE
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1999, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,888 $ (86) $ (471)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on impairment of operating investment property - 1,204 -
Depreciation and amortization 385 507 514
Amortization of deferred loan costs 96 24 34
Interest expense on zero coupon loans 1,546 1,432 827
Gain on sale of operating investment property (3,469) - -
Partnership's share of gain on sale of
operating investment property - (2,465) -
Partnership's share of unconsolidated
ventures' income (losses) (281) 555 361
Changes in assets and liabilities:
Accrued interest and other receivables (62) 4 18
Accounts receivable - affiliates - - 7
Prepaid expenses 1 - -
Deferred expenses - - 18
Accounts payable and accrued expenses (88) 40 25
Accrued real estate taxes (13) (1) 1
Tenant security deposits - (4) -
Advances from consolidated ventures 137 (92) (3)
------- --------- ---------
Total adjustments (1,748) 1,204 1,802
------- --------- ---------
Net cash provided by operating activities 1,140 1,118 1,331
------- --------- ---------
Cash flows from investing activities:
Net proceeds from sale of operating investment
property 6,958 - -
Additions to operating investment properties (20) (3) -
Receipt of master lease payments - 140 -
Payment of leasing commissions (3) (9) (8)
Distributions from unconsolidated joint ventures 864 9,278 912
------- --------- ---------
Net cash provided by investing activities 7,799 9,406 904
------- --------- ---------
Cash flows from financing activities:
Cash distributions to partners (4,298) (9,350) (1,020)
Payments of principal and
interest on notes payable (3,492) (43) (39)
------- --------- ---------
Net cash used in financing activities (7,790) (9,393) (1,059)
------- --------- ---------
Net increase in cash and cash equivalents 1,149 1,131 1,176
Cash and cash equivalents, beginning of year 5,746 4,615 3,439
------- --------- ---------
Cash and cash equivalents, end of year $ 6,895 $ 5,746 $ 4,615
======= ========= =========
Cash paid during the year for interest $ 243 $ 337 $ 343
======= ========= =========
</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. 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). On August 13, 1998, Portland Pacific Associates Two, a
joint venture in which the Partnership had an interest, sold the property known
as Willow Grove Apartments to an unrelated third party (see Note 5). As of March
31, 1999, the Partnership retained its ownership interest in two of the original
properties, both of which are retail shopping centers. 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 the disposition of the Partnership's remaining
assets could be completed before the end of calendar year 1999. The disposition
of the two remaining real estate investments would be followed by the
liquidation of the Partnership.
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, 1999 and 1998 and revenues and expenses for each
of the three years in the period ended March 31, 1999. Actual results could
differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in certain unconsolidated joint venture partnerships. 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. 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, 1999 and 1998, 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 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. Upon sale
or disposition of the Partnership's investments, the taxable gain or the tax
loss incurred will be allocated among the partners. The principal difference
between the Partnership's accounting on a federal income tax basis and the
accompanying financial statements prepared in accordance with generally accepted
accounting principals (GAAP) relates to the methods used to determine the
depreciation expense on the consolidated and unconsolidated operating investment
properties. As a result of the difference in depreciation, the gains calculated
upon the sale of the operating investment properties for GAAP purposes differ
from those calculated for federal income tax purposes.
The cash and cash equivalents, escrowed cash 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, 1999 and 1998 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, 1999, 1998 and 1997 is $97,000, $94,000 and $90,000, 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 $11,000, $20,000 and $12,000 (included in general and administrative
expenses) for managing the Partnership's cash assets for the years ended March
31, 1999, 1998 and 1997, respectively.
4. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
As of March 31, 1999 and 1998, the Partnership had an investment in one
unconsolidated joint venture. The investment in the unconsolidated joint venture
is accounted for on the equity method in the Partnership's financial statements.
As discussed in Note 2, the unconsolidated joint venture reports its 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. Richmond Paragon Partnership also reported its
operations on a calendar year basis. Due to the Partnership's policy of
accounting for significant lag-period transactions 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.
