UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 30, 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 of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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 the registrant dated Part IV
May 14, 1985, as supplemented
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership Interests II-1
and Related Security Holder Matters
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial II-2
Condition and Results of Operations
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-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-37
<PAGE>
PART I
Item 1. Business
Paine Webber Income Properties Seven Limited Partnership (the "Partnership")
is a limited partnership formed in January 1985 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of income-producing real properties including apartments,
shopping centers and office buildings. The Partnership sold $37,969,000 in
Limited Partnership units (the "Units"), representing 37,969 Units at $1,000 per
Unit, from May 14, 1985 to May 13, 1986 pursuant to a Registration Statement on
Form S-11 filed under the Securities Act of 1933 (Registration No. 2-95562).
Limited Partners will not be required to make any additional capital
contributions.
The Partnership originally invested the net proceeds of the public offering,
through five joint venture partnerships, in seven operating properties. As
discussed further below, although the Partnership retains an interest in its
five joint venture partnerships, a major portion of the investment in the
Concourse joint venture was lost through foreclosure proceedings in fiscal 1993.
As of September 30, 1996, the Partnership owned, through joint venture
partnerships, interests in the operating properties set forth in the following
table:
<TABLE>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- -------- ---- ----------- ---------------------
<S> <C> <C> <C>
West Palm Beach Concourse 30,473 7/31/85 Fee ownership of land
Associates (2) gross and improvements
The Concourse leasable (through joint venture)
Retail Plaza sq. ft.
West Palm Beach, Florida
Chicago Colony Apartments 783 12/27/85 Fee ownership of land
Associates units and improvements
The Colony Apartments (through joint venture)
Mount Prospect, Illinois
Chicago Colony Square 39,572 12/27/85 Fee ownership of land
Associates gross and improvements
Colony Square Shopping Center leasable (through joint venture)
Mount Prospect, Illinois sq. ft.
Daniel Meadows Partnership 200 6/19/86 Fee ownership of land
The Meadows on the Lake units and improvements
Apartments (through joint venture)
Birmingham, Alabama
HMF Associates (a joint venture Fee ownership of land
which owns the following three and improvements
properties): (through joint venture)
Enchanted Woods Apartments 217 5/29/87
(formerly Forest Ridge units
Apartments)
Seattle, Washington
The Marina Club Apartments 77 6/29/87
Seattle, Washington Units
The Hunt Club Apartments 130 6/29/87
Seattle, Washington units
</TABLE>
(1) See Notes to the Consolidated Financial Statements filed with this Annual
Report for a description of the long-term mortgage indebtedness secured by
the Partnership's operating property investments and for a description of
the agreements through which the Partnership has acquired these real estate
investments.
(2) On October 29, 1992, West Palm Beach Concourse Associates entered into a
settlement agreement with its mortgage lenders which resulted in the
retention of the ownership of the retail component of the original
investment property (30,473 square feet) and the foreclosure of the two
office towers (70,000 square feet each) by the first mortgage lender. The
foreclosure of the office towers was completed on December 17, 1992. West
Palm Beach Concourse Associates had been in default of the first and second
mortgage loans secured by the venture's mixed-use, office and retail
operating properties since May 1991. The inability of the venture to service
its debt obligations resulted from a significant deterioration in leasing
levels and effective rental rates for the office towers caused by severely
depressed local market conditions.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some
extent, will not constitute taxable income;
(ii) preserve and protect Limited Partners' capital;
(iii) achieve long-term appreciation in the value of its properties; and
(iv) provide a build up of equity through the reduction of mortgage loans
on its properties.
Regular quarterly distributions of excess operating cash flow were suspended
in 1990. Through September 30, 1996, the Limited Partners had received
cumulative cash distributions from operations totalling approximately
$7,706,000, or approximately $219 per original $1,000 investment for the
Partnership's earliest investors. A substantial portion of the cash
distributions to date have been sheltered from current taxable income. As a
result of recent improvement in the operating performances of The Meadows on the
Lake Apartments and the Colony Apartments, the Partnership expects to reinstate
the payment of regular quarterly cash distributions effective for the quarter
ended December 31, 1996 at an annualized rate of 2.5% on original invested
capital. In addition, the Partnership retains an ownership interest in its five
original joint venture investments, although, as noted above, a major portion of
the investment in The Concourse was lost to foreclosure in December 1992. The
foreclosure of the Concourse office towers, which represented approximately 28%
of the Partnership's original investment portfolio, will result in the inability
of the Partnership to return the full amount of the original capital contributed
by the Limited Partners. The amount of capital which will be returned will
depend upon the proceeds received from the final liquidation of the remaining
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their final disposition,
which, for the most part, cannot presently be determined. As discussed further
in Item 7, the Partnership does not currently expect to receive any proceeds
from the disposition of the three apartment complexes owned by HMF Associates
because the mortgage debt obligations secured by the properties significantly
exceed the estimated fair market values of the properties. These mortgage debt
obligations are scheduled to mature in fiscal 1997, at which time all three
operating properties could be lost to foreclosure. In addition, 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 two retail property investments. The
Managing General Partner's strategy is to preserve the Partnership's remaining
equity interests and to seek strategic opportunities to enhance property values,
within the constraints of the Partnership's limited capital resources, while the
respective local economies and rental markets continue to improve in order to
return as much of the invested capital as possible.
All of the properties securing the Partnership's investments are located
in real estate markets in which they face significant competition for the
revenues they generate. The apartment complexes compete with numerous projects
of similar type generally on the basis of price, location and amenities. As in
all markets, the apartment projects also compete with the local single family
home market for prospective tenants. The continued availability of low interest
rates on home mortgage loans has increased the level of this competition in all
parts of the country over the past several years. However, the impact of the
competition from the single-family home market has been offset by the lack of
significant new construction activity in the multi-family apartment market over
most of this period. In the past 12 months, development activity for
multi-family properties in many markets has escalated significantly. The
shopping center and retail plaza also compete for long-term commercial tenants
with numerous projects of similar type generally on the basis of location,
rental rates, tenant mix and tenant improvement allowances.
The Partnership has no real estate investments 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
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly owned
subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Seventh
Income Properties Fund, Inc. and Properties Associates 1985, L.P. Seventh Income
Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing
General Partner of the Partnership. The Associate General Partner of the
Partnership is Properties Associates 1985, L.P., a Virginia limited partnership,
certain limited partners of which are also officers of the Adviser and the
Managing General Partner. Subject to the Managing General Partner's overall
authority, the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
<PAGE>
Item 2. Properties
As of September 30, 1996, the Partnership owned interests in seven operating
properties through joint venture partnerships. The 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 each property.
Occupancy figures of each fiscal quarter during 1996, along with an average
for the year, are presented below for each property.
Percent Occupied At
-----------------------------------------------
Fiscal
1996
12/31/95 3/31/96 6/30/96 9/30/96 Average
-------- ------- ------- ------- -------
The Concourse Retail Plaza 100% 100% 90% 90% 95%
The Colony Apartments 97% 98% 97% 98% 98%
Colony Square Shopping Center 91% 91% 95% 97% 94%
The Meadows on the Lake
Apartments 95% 95% 96% 98% 96%
Enchanted Woods Apartments 91% 87% 87% 84% 87%
(formerly Forest Ridge
Apartments)
The Marina Club Apartments 94% 95% 89% 86% 91%
The Hunt Club Apartments 92% 92% 88% 91% 91%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Seventh Income Properties Fund, Inc. and Properties
Associates 1985, L.P. ("PA1985"), which are the General Partner of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Income Properties
Seven Limited Partnership, PaineWebber, Seventh Income Properties Fund, Inc. and
PA1985 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in PaineWebber
Income Properties Seven Limited Partnership, also allege that following the sale
of the partnership interests, PaineWebber, Seventh Income Properties Fund, Inc.
and PA1985 misrepresented financial information about the Partnership's value
and performance. The amended complaint alleged that PaineWebber, Seventh Income
Properties Fund, Inc. and PA1985 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
Mediation with respect to the Bandrowski action described above was held in
December 1996. As a result of such mediation, a tentative settlement between
PaineWebber and the plaintiffs was reached which would provide for a complete
resolution of the action. PaineWebber anticipates that releases and dismissals
with regard to this action will be received by February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1996 there were 2,345 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for the Units will develop. The Managing
General Partner will not redeem or repurchase Units.
There were no cash distributions made to the Limited Partners during fiscal
1996. Because of improvements in cash flow and the expectation that it will
continue in the future, the Partnership expects to reinstate 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 would be made on
February 14, 1997, for the quarter ending December 31, 1996. In addition, the
Partnership expects to make a special distribution of $40 per original $1,000
investment on February 14, 1997, to unit holders of record on December 31, 1996.
This amount represents a distribution of Partnership reserves which exceed
expected future requirements. Until this information concerning the expected
reinstatement of regular quarterly distributions and the special distribution is
fully disseminated, share trading in the informal secondary market has been
temporarily suspended. Secondary share trading is scheduled to resume on January
16, 1997.
Item 6. Selected Financial Data
Paine Webber Income Properties Seven Limited Partnership
For the years ended September 30, 1996, 1995, 1994, 1993 and 1992
(In thousands except per unit data)
1996 1995 1994 1993(1) 1992
---- ---- ---- ------- ----
Revenues $ 773 $ 835 $ 561 $ 905 $ 1,656
Operating loss $ (128) $ (101) $ (401) $ (530) $(1,756)
Provision for
investment loss - - - - $(2,148)
Partnership's share
of unconsolidated
ventures' losses $ (276) $(1,100) $(1,592) $ (2,484) $(1,713)
Loss on transfer
of assets
at foreclosure - - - $ (6,468) -
Loss before
extraordinary
gains $ (404) $(1,200) $(1,992) $ (9,479) $ (5,601)
Extraordinary gains from
settlement of debt
obligations - $ 1,600 - $ 6,405 -
Net income (loss) $ (404) $ 400 $(1,992) $ (3,074) $ (5,601)
Per Limited Partnership Unit:
Loss before
extraordinary
gains $ (10.53) $(31.29) $(51.90) $(247.02) ($145.97)
Extraordinary gains
from settlement of
debt obligations - $ 41.72 - $ 166.91 -
Net income (loss) $ (10.53) $ 10.43 $(51.90) $ (80.11) $(145.97)
Total assets $ 8,852 $ 7,148 $ 6,347 $ 5,191 $ 18,484
Mortgage notes
payable $1,671 $ 1,723 $2,499 $ 2,523 $ 2,557
(1) The significant decline in total assets as of September 30, 1993 and the
decline in revenues in fiscal 1993 resulted from the foreclosure, in
December 1992, of two office towers owned by a joint venture in which
the Partnership owns a majority and controlling interest. As more fully
explained in Note 4 to the accompanying consolidated financial
statements, at September 30, 1992 certain assets and liabilities
associated with these properties were segregated and separately
classified on the Partnership's balance sheet as assets and liabilities
of operating investment properties subject to foreclosure. In 1993, the
assets and liabilities of the office towers were written off.
The above selected financial data should be read in conjunction with the
consolidated financial statements and the related notes appearing elsewhere in
this Annual Report.
The above per Limited Partnership Unit information is based upon the 37,969
Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered units of limited partnership interests to the public
from May 14, 1985 to May 13, 1986 pursuant to a Registration Statement filed
under the Securities Act of 1933. Gross proceeds of $37,969,000 were received by
the Partnership, and after deducting selling expenses and offering costs,
approximately $32,602,000 was invested in five joint venture partnerships which
owned seven operating properties, comprised of five multi-family apartment
complexes, one mixed-use office and retail property and one shopping center.
Although the Partnership retains an interest in all five of its original joint
ventures, 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. The Partnership retains an interest in the retail plaza
portion of the Concourse property. 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
September 30, 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 Partnership does not have any commitments for additional
investments but may be called upon to fund its share of operating deficits or
capital needs of its existing investments in accordance with the respective
joint venture agreements.
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. Nonetheless, 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 expects
to reinstate 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 would 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, combined with the
recently completed refinancings at attractive interest rates, 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 also
expects to 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. Trading of the Partnership's Units has been temporarily suspended
until the above information concerning the expected reinstatement of regular
quarterly distributions and the special distribution is fully disseminated.
Trading is scheduled to resume on January 16, 1997.
