UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
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 : 0-15037
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-2870345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and September 30, 1996 (Unaudited)
(In thousands)
ASSETS
December 31 September 30
----------- ------------
Operating investment property:
Land $ 698 $ 698
Buildings and improvements 4,294 4,294
Equipment and fixtures 107 107
---------- ---------
5,099 5,099
Less accumulated depreciation (1,684) (1,651)
---------- ---------
3,415 3,448
Cash and cash equivalents 5,642 5,067
Escrowed funds 14 74
Accounts receivable 101 107
Accounts receivable - affiliates 2 2
Deferred expenses, net 117 122
Other assets 34 32
----------- ---------
$ 9,325 $ 8,852
========== =========
LIABILITIES AND PARTNERS' DEFICIT
Equity in losses from unconsolidated
joint ventures in excess
of investments and advances $ 9,065 $ 8,413
Mortgage note payable 1,658 1,671
Accounts payable and accrued expenses 49 61
Accrued interest payable 15 15
Accrued real estate taxes - 59
Other liabilities 9 10
Partners' deficit (1,471) (1,377)
---------- ---------
$ 9,325 $ 8,852
========== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended December 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
1996 1995
---- ----
Revenues:
Rental income and expense recoveries $ 119 $ 143
Interest and other income 80 56
-------- ---------
199 199
Expenses:
Mortgage interest 48 50
Property operating expenses 38 29
Depreciation and amortization 36 38
Real estate taxes 22 19
General and administrative 39 112
-------- --------
183 248
-------- --------
Operating income (loss) 16 (49)
Partnership's share of unconsolidated
ventures' losses (110) (26)
-------- ---------
Net loss $ (94) $ (75)
======== ========
Net loss per Limited Partnership Unit $ (2.44) $(1.96)
======= ======
The above net loss per Limited Partnership Unit is based upon the 37,969
Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the three months ended December 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at September 30, 1995 $ (752) $ (221)
Net loss (1) (74)
--------- ---------
Balance at December 31, 1995 $ (753) $ (295)
========= =========
Balance at September 30, 1996 $ (756) $ (621)
Net loss (1) (93)
--------- ---------
Balance at December 31, 1996 $ (757) $ (714)
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (94) $ (75)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 36 38
Amortization of deferred financing costs 2 2
Partnership's share of unconsolidated ventures' losses 110 26
Changes in assets and liabilities:
Escrow deposits 60 57
Accounts receivable 6 (37)
Accounts receivable - affiliate - (1)
Other assets (2) 1
Accounts payable and accrued expenses (12) (7)
Accrued real estate taxes (59) (60)
Other liabilities (1) -
------- ------
Total adjustments 140 19
------- ------
Net cash provided by (used in)
operating activities 46 (56)
Cash flows from investing activities:
Distributions from unconsolidated joint ventures 542 667
Cash flows from financing activities:
Principal payments on long-term debt (13) (13)
------- ------
Net increase in cash and cash equivalents 575 598
Cash and cash equivalents, beginning of period 5,067 3,252
------- ------
Cash and cash equivalents, end of period $ 5,642 $3,850
======= ======
Cash paid during the period for interest $ 46 $ 48
======= ======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended September 30, 1996. In the
opinion of management, the accompanying consolidated financial statements,
which have not been audited, reflect all adjustments necessary to present
fairly the results for the interim period. All of the accounting adjustments
reflected in the accompanying interim financial statements are of a normal
recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1996 and September 30,
1996 and revenues and expenses for the three months ended December 31, 1996
and 1995. Actual results could differ from the estimates and assumptions
used.
2. Investments in Unconsolidated Joint Venture Partnerships
The Partnership has investments in four unconsolidated joint ventures
which own six operating properties, as more fully described in the
Partnership's Annual Report. The unconsolidated joint venture investments are
accounted for using the equity method because the Partnership does not have a
voting control interest in the ventures. Under the equity method, the assets,
liabilities, revenues and expenses of the joint ventures do not appear in the
Partnership's financial statements. Instead, the investments are carried at
cost adjusted for the Partnership's share of the ventures' earnings and
losses and distributions.