<PAGE>
Condensed combined financial statements of the unconsolidated 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, 1998
and 1997 includes only the accounts of the DeVargas Center joint venture. The
condensed combined statement of operations for the year ended December 31, 1998
includes the results of the DeVargas Center joint venture for calendar 1998. 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.
Condensed Balance Sheets
December 31, 1998 and 1997
(in thousands)
Assets
1998 1997
---- ----
Current assets $ 820 $ 709
Operating investment property, net 12,146 12,413
Other assets 754 631
------- -------
$13,720 $13,753
======= =======
Liabilities and Venturers' Capital
Current liabilities $ 852 $ 466
Other liabilities 4,984 4,610
Partnership's share of combined
venturers' capital 5,793 6,359
Co-venturers' share of combined
venturers' capital 2,091 2,318
------- -------
$13,720 $13,753
======= =======
Reconciliation of Partnership's Investment
March 31, 1999 and 1998
(in thousands)
1999 1998
---- ----
Partnership's share of capital at
December 31, as shown above $ 5,793 $ 6,359
Excess basis due to investment in venture, net (1) 351 370
Timing differences (2) (216) (216)
------- -------
Investments in unconsolidated joint ventures,
at equity, at March 31 $ 5,930 $ 6,513
======= =======
(1)At March 31, 1999 and 1998, the Partnership's investment exceeds its
share of the joint venture capital accounts by $351,000 and $370,000,
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, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental revenues and expense
recoveries $ 2,581 $ 4,877 $ 4,198
Interest and other income 5 42 22
-------- ------- -------
2,586 4,919 4,220
Expenses:
Property operating expenses 780 1,562 1,362
Depreciation and amortization 758 2,246 1,635
Real estate taxes 74 171 131
Administrative and other 150 325 298
Interest expense 407 1,151 1,037
-------- ------- -------
2,169 5,455 4,463
-------- ------- -------
Operating income (loss) 417 (536) (243)
Gain on sale of operating
investment property - 2,337 -
-------- -------- -------
Net income (loss) $ 417 $ 1,801 $ (243)
======== ======== =======
Net income (loss):
Partnership's share of
combined income (loss) $ 298 $ 1,959 $ (341)
Co-venturers' share of
combined income (loss) 119 (158) 98
-------- -------- --------
$ 417 $ 1,801 $ (243)
======== ======== ========
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
---- ---- ----
Partnership's share of operations,
as shown above $ 298 $ 1,959 $ (341)
Amortization of excess basis (17) (49) (20)
-------- -------- -------
Partnership's share of unconsolidated
ventures' net income (loss) $ 281 $ 1,910 $ (361)
======== ======== =======
The Partnership's share of the unconsolidated ventures' net income (loss)
is presented as follows in the consolidated statements of operations (in
thousands):
1999 1998 1997
---- ---- ----
Partnership's share of
unconsolidated ventures'
income (losses) $ 281 $ (555) $ (361)
Partnership's share of gain
on sale of operating
investment property - 2,465 -
--------- -------- --------
$ 281 $ 1,910 $ (361)
========= ======== ========
Investment in unconsolidated joint venture, at equity, is the
Partnership's net investment in the remaining joint venture partnership. This
joint venture is subject to a partnership agreement which determines the
distribution of available funds, the disposition of the venture's 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
investment in this joint venture is restricted as to distributions.
<PAGE>
Investment in unconsolidated joint venture, at equity, on the accompanying
balance sheets at March 31, 1999 and 1998 is comprised of the following equity
method carrying values (in thousands):
1999 1998
---- ----
DeVargas Center Joint Venture $ 5,930 $ 6,513
======== ========
The cash distributions received from the Partnership's unconsolidated
joint venture investments during fiscal 1999, 1998 and 1997 are as follows (in
thousands):
1999 1998 1997
---- ---- ----
DeVargas Center Joint Venture $ 864 $ 928 $ 812
Richmond Paragon Partnership - 8,350 100
------- -------- --------
$ 864 $ 9,278 $ 912
======= ======== ========
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 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. 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 loan had an
outstanding balance of $4,984,000 at December 31, 1998. Subsequent to year-end,
the venture obtained a one-year extension of the maturity date to June 1, 2000.