As previously reported, on August 1, 1995 the $16.75 million non-recourse
wraparound mortgage note secured by the Colony Apartments property was
refinanced with a new $17.4 million non-recourse mortgage note at a fixed
interest rate of 7.6% per annum. The new note requires monthly principal and
interest payments of approximately $130,000 until maturity on August 1, 2002. As
a condition of the new loan, the Colony Apartments joint venture was required to
establish an escrow account in the amount of $685,000 for the completion of
agreed upon repairs, $156,600 for capital replacement reserves and $600,000 for
real estate taxes. Despite the significant decrease in the interest rate on the
mortgage loan, the venture's monthly debt service decreased by only $28,000 due
to the higher principal balance and the monthly principal amortization required
under the new loan agreement. The Colony Apartments joint venture continues to
generate significant excess cash flow which, over the past several years, has
represented the Partnership's only consistent source of liquidity. The
Partnership received cash flow distributions of $1,517,000 from the Colony
Apartments joint venture during fiscal 1996, a significant improvement from
distributions of $797,000 received during fiscal 1995. In fiscal 1996, the
Partnership also received distributions of $345,000 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 fiscal 1996, 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. 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 September 30, 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. Occupancy at the Concourse Retail Plaza declined in the third quarter
of fiscal 1996 when a tenant occupying approximately 4,000 square feet vacated
its space in early May. Although this tenant vacated its space, it is still
obligated to pay rent until a suitable sublessor can be found for the remainder
of its lease term which can be terminated with six months notice in 1999.
Management continues to closely monitor the operating performance of the
property's other three restaurant tenants. Two of these tenants 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. Both tenants are currently
meeting the modified terms of their rental obligations, although one of the
tenants continues to report operational difficulties. At Colony Square,
occupancy increased in the third and fourth quarters of fiscal 1996 as three
existing tenants expanded their space in conjunction with renewals of their
lease obligations. Subsequent to these renewals, only one 1,200 square foot
space remains unleased at Colony Square. Despite the positive leasing
developments, the Colony Square joint venture still does not produce any excess
net cash flow after its debt service payments.
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 the
cure construction defects in the operating investment properties. The loans and
any additional advances bear interest at a rate of 9% per annum. As of September
30, 1996, additional lender advances totalling approximately $4.8 million have
been made, and the total debt obligation of the joint venture totalled $23.3
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 construction defects and the
subsequent lease-up of the properties, the venture's net operating income level
is not sufficient to fully cover the interest accruing on the outstanding debt
obligation. As a result, the total obligation due to the mortgage lender will
continue to increase through the scheduled maturity date. Furthermore, the
current aggregate estimated value of the investment properties is substantially
less than the venture's outstanding debt obligation as of September 30, 1996.
Accordingly, it is unlikely that the venture will be able to settle or refinance
the debt at the time of the fiscal 1997 maturity. 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
September 30, 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. During fiscal 1995,
management had preliminary 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 have involved a prepayment of the
existing mortgage indebtedness at a discount and would have required an equity
infusion by the venture of between approximately $1 million and $1.5 million.
Management of the Partnership 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 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 September 30, 1996 the Partnership and its consolidated venture had cash
and cash equivalents of approximately $5,067,000. 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.
Results of Operations
1996 Compared to 1995
- ---------------------
The Partnership reported a net loss of $404,000 for the year ended September
30, 1996, as compared to net income of $400,000 in fiscal 1995. This change in
the Partnership's net operating results is attributable to a $27,000 increase in
the Partnership's operating loss and an extraordinary gain of $1,600,000
recognized in fiscal 1995 which were partially offset by a decrease of $824,000
in the Partnership's share of unconsolidated ventures' losses. The $1,600,000
extraordinary gain resulted from the discounts obtained on the repayment of the
Concourse second mortgage loan and the refinancing of the Colony Apartments
first mortgage debt obligation during fiscal 1995. The consolidated Concourse
joint venture recognized an extraordinary gain on settlement of debt obligation
of $530,000 in fiscal 1995 resulting from the November 1994 discounted repayment
of the second mortgage note secured by the Concourse Retail Plaza. In addition,
the unconsolidated Colony Apartments joint venture received a discount of
$1,070,000 on the pay-off of the venture's wraparound mortgage loan in
connection with the August 1995 refinancing transaction, as discussed further
above. This discount was recorded as an extraordinary gain on settlement of debt
obligation and was allocated 100% to the Partnership in accordance with the
joint venture agreement.
The Partnership's share of unconsolidated ventures' losses decreased by
$824,000 in fiscal 1996, when compared to fiscal 1995, partly due to a gain of
$197,000 recognized by the Meadows joint venture in fiscal 1996, along with a
$306,000 increase in combined revenues and a $507,000 decrease in combined
interest expense. As of September 30, 1995, management of the Meadows joint
venture had estimated that the costs to complete the required structural repairs
to the Meadows on the Lake Apartments would exceed the insurance settlement
proceeds by $300,000, and the venture recognized a loss of such amount in fiscal
1995. During fiscal 1996, management revised its plans for completing the
renovations resulting in the required repairs being accomplished for
substantially less than the prior estimates. This change in estimate resulted in
a gain of $197,000 for financial reporting purposes which is reflected in the
venture's fiscal 1996 income statement. Combined revenues increased by $306,000
due to a $250,000 increase in rental revenues and a $56,000 increase in other
income. Rental revenues at Colony Apartments and Colony Square increased by
$272,000 and $43,000, respectively, due to increases in rental rates while
combined rental revenues from the three properties owned by HMF Associates
decreased by $63,000 due to declines in average occupancy at two of the three
properties. The decrease in combined interest expense in fiscal 1996 is
primarily attributable to a $540,000 decrease in interest expense at the Colony
Apartments joint venture due to the lower interest rate obtained as a result of
the August 1995 refinancing discussed further above. The impact of the
accounting for the Meadows insurance settlement, the increase in revenues and
the decline in interest expense were partially offset by increases in
deprecation and amortization and repairs and maintenance expenses during fiscal
1996. Depreciation and amortization increased by $119,000 primarily due to the
additional depreciation associated with the capital improvements completed at
the Colony Apartments, Meadows Apartments, and the properties owned by HMF
Associates over the past two years. Repairs and maintenance expenses increased
by $112,000 due to higher expenses incurred at three of the four unconsolidated
joint ventures during fiscal 1996.
The Partnership's operating loss increased by $27,000 when compared to
fiscal 1995 primarily due to a $88,000 decrease in interest income and a slight
increase in the net loss of the consolidated Concourse joint venture which were
partially offset by a decrease in the Partnership's general and administrative
expenses. The Partnership's interest income decreased by $88,000 due to the
recognition in fiscal 1995 of $175,000 of previously unrecorded interest
received on an optional loan to a joint venture which was repaid in fiscal 1995.
Interest income without the effect of this optional loan repayment increased by
$87,000 in fiscal 1996 as a result of higher average outstanding cash balances
during the current year. General and administrative expenses decreased by
$79,000 primarily due additional professional fees incurred in fiscal 1995
associated with an independent valuation of the Partnership's portfolio of real
estate assets and legal fees associated with the Concourse refinancing
transaction. The net loss of the consolidated Concourse joint venture increased
by $6,000 in fiscal 1996 primarily due to a bad debt of $89,000 recognized in
fiscal 1996 in connection with the rental obligation forgiveness discussed
further above. The current year bad debt expense was partially offset by a
$20,000 decrease in interest expense, a $16,000 decline in property operating
expenses, a $5,000 reduction in real estate taxes and a $10,000 decrease in
depreciation expense. Interest expense decreased by $20,000 due to the lower
interest rate on the venture's first mortgage loan which was refinanced in
January 1995.
1995 Compared to 1994
- ---------------------
The Partnership reported net income of $400,000 for the year ended September
30, 1995, as compared to a net loss of $1,992,000 for the prior year. This
favorable change in the Partnership's net operating results was due to a
substantial decrease in the Partnership's share of unconsolidated ventures'
losses, extraordinary gains realized from discounts obtained on the Concourse
second mortgage loan and the Colony Apartments first mortgage debt obligation
and a decrease in the Partnership's operating loss.
The Partnership's share of unconsolidated ventures' losses decreased by
$492,000 in fiscal 1995 when compared to fiscal 1994 primarily due to an
increase of $429,000 in rental revenues from the lease-up of the renovated
apartment complexes owned by HMF Associates. As further discussed above, the
apartments owned by HMF Associates had construction-related defects that forced
management to cease its leasing activities during the majority of the
remediation period from fiscal 1991 through 1993. Average occupancy at the three
HMF apartment complexes increased from 83% during the re-leasing phase in fiscal
1994 to 93% for fiscal 1995. Increases in rental revenues at the Meadows
Apartments, Colony Apartments and Colony Square Shopping Center also had a
positive impact on the Partnership's share of unconsolidated ventures' losses
for fiscal 1995. Revenues at the Meadows Apartments and Colony Apartments
increased due to slight increases in both rental rates and average occupancy
when compared to fiscal 1994. At The Meadows on the Lake Apartments, rental
revenues improved by $73,000, or 5%, in fiscal 1995, when compared to the prior
year, while average occupancy increased from 97% to 98%. Rental revenues
increased by $140,000, or 3%, at the Colony Apartments where average occupancy
also increased from 97% for fiscal 1994 to 98% for fiscal 1995. In addition,
repairs and maintenance expenses decreased by $339,000 at the Colony Apartments
as a result of a shift in focus of the property's maintenance program from
deferred repairs and maintenance performed in fiscal 1994 to capital
expenditures incurred in fiscal 1995. Capital expenditures of the Colony
Apartments joint venture increased by $315,000 in fiscal 1995. At the Colony
Square Shopping Center, revenues (including tenant reimbursements of operating
expenses) were up by $41,000 over fiscal 1994 as a result of the increase in
average occupancy from 91% for fiscal 1994 to 93% for fiscal 1995. The increases
in rental revenues at all of the unconsolidated joint ventures and the decrease
in repairs and maintenance expenses at the Colony Apartments were partially
offset by increases in depreciation and amortization expense at the Colony
Apartments and HMF Associates joint ventures and by an increase of $175,000 in
real estate taxes at HMF Associates as a result of certain refunds of prior year
taxes received in fiscal 1994. In addition, a $300,000 loss on insurance
settlement recognized by the Meadows joint venture in fiscal 1995 also offset
the favorable change in unconsolidated ventures' losses.
The consolidated Concourse joint venture recognized a gain on settlement of
debt obligation of $530,000 in fiscal 1995 resulting from the discounted
repayment of the second mortgage note secured by the Concourse Retail Plaza. In
addition, the unconsolidated Colony Apartments joint venture received a discount
of $1,070,000 on the pay-off of the venture's wraparound mortgage loan in
connection with the venture's fiscal 1995 refinancing transaction. Such discount
was recorded as an extraordinary gain on settlement of debt obligation and was
allocated 100% to the Partnership in accordance with the joint venture
agreement. The Partnership's operating loss for fiscal 1995 decreased by
$300,000 when compared to fiscal 1994 as a result of an increase in interest
income and decreases in the operating loss of the consolidated Concourse joint
venture. Interest income in fiscal 1995 includes an amount of interest received
on an optional loan to a joint venture which was repaid in fiscal 1995. Interest
income also increased as a result of higher average outstanding cash balances
and an increase in interest rates in fiscal 1995. The operating loss at the
Concourse joint venture decreased by $38,000 in fiscal 1995 primarily due to a
slight increase in rental revenues and a decrease of $31,000 in interest expense
which resulted from the lower interest rate on the venture's new first mortgage
note. The increase in rental revenues of $18,000 resulted from an increase in
the average occupancy of the Concourse Retail Plaza from 90% for fiscal 1994 to
93% for fiscal 1995.
1994 Compared to 1993
- ---------------------
The Partnership reported a net loss of $1,992,000 for the fiscal year ended
September 30, 1994, a decrease of $1,082,000 when compared with the net loss of
$3,074,000 in fiscal 1993. This favorable change in net operating results can be
primarily attributed to a decrease in the Partnership's share of consolidated
ventures' losses of $892,000 and a decrease in the Partnership's operating loss
of $129,000.
The Partnership's share of unconsolidated ventures' losses decreased
primarily due to increases in revenues of $1,139,000 from the lease-up of the
renovated apartment complexes owned by HMF Associates. As discussed further
above and in Note 5 to the accompanying financial statements, the apartments
owned by HMF Associates had construction-related defects that forced management
to cease its leasing activities during the majority of the remediation period
from fiscal 1991 through 1993. A net increase in total expenses at HMF
Associates of $379,000 partially offset the increase in revenues in fiscal 1994.
Expenses at this joint venture increased in fiscal 1994 mainly due to higher
mortgage interest expense resulting from advances from the mortgage lender used
for construction repairs, as well as deferred debt service payments added to the
principal balance of the venture's debt. The three other unconsolidated
ventures, Chicago Colony Apartments Associates, Chicago Colony Square Associates
and Daniel Meadows Partnership, also contributed to the favorable change in the
Partnership's net operating results with each venture posting modest increases
in rental revenues and net operating results.