Summarized operations of the four unconsolidated joint ventures for the
three months ended December 31, 1996 and 1995 are as follows:
Condensed Combined Summary of Operations
For the three months ended December 31, 1996 and 1995
(in thousands)
1996 1995
---- ----
Rental revenues and expense recoveries $2,644 $2,622
Interest and other income 100 103
------ ------
2,744 2,725
Property operating expenses 951 885
Interest expense 999 969
Real estate taxes 476 484
Depreciation and amortization 430 418
------ ------
2,856 2,756
------ ------
Net loss $ (112) $ (31)
====== ======
Net loss:
Partnership's share of combined losses $ (108) $ (24)
Co-venturers' share of combined losses (4) (7)
------ ------
$ (112) $ (31)
====== ======
<PAGE>
Reconciliation of Partnership's Share of Operations
For the three months ended December 31, 1996 and 1995
(in thousands)
1996 1995
---- ----
Partnership's share of combined
losses, as shown above $ (108) $ (24)
Amortization of excess basis (2) (2)
------ ------
Partnership's share of
unconsolidated ventures' losses $ (110) $ (26)
====== =======
As discussed further in the Annual Report, HMF Associates is a joint
venture in which the Partnership has an interest and which owns three
multi-family apartment properties in the Seattle, Washington area: the
Enchanted Woods Apartments, the Hunt Club Apartments and the Marine Club
Apartments. The maturity date of the loan secured by the Enchanted Woods
Apartments is June 1, 1997, while the maturity date of the loans secured by
the Hunt Club and Marina Club properties is July 1, 1997, at which time all
unpaid principal, interest and advances are due. At the present time, the
venture's net operating income level is not sufficient to fully cover the
interest accruing on the outstanding debt obligations. As a result, the total
obligation due to the mortgage lender will continue to increase through the
scheduled maturity dates. Furthermore, the current aggregate estimated fair
value of the operating investment properties is substantially lower than the
outstanding obligations to the first mortgage holder as of December 31, 1996.
Accordingly, it is unlikely that the venture will be able to settle or
refinance the debt at the time of the fiscal 1997 maturities. The result
could be a foreclosure of the operating investment properties. The
Partnership has a large negative carrying value for its investment in HMF
Associates as of December 31, 1996 because prior year equity method losses
and distributions have exceeded the Partnership's investments in the venture.
Consequently, the Partnership would recognize a gain upon the foreclosure of
the operating investment properties.
3. Operating Investment Property
The Partnership has a controlling interest in one joint venture, West Palm
Beach Concourse Associates, which owns the Concourse Retail Plaza. The Retail
Plaza consists of 30,473 net rentable square feet located in West Palm Beach
Florida. Subsequent to a settlement and assignment agreement executed in
fiscal 1990, the Partnership's co-venture partner is Seventh Income
Properties Fund, Inc., the Managing General Partner of the Partnership. The
amended and restated terms of the joint venture agreement are more fully
described in the Partnership's Annual Report. The Partnership employs the
services of a local unaffiliated property management company to administer
the day-to-day operations of the investment property.
The following is a summary of property operating expenses for the
three-month periods ended December 31, 1996 and 1995 (in thousands):
1996 1995
---- ----
Repairs and maintenance $ 7 $ 4
Utilities 1 1
Insurance 2 1
Administrative and other 24 19
Management fees 4 4
------ ------
$ 38 $ 29
====== ======
<PAGE>
4. Mortgage Note Payable
Mortgage note payable on the consolidated balance sheets relates to the
Partnership's consolidated joint venture, West Palm Beach Concourse
Associates, and is secured by the venture's operating investment property. At
December 31, 1996 and September 30, 1996, mortgage note
payable consists of the following (in thousands):
December 31 September 30
----------- ------------
11.12% first mortgage, payable in
installments of $20 per month,
including interest, through January
1, 2005. All outstanding principal
and accrued interest is due on
January 10, 2005. The fair value of
this note payable approximated its
carrying value as of December 31,
1996. $ 1,658 $ 1,671
In accordance with the Concourse mortgage loan agreements, certain
insurance premiums and real estate taxes are required to be held in escrow.
