SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405/A
AMENDMENT NO. 1
Filed pursuant to Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1998 Commission File Number 0-9555
JMB INCOME PROPERTIES, LTD. - VII
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(Exact name of registrant as specified in its charter)
Illinois 36-2999384
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(State of organization) (I.R.S. Employer Identification No.)
900 N. Michigan Ave., Chicago, Illinois 60611
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(Address of principal executive office) (Zip Code)
The undersigned registrant hereby amends the following section of its
Report for the year ended December 31, 1998 on Form 10-K405 as set forth in
the pages attached hereto:
PART II
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. Pages 11 through 14.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
JMB INCOME PROPERTIES, LTD. - VII
By: JMB Realty Corporation
Managing General Partner
GAILEN J. HULL
By: Gailen J. Hull
Vice President and
Principal Accounting Officer
Dated: May 12, 1999
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As a result of the public offering of Interests as described in
Item 1, the Partnership had approximately $54,700,000 (after deducting
selling expenses and other offering costs) with which to make investments
in income-producing commercial and residential real property, to pay legal
fees and other costs (including acquisition fees) related to such
investments and for working capital reserves. A portion of such proceeds
was utilized to acquire the properties described in Item 1 above.
The board of directors of JMB Realty Corporation ("JMB"), the managing
general partner of the Partnership, has established a Special Committee
(the "Special Committee") consisting of certain directors of JMB to deal
with all matters relating to tender offers for Interests in the
Partnership, including any and all responses to such tender offers. The
Special Committee has retained independent counsel to advise it in
connection with any potential tender offers for Interests and has retained
Lehman Brothers Inc. as financial advisor to assist the Special Committee
in evaluating and responding to any additional potential tender offers for
Interests.
During 1997, some of the Limited Partners in the Partnership received
from unaffiliated third parties unsolicited tender offers to purchase up to
4.9% of the Interests in the Partnership at amounts ranging from $100 to
$129 per Interest. The Partnership recommended against acceptance of these
offers on the basis that, among other things, the offer price was
inadequate. Additionally, in 1998, some of the Limited Partners in the
Partnership received from an unaffiliated third party an unsolicited tender
offer to purchase up to 3.29% of the Interests in the Partnership at an
amount of $200 per Interest. The Partnership remained neutral and
expressed no opinion with regard to acceptance of the offer. As of the
date of this report, all such offers have expired. As of the date of this
report, the Partnership is aware that, in the aggregate, 9.88% of the
outstanding Interests have been purchased by such unaffiliated third
parties either pursuant to such tender offers or through negotiated
purchases. In addition, it is possible that other offers for Interests may
be made by unaffiliated third parties in the future, although, there is no
assurance that any other third party will commence an offer for Interests,
the terms of any such offer or whether any such offer, if made, will be
consummated, amended or withdrawn.
At December 31, 1998, the Partnership and its consolidated venture had
cash and cash equivalents of approximately $5,612,000. Such remaining
funds are available for distributions to partners and for working capital
requirements. The Partnership and its consolidated venture has currently
budgeted in 1999 no significant expenditures for tenant improvements and
other capital expenditures at Westdale Mall. Actual amounts expended may
vary depending on a number of factors including actual leasing activity,
results of property operations, the extent of unaffiliated venture partner
compliance with its obligation to share in the funding of such requirements
as discussed below, liquidity considerations and other market conditions
over the course of the year. The sources of capital (in addition to the
cash and cash equivalents noted above) for such items and for both short-
term and long-term future liquidity and distributions are expected to be
through net cash generated by the Partnership's remaining investment
property and through the sale of such investment. Reference is made to the
Partnership's property specific discussions below. The Partnership and its
venture's mortgage obligations are all non-recourse.
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ONE WOODFIELD LAKE
The Partnership had committed to a plan to sell its interest in the
property, and therefore, had classified the property as held for sale or
disposition as of December 31, 1996. On October 10, 1997, the Partnership
sold its interest to its unaffiliated venture partner. Reference is made
to the Notes for a further description of such transaction.