The Partnership's operating loss for fiscal 1994 decreased mainly due to the
inclusion in fiscal 1993 of a partial year of operations associated with the two
office towers owned by the consolidated Concourse joint venture prior to their
foreclosure in December 1992. The operations of the office towers, after debt
service, had been generating sizable losses prior to the foreclosure
transaction. The decrease in operating loss resulting from the foreclosure of
the Concourse office towers was partially offset by an increase in Partnership
general and administrative expenses in fiscal 1994. General and administrative
expenses increased mainly as a result of additional expenditures incurred
related to an independent valuation of the Partnership's operating properties
which was commissioned in fiscal 1994 in conjunction with management's ongoing
refinancing and portfolio management responsibilities.
Inflation
- ---------
The Partnership completed its eleventh full year of operations in fiscal
1996 and the effects of inflation and changes in prices on the Partnership's
operating results to date have not been significant.
Inflation in future periods may increase revenues, as well as operating
expenses, at the Partnership's operating investment properties. Some of the
existing leases with tenants at the Partnership's retail plaza and retail
shopping center contain rental escalation and/or expense reimbursement clauses
based on increases in tenant sales or property operating expenses, which would
tend to rise with inflation. Tenants at the Partnership's apartment properties
have short-term leases, generally of six-to-twelve months in duration. Rental
rates at these properties can be adjusted to keep pace with inflation, as market
conditions allow, as the leases are renewed or turned over. Such increases in
rental income would be expected to at least partially offset the corresponding
increases in Partnership and property operating expenses caused by future
inflation.
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 Seventh Income Properties
Fund, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1985, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation, however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(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 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and
Assistant Treasurer 54 1/15/85 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 34 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
and 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, and for which Paine Webber Properties Incorporated serves as the
Adviser. 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 a Senior Vice President and Chief Financial
Officer of the Adviser 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 the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
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 the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and a Vice President and Treasurer of the Adviser which he
joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the
Controller of the Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner
and a Vice President and Manager of Financial Reporting of the Adviser 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 were 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 September 30, 1996, 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 direct remuneration from the Partnership. The Partnership is required
to pay certain fees to the Adviser, and the General Partners are entitled to
receive a share of Partnership cash distributions and a share of profits and
losses. These items are described under Item 13.
Regular quarterly distributions to the Partnership's Unitholders were
suspended from fiscal 1990 through fiscal 1996. Distributions are expected to be
reinstated at an annual rate of 2.5% on original invested capital effective for
the first of fiscal 1997. However, the Partnership's Units of Limited
Partnership Interest are not actively traded on any organized exchange, and no
efficient secondary market exists. Accordingly, no accurate price information is
available 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, Seventh Income Properties Fund, Inc. is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia limited partnership, certain limited partners of which are also
officers of the Adviser and 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, nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of limited partnership interest of the Partnership. As of September 30,
1996, PaineWebber and its affiliates owned 132 Units of limited partnership
interests 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.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Seventh Income Properties
Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group, Inc. ("PaineWebber") and Properties Associates 1985, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General Partner and
PaineWebber Properties Incorporated. Subject to the Managing General Partner's
overall authority, the business of the Partnership is managed by PaineWebber
Properties Incorporated (the "Adviser") pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI").
The General Partners, the Adviser and PWI receive fees and compensation,
determined on an agreed-upon basis, in consideration for various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments.
In connection with the acquisition of properties, the Adviser received
acquisition fees in an amount equal to 5% of the gross proceeds from the sale of
the Partnership Units. In connection with the sale of each property, the Adviser
may receive a disposition fee in an amount equal to the lesser of 1% of the
aggregate sales price of the property or 50% of the standard brokerage
commissions, subordinated to the payment of certain amounts to the Limited
Partners.
Under the terms of the Partnership Agreement, as amended, any taxable
income or tax loss (other than from a Capital Transaction) of the Partnership
will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. Taxable income or tax loss arising from a sale or refinancing
of investment properties will 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, however, that the General Partners shall not
be allocated aggregate gain as a result of all sales or refinancings in excess
of the aggregate net losses previously allocated to them and the total cash
distributed to them; provided further, however, that the General Partners shall
be allocated at least 1% of taxable income arising from a sale or refinancing.
If there are no sale or refinancing proceeds, taxable income or tax loss from a
sale or refinancing will be allocated 98.94802625% to the Limited Partners and
1.05197375% to the General Partners. Notwithstanding this, the Partnership
Agreement provides that the allocation of taxable income and tax losses arising
from the sale of a property which leads to the dissolution of the Partnership
shall be adjusted to the extent feasible so that neither the General or Limited
Partners recognize any gain or loss as a result of having either a positive or
negative balance remaining in their capital accounts upon the dissolution of the
Partnership. If the General Partner has a negative capital account balance
subsequent to the sale of a property which leads to the dissolution of the
Partnership, the General Partner may be obligated to restore a portion of such
negative capital account balance as determined in accordance with the provisions
of the Partnership Agreement. 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.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee.
Under the advisory contract, the Adviser 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. The Adviser will be paid a basic management fee (3% of adjusted cash
flow, as defined in the Partnership Agreement) and an incentive management fee
(2% of adjusted cash flow subordinated to a noncumulative annual return to the
Limited Partners equal to 6% based upon their adjusted capital contributions),
in addition to the asset management fee described above, for services rendered.
No management fees were earned by the Adviser for the year ended September 30,
1996.
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 September 30, 1996 is $81,000, representing reimbursements to
this affiliate 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 $13,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended September 30, 1996. 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 listed on the accompanying Index to Exhibits at
Page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of
fiscal 1996.
(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.
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
By: Seventh Income Properties Fund, 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
Dated: January 10, 1997
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 in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 10, 1997
---------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 10, 1997
---------------------- ----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ------------------------ ------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated May 14, 1985, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended September 30, 1996 has
been sent to the Limited Partners.
An Annual Report will be sent to
the Limited Partners
subsequent to this filing.
(27) Financial Data Schedule Filed as 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 14(d)
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
Paine Webber Income Properties Seven Limited Partnership:
Report of independent auditors F-2
Consolidated balance sheets as of September 30, 1996 and 1995 F-3
Consolidated statements of operations for the years ended
September 30, 1996, 1995 and 1994 F-4
Consolidated statements of changes in partners' capital
(deficit) for the years ended September 30, 1996, 1995 and 1994 F-5
Consolidated statements of cash flows for the years ended
September 30, 1996, 1995 and 1994 F-6
Notes to consolidated financial statements F-7
Schedule III - Real estate and accumulated depreciation F-24
Combined Joint Ventures of Paine Webber Income Properties Seven Limited
Partnership:
Report of independent auditors F-25
Combined balance sheets as of September 30, 1996 and 1995 F-26
Combined statements of operations and changes in venturers' F-27
deficit for the years ended September 30, 1996, 1995 and 1994
Combined statements of cash flows for the years ended
September 30, 1996, 1995 and 1994 F-28
Notes to combined financial statements F-29
Schedule III - Real estate and accumulated depreciation F-37
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Seven Limited Partnership:
We have audited the accompanying consolidated balance sheets of Paine Webber
Income Properties Seven Limited Partnership as of September 30, 1996 and 1995,
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 September 30, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Paine Webber Income Properties Seven Limited Partnership at September 30, 1996
and 1995, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 30, 1996, 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
January 8, 1997
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(In thousands, except per Unit amounts)
ASSETS
1996 1995
---- ----
Operating investment property:
Land $ 698 $ 698
Buildings and improvements 4,294 4,269
Equipment and fixtures 107 107
--------- ----------
5,099 5,074
Less accumulated depreciation (1,651) (1,512)
--------- ---------
3,448 3,562
Cash and cash equivalents 5,067 3,252
Escrowed funds 74 75
Accounts receivable 107 84
Accounts receivable - affiliates 2 2
Deferred expenses, net of accumulated amortization
of $56 ($37 in 1995) 122 141
Other assets 32 32
--------- ----------
$ 8,852 $ 7,148
========= ==========
LIABILITIES AND PARTNERS' DEFICIT
Equity in losses from unconsolidated joint
ventures in excess
of investments and advances $ 8,413 $ 6,275
Mortgage note payable 1,671 1,723
Accounts payable and accrued expenses 61 37
Accrued interest payable 15 16
Accrued real estate taxes 59 60
Other liabilities 10 10
--------- ----------
Total liabilities 10,229 8,121
Partners' deficit:
General Partners:
Capital contributions 1 1
Cumulative net loss (475) (471)
Cumulative cash distributions (282) (282)
Limited Partners ($1,000 per Unit; 37,969 Units issued):
Capital contributions, net of offering costs 33,529 33,529
Cumulative net loss (26,444) (26,044)
Cumulative cash distributions (7,706) (7,706)
--------- ----------
Total partners' deficit (1,377) (973)
--------- ----------
$ 8,852 $ 7,148
========= ==========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1996, 1995 and 1994
(In thousands, except per Unit amounts)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense recoveries $ 523 $ 497 $ 479
Interest and other income 250 338 82
------- ------ --------
773 835 561
Expenses:
Mortgage interest 195 215 246
Property operating expenses 103 119 112
Depreciation expense 139 149 145
Real estate taxes 77 82 76
General and administrative 285 364 373
Bad debt expense 89 - 2
Amortization expense 13 7 8
------- ------- --------
901 936 962
------- ------- --------
Operating loss (128) (101) (401)
Partnership's share of unconsolidated
ventures' losses (276) (1,100) (1,592)
Venture partner's share of consolidated
venture's operations - 1 1
------- -------- -------
Loss before extraordinary gains (404) (1,200) (1,992)
Extraordinary gains from settlement
of debt obligations - 1,600 -
------- -------- --------
Net income (loss) $ (404) $ 400 $(1,992)
======= ========= =======
Net income (loss) per Limited Partnership Unit:
Loss before extraordinary gains $(10.53) $(31.29) $ (51.90)
Extraordinary gains from settlement
of debt obligations - 41.72 -
------- ------- --------
Net income (loss) $(10.53) $ 10.43 $ (51.90)
======= ======= ========
The above per Limited Partnership Unit information is based upon the 37,969
Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at September 30, 1993 $ (735) $ 1,354 $ 619
Net loss (21) (1,971) (1,992)
------ ------- ---------
Balance at September 30, 1994 (756) (617) (1,373)
Net income 4 396 400
------ ------- ---------
Balance at September 30, 1995 (752) (221) (973)
Net loss (4) (400) (404)
------ ------- ---------
Balance at September 30, 1996 $ (756) $ (621) $ (1,377)
====== ======= ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (404) $ 400 $(1,992)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 152 156 153
Amortization of deferred financing costs 6 6 -
Partnership's share of unconsolidated
ventures' losses 276 1,100 1,592
Venture partner's share of
consolidated venture's operations - (1) (1)
Extraordinary gains from settlement of debt
obligations - (1,600) -
Changes in assets and liabilities:
Escrowed funds 1 2 (2)
Accounts receivable (23) (34) (10)
Deferred expenses - (8) (1)
Other assets - (27) (1)
Accounts payable - affiliates - - (20)
Accounts payable and accrued expenses 24 7 (10)
Accrued interest payable (1) 7 (3)
Accrued real estate taxes (1) 3 (3)
------- ------- -------
Total adjustments 434 (389) 1,694
------- ------- -------
Net cash provided by (used in)
operating activities 30 11 (298)
Cash flows from investing activities:
Additions to operating investment property (25) (132) -
Additional investments in unconsolidated
joint ventures - - (14)
Distributions from unconsolidated
joint ventures 1,862 1,211 1,632
-------- ------- ------
Net cash provided by investing
activities 1,837 1,079 1,618
-------- ------- ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 1,751 -
Repayment of mortgage notes payable (52) (2,077) (23)
Deferred loan costs - (83) (25)
-------- ------- -------
Net cash used in financing activities (52) (409) (48)
-------- ------- -------
Net increase in cash and cash equivalents 1,815 681 1,272
Cash and cash equivalents, beginning of year 3,252 2,571 1,299
--------- -------- --------
Cash and cash equivalents, end of year $ 5,067 $ 3,252 $ 2,571
======== ======== ========
Cash paid during the year for interest $ 190 $ 202 $ 250
======== ======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
Notes to Financial Statements
1. Organization and Nature of Operations
Paine Webber Income Properties Seven Limited Partnership (the
"Partnership") is a limited partnership organized pursuant to the laws of the
State of Delaware in January 1985 for the purpose of investing in a diversified
portfolio of income-producing properties. The Partnership authorized the
issuance of Partnership units (the "Units"), at $1,000 per Unit, of which 37,969
were subscribed and issued between May 14, 1985 and May 13, 1986.
The Partnership originally invested the net proceeds of the public offering,
through five joint venture partnerships, in seven operating properties,
comprised of five multi-family apartment complexes, one mixed-use office and
retail property and one shopping center. As discussed further in Note 4,
although the Partnership retains an interest in all five of its original joint
ventures, the office portion of the investment in the mixed-use Concourse
property was lost through foreclosure proceedings on December 17, 1992. The
Partnership retains an interest in the retail plaza portion of the Concourse
property. The two office towers owned by the Concourse joint venture had
comprised approximately 28% of the Partnership's original investment portfolio.