The other terms of the loan remain the same.
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 was 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. 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. The Partnership's share of the gain on the sale of the One
Paragon Place property amounted to $2,465,000 in fiscal 1998.
Per the terms of the joint venture agreement, taxable income from
operations was allocated in accordance with the net cash flow distributions to
the partners. 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. Net income or loss for financial
reporting purposes has been allocated in accordance with the allocations of
taxable income or tax loss.
5. Operating investment properties
-------------------------------
At March 31, 1999, the Partnership's balance sheets include one operating
investment property (two at March 31, 1998): Colony Plaza Shopping Center, owned
by Colony Plaza General Partnership. The Partnership has held a controlling
interest in Colony Plaza General Partnership since its inception in fiscal 1990.
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. On August 13, 1998, Portland Pacific
Associates Two sold the Willow Grove Apartments to an unrelated third party for
$7,137,000. 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 $11,486,000 as of March 31, 1999. 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,
compounded semi-annually, in accordance with the loan agreement. At the present
time, it appears likely that the Partnership will have to relinquish its
ownership of the property, along with the majority of the cash flow generated by
the property during the default period, in order to satisfy the obligation to
the lender (see Note 6). The Partnership does not expect to recognize a loss for
financial reporting purposes in conjunction with the disposition of the Colony
Plaza property.
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, 1998, the cumulative preferred return payable to
the Partnership was $1,094,000.
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, 1998,
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.
<PAGE>
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.
During fiscal 1998, the Partnership had been monitoring the development
activity in the Portland apartment market and exploring potential sale
opportunities for the Willow Grove Apartments. With strong local market
conditions, the Partnership believed it was an appropriate 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 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, a sale
transaction was completed on August 13, 1998. The Willow Grove property was sold
to this 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 approximately $168,000 and closing
proration adjustments of approximately $95,000. 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 the
Partnership of record as of August 13, 1998. The Partnership recognized a gain
of $3,469,000 in fiscal 1999 in connection with the sale of the Willow Grove
property.
Under the terms of the Amended and Restated Joint Venture Agreement,
taxable income from operations in each year was to be allocated first to the
Partnership until the Partnership had 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 was to be allocated 99%
to the Partnership and 1% to the co-venturer. All tax losses from operations
were to be allocated 99% to the Partnership and 1% to the co-venturer.
Allocations of income or loss for financial accounting purposes have been made
in accordance with the allocations of taxable income or tax loss.
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 was retained
in a property management capacity through the date of the sale for the same
annual fee under a contract which was cancellable for any reason upon 30 days'
written notice from the Partnership.