WESTDALE MALL
Westdale Mall continues to operate in a very competitive retail
environment, which may adversely affect its operations due to various
circumstances. Montgomery Ward, which owns a store adjacent to Westdale
Mall, filed for bankruptcy in July 1997, and it is unknown at this time
whether its store will continue to operate. Econofoods, which occupies
48,400 square feet of space on the periphery of the site, has announced it
will open a new, larger store in an open air center across the street from
Westdale Mall; therefore, the Partnership believes that the tenant will
likely not renew its lease upon expiration in July 2000. The operator of
the cinema at Westdale Mall has also started construction of a 12-screen
multiplex cinema in a nearby development. Furthermore, it is expected that
Westdale Mall will be subject to greater competition in the future,
particularly from a new shopping center that opened in 1998 approximately
20 miles from Westdale Mall. During 1998, occupancy decreased to 90%, and
9% of the property is leased to tenants on a month-to-month basis. As
leases expire, lease renewals and new leases are likely to be at rental
rates equal to or slightly below rates on existing leases. In addition,
new leases will likely require expenditures for lease commission and tenant
improvements prior to tenant occupancy. This anticipated decline in rental
rates, an anticipated increase in re-leasing time and the costs upon re-
leasing will result in a decrease in cash flow from operations over the
near term. The Partnership is also evaluating certain capital improvement
projects and the competitive positioning of this property in its market.
In addition, the Partnership has committed to a plan to sell the property
or its interest in the property, and therefore, has classified the property
as held for sale or disposition as of December 31, 1996. The property has
not been subject to continued depreciation as of such date. During the
third quarter of 1998, the Rouse Company or an affiliate thereof purchased
a portion of an interest in the unaffiliated venture partner in the joint
venture and was also assigned management of the property.
The joint venture intends to allocate the resources necessary for the
manager of the mall to continue to attract new tenants, subject to working
capital sources and reserves. The Gap, a retail store located in the mall,
was provided with a tenant allowance of $370,440 in consideration for the
renewal of its lease. The unaffiliated venture partner in the joint
venture elected not to contribute it's share of this tenant allowance. The
Partnership, in order to retain this tenant, funded the tenant allowance
during 1997 and 1998. The tenant allowance contribution of $370,440, plus
15% simple interest per annum, has been added to the Partnership's
preferred position from any future sales proceeds pursuant to the Westdale
venture agreement.
The Partnership, on behalf of the joint venture, is presently actively
marketing the property for sale. However, there can be no assurance that a
sale will be consummated.
GENERAL
There are certain risks associated with the Partnership's investment
made through its joint venture including the possibility that the
Partnership's joint venture partners in the investment might become unable
or unwilling to fulfill their financial or other obligations, or that the
joint venture partners may have economic or business interests or goals
that are inconsistent with those of the Partnership.
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As a result of the real estate market conditions discussed above, the
Partnership continues to conserve its working capital. All expenditures
are carefully analyzed and certain capital projects are deferred when
appropriate. In an effort to reduce Partnership operating expenses, the
Partnership elected to make semi-annual rather than quarterly distributions
of operating cash flow commencing with the 1996 distributions. The
Partnership has also sought loan modifications where appropriate. By
conserving working capital, the Partnership will be in a better position to
meet the future needs of its remaining property since the availability of
satisfactory outside sources of capital may be limited given the
portfolio's current debt levels. Due to these factors, the Partnership has
held its remaining investment property longer than originally anticipated
in an effort to maximize the return to the Limited Partners. However,
after reviewing the remaining property and the marketplace in which it
operates, the General Partners of the Partnership expect to be able to
conduct an orderly liquidation of this remaining investment as quickly as
practicable. Therefore, the affairs of the Partnership are expected to be
wound up no later than December 31, 1999, barring unforeseen economic
developments.
RESULTS OF OPERATIONS
The decrease in cash and cash equivalents at December 31, 1998 as
compared to December 31, 1997 is primarily due to the distribution of sale
proceeds in 1998 of $3,569,500 to the Limited Partners and $1,115,054 to
the General Partners as a result of the redemption on October 10, 1997 of
the Partnership's interest in the One Woodfield Lake Limited Partnership.
The increase in escrow deposits and restricted funds at December 31,
1998 as compared to December 31, 1997 is primarily due to the timing of
payments into such accounts at the Partnership's Westdale investment
property.