In addition, as discussed further in Note 5, the Partnership does not currently
expect to receive any proceeds from the disposition of three Seattle, Washington
area apartment properties owned by one of its joint ventures because the
mortgage debt obligation secured by the properties significantly exceeds the
estimated fair market value of the properties. This mortgage debt obligation is
scheduled to mature in fiscal 1997, at which time the operating properties could
be lost to foreclosure.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying consolidated 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 September 30, 1996 and 1995 and revenues
and expenses for each of the three years in the period ended September 30, 1996.
Actual results could differ from the estimates and assumptions used.
The accompanying consolidated financial statements include the
Partnership's investments in five joint venture partnerships which own seven
operating properties. Except as described below, the Partnership accounts for
its investments in joint venture partnerships using the equity method because
the Partnership does not have a voting control interest in the ventures. Under
the equity method, the venture is carried at cost adjusted for the Partnership's
share of the venture's earnings or losses and distributions. See Note 5 for a
description of these unconsolidated joint venture partnerships.
As further discussed in Note 4, on September 14, 1990, the co-venture
partner of West Palm Beach Concourse Associates assigned its 15% general
partnership interest to Seventh Income Properties Fund, Inc., the Managing
General Partner of the Partnership (see Note 3). The assignment gave the
Partnership control over the affairs of the joint venture. Accordingly, this
joint venture, which had been accounted for under the equity method in years
prior to fiscal 1990, is presented on a consolidated basis in the accompanying
financial statements. All transactions between the Partnership and the joint
venture have been eliminated in consolidation. The operating investment property
(the Concourse Retail Plaza) is carried at the lower of cost, reduced by
previously received guaranteed payments and accumulated depreciation, or net
realizable value. The net realizable value of a property held for long-term
investment purposes is measured by the recoverability of the Partnership's
investment through expected future cash flows on an undiscounted basis, which
may exceed the property's market value. The net realizable value of a property
held for sale approximates its current market value. The operating investment
property is not considered to be held for sale as of September 30, 1996 or 1995.
The Partnership has reviewed FAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is
effective for financial statements for years beginning after December 15, 1995,
and believes this new pronouncement will not have a material effect on the
Partnership's financial statements.
Depreciation expense on the operating investment property is computed
using the straight-line method over an estimated useful life of thirty years for
the buildings and improvements and five years for the equipment and fixtures.
Acquisition fees have been capitalized and are included in the cost of the
operating investment property.
Deferred expenses at September 30, 1996 and 1995 include leasing
commissions and deferred refinancing cost related to the Concourse Retail Plaza.
The leasing commissions are being amortized on a straight-line basis over the
terms of the related leases. The deferred refinancing costs are being amortized
on a straight-line basis over the term of the new loan. Amortization of deferred
refinancing costs is included in interest expense on the accompanying statements
of operations.
The consolidated joint venture leases retail space at the operating
investment property under short-term and long-term operating leases. Rental
revenues are recognized on a straight-line basis over the term of the respective
leases.
For the purposes of reporting cash flows, cash and cash equivalents
include all highly liquid debt instruments which have original maturities of 90
days or less.
The cash and cash equivalents, escrowed funds, accounts receivable,
accounts payable and accrued liabilities appearing on the accompanying balance
sheets represent financial instruments for purposes of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." The carrying amount of these assets and liabilities approximates
their fair value as of September 30, 1996 due to the short-term maturities of
these instruments. The mortgage note payable is also a financial instrument for
purposes of FAS 107. The fair value of the mortgage note payable is estimated
using discounted cash flow analysis based on the current market rate for a
similar type of borrowing arrangement (see Note 6).
No provision for income taxes has been made in the accompanying financial
statements as the liability for such 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. In cases where the disposition of the investment involves the
lender foreclosing on the investment, taxable income could occur without
distribution of cash. This income would represent passive income to the partners
which could be offset by each partners' existing passive losses, including any
passive loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Seventh Income Properties
Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group, Inc. ("PaineWebber") and Properties Associates 1985, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General Partner and
PaineWebber Properties Incorporated. Subject to the Managing General Partner's
overall authority, the business of the Partnership is managed by PaineWebber
Properties Incorporated (the "Adviser") pursuant to an advisory contract. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). The
General Partners, the Adviser and PWI receive fees and compensation, determined
on an agreed-upon basis, in consideration for various services performed in
connection with the sale of the Units, the management of the Partnership and the
acquisition, management, financing and disposition of Partnership investments.
In connection with the acquisition of properties, the Adviser received
acquisition fees in an amount equal to 5% of the gross proceeds from the sale of
the Partnership Units. In connection with the sale of each property, the Adviser
may receive a disposition fee in an amount equal to the lesser of 1% of the
aggregate sales price of the property or 50% of the standard brokerage
commissions, subordinated to the payment of certain amounts to the Limited
Partners.
Under the terms of the Partnership Agreement, as amended, any taxable
income or tax loss (other than from a Capital Transaction) of the Partnership
will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the
General Partners. Taxable income or tax loss arising from a sale or refinancing
of investment properties will 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, however, that the General Partners shall not
be allocated aggregate gain as a result of all sales or refinancings in excess
of the aggregate net losses previously allocated to them and the total cash
distributed to them; provided further, however, that the General Partners shall
be allocated at least 1% of taxable income arising from a sale or refinancing.
If there are no sale or refinancing proceeds, taxable income or tax loss from a
sale or refinancing will be allocated 98.94802625% to the Limited Partners and
1.05197375% to the General Partners. Notwithstanding this, the Partnership
Agreement provides that the allocation of taxable income and tax losses arising
from the sale of a property which leads to the dissolution of the Partnership
shall be adjusted to the extent feasible so that neither the General or Limited
Partners recognize any gain or loss as a result of having either a positive or
negative balance remaining in their capital accounts upon the dissolution of the
Partnership. If the General Partner has a negative capital account balance
subsequent to the sale of a property which leads to the dissolution of the
Partnership, the General Partner may be obligated to restore a portion of such
negative capital account balance as determined in accordance with the provisions
of the Partnership Agreement. 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.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the
General Partners and 3.99% to the Adviser, as an asset management fee. The
Partnership suspended its quarterly distribution payments in 1990.
Under the advisory contract, the Adviser 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. The Adviser will be paid a basic management fee (3% of adjusted cash
flow, as defined in the Partnership Agreement) and an incentive management fee
(2% of adjusted cash flow subordinated to a noncumulative annual return to the
Limited Partners equal to 6% based upon their adjusted capital contributions),
in addition to the asset management fee described above, for services rendered.
No basic or asset management fees were earned by the Adviser during the
three-year period ended September 30, 1996. No incentive management fees have
been earned to date.
Included in general and administrative expenses for the years ended
September 30, 1996, 1995 and 1994 is $81,000, $86,000 and $96,000, 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 $13,000, $4,000 and $5,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1996, 1995 and 1994,
respectively.
<PAGE>
4. Operating Investment Property
Operating investment property at September 30, 1996 and 1995 represents
the fixed assets of West Palm Beach Concourse Associates, a joint venture in
which the Partnership has a controlling interest. The Partnership acquired an
interest in West Palm Beach Concourse Associates (the "Joint Venture"), a
Florida general partnership organized on July 31, 1985 in accordance with a
joint venture agreement between the Partnership and Palm Beach Lake Associates
(co-venturer), to own and operate The Concourse Towers I and II and Retail Plaza
(the "Properties"). The Properties originally consisted of two office towers
with 140,000 square feet of rentable space and a 30,473 rentable square foot
retail plaza located in West Palm Beach, Florida. On September 14, 1990, the
co-venture partner of West Palm Beach Concourse Associates assigned its general
partnership interest to Seventh Income Properties Fund, Inc. ("SIPF"), the
Managing General Partner of the Partnership, in return for a release from any
further obligations or duties called for under the terms of the joint venture
agreement. As a result, the Partnership assumed control over the affairs of the
joint venture.
The aggregate cash investment made by the Partnership for its original
interest in West Palm Beach Concourse Associates was approximately $11,325,000
(including an acquisition fee of $663,000 paid to the Adviser). At September 30,
1992, the Properties were encumbered by three separate nonrecourse first
mortgage loans and a nonrecourse second mortgage loan with an aggregate balance
of approximately $12,873,000. The Concourse joint venture suspended payments to
the second mortgage lender in May of 1991 and suspended payments to the first
mortgage lender in January of 1992 due to the continued deterioration of
operating results that reduced the venture's net cash flow below levels required
to cover the scheduled mortgage loan payments. The venture's cash flow problems
resulted from a significant decline in market rental rates, as a result of the
oversupply of competing office space in the West Palm Beach, Florida market. The
venture's net cash flow dropped dramatically upon the expiration, in August of
1991, of a master lease which had covered all of Tower II. Upon expiration of
the master lease, which had been in effect since the time of the property's
acquisition, several sub-lessees decided to vacate the building and the leased
percentage of the Tower II space fell from 100% to less than 50%. Upon
suspending debt service payments, management requested certain concessions and
modifications from the lenders necessary for the venture to be able to compete
effectively in the marketplace for tenants and service its debt obligations.
After protracted negotiations, the first mortgage lender was ultimately
unwilling or unable to grant the sought-after modifications and filed suit
against the venture to foreclose on the entire mixed-use complex, under the
cross-collateralization provisions of the three first mortgage loans.
On October 29, 1992, the Partnership consummated a settlement agreement
with the first mortgage lender regarding the foreclosure suits on the Concourse
office towers and retail plaza whereby the foreclosure action against the retail
plaza was dismissed and the first mortgage loan on the retail property was
reinstated (see Note 6). In return for this reinstatement, the Partnership
agreed not to contest a stipulated order of foreclosure on the two office
towers. The foreclosure of the two office towers was completed on December 17,
1992. In conjunction with this settlement agreement, the second mortgage lender,
in return for a payment of $100,000 from the venture, agreed to release the two
office towers from the second mortgage lien, to reduce the principal balance on
the second mortgage on the retail plaza to $750,000, and to extend the maturity
date of this loan to July 1997. As described in Note 6, this second mortgage
loan was repaid in fiscal 1995.
Effective January 1, 1991, SIPF assigned to the Partnership that portion
of its venture interest which is equal to 14% of the interests in the venture.
In connection with the assignment, the venture partners agreed to amend and
restate the entire Joint Venture Agreement. The terms of the Amended and
Restated Joint Venture Agreement are summarized below.
The Amended and Restated Joint Venture Agreement provides that net cash
flow (as defined) shall be distributed in the following order of priority: (i)
First, to the Partnership until the Partnership has received a cumulative
non-compounded return of 10% on its net investment of $10,450,000 plus any
additional contributions made subsequent to January 1, 1991; (ii) Second, any
remaining net cash flow shall be distributed to the partners in proportion to
their venture interests (99% to the Partnership and 1% to SIPF).
Under the terms of the Amended and Restated Joint Venture Agreement,
taxable income from operations in each year shall be allocated first to the
Partnership until the Partnership has been allocated an amount equal to a 10%
cumulative non-compounded return on the Partnership's net investment plus any
additional contributions. Any remaining taxable income shall be allocated 99% to
the Partnership and 1% to SIPF. All tax losses from operations shall be
allocated 99% to the Partnership and 1% to SIPF. Allocations of income or loss
for financial accounting purposes have been made in accordance with the
allocations of taxable income or tax loss.
Net profits and losses arising from a capital transaction shall be
allocated among the venture partners under the specific provisions of the
Amended and Restated Joint Venture Agreement. Any net proceeds available to the
venture, arising from the sale, refinancing or other disposition of the
property, after the payment of all obligations to the mortgage lenders and the
repayment of certain advances from the Partnership shall be distributed to the
venture partners in proportion to their positive capital account balances after
the allocation of all gains or losses.
If additional cash is required in connection with the operation of the
Joint Venture, the venture partners shall contribute such required funds in
proportionate amounts as may be determined by the venture partners at such time.
The following is a summary of property operating expenses for the years
ended September 30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 59 $ 55 $ 56
Utilities 5 4 5
Insurance, net of refund of $6 in 1994 6 6 (1)
General and administrative 18 42 40
Management fees 15 12 12
---- ------ -----
$103 $ 119 $ 112
==== ====== =====
5. Investments in Unconsolidated Joint Venture Partnerships
At September 30, 1996 and 1995, the Partnership has investments in four
unconsolidated joint ventures which own six operating properties. The
unconsolidated joint ventures are accounted for on the equity method in the
Partnership's financial statements.
Condensed combined financial statements of these joint ventures follow.