As a result of the sale transaction described above, the following
combined summary of property operating expenses for calendar 1998 includes the
operating expenses of Willow Grove only through the date of sale, August 13,
1998, and of Colony Plaza for all of calendar 1998. The combined summary of
property operating expenses includes both the Colony Plaza and Willow Grove
joint ventures for the years ended December 31, 1997 and 1996 (in thousands):
1998 1997 1996
---- ---- ----
Repairs and maintenance $ 158 $ 154 $ 140
Utilities 63 103 85
Management fees 73 92 94
Professional fees 65 43 41
Administrative and other 142 149 160
------ ------ ------
$ 501 $ 541 $ 520
====== ====== ======
<PAGE>
6. Notes payable
-------------
Notes payable and accrued interest on the books of the Partnership at
March 31, 1999 and 1998 consist of the following (in thousands):
1999 1998
---- ----
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). $11,486 $ 9,940
9.59% nonrecourse loan payable to a
finance company, which was secured
by the Willow Grove operating
investment property. The note,
issued to Portland Pacific
Associates Two, required 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. This loan was
assumed by the buyer of the Willow
Grove property as part of the
fiscal 1999 sale transaction (see
Note 5). - 3,492
------- -------
$11,486 $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, as discussed further in Note 7, the prospects for such
negotiations appear unfavorable at the present time. During this negotiation
period, penalty interest is accruing on the outstanding principal balance at
15.0% per annum, compounded semi-annually, in accordance with the loan
agreement. Due to the current default status of the mortgage note payable, it is
not practicable for management to estimate the fair value of the Colony Plaza
debt obligation. As a result of the property's leasing status, the stability of
the Center's future rental income remains uncertain, which does not allow the
Partnership 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. The fair market value of the property at its current leasing
level is substantially below the amount of the accrued interest and principal
owed to the mortgage lender. Consequently, on March 24, 1999, the Partnership
notified the lender that it was prepared to either transfer ownership title for
Colony Plaza Shopping Center to the lender in lieu of a foreclosure action or to
assist the lender in a sale of the property to a third party. At the present
time, the Partnership is actively negotiating a settlement agreement with the
lender whereby the Partnership would relinquish its ownership of the property to
the mortgage holder, along with the majority of the cash flow generated by the
property since the December 1996 maturity date (approximately $2 million), in
order to satisfy the obligation to the lender. 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 1999 consolidated
balance sheet and statement of operations total approximately $8,884,000,
$11,539,000, $1,324,000 and $601,000, respectively. The Partnership does not
expect to recognize a loss for financial reporting purposes upon the disposition
of the Colony Plaza property.
<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, 1998 (in thousands):
Years ending December 31:
1999 $ 936
2000 777
2001 678
2002 626
2003 624
Thereafter 3,347
---------
$ 6,988
=========
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, 1998, 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
comprised 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. During fiscal 1999, Food Lion opened its store at
the Colony Plaza Shopping Center. While the Colony Plaza property was 89% leased
as of March 31, 1999, its physical occupancy level was 52% as a result of the
Wal-Mart store closing. 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). In addition, another major tenant, Goody's, had a May 31, 1999
lease expiration and plan to vacate their 35,200 square feet of space at Colony
Plaza subsequent to year-end to relocate to a newly constructed store at another
site in the market area. Goody's new store will not be ready for occupancy until
July 1999, so the tenant has negotiated a month-to-month renewal of their lease
but is expected to vacate by July 31, 1999.
8. Subsequent Event
----------------
On May 15, 1999, the Partnership distributed $170,000 to the Limited
Partners and $2,000 to the General Partners for the quarter ended March 31,
1999.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER EQUITY PARTNERS THREE LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1999
(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>
CONSOLIDATED JOINT VENTURE PROPERTY:
Shopping
Center
Augusta,
Georgia $11,486 $3,720 $10,170 $(2,368) $3,281 $ 8,241 $11,522 $2,736 1989 1/18/90 12-40 yrs.
Notes:
(A) The aggregate cost of real estate owned by the consolidated joint venture at December 31, 1998 for Federal income tax purposes
is approximately $12,968.
(B) See Note 6 to the accompanying financial statements for a description of the terms of the debt encumbering by the consolidated
joint venture property and a discussion of the current default status of the first mortgage loan.