The balance of escrow deposits on the accompanying balance sheets at December
31, 1996 and September 30, 1996 consists of such escrowed insurance premiums
and real estate taxes in the aggregate amounts of $14,000 and $74,000,
respectively.
5. Related Party Transactions
Accounts receivable - affiliates at December 31, 1996 and September 30,
1996 consist of investor service fees due from the Daniel Meadows Partnership
of $2,500 and $1,875, respectively.
Included in general and administrative expenses for the three months ended
December 31, 1996 and 1995 is $21,000 and $21,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the three months
ended December 31, 1996 and 1995 is $6,000 and $5,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
6. Contingencies
As discussed in more detail in the Annual Report for the year ended
September 30, 1996, the Partnership is involved in certain legal actions. At
the present time, the Managing General Partner is unable to determine what
impact, if any, the resolution of these matter may have on the Partnership's
financial statements, taken as a whole.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
As discussed in the Special Report mailed to the Unitholders in December
1996, due to improvements in the Partnership's cash flow and the expectation
that it will continue in the future, the Partnership has reinstated the payment
of regular quarterly distributions at the annual rate of 2.5% on an original
$1,000 investment. The first payment of $6.25 per original $1,000 Unit will be
made on February 14, 1997 for the quarter ended December 31, 1996. The payment
of quarterly distributions was discontinued in early 1990 primarily due to the
lack of cash flow from several of the Partnership's investments. The plan to
reinstate quarterly distributions is attributable to the improvement in property
operations and the lower debt service costs at the Colony Apartments and The
Meadows on the Lake Apartments, which represent a combined 48% of the
Partnership's original investment portfolio. The Partnership will also make a
special distribution of $40 per original $1,000 investment on February 14, 1997
to Unitholders of record on December 31, 1996. This amount represents a
distribution of Partnership reserves which exceed expected future requirements.
The Partnership retains an interest in all five of its original joint
ventures, although the office portion of the investment in the mixed-use
Concourse property was lost through foreclosure proceedings by the first
mortgage lender on December 17, 1992. In addition, as discussed further below,
the Partnership does not currently expect to receive any proceeds from the
disposition of the three Seattle, Washington area apartment properties owned by
HMF Associates because the mortgage debt obligations secured by the properties
significantly exceed the estimated fair market values of the properties as of
December 31, 1996. These mortgage debt obligations are scheduled to mature in
fiscal 1997, at which time all three operating properties could be lost to
foreclosure. The loss of the Concourse Office Towers to foreclosure in fiscal
1993 and the expected loss of the three properties owned by HMF Associates means
that the Partnership will be unable to return the full amount of the original
invested capital to the Limited Partners. The two office towers represented 28%
of the Partnership's original investment portfolio. The three apartment
complexes owned by HMF Associates comprise another 13% of the original
investment portfolio. Of the four remaining assets, the two multi-family
properties both have significant equity above the outstanding debt obligations
based on estimated current property values, while the two retail properties
would not be expected to yield substantial net proceeds after the mortgage debt
if sold under current market conditions.