<PAGE>
Condensed Combined Balance Sheets
September 30, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 3,162 $ 4,658
Operating investment property, net 36,019 36,597
Other assets, net 327 385
------- -------
$39,508 $41,640
======= =======
Liabilities and Partners' Deficit
Current liabilities $25,832 $ 3,670
Long-term debt, less current portion 22,602 45,299
Loans from venturers 366 449
Partnership's share of combined deficit (8,531) (7,007)
Co-venturers' share of combined deficit (761) (771)
------- -------
$39,508 $41,640
======= =======
Reconciliation of Partnership's Investment
1996 1995
Partnership's share of combined deficit,
as shown above $(8,531) $ (7,007)
Prepaid distributions to Partnership (234) -
Partnership's share of current liabilities
and long-term debt 168 541
Excess basis due to investment in ventures, net (1) 184 191
-------- --------
Investment in unconsolidated ventures, at equity $ (8,413) $ (6,275)
======== ========
(1) At September 30, 1996 and 1995, the Partnership's investment exceeded
its share of the joint venture partnerships' capital accounts by
approximately $184,000 and $191,000, respectively. This amount, which
relates to certain expenses incurred by the Partnership in connection
with acquiring its joint venture investments, is being amortized over
the estimated useful life of the investment properties.
<PAGE>
Condensed Combined Summary of Operations
For the years ended September 30, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Rental revenues and expense recoveries $ 10,372 $ 10,122 $ 9,441
Interest and other income 521 465 423
-------- -------- -------
10,893 10,587 9,864
Mortgage interest 3,892 4,468 4,349
Property operating expenses 5,609 5,285 5,567
Depreciation and amortization 1,849 1,661 1,566
(Gain) loss on insurance settlement (197) 300 -
--------- -------- -------
11,153 11,714 11,482
--------- -------- --------
Loss before extraordinary gain (260) (1,127) (1,618)
Extraordinary gain from settlement
of debt obligation - 1,070 -
--------- -------- --------
Net loss $ (260) $ (57) $(1,618)
========= ======== =======
Net income (loss):
Partnership's share of combined
net income (loss) $ (269) $ (23) $(1,585)
Co-venturers' share of combined
net income (loss) 9 (34) (33)
--------- -------- -------
$ (260) $ (57) $(1,618)
========= ======== =======
Reconciliation of Partnership's Share of Operations
(in thousands)
1996 1995 1994
---- ---- ----
Partnership's share of combined net
loss, as shown above $ (269) $ (23) $(1,585)
Amortization of excess basis (7) (7) (7)
---------- --------- -------
Partnership's share of unconsolidated
ventures' net losses $ (276) $ (30) $(1,592)
========= ========= =======
The Partnership's share of the unconsolidated ventures' net losses is
presented as follows in the consolidated statements of operations (in
thousands):
Partnership's share of unconsolidated
ventures' losses $ (276) $ (1,100) $(1,592)
Partnership's share of extraordinary
gain on settlement of debt
obligation - 1,070 -
-------- -------- --------
$ (276) $ (30) $(1,592)
======== ======== =======
The unconsolidated joint ventures are subject to partnership agreements
which determine the distribution of available funds, the disposition of the
ventures' assets and the rights of the partners, regardless of the Partnership's
percentage ownership interest in the venture. Substantially all of the
Partnership's investments in these unconsolidated joint ventures are restricted
as to distributions.
<PAGE>
Investments in unconsolidated joint ventures, at equity, on the balance
sheet is comprised of the following equity method carrying values (in
thousands):
1996 1995
---- ----
Chicago Colony Apartments Associates $ (241) $ 273
Chicago Colony Square Associates 1,138 1,078
Daniel Meadows Partnership 506 584
HMF Associates (9,816) (8,210)
--------- ---------
$ (8,413) $ (6,275)
========= =========
The Partnership received cash distributions from the unconsolidated joint
ventures during fiscal 1996, 1995 and 1994 as set forth below (in thousands):
1996 1995 1994
---- ---- ----
Chicago Colony Apartments Associates $ 1,517 $ 797 $ 632
Daniel Meadows Partnership 345 14 -
HMF Associates - 400 1,000
------- ------- -------
$ 1,862 $ 1,211 $ 1,632
======= ======= =======
A description of the ventures' properties and the terms of the joint
venture agreements are summarized as follows:
a. Chicago Colony Apartments Associates
-------------------------------------
On December 27, 1985, the Partnership acquired a general partnership
interest in Chicago Colony Apartments Associates (the "Joint Venture"), an
Illinois general partnership that purchased and operates The Colony Apartments;
a 783-unit apartment complex located in Mount Prospect, Illinois. The
Partnership's co-venture partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest was
approximately $11,848,000 (including an acquisition fee of $687,500 paid to the
Adviser). On August 1, 1995, the $16.75 million non-recourse wraparound mortgage
note secured by the Colony Apartments property was refinanced with a new $17.4
million non-recourse mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the wraparound mortgage loan under the terms of the loan agreement and did
not require any contributions from the venture partners to complete the
refinancing transaction. The discount was recorded by the venture as an
extraordinary gain on settlement of debt obligation. The Partnership was
allocated 100% of such extraordinary gain. As a condition of the new loan, the
Colony Apartments joint venture was required to establish an escrow account in
the amount of $685,000 for the completion of agreed upon repairs, $156,600 for
capital replacement reserves and $600,000 for real estate taxes. The outstanding
balance of the first mortgage loan, which is scheduled to mature in August 2002,
was $17,136,000 as of September 30, 1996.
The Joint Venture Agreement provides that cash flow for any year shall
first be distributed to the Partnership in the amount of $1,100,000, payable
monthly (the Partnership preference return). The Partnership's preference return
is cumulative monthly but not annually. The next $317,500 thereafter will be
distributed to the co-venturer on a noncumulative annual basis, payable
quarterly. Any cash flow not previously distributed at the end of each fiscal
year will be applied in the following order of priority: first to the payment of
all unpaid accrued interest on all outstanding operating notes, if any, the next
$425,000 of cash flow in any year will be distributed 80% to the Partnership and
20% to the co-venturer, the next $425,000 of cash flow in any year will be
distributed 70% to the Partnership and 30% to the co-venturer, and any remaining
balance will be distributed 65% to the Partnership and 35% to the co-venturer.
After the end of each month during the year in which the Partnership has not
received its cumulative preference return, the co-venturer shall distribute to
the Partnership the lesser of (a) the excess, if any, of the cumulative
Partnership preference return over the aggregate amount of net cash flow
previously distributed to the Partnership during the year or (b) any net cash
flow distributed to the co-venturer during the year. During fiscal 1996,
distributions to the Partnership exceeded available net cash flow by $234,000,
which is reflected as prepaid distributions to venturer on the Joint Venture's
financial statements.
The Joint Venture Agreement further provides that net sale or refinancing
proceeds shall be distributed (after payment of mortgage debt and other
indebtedness of the Joint Venture) as follows and in the following order of
priority: (1) the Partnership and the co-venturer shall receive amounts due for
operating loans or additional cash contributions, if any, made to the Joint
Venture, (2) the amount of any undistributed preference payments to the
Partnership, (3) the Partnership shall receive $12,680,281, (4) the next
$3,619,500 of such proceeds shall be distributed to the co-venturer, (5) the
Manager of the apartment complex shall receive any subordinated management fees
not previously paid, (6) the next $8,750,000 of such proceeds shall be
distributed 80% to the Partnership and 20% to the co-venturer, (7) any remaining
balance shall then be distributed 85% to the Partnership and 15% to the
co-venturer until the Partnership receives an amount equal to the sum of net
losses allocated to the Partnership through 1989 times a percentage equal to 50%
less the weighted average maximum Federal income tax rate for individuals plus a
simple rate of return equal to 8% per annum; (8) the next $4,000,000 of such
proceeds shall be distributed 70% to the Partnership and 30% to the co-venturer,
and (9) the balance of such proceeds, if any, shall be distributed 65% to the
Partnership and 35% to the co-venturer.
Taxable income and tax losses from operations in each year shall be
allocated to the Partnership and the co-venturer in any year in the same
proportions as actual cash distributions, except that, through December 31,
1987, all net losses shall be allocated to the Partnership, and thereafter, in
no event, shall the co-venturer be allocated less than 10% of the taxable income
or losses nor shall the co-venturer be allocated income without a like cash
distribution. Allocations of income and loss for financial accounting purposes
have been made in conformity with the actual allocations of taxable income or
tax loss.
If additional cash is required for any reason in connection with the Joint
Venture after December 31, 1988, it will be provided 80% by the Partnership and
20% by the co-venturer as interest-bearing loans to the Joint Venture.
The Joint Venture has entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership upon
the occurrence of certain events. The management fee is 5% of gross receipts
collected from the property (excluding interest on certain Joint Venture reserve
funds), and 40% of such fee was subordinated to the receipt by the Partnership
and the co-venturer of their preferred returns during the period through
December 31, 1988. Cumulative subordinated management fees at September 30, 1996
totalled approximately $275,000.
b. Chicago Colony Square Associates
--------------------------------
On December 27, 1985, the Partnership also acquired a general partnership
interest in Chicago Colony Square Associates (the "Joint Venture") an Illinois
general partnership that purchased and operates Colony Square Shopping Center; a
shopping center consisting of two one-story buildings with 39,572 net rentable
square feet, located in Mount Prospect, Illinois. The Partnership's co-venture
partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its investment was
approximately $1,416,000 (including an acquisition fee of $81,250 paid to the
Adviser). The shopping center is encumbered by a nonrecourse assumable first
mortgage loan with a balance of approximately $1,078,000 at September 30, 1996.
This mortgage loan is scheduled to mature in November 2006.
The Joint Venture Agreement provides that cash flow for any year shall
first be distributed to the Partnership in the amount of $130,000, payable
monthly (the Partnership preference return). The Partnership's preference return
is cumulative monthly but not annually. The next $22,900 thereafter will be
distributed to the co-venturer on a noncumulative annual basis, payable
quarterly (the co-venturer preference return). Any cash flow not previously
distributed at the end of each fiscal year will be applied in the following
order: first to the payment of all unpaid accrued interest on all outstanding
operating notes, if any, the next $50,000 of annual cash flow will be
distributed 80% to the Partnership and 20% to the co-venturer, the next $50,000
of annual cash flow will be distributed 70% to the Partnership and 30% to the
co-venturer and any remaining balance will be distributed 60% to the Partnership
and 40% to the co-venturer. After the end of each month during the year in which
the Partnership has not received its cumulative preference return, the
co-venturer shall distribute to the Partnership the lesser of (a) the excess, if
any, of the cumulative Partnership preference return over the aggregate amount
of the net cash flow previously distributed to the Partnership during the year
or (b) any net cash flow distributed to the co-venturer during the year.
The Joint Venture Agreement further provides that sale or refinancing
proceeds shall be distributed (after payment of mortgage debt and other
indebtedness of the Joint Venture) as follows and in the following order of
priority: (1) the Partnership and the co-venturer shall receive amounts due for
operating loans and accrued interest or additional cash contributions, if any,
made to the Joint Venture, (2) the amount of any undistributed preference
payments not previously collected by the Partnership shall then be paid, (3) the
Partnership shall receive $1,508,127, (4) the next $261,060 of such proceeds
shall be distributed to the co-venturer, (5) the Manager of the Shopping Center
shall receive any subordinated management fees not previously paid, (6) the next
$1,000,000 of such proceeds shall be distributed 80% to the Partnership and 20%
to the co-venturer, (7) any remaining balance shall then be distributed 85% to
the Partnership and 15% to the co-venturer until the Partnership receives an
amount equal to the sum of net losses allocated to the Partnership through 1989
times a percentage equal to 50% less the weighted average maximum Federal income
tax rate for individuals plus a simple rate of return equal to 8% per annum, (8)
the next $450,000 of such proceeds shall be distributed 70% to the Partnership
and 30% to the co-venturer, and (9) the balance of such proceeds, if any, shall
be distributed 60% to the Partnership and 40% to the co-venturer.
Taxable income and tax losses from operations in each year will be
allocated to the Partnership and the co-venturer in any year in the same
proportions as actual cash distributions, except that, through December 31,
1987, all net losses were allocated to the Partnership, and thereafter, in no
event, will the co-venturer ever be allocated less than 10% of the taxable
income or tax losses nor will the co-venturer be allocated income without a like
cash distribution. Allocations of income and loss for financial accounting
purposes have been made in conformity with the actual allocations of taxable
income or tax loss.
If additional cash is required for any reason in connection with the Joint
Venture, it will be provided 80% by the Partnership and 20% by the co-venturer
as interest-bearing loans to the Joint Venture.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership upon
the occurrence of certain events. The management fee will be 5% of gross
receipts collected (excluding interest on certain Joint Venture reserve funds),
and 40% of such fee was subordinated to the receipt by of the Partnership and
the co-venturer of their preferred returns during the period through December
31, 1988. Cumulative subordinated management fees at September 30, 1996 totalled
approximately $27,000.