(C) Reconciliation of real estate owned by the consolidated joint venture:
1998 1997 1996
---- ---- ----
Balance at beginning of period $16,695 $18,361 $ 18,361
Sale of operating investment property 5,193) - -
Additions and improvements 20 3 -
Reduction of basis due to
master lease payments received - (140) -
Write off due to permanent impairment (see Note 2) - (1,529) -
------- -------- --------
Balance at end of period $11,522 $16,695 $ 18,361
======= ======= ========
(D) Reconciliation of accumulated depreciation for the consolidated joint venture:
Balance at beginning of period $ 4,061 $ 3,893 $ 3,395
Sale of operating investment property (1,704) - -
Depreciation expense 379 493 498
Write off due to permanent impairment (see Note 2) - (325) -
------- ------- --------
Balance at end of period $ 2,736 $ 4,061 $ 3,893
======= ======= ========
(E) Included in Costs Capitalized (Removed) Subsequent to Acquisition are an impairment write-down on the consolidated
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 consolidated 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, 1998 and 1997, and the related
statements of income, venturers' capital and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
March 5, 1999,
except for Note 7,
as to which the date
is June 1, 1999
<PAGE>
DEVARGAS CENTER JOINT VENTURE
BALANCE SHEETS
December 31, 1998 and 1997
(In thousands)
ASSETS
1998 1997
---- ----
PROPERTY:
Land $ 4,052 $ 4,052
Buildings and improvements 14,605 14,172
Construction-in-progress 4 -
-------- --------
Total 18,661 18,224
Less accumulated depreciation 6,515 5,811
-------- --------
Property - net 12,146 12,413
CASH 760 677
ACCOUNTS RECEIVABLE, Net 60 32
ACCRUED RENT RECEIVABLES 205 217
UNAMORTIZED LEASE COSTS 539 399
OTHER ASSETS 10 15
-------- --------
TOTAL $ 13,720 $ 13,753
======== ========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses:
Affiliates $ 661 $ 331
Other 99 44
Notes payable - affiliate 4,984 4,610
Rentals collected in advance 65 65
Tenants' security deposits 27 26
-------- --------
Total liabilities 5,836 5,076
VENTURERS' CAPITAL 7,884 8,677
-------- --------
TOTAL $ 13,720 $ 13,753
======== ========
See accompanying notes.
<PAGE>
DEVARGAS CENTER JOINT VENTURE
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
1998 1997 1996
---- ---- ----
REVENUES - Rentals $ 2,586 $ 2,589 $ 2,218
------- ------- -------
EXPENSES EXCLUSIVE OF DEPRECIATION AND
AMORTIZATION:
Repairs and maintenance 681 723 675
General and administrative 81 96 82
Management fees - Weingarten Realty
Management Company 99 99 84
Interest 407 425 341
Ad valorem taxes 74 38 19
Advertising and promotion 43 28 28
Insurance 26 34 37
------- ------- -------
Total 1,411 1,443 1,266
------- ------- -------
INCOME BEFORE DEPRECIATION AND
AMORTIZATION 1,175 1,146 952
DEPRECIATION AND AMORTIZATION (758) (819) (701)
------- ------- -------
NET INCOME $ 417 $ 327 $ 251
======= ======= =======
See accompanying notes.
<PAGE>
DEVARGAS CENTER JOINT VENTURE
STATEMENTS OF VENTURERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
Weingarten PaineWebber
Realty Equity
Total Investors Partners
----- --------- --------
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
Distributions to Venturers (1,210) (346) (864)
Net income 417 119 298
------- -------- --------
VENTURERS' CAPITAL, DECEMBER 31, 1998 $ 7,884 $ 2,091 $ 5,793
======= ======== ========
See accompanying notes.
<PAGE>
DEVARGAS CENTER JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 417 $ 327 $ 251
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 758 819 701
Net effect of changes in
operating accounts 189 37 (82)
-------- ------- --------
Net cash provided by
operating activities 1,364 1,183 870
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (446) (44) (1,382)
-------- ------- --------
Net cash used in investing
activities (446) (44) (1,382)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Venturers (1,209) (1,074) (825)
Contribution from Venturer - - 11
Proceeds from notes payable - affiliate 374 418 1,251
Principal payments of notes payable -
affiliate - (23) (55)
-------- ------- --------
Net cash (used in) provided by
financing activities (835) (679) 382
-------- ------- --------
NET INCREASE (DECREASE) IN CASH 83 460 (130)
CASH AT BEGINNING OF YEAR 677 217 347
-------- ------- --------
CASH AT END OF YEAR $ 760 $ 677 $ 217
======== ====== ========
See accompanying notes.
<PAGE>
DEVARGAS CENTER JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 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.