During the first quarter of fiscal 1997, the Partnership received cash flow
distributions of $184,000 from the Colony Apartments joint venture and $358,000
from the Meadows joint venture. During the third quarter of fiscal 1996, the
Meadows joint venture completed the final phase of the repair work on the
construction defects at the property using the proceeds from the insurance
settlement originally escrowed with the lender plus excess cash flow from
property operations. There was minimal disruption to the property's tenants
during this repair process, and there has been no apparent adverse effect on the
market value of the investment property as a result of this situation. Occupancy
levels remained in the mid-to-high 90% range throughout the period in which the
repairs were completed, and the property's effective rental rates are comparable
to other apartment communities in its sub-market. With the repair work at The
Meadows on the Lake Apartments completed, the venture has begun generating
regular distributions of excess cash flow to the Partnership. Future
distributions from the Colony Apartments and Meadows joint ventures are expected
to be sufficient to fund the Partnership's operating costs, allow for the
payment of quarterly distributions to the Unitholders and provide adequate
liquidity to fund the capital needs which may exist at the other joint venture
investment properties. Assuming that the overall market for multi-family
apartment properties remains strong, the Partnership may have favorable
opportunities to sell its interests in the Colony Apartments and The Meadows on
the Lake Apartments in the near term. The sales of these two assets, which, as
discussed above, represent the Partnership's sole sources of liquidity, would
likely prompt the accelerated dispositions of the remaining investment
properties. Under such circumstances, the Partnership could be positioned for a
possible liquidation within the next 2-to-3 years. However, there are no
assurances that the Partnership will be able to complete the disposition of its
remaining investments within this time frame.
Occupancy levels at the Concourse Retail Plaza and the Colony Square
Shopping Center were 90% and 97%, respectively, as of December 31, 1996. At the
present time, real estate values for retail shopping centers in certain markets
are being adversely impacted by the effects of overbuilding and consolidations
among retailers which have resulted in an oversupply of space. It remains
unclear at this time what impact, if any, this general trend will have on the
operations and/or market values of the Partnership's retail properties in the
near term. Management continues to closely monitor the operating performance of
the three restaurant tenants at the Concourse Retail Plaza. Two of these
tenants, which occupy approximately 40% of the property's leasable space,
reported declining sales during fiscal 1996 and fell behind on their rental
payments. Management negotiated agreements with both tenants to cure the rental
delinquencies which, in one of the cases, involved the forgiveness of a portion
of the delinquency and a reduction in the future monthly rent payment in return
for an increase in the term of the lease obligation. One of these tenants is
currently meeting the modified terms of its rental obligations. However, the
other tenant, which occupies 28% of the center, has continued to report
operational difficulties and recently fell behind on its new rental payment
arrangement. The Colony Square Shopping Center was 97% occupied as of December
31, 1996. Subsequent to the quarter end, a lease was signed for the remaining
1,200 square feet of vacant space, bringing the property to 100% leased. Despite
the positive leasing developments, the Colony Square joint venture still does
not produce any significant excess net cash flow after its debt service
payments. Upcoming improvements to the property include the conversion from an
electric heating system to a gas system.
As previously reported, under the terms of the HMF Associates loan
modification executed in fiscal 1992, all accrued and unpaid interest
outstanding as of June 30, 1992 was converted to principal. Subject to lender
approval, the Partnership was entitled to obtain additional advances up to
$9,100,000 to fund certain operating expenses of the joint venture and to cure
the construction defects in the operating investment properties. The loans and
any additional advances bear interest at a rate of 9% per annum. As of December
31, 1996, additional lender advances totalling approximately $4.8 million have
been made, and the total debt obligation of the joint venture totalled $23.5
million. Monthly payments are made in an amount equal to the "net operating
income", as defined, for the prior month. Unpaid interest is added to the
principal balance of the indebtedness on a monthly basis. The maturity date of
the loan secured by the Enchanted Woods Apartments is June 1, 1997, while the
maturity date of the loans secured by the Hunt Club and Marina Club properties
is July 1, 1997, at which time all unpaid principal, interest and advances are
due. Despite the successful remediation of the properties' construction defects
and the subsequent lease-up of the apartment units, the venture's net operating
income level is not sufficient to fully cover the interest accruing on the
outstanding debt obligations. As a result, the total obligation due to the
mortgage lender will continue to increase through the scheduled maturity dates.