<PAGE>
c. Daniel Meadows Partnership
---------------------------
On June 19, 1986, the Partnership acquired a general partnership interest
in Daniel Meadows Partnership (the "Joint Venture"), a Virginia general
partnership which has been formed to develop, own and operate The Meadows on the
Lake Apartments, a 200-unit apartment complex located in Birmingham, Alabama.
The Partnership's co-venture partner is an affiliate of Daniel Realty Company.
The aggregate cash investment by the Partnership for its interest was
approximately $3,807,000 (including an acquisition fee of $207,000 paid to the
Adviser). The apartment complex is encumbered by a mortgage note with a balance
of approximately $4,773,000 at September 30, 1996. The mortgage debt, in the
initial principal amount of $4,850,000, bears interest at a variable rate of
2.25% over the 30-day LIBOR rate (equivalent to a rate of approximately 7.6875%
per annum as of September 30, 1996). The loan requires monthly interest and
principal payments based on a 25-year amortization schedule and is scheduled to
mature on February 5, 2000.
During fiscal 1991, the Partnership discovered that certain materials used
to construct The Meadows Apartments, in Birmingham, Alabama were installed
incorrectly and would require substantial repairs. During fiscal 1992, the
Meadows joint venture engaged local legal counsel to seek recoveries from the
venture's insurance carrier, as well as various contractors and suppliers, for
the venture's claim of damages, which were estimated at approximately $1
million, not including legal fees and other incidental costs. During fiscal
1993, the insurance carrier deposited approximately $38,000 into an escrow
account controlled by the venture's mortgage lender in settlement of the
undisputed portion of the venture's claim. During fiscal 1994, the insurer
agreed to enter into non-binding mediation towards settlement of the disputed
claims out of court. On October 3, 1994, the joint venture agreed to settle its
claims against the insurance carrier, architect, general contractor and the
surety/completion bond insurer for $1,076,000, which was in addition to the
$38,000 previously paid by the insurance carrier. These settlement proceeds were
escrowed with the mortgage holder, which agreed to release such funds as needed
for structural renovations. The venture's mortgage loan described above was to
be fully recourse to the joint venture and to the partners of the joint venture
until the repairs were completed, at which time the entire obligation becomes
non-recourse. As of September 30, 1996, a total of $103,000 in excess of the
available settlement proceeds had been spent for the renovations, which were
completed during fiscal 1996. The venture had recognized a loss of $300,000 in
fiscal 1995 equal to the amount by which the total repair costs, including
estimated costs to complete, exceeded the total settlement proceeds. During
fiscal 1996, management revised its plans for completing the renovations
resulting in the required repairs being accomplished for substantially less than
the prior estimates. This change in estimate resulted in a gain of $197,000 for
financial reporting purposes which is reflected in the venture's fiscal 1996
income statement.
The Joint Venture Agreement provides that from available cash flow, after
the repayment of any optional loans made by the partners, the Partnership will
receive an 8% per annum cumulative preferred return on $3,600,000, payable
monthly through June 30, 1989; 9% per annum through June 30, 1991 and 10% per
annum thereafter. The General Partners of the co-venturer personally guaranteed
payment of the Partnership's preferred return through June 30, 1988. Any excess
cash remaining, after payment to the Partnership of its preferred distribution,
will be distributed 60% to the Partnership and 40% to the co-venturer,
respectively. In addition, the Partnership is entitled to receive $2,500
annually as an investor servicing fee. As of September 30, 1996, the
Partnership's unpaid cumulative preference return amounted to approximately
$2,382,000. Such amount is payable only from available future sale or
refinancing proceeds. Accordingly, the unpaid cumulative preference return is
not accrued in the venture's financial statements.
The Joint Venture Agreement generally provides that Net Proceeds, as
defined, (other than refinancing proceeds, which shall be distributed 60% to the
Partnership and 40% to the co-venturer) shall be distributed, after payment of
mortgage debt and other indebtedness of the Joint Venture, as follows and in the
following order of priority: (1) to repay accrued interest and principal, in
that order, on any optional loans made by the partners, (2) to the Partnership
until the Partnership has received the cumulative annual preferred distributions
following the guarantee period specified above, (3) to the Partnership until it
has received cumulative distributions of $4,140,000, and (4) thereafter, the
balance, if any, 60% to the Partnership and 40% to the co-venturer.
Taxable income from operations in each year shall be allocated to the
Partnership and the co-venturer in accordance with distributions of cash, to the
extent of such distributions, and then 60% to the Partnership and 40% to the
co-venturer, respectively. Until the date upon which the Partnership has been
allocated cumulative tax losses equal to $3,600,000, tax losses will be
allocated 98% to the Partnership and 2% to the co-venturer, respectively.
Thereafter, tax losses are allocated 60% to the Partnership and 40% to the
co-venturer. Allocations of income or loss for financial accounting purposes
have been made in conformity with the allocations of taxable income or tax loss.
Generally, gains and losses arising from a sale of the property are
allocated first on the basis of the partner's capital balances; thereafter,
remaining gains and losses are allocated 60% to the Partnership and 40% to the
co-venturer.
If additional working capital is required in connection with the operating
property, it may be provided as additional capital contributions by the
Partnership and the co-venturer in the proportion of 60% and 40%, respectively.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership upon
the occurrence of certain events. The management fee is 5% of rents and other
income collected from the property, as defined in the management agreement.
d. HMF Associates
---------------
On March 5, 1987, the Partnership formed a joint venture with Pacific
Union Investment Corporation (the co-venturer) pursuant to a joint venture
agreement. The joint venture was formed as a California general partnership and
purchased and operates the Enchanted Woods (formerly Forest Ridge), Hunt Club
and Marina Club apartment complexes, all of which are located in the Seattle,
Washington area. The Enchanted Woods property is a 217-unit garden apartment
complex and contains approximately 212,463 net rentable square feet. The Hunt
Club property is a 130-unit garden apartment complex and contains approximately
101,912 net rentable square feet, and the Marina Club property is a 77-unit
garden court apartment complex and contains approximately 60,331 net rentable
square feet.
The original aggregate cash investment by the Partnership for its interest
was approximately $4,206,000 (including an acquisition fee of $259,700 paid to
the Adviser). Construction-related defects were discovered at all three
apartment complexes prior to fiscal 1991. The deficiencies and damages included
lack of adequate fire blocking materials in the walls and other areas and
insufficient structural support, as required by the Uniform Building Code.
During 1991, HMF Associates participated as a plaintiff in a lawsuit filed
against the developer, which also involved certain other properties constructed
by the developer. The suit alleged, among other things, that the developer
failed to construct the buildings in accordance with the plans and
specifications, as warranted, used substandard materials and provided inadequate
workmanship. The joint venture's claim against the developer was settled during
fiscal 1991 for $4,189,000. Such funds were received in December of 1991 and
were recorded by the venture as a reduction to the basis of the operating
properties. Of the settlement proceeds, $1,397,000 was paid to legal counsel in
connection with the litigation and was capitalized as an addition to the
carrying value of the operating investment properties. In addition to the cash
received at the time of the settlement, the venture received a note of
approximately $584,000 from the developer which was due in 1994. During fiscal
1993, the venture agreed to accept a discounted payment of approximately
$409,000 in full satisfaction of the note if payment was made by December 31,
1993. The developer made this discounted payment to the venture in the first
quarter of fiscal 1994. In addition, during fiscal 1994 the venture received
additional settlement proceeds totalling approximately $1,270,000 from its
pursuit of claims against certain subcontractors of the development company and
other responsible parties. Additional settlement proceeds totalling
approximately $1,444,000 were collected during fiscal 1995. As of September 30,
1995, all claims had been settled and no additional proceeds were anticipated.
Per the terms of the joint venture agreement, as amended, available net
litigation proceeds, after payment of all associated expenses, were distributed
90% to the Partnership and 10% to the co-venturer. During fiscal 1994, the
Partnership received a distribution of $1,000,000 from the joint venture,
representing its share of the available settlement proceeds. During fiscal 1995,
the Partnership received a repayment of a $400,000 optional loan, plus
approximately $175,000 in accrued interest on such loan, from its share of the
additional settlement proceeds. The repairs to the operating investment
properties, which were completed during fiscal 1994, net of insurance proceeds,
were capitalized or expensed in accordance with the joint venture's normal
accounting policy for such items.
As part of the initial settlement, the venture also negotiated a loan
modification agreement which provided the remainder of the funds required to
complete the repairs of the operating investment properties. Under the terms of
the HMF Associates loan modification executed in fiscal 1992, all accrued and
unpaid interest outstanding as of March 31, 1992 was converted to principal.
Subject to lender approval the Partnership may obtain additional advances up to
$9,100,000 to fund certain operating expenses of the joint venture and to cure
construction damages in the operating investment properties. The loans and any
additional advances bear interest at a rate of 9% per annum. As of September 30,
1996, additional lender advances totalling approximately $4.8 million have been
made, and the total debt obligation of the joint venture totalled $23.3 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 lease-up of the properties following the completion of the required
repairs, the venture's net operating income level is not sufficient to fully
cover the interest accruing on the outstanding debt obligation. As a result, the
total obligation due to the mortgage lender will continue to increase through
the scheduled maturity date. Furthermore, the current aggregate estimated fair
value of the operating investment properties is substantially lower than the
outstanding obligation to the first mortgage holder as of September 30, 1996.
Accordingly, it is unlikely that the venture will be able to settle or refinance
the debt at the time of the fiscal 1997 maturity. 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 September 30,
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.
The Joint Venture Agreement currently provides for the distribution of
available cash flow between the Partnership and the co-venturer. However, due to
the terms of the debt modification, which requires all net cash flow from
property operations to be paid to the lender as debt service, there will be no
distributable cash flow available for payment to the venture partners until the
existing mortgage debt is repaid or refinanced.
Taxable income from operations shall be allocated in accordance with the
allocation of net cash flow distributions called for in the venture agreement.
Tax losses from operations, after consideration of certain priority items, shall
be allocated between the Partnership and the co-venturer in proportion to net
cash flow actually distributed or distributable during any fiscal year. Interest
expense on loans from the venture partners are specifically allocated to the
respective venture partners. Allocations of income and loss for financial
accounting purposes have been made in conformity with the allocations of taxable
income or tax loss.
The Joint Venture Agreement provides that capital proceeds, after debt
obligations are paid, shall be distributed as follows: First, to the Partnership
to pay the aggregate amount of its preference not therefore paid (approximately
$2,601,000 at September 30, 1996). Second, to the Partnership and the
co-venturer to repay advances and guaranty period capital loans. Third, to the
Partnership until it receives its net investment plus $585,000. Fourth, to the
co-venturer to repay guaranty period preference and operating loans. Fifth, to
the Manager to repay any subordinated management fees. Sixth and thereafter, 80%
to the Partnership and 20% to the co-venturer.
Capital profits shall be allocated as follows: First, to the partners to
relieve their capital accounts of any negative balance and second, to the
partners in the manner that capital proceeds are distributed. Capital losses
shall be allocated to partners with positive capital accounts, then 80% to the
Partnership and 20% to the co-venturer.
The joint venture originally entered into a property management agreement
with an affiliate of the co-venturer for property management services. The
management fee is equal to the greater of 5% of gross receipts, as defined in
the agreement, or $9,000 a month. The co-venturer is also reimbursed for certain
accounting expenses. In addition, under an amendment to the joint venture
agreement and as consideration for services provided in conjunction with the
litigation discussed above, the venture paid the co-venturer fees of $96,000 and
$76,000 during fiscal 1995 and 1994, respectively.
6. 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 September 30,
1996 and 1995, mortgage note payable consists of the
following (in thousands):
1996 1995
---- ----
11.12% first mortgage, payable in
installments of $20 per month,
including interest, through January
1, 2005. The fair value of this note
payable approximated its carrying
value as of September 30, 1996. $ 1,671 $ 1,723
Less amount due within one year (57) (51)
------- -------
$ 1,614 $ 1,672
======= =======
During fiscal 1994, the venture reached an agreement with the second
mortgage lender to fully extinguish a $750,000 second mortgage lien on the
Concourse operating property in return for a cash payment of $300,000. The
Partnership advanced the funds required to complete this transaction in November
1994. The transaction resulted in an extraordinary gain recognized in fiscal
1995 of $530,000.
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 escrowed funds on the accompanying balance sheets at September 30,
1996 and September 30, 1995 consist of such escrowed insurance premiums and real
estate taxes in the aggregate amounts of $74,000 and $75,000, respectively.
<PAGE>
Scheduled maturities of long-term debt are summarized as follows (in
thousands):
1997 $ 57
1998 64
1999 71
2000 80
2001 89
Thereafter 1,310
------
$1,671
======
7. Leases
The Partnership's consolidated joint venture, West Palm Beach Concourse
Associates, derives its revenues from non cancelable operating leases. The
initial terms of the leases range from 1 to 40 years with the majority of leases
providing for the pass through of certain property expenses to the tenants.