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, 1998 is $1,882,668 in 1999; $1,832,434 in 2000; $1,764,501 in 2001;
$1,610,111 in 2002; $1,532,177 in 2003; and $15,193,519 thereafter. The future
minimum lease payments do not include estimates for contingent rentals. Such
contingent rentals aggregated $823,386 in 1998, $848,134 in 1997 and $752,752 in
1996.
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 February 1999 for amounts distributable at
December 31, 1998. To partially satisfy the preference requirement, PWEP
received the entire $216,000 payment resulting in a preferential distribution in
arrears of $387,145 to WRI as of December 31, 1998.
5. NOTES PAYABLE - AFFILIATE
-------------------------
At year-end, notes payable to WRI were as follows (in thousands):
1998 1997
---- ----
Promissory note, bearing interest
at prime with a floor of 9% (7.75% at
December 31, 1998), due June 1999 and
collateralized by property $4,984 $4,610
====== ======
On May 26, 1998, the Joint Venture amended and restated the maximum
balance available for borrowing from $5 million to $6.5 million under the
promissory note (the "Note") which is due June 1, 1999. The principal balance of
the Note is payable at maturity, and accrued interest is due and payable on a
monthly basis. The Note bears interest at prime with a ceiling 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 (see Note
7).
6. CHANGES IN OPERATING ACCOUNTS
-----------------------------
The effect of changes in the operating accounts on cash flows from
operating activities is a follows (in thousands):
1998 1997 1996
---- ---- ----
Decrease (increase) in:
Accounts receivable $ (28) $ 64 $ (36)
Accrued rent receivables 13 (34) (44)
Other assets (176) (147) (150)
Increase (decrease) in:
Accounts payable and accrued
expense 378 150 136
Other liabilities - primarily
rentals collected in advance 2 4 12
------- ------ ------
Net effect of changes in
operating accounts $ 189 $ 37 $ (82)
======= ====== ======
Cash payments of interest totalled $409,137, $425,227 and $329,114 in
1998, 1997 and 1996, respectively.
7. SUBSEQUENT EVENT
----------------
The Second Renewal and Extension of Note and Mortgage was executed
effective June 1, 1999 to extend the maturity date of the Note to June 1, 2000.
<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
(In thousands)
December 31
-------------------------
1997 1996
---- ----
Assets
Current assets:
Cash $ 29 $ 139
Escrowed cash 576 690
Receivable from tenants 31 15
Prepaid expenses 8 8
------- --------
Total current assets 644 852
Operating investment property, at cost:
Land - 2,712
Building and improvements - 16,235
Furniture, fixtures and equipment - 2,850
------- --------
- 21,797
Less accumulated depreciation - (7,446)
------- --------
Net operating investment property - 14,351
Property held for sale 13,759 -
Deferred rents receivable 102 127
Other assets 444 371
------- --------
Total assets $14,949 $ 15,701
======= ========
Liabilities and Partners' Capital
Current liabilities:
Accounts payable and accrued interest $ 68 $ 59
Tenants' security deposits 24 23
Deferred rental income 26 29
Current portion of mortgage notes payable 134 124
------- --------
Total current liabilities 252 235
Mortgage notes payable 8,377 8,511
------- --------
Total liabilities 8,629 8,746
Partners' capital 6,320 6,955
------- --------
Total liabilities and partners' capital $14,949 $ 15,701
======= ========
See accompanying notes.
<PAGE>
Richmond Paragon Partnership
(A General Partnership)
Statements of Operations
(In thousands)
Year ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Rental $2,133 $1,980 $1,798
Other 40 22 500
------ ------ ------
2,173 2,002 2,298
Expenses:
Depreciation and amortization 933 934 1,038
Interest expense 685 696 91
Repairs and maintenance 310 277 248
Utilities 245 239 240
Real estate taxes 108 112 114
Management fees 86 85 93
General and administrative 97 76 102
Salaries and related costs 40 57 65
Insurance 19 20 20
------ ------ ------
2,523 2,496 2,011
------ ------ ------
Net income (loss) $ (350) $ (494) $ 287
====== ====== ======
See accompanying notes.