Furthermore, the current aggregate estimated value of the investment properties
is substantially less than the venture's outstanding debt obligations as of
December 31, 1996. Accordingly, it is unlikely that the venture will be able to
settle or refinance the debt at the time of the fiscal 1997 maturities. The
result could be a foreclosure of all three of the operating investment
properties. The Partnership has a large negative carrying value for its
investment in HMF Associates as of December 31, 1996 because prior year equity
method losses and distributions have exceeded the Partnership's investments in
the venture. Consequently, the Partnership would recognize a gain for both book
and tax purposes upon the foreclosure of the operating investment properties.
Management has had numerous discussions with the mortgage holder for the
properties owned by HMF Associates regarding a possible loan modification aimed
at preventing the further accumulation of the deferred interest and reducing the
overall debt obligation. Such a plan would involve the prepayment of the
existing mortgage indebtedness at a discount and would require an equity
infusion by the venture of between approximately $1 million and $1.5 million.
Management of the Partnership has evaluated whether an additional investment of
this magnitude in the venture would be economically prudent in light of the
future appreciation potential of the properties and has concluded that it would
be unwise to commit the additional equity investment required to effect the
proposed debt restructuring. Management continues to examine alternative value
creation scenarios, however, it appears unlikely at the present time that the
Partnership will realize any future proceeds from the ultimate disposition of
its interests in these three properties.
At December 31, 1996 the Partnership and its consolidated venture had cash
and cash equivalents of approximately $5,642,000. Such cash and cash equivalents
will be utilized as needed for Partnership requirements such as the payment of
operating expenses, distributions to partners, as discussed further above, and
the funding of operating deficits or capital improvements of the joint ventures
in accordance with the terms of the respective joint venture agreements, to the
extent economically justified. The source of future liquidity and distributions
to the partners is expected to be from available net cash flow generated by the
operations of the Partnership's investment properties and from net proceeds 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 a long-term basis.
Results of Operations
Three Months Ended December 31, 1996
- ------------------------------------
The Partnership reported a net loss of $94,000 for the three months
ended September 30, 1996, as compared to a net loss of $75,000 for the same
period in the prior year. This increase in the Partnership's net loss is
attributable to an $84,000 increase in the Partnership's share of unconsolidated
ventures' losses which was partially offset by a favorable change in the
Partnership's operating income (loss) of $65,000. The increase in the
Partnership's share of unconsolidated ventures' losses is primarily attributable
to increases in property operating expenses and interest expense which were
partially offset by a small improvement in rental revenues. Property operating
expenses were higher for the three months ended December 31, 1996 by $66,000 due
to increases at each of the five unconsolidated joint ventures, primarily in the
area of repairs and maintenance costs. Interest expense increased by $30,000
mainly due to the accumulating principal balance on the mortgage loans secured
by properties owned by HMF Associates, as discussed further above. Rental
revenues increased by $22,000 primarily due to an increase in rental rates at
the Colony Apartments for the current three-month period. The favorable change
in the Partnership's operating income (loss) is primarily attributable to a
decrease in general and administrative expenses. General and administrative
expenses decreased by $73,000 primarily due to certain additional professional
fees incurred in the first quarter of fiscal 1996.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
The status of the litigation involving the Partnership's General Partners
and their affiliates remains unchanged from what was reported in the Annual
Report on Form 10-K for the year ended September 30, 1996.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
By: SEVENTH INCOME PROPERTIES FUND, INC.
Managing General Partner
By: /s/ Walter V. Arnold
---------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: February 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 5,642
<SECURITIES> 0
<RECEIVABLES> 103
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,759
<PP&E> 5,099
<DEPRECIATION> 1,684
<TOTAL-ASSETS> 9,325
<CURRENT-LIABILITIES> 73
<BONDS> 1,658
0
0
<COMMON> 0
<OTHER-SE> (1,471)
<TOTAL-LIABILITY-AND-EQUITY> 9,325
<SALES> 0
<TOTAL-REVENUES> 199
<CGS> 0
<TOTAL-COSTS> 135
<OTHER-EXPENSES> 110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (94)
<INCOME-TAX> 0
<INCOME-CONTINUING> (94)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94)
<EPS-PRIMARY> (2.44)
<EPS-DILUTED> (2.44)
</TABLE>