Approximate minimum future rentals due to be received on existing non
cancelable leases of the retail plaza owned by the consolidated venture for the
next five years ending September 30 and thereafter are as follows (in
thousands):
1997 $ 406
1998 361
1999 311
2000 270
2001 174
Thereafter 1,382
-------
$ 2,904
=======
The above amounts do not include contingent rentals based on
cost-of-living increases and rentals which may be received under certain leases
on the basis of a percentage of sales in excess of stipulated minimums.
Percentage rents received during fiscal 1995 and 1994 were $2,000 and $8,000,
respectively. No percentage rents were received during fiscal 1996.
8. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Seventh Income Properties Fund, Inc. and Properties
Associates 1985, L.P. ("PA1985"), which are the General Partner of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Income Properties
Seven Limited Partnership, PaineWebber, Seventh Income Properties Fund, Inc. and
PA1985 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in PaineWebber
Income Properties Seven Limited Partnership, also allege that following the sale
of the partnership interests, PaineWebber, Seventh Income Properties Fund, Inc.
and PA1985 misrepresented financial information about the Partnership's value
and performance. The amended complaint alleged that PaineWebber, Seventh Income
Properties Fund, Inc. and PA1985 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
Mediation with respect to the Bandrowski action described above was held in
December 1996. As a result of such mediation, a tentative settlement between
PaineWebber and the plaintiffs was reached which would provide for a complete
resolution of the action. PaineWebber anticipates that releases and dismissals
with regard to this action will be received by February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements.
<PAGE>
9. Subsequent Event
Subsequent to September 30, 1996, the Partnership announced that it plans
to reinstate the payment of regular quarterly distributions at a annual rate of
2.5% on an original $1,000 investment. The first payment of $6.25 per original
$1,000 Unit would be made on February 14, 1997, for the quarter ending December
31, 1996. In addition, the Partnership expects to make a special distribution of
$40 per original $1,000 investment on February 14, 1997 to Unitholders of record
on December 31, 1996, which represents a distribution of Partnership reserves
which exceed expected future requirements.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- -------- ----------- ---- -------- ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Plaza
West Palm Beach,
FL $1,671 $ 742 $4,518 $(161) $698 $4,401 $5,099 $ 1,651 1979-80 7/31/85 5-30 yrs.
Notes
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $5,391.
(B) See Notes 4 and 6 of Notes to Financial Statements.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 5,074 $ 4,942 $ 4,942
Acquisitions and improvements 25 132 -
Reductions in basis due to foreclosure (1) - - -
-------- -------- --------
Balance at end of year $ 5,099 $ 5,074 $ 4,942
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 1,512 $ 1,363 $ 1,218
Removal of accumulated depreciation
at foreclosure (1) - - -
Depreciation expense 139 149 145
-------- -------- --------
Balance at end of year $ 1,651 $ 1,512 $ 1,363
======== ======== ========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Seven Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Seven Limited Partnership as of
September 30, 1996 and 1995, and the related combined statements of operations
and changes in venturers' deficit, and cash flows for each of the three years in
the period ended September 30, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Joint Ventures of Paine Webber Income Properties Seven Limited
Partnership at September 30, 1996 and 1995, and the combined results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, 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
November 15, 1996
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
September 30, 1996 and 1995
(In thousands)
Assets
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 1,958 $ 2,489
Escrow deposits 896 2,025
Prepaid distributions to venturer 234 -
Other current assets 74 144
-------- --------
Total current assets 3,162 4,658
Operating investment properties
Land 6,472 6,449
Buildings, improvements and equipment 51,632 50,467
-------- --------
58,104 56,916
Less accumulated depreciation (22,085) (20,319)
-------- --------
Net operating investment properties 36,019 36,597
Deferred expenses, net of accumulated amortization
of $345 ($262 in 1995) 238 271
Other assets 89 114
-------- --------
$ 39,508 $ 41,640
======== ========
Liabilities and Venturers' Deficit
Current liabilities:
Current portion of long-term debt $ 23,691 $ 353
Real estate taxes payable 1,181 1,934
Accounts payable and accrued liabilities 263 457
Accounts payable - affiliates 30 2
Accrued interest 142 147
Tenant security deposits 309 299
Distributions payable to venturers 216 478
-------- --------
Total current liabilities 25,832 3,670
Loans from venturers 366 449
Long-term debt 22,602 45,299
Venturers' deficit (9,292) (7,778)
-------- --------
$ 39,508 $ 41,640
======== ========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' DEFICIT
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 10,372 $ 10,122 $ 9,441
Interest and other income 521 465 423
-------- -------- -------
10,893 10,587 9,864
Expenses:
Interest expense 3,961 4,468 4,349
Depreciation expense 1,766 1,651 1,529
Real estate taxes 1,830 1,799 1,536
Repairs and maintenance 780 668 1,079
Management fees 541 534 507
Utilities 620 598 547
Salaries and related expenses 979 914 913
General and administrative 859 772 985
Amortization expense 14 10 37
Gain (loss) on insurance settlement (197) 300 -
-------- -------- -------
11,153 11,714 11,482
Loss before extraordinary gain (260) (1,127) (1,618)
Extraordinary gain from settlement
of debt obligation - 1,070 -
-------- -------- ------
Net loss (260) (57) (1,618)
Distributions to venturers (1,254) (1,085) (1,818)
Contributions from partners - - 24
Venturers' deficit, beginning of year (7,778) (6,636) (3,224)
-------- ------- -------
Venturers' deficit, end of year $ (9,292) $(7,778) $(6,636)
======== ======= =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (260) $ (57) $(1,618)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,780 1,661 1,566
Amortization of deferred financing costs 69 45 -
Interest added to long-term debt principal 2,053 1,976 1,890
Interest on loans from venturers 17 28 78
Changes in assets and liabilities:
Escrow deposits 1,129 (372) 20
Accounts receivable - (83) 200
Accounts receivable - affiliates - - 27
Other current assets 70 (12) (4)
Deferred expenses (13) (16) (8)
Other assets 25 (105) 20
Accounts payable and accrued liabilities (194) 101 (297)
Accounts payable - affiliates 28 (12) (31)
Real estate taxes payable (753) 872 40
Accrued interest (5) (20) -
Tenant security deposits 10 (8) 8
------ ------- ------
Total adjustments 4,216 4,055 3,509
------ ------- ------
Net cash provided by
operating activities 3,956 3,998 1,891
------ ------- ------
Cash flows from investment activities:
Additions to operating
investment properties (1,188) (1,624) (1,495)
Proceeds from insurance settlements - 2,520 1,679
------- -------- ------
Net cash (used in) provided by
investing activities (1,188) 896 184
------ -------- ------
Cash flows from financing activities:
Loan proceeds - 22,250 648
Escrow deposits funded from
refinancing proceeds - (1,442) -
Increase in deferred financing costs (37) (204) -
Repayment of long-term debt (1,412) (22,842) (931)
Repayment of loans to venturers (100) (805) -
Capital contributions - - 24
Distributions to venturers (1,750) (931) (1,632)
------- ------ -------
Net cash used in financing
activities (3,299) (3,974) (1,891)
-------- ------ -------
Net (decrease) increase in cash
and cash equivalents (531) 920 184
Cash and cash equivalents, beginning of year 2,489 1,569 1,385
--------- --------- --------
Cash and cash equivalents, end of year $ 1,958 $ 2,489 $ 1,569
========= ========= ========
Cash paid during the year for interest $ 1,827 $ 2,438 $ 2,495
========= ========= ========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
Notes to Combined Financial Statements
1. Organization and Nature of Operations
The accompanying financial statements of the Combined Joint Ventures of
Paine Webber Income Properties Seven Limited Partnership (the "Combined Joint
Ventures") include the accounts of Chicago Colony Apartments Associates, an
Illinois general partnership; Chicago Colony Square Associates, an Illinois
general partnership; Daniel Meadows Partnership, a Virginia general partnership;
and HMF Associates, a California general partnership. The financial statements
of the Combined Joint Ventures are presented in combined form, rather than
individually, due to the nature of the relationship between the co-venturers and
Paine Webber Income Properties Seven Limited Partnership ("PWIP7") which owns a
majority financial interest but does not have voting control in each joint
venture.
The dates of PWIP7's acquisition of interests in the joint ventures are
as follows:
Date of Acquisition
Joint Venture of Interest
------------- -----------
Chicago Colony Apartments Associates 12/27/85
Chicago Colony Square Associates 12/27/85
Daniel Meadows Partnership 6/19/86
HMF Associates 5/29/87
The accompanying combined financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The four joint
ventures described above own six operating investment properties, which consist
of five multi-family apartment complexes and one retail shopping center. The
first mortgage debt of HMF Associates, amounting to $23,305,490 at September 30,
1996, is due July 1, 1997. Based on a review of the cash operating budgets for
fiscal year 1997, the projected cash flow of HMF Associates, which owns three
apartment complexes, will not be sufficient to meet the debt service obligation.
Also, due to the under performance of the properties, it is uncertain whether
HMF Associates will be able to settle or refinance the debt at maturity. The
partners have represented that they do not intend to make contributions to HMF
Associates to the extent necessary to fund any negative cash flow of the joint
venture. These factors as well as others indicate that HMF Associates may be
unable to continue as a going concern unless it is able to generate sufficient
cash flows to meet its obligations as they come due and sustain its operations
sufficient to recover its investment in real estate. The accompanying financial
statements do not include any adjustments to reflect the classification of
assets or the amounts and classification of liabilities that might result from
the possible inability of HMF Associates to continue as a going concern.
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 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 September 30, 1996 and 1995 and revenues and expenses for
each of the three years in the period ended September 30, 1996. Actual results
could differ from the estimates and assumptions used.
Basis of presentation
---------------------
Generally, the records of the Combined Joint Ventures are maintained on
the income tax basis of accounting and adjusted to generally accepted accounting
principles for financial reporting purposes, principally for depreciation.
Operating investment properties
-------------------------------
The operating investment properties are carried at the lower of cost, less
accumulated depreciation, certain guaranteed payments from partners (see Note 3)
and insurance proceeds, or net realizable value. The net realizable value of a
property held for long-term investment purposes is measured by the
recoverability of the venture's investment through expected future cash flows on
an undiscounted basis, which may exceed the property's market value. The net
realizable value of a property held for sale approximates its current market
value. None of the operating investment properties owned by the Combined Joint
Ventures were considered to be held for sale as of September 30, 1996 or 1995.
Depreciation expense is computed on a straight-line basis over the estimated
useful lives of the buildings, improvements and equipment, generally five to
thirty years. Professional fees (including deferred acquisition fees paid to an
affiliate of PWIP7, see Note 4), and other costs incurred in connection with the
acquisition of the properties have been capitalized and are included in the cost
of the land and buildings.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of" ("Statement 121"), which 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. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Statement 121 is effective for financial statements for years beginning
after December 15, 1995. The Combined Joint Ventures will adopt Statement 121 in
fiscal 1997 and, based on current circumstances, management does not believe the
adoption will have a material effect on results of operations or financial
position.
Deferred expenses
-----------------
Deferred expenses consist primarily of loans fees which are being
amortized over the terms of the related loans. Such amortization expense is
included in interest expense on the accompanying statements of operations.
Revenue Recognition
-------------------
The Combined Joint Ventures lease space at the operating investment
properties under short-term and long-term operating leases. Rental revenues are
recognized on a straight-line basis as earned pursuant to the terms of the
leases.
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the
current year presentation.
Income tax matters
------------------
The Combined Joint Ventures are comprised of entities which are not
taxable and accordingly, the results of their operations are included on the tax
returns of the various partners. Accordingly, no income tax provision is
reflected in the accompanying combined financial statements.
Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Combined Joint Ventures
consider all short-term investments with original maturity dates of 90 days or
less to be cash equivalents.
<PAGE>
Escrow deposits
---------------
In accordance with the mortgage loan agreements of the Combined Joint
Ventures, certain building repair reserves, capital improvement reserves,
insurance premiums and real estate taxes are required to be held in escrow. The
escrow deposit amounts on the balance sheet at September 30, 1996 and 1995 are
principally comprised of such escrowed amounts.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and cash equivalents, escrow deposits,
accounts payable and accrued liabilities approximate their fair values as of
September 30, 1996 due to the short-term maturities of these instruments. It is
not practicable for management to estimate the fair value of the loans from
venturers without incurring excessive costs because the obligations were
provided in non-arm's length transactions without regard to fixed maturities,
collateral issues or other traditional conditions and covenants. The fair value
of long-term debt is estimated, where applicable, using discounted cash flow
analyses, based on the current market rate for similar types of borrowing
arrangements (see Note 6).