<PAGE>
Richmond Paragon Partnership
(A General Partnership)
Statements of Partners' Capital
(In thousands)
Richmond One Paine Webber
Paragon Equity
Place Partners
Associates Three Total
Limited Limited Partners'
Partnership Partnership Capital
----------- ----------- -------
Balance at December 31, 1994 $ 100 $16,256 $16,356
Net income (loss) 12 275 287
Contributions - 186 186
Distributions - (1,277) (1,277)
Net proceeds from financing transactions - (8,059) (8,059)
Interest payment made b PWEP3 - 3 3
------- ------- -------
Balance at December 31, 1995 112 7,384 7,496
Net income (loss) 98 (593) (495)
Distributions - (46) (46)
------- ------- -------
Balance at December 31, 1996 210 6,745 6,955
Net income (loss) 75 (425) (350)
Distributions - (285) (285)
------- ------- -------
Balance at December 31, 1997 $ 285 $ 6,035 $ 6,320
======= ======= =======
See accompanying notes.
<PAGE>
Richmond Paragon Partnership
(A General Partnership)
Statements of Cash Flows
(In thousands)
Year ended December 31
---------------------------------
1997 1996 1995
---- ---- ----
Operating activities
Net income (loss) $ (350) $ (495) $ 287
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 933 934 1,038
Interest funded by PWEP3 - - 3
Changes in operating assets and
liabilities:
Escrowed cash 114 (184) (27)
Receivable from tenants (16) (10) 8
Deferred rents receivable 26 135 44
Other assets (187) (39) (58)
Accounts payable and accrued interest 9 (34) 54
Tenants' security deposits 1 (2) 4
Deferred rental income (3) 29 -
------ ------- -------
Net cash provided by operating
activities 527 334 1,353
------ ------- -------
Investing activity
Additions to operating investment
property (228) (123) (192)
------ ------- -------
Net cash used in investing activity (228) (123) (192)
------ ------- -------
Financing activities
Principal payments on mortgage notes
payable (124) (115) -
Contributions by partner - - 186
Distributions to partner (285) (46) (1,338)
------ ------- -------
Net cash used in financing
activities (409) (161) (1,152)
------ ------- -------
Net (decrease) increase in cash (110) 50 9
Cash at beginning of year 139 89 80
------ ------- -------
Cash at end of year $ 29 $ 139 $ 89
====== ======= =======
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.
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 using a method 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.
The fair value of the mortgage notes payable approximates their carrying value
as of December 31, 1997 and 1996.
As of December 31, 1997, maturities of the mortgage notes payable for the next
five years are approximately as follows (in thousands):
1998 $ 134
1999 145
2000 158
2001 171
2002 7,903
-------
$ 8,511
=======
<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
(in thousands):
1998 $1,669
1999 1,290
2000 874
2001 657
2002 303
------
$4,793
======
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 were as follows (in thousands):
Mortgage notes payable:
Amount remitted to PWEP3 $8,750
Financing costs paid by PWEP3 (691)
Interest paid by PWEP3 (3)
------
Reduction in PWEP3 partners' capital $8,056
======
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 audited financial statements for the year ended March 31, 1999 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-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 6,895
<SECURITIES> 0
<RECEIVABLES> 159
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,060
<PP&E> 17,452
<DEPRECIATION> 2,736
<TOTAL-ASSETS> 21,781
<CURRENT-LIABILITIES> 302
<BONDS> 11,486
0
0
<COMMON> 0
<OTHER-SE> 9,993
<TOTAL-LIABILITY-AND-EQUITY> 21,781
<SALES> 0
<TOTAL-REVENUES> 6,059
<CGS> 0
<TOTAL-COSTS> 1,286
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,885
<INCOME-PRETAX> 2,888
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,888
<EPS-BASIC> 56.63
<EPS-DILUTED> 56.63
</TABLE>