The decrease in accrued interest at December 31, 1998 as compared to
December 31, 1997 is primarily due to the timing of mortgage payments at
the Westdale Mall investment property.
Significant fluctuations in the accompanying consolidated statements
of operations not otherwise reported herein are primarily due to the
redemption on October 10, 1997 of the Partnership's interest in the One
Woodfield Lake Limited Partnership.
The decreases in depreciation expense and venture partners' share of
venture's operations for the years ended December 31, 1998 and December 31,
1997 as compared to the year ended December 31, 1996 are primarily due to
no further depreciation expense being incurred on the Westdale Mall and the
One Woodfield Lake investment properties as a result of the properties
being classified as "held for sale or disposition" in accordance with
SFAS 121 on December 31, 1996, and therefore, no longer subject to
continued depreciation as of that date.
The increase in general and administrative expenses for the year ended
December 31, 1998 as compared to the same periods in 1997 and 1996 is
primarily due to the payment of the Illinois Replacement Tax, in the first
quarter of 1998, on the proceeds received from the redemption of One
Woodfield Lake.
The gain on redemption of Partnership's interest in investment
property for the year ended December 31, 1997 is due to the sale of the
Partnership's interest in the One Woodfield Lake office building on
October 10, 1997.
INFLATION
Due to the decrease in the level of inflation in recent years,
inflation generally has not had a material effect on rental income or
property operating expenses.
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Inflation is not expected to significantly impact future operations
due to the expected liquidation of the Partnership by the end of 1999.
However, to the extent that inflation in future periods would have an
adverse impact on property operating expenses, the effect would generally
be offset by amounts recovered from tenants as many of the long-term leases
at the Partnership's remaining property have escalation clauses covering
increases in the cost of operating and maintaining the property as well as
real estate taxes. Therefore, there should be little effect on operating
earnings if the property remains substantially occupied. In addition,
substantially all of the leases at the Partnership's remaining property
contain provisions which entitle the Partnership to participate in gross
receipts of tenants above fixed minimum amounts.
YEAR 2000
The year 2000 problem is the result of computer programs being written
with two digits rather than four to define a year. Consequently, any
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations
including, among other things, an inability to process transactions or
engage in other normal business activities. In addition, other date-
sensitive electronic devices could experience various operational
difficulties as a result of not being year 2000 compliant.
The Partnership uses the telephone, accounting, transfer agent and
other administrative systems, which include both hardware and software,
provided by affiliates of the Corporate General Partner and certain third
party vendors. Except as noted in the following sentence, the Partnership
or its affiliates have received representations to the effect that the
telephone, accounting, transfer agent and other administrative systems are
year 2000 compliant in all material respects. Both the hardware and
software for individual personal computers used in the Partnership's
administrative systems are expected to be tested for their year 2000
compliance during the summer of 1999. Given its limited operations, the
Partnership believes that its accounting, transfer agent and most of its
other administrative systems functions could, if necessary, be performed
manually (i.e., without significant information technology) for an extended
period of time without a material increase in costs to the Partnership.
Accordingly, the Partnership does not believe that the year 2000 problem
presents a material risk for these aspects of its operations. To date, the
Partnership has not incurred any material direct costs for year 2000
compliance.
The Partnership has asked the property manager for the Westdale Mall
for information concerning the property's year 2000 compliance but has not
received a response. The Partnership intends to continue seeking
information regarding the property's year 2000 compliance. In the event
that the Westdale Mall is not year 2000 compliant in all material respects,
the property could experience various operational difficulties or systems
failures. This could result in unanticipated remediation costs and, under
certain circumstances, possible other costs and expenses. If such were to
occur, there is no assurance that such costs and expenses would not, under
certain circumstances, have a material adverse effect on the Partnership or
its investment in the Westdale Mall in the event that the property is not
sold during 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership has identified interest rate changes as a potential
market risk. However, as the Partnership's long-term debt bears interest
at a fixed rate and is due to mature subsequent to the Partnership's
expected liquidation and termination (on or before December 31, 1999), the
Partnership does not believe that it is exposed to market risk relating to
interest rate changes.
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