3. Joint Ventures
See Note 5 to the financial statements of PWIP7 included in this Annual
Report for a more detailed description of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below:
a. Chicago Colony Apartments Associates
------------------------------------
The joint venture owns and operates The Colony Apartments, a 783-unit
apartment complex located in Mount Prospect, Illinois.
b. Chicago Colony Square Associates
---------------------------------
The joint venture owns and operates Colony Square Shopping Center, a
39,572 gross leasable square foot shopping center, located in Mount
Prospect, Illinois.
c. Daniel Meadows Partnership
--------------------------
The joint venture owns and operates The Meadows on the Lake
Apartments, a 200-unit apartment complex, located in Birmingham, Alabama.
During fiscal 1991, the venture discovered that certain materials used to
construct the operating property were installed incorrectly and would
require substantial repairs. During fiscal 1992, the Meadows joint venture
engaged local legal counsel to seek recoveries from the venture's
insurance carrier, as well as various contractors and suppliers, for the
venture's claim of damages, which were estimated at approximately $1
million, not including legal fees and other incidental costs. During
fiscal 1993, the insurance carrier deposited approximately $38,000 into an
escrow account controlled by the venture's mortgage lender in settlement
of the undisputed portion of the venture's claim. During fiscal 1994, the
insurer agreed to enter into non-binding mediation towards settlement of
the disputed claims out of court. On October 3, 1994, the joint venture
verbally agreed to settle its claims against the insurance carrier,
architect, general contractor and the surety/completion bond insurer for
$1,076,000, which was in addition to the $38,000 previously paid by the
insurance carrier. These settlement proceeds were escrowed with the
mortgage holder, which agreed to release such funds as needed for
structural renovations. The loan was to be fully recourse to the joint
venture and to the partners of the joint venture until the repairs were
completed, at which time the entire obligation becomes non-recourse. As of
September 30, 1996, a total of $103,000 in excess of the available
settlement proceeds had been spent for the renovations, which were
completed during fiscal 1996. The venture had recognized a loss of
$300,000 in fiscal 1995 equal to the amount by which the total repair
costs, including estimated costs to complete, exceeded the total
settlement proceeds. During fiscal 1996, management revised its plans for
completing the renovations resulting in the required repairs being
accomplished for substantially less than the prior estimates. This change
in estimate resulted in a gain of $197,000 for financial reporting
purposes which is reflected in the accompanying fiscal 1996 statement of
operations.
d. HMF Associates
---------------
The joint venture owns and operates three properties, Enchanted Woods
(formerly Forest Ridge) Apartments, a 217-unit apartment complex, The
Marina Club Apartments, a 77-unit apartment complex, and The Hunt Club
Apartments, a 130-unit apartment complex, all located in Seattle,
Washington. Construction-related defects had been discovered at all three
apartment complexes owned by HMF Associates prior to fiscal 1991. The
deficiencies and damages included lack of adequate fire blocking materials
in the walls and other areas and insufficient structural support, as
required by the Uniform Building Code. During 1991, HMF Associates
participated as a plaintiff in a lawsuit filed against the developer,
which also involved certain other properties constructed by the developer.
The suit alleged, among other things, that the developer failed to
construct the buildings in accordance with the plans and specifications,
as warranted, used substandard materials and provided inadequate
workmanship. The joint venture's claim against the developer was settled
during fiscal 1991 for $4,189,000. Such funds were received in December of
1991 and were recorded by the venture as a reduction to the basis of the
operating properties. Of the settlement proceeds, $1,397,000 was paid to
legal counsel in connection with the litigation and was capitalized as an
addition to the carrying value of the operating investment properties. In
addition to the cash received at the time of the settlement, the venture
received a note of approximately $584,000 from the developer which was due
in 1994. During fiscal 1993, the venture agreed to accept a discounted
payment of approximately $409,000 in full satisfaction of the note if
payment was made by December 31, 1993. The developer made this discounted
payment to the venture in the first quarter of fiscal 1994. In addition,
during fiscal 1995 and 1994 the venture received additional settlement
proceeds totalling approximately $1,444,000 and $1,270,000 respectively,
from its pursuit of claims against certain subcontractors of the
development company and other responsible parties. As of September 30,
1995, the venture had settled all of the outstanding litigation related to
the construction defects and no additional litigation proceeds were
expected. The repairs to the operating investment properties, which were
completed during fiscal 1994, net of insurance proceeds, were capitalized
or expensed in accordance with the joint venture's normal accounting
policy for such items. Per the terms of the joint venture agreement, as
amended, available net litigation proceeds, after payment of all
associated expenses, were distributed 90% to the Partnership and 10% to
the co-venturer.
The following description of the joint venture agreements provides certain
general information.
Allocations of net income and loss
----------------------------------
The agreements generally provide that taxable income and tax losses (other
than those resulting from sales or other dispositions of the projects) will be
allocated between PWIP7 and the co-venturers in the same proportions as cash
flow distributed or distributable for such year, except for certain items which
are specifically allocated to the partners as set forth in the joint venture
agreements. Internal Revenue Service regulations require partnership allocations
of income and loss to the respective partners to have "substantial economic
effect". For certain of the joint ventures this requirement resulted in joint
venture losses for the years ended September 30, 1996, 1995 and 1994 being
allocated in a manner different from that provided in the joint venture
agreements. Allocations of income and loss for financial reporting purposes have
been made in accordance with the actual allocations of taxable income and tax
loss.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.
Distributions
-------------
Subsequent to the Guaranty Periods, distributable funds will generally be
distributed first, to repay accrued interest and principal on certain loans;
second, to pay specified amounts to PWIP7; third, to pay specified amounts to
the co-venturers; and fourth, to distribute the balance in proportions ranging
from 80% to 60% to PWIP7 and 20% to 40% to the co-venturers, as set forth in the
joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
Guaranty Periods
----------------
The joint venture agreements generally provided that during the Guaranty
Periods (as defined in the joint venture agreements), in the event that net cash
flow was insufficient to fund operations including amounts necessary to pay
PWIP7 preferred distributions, the co-venturers were required to fund amounts
equal to such deficiencies. The co-venturers obligation to fund such amounts
pursuant to their guarantees was generally to be in the form of capital
contributions to the joint ventures.
The Guaranty Periods of the joint ventures generally began from the date
PWIP7 purchased its interest in each joint venture for a period of 2 to 5 years.
The Guaranty Periods for the Combined Joint Ventures expired as follows:
<PAGE>
Guaranty Period
---------------
Chicago Colony Apartments
Associates December 31, 1988
Chicago Colony Square Associates December 31, 1988
Daniel Meadows Partnership June 30, 1988
HMF Associates May 31, 1990
4. Related party transactions
The Combined Joint Ventures originally entered into property management
agreements with affiliates of the co-venturers, cancellable at the joint
ventures' option upon the occurrence of certain events. The management fees are
generally equal to 5% of gross receipts, as defined in the agreements. Pursuant
to an amendment to the joint venture agreement and as consideration for services
provided relating to the litigation discussed in Note 6, HMF Associates paid the
property manager fees of $96,000 and $76,000 during fiscal 1995 and 1994,
respectively. Such fees were capitalized as part of the basis of the property.
One of the joint ventures is required to pay a yearly investor servicing
fee to PWIP7 of $2,500.
Accounts payable - affiliates at September 30, 1996 and 1995 consist
primarily of management fees and reimbursements owed to the property managers of
the operating properties. Loans from venturers at September 30, 1996 and 1995 of
$366,000 and $449,000, respectively, represent loans plus accrued interest
payable to the partners of the HMF Associates joint venture. Included in
interest expense for the years ended September 30, 1996, 1995 and 1994 is
$17,000, $36,000 and $78,000, respectively, of interest on such loans.
5. Long-term debt
Long-term debt at September 30, 1996 and 1995 consists of the following
(in thousands):
1996 1995
---- ----
7.6% mortgage loan, secured by the
Colony Apartments property, payable
in monthly installments, including
principal and interest of $130
through August 1, 2002, at which
time the final principal
installment of $15,277 plus any
accrued interest is due. The fair
value of this note payable was
approximately $16,972 as of
September 30, 1996. $17,136 $ 17,380
9-1/2% mortgage loan, secured by
the Colony Square Shopping Center
property, payable in monthly
installments of $14 through October
1, 2006 with the remaining balance
($10,581) due and payable on
November 1, 2006. The fair value of
this note payable was approximately
$1,116 as of September 30, 1996.
1,078 1,139
First mortgage loan, secured by the
Meadows on the Lake Apartments
property. Monthly installments of
principal, based on a 25-year
amortization schedule, and
interest, based on LIBOR plus 2.25%
(7.6875% at September 30, 1996),
through maturity on February 5,
2000. The fair value of this note
payable approximated its carrying
value as of September 30, 1996. 4,773 4,822
<PAGE>
First mortgage loans made to the
HMF Associates joint venture, which
loans are secured by first deeds of
trust on the operating investment
properties owned by the joint
venture. The original loans were
modified on March 31, 1992 (see
discussion below). 23,306 22,311
46,293 45,652
Less current portion (23,691) (353)
-------- -------
$ 22,602 $45,299
======== =======
On August 1, 1995, the $16.75 million non-recourse wraparound mortgage
note secured by the Colony Apartments property was refinanced with a new $17.4
million non-recourse mortgage note at a fixed interest rate of 7.6% per annum.
The joint venture received a discount of approximately $1,070,000 on the pay-off
of the wraparound mortgage loan under the terms of the loan agreement and did
not require any contributions from the venture partners to complete the
refinancing transaction. The discount was recorded by the venture as an
extraordinary gain on settlement of debt obligation. PWIP7 was allocated 100% of
such extraordinary gain. As a condition of the new loan, the Colony Apartments
joint venture was required to establish an escrow account in the amount of
$685,000 for the completion of agreed upon repairs, $156,600 for capital
replacement reserves and $600,000 for real estate taxes. Despite the significant
decrease in the interest rate on the mortgage loan, the venture's monthly debt
service will only decrease by approximately $28,000 due to the higher principal
balance and the monthly principal amortization required under the new loan
agreement.
On March 31, 1992 the loans secured by the apartment properties owned by
HMF Associates were modified whereby all accrued and unpaid interest was
converted to principal. Subject to lender approval, the joint venture may obtain
additional advances up to $9,100,000 ($4,320,000 remaining at September 30, 1996
and 1995, respectively) to fund certain operating expenses of the Partnership
and to cure construction damages in the operating investment properties (see
Note 3). The loans and additional advances bear interest at a rate of 9% per
annum. 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 final 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 lease-up of the properties following
the completion of the required repairs, the venture's net operating income level
is not sufficient to fully cover the interest accruing on the outstanding debt
obligation. As a result, the total obligation due to the mortgage lender will
continue to increase through the scheduled maturity date. Furthermore, the
current aggregate estimated fair value of the operating investment properties,
while higher than their net carrying values, is substantially lower that the
outstanding obligation to the first mortgage holder as of September 30, 1996.
Accordingly, it is unlikely that the venture will be able to settle or
refinancing the debt at the time of the fiscal 1997 maturity. The result could
be a foreclosure of all three of the operating investment properties. As a
result of these circumstances, it is not practicable for management to estimate
the fair value of the mortgage debt obligation as of September 30, 1996.
Scheduled maturities of long-term debt for each of the next five years and
thereafter are as follows (in thousands):
1997 $ 23,691
1998 418
1999 454
2000 5,012
2001 455
Thereafter 16,263
---------
$ 46,293
=========
6. Leases
Chicago Colony Square Associates leases shopping center space to retail
tenants under operating leases. Lease effective dates range from 12 to 192
months. Approximate future minimum payments to the joint venture under non
cancelable operating lease agreements are as follows (in thousands):
1997 $ 346
1998 154
1999 86
2000 56
2001 37
-------
$ 679
=======
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
----------- ------------ ---- -------- ----------- ---- -------- ------ ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Apartment Complex
Mount Prospect,
IL $17,136 $ 3,132 $25,378 $(393) $ 2,875 $25,242 $28,117 $12,002 1975 12/27/85 5-30 yrs.
Shopping Center
Mount Prospect,
IL 1,078 1,014 1,883 (12) 985 1,900 2,885 668 1978 12/27/85 5-30 yrs.
Apartment Complex
Birmingham, AL 4,773 480 7,497 547 506 8,018 8,524 4,087 1985-86 6/19/86 5-30 yrs.
Apartment Complexes:
Enchanted Woods, Hunt
Club and Marina Club 5/29/87 &
Seattle, WA 23,306 2,106 14,150 2,322 2,106 16,472 18,578 5,328 1987 6/29/87 5-27.5 yrs
------- ------ ------- ------ ------- ------ ------- ------
$46,293 $ 6,732 $48,908 $2,464 $ 6,472 $51,632 $58,104 $22,085
======= ======= ======= ====== ====== ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $61,421.
(B) See Note 5 to Combined Financial Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $56,916 $57,812 $57,996
Acquisitions and improvements 1,188 1,624 1,495
Reductions due to receipt of insurance
settlement proceeds - (2,520) (1,679)
------ ------- -------
Balance at end of year $58,104 $56,916 $57,812
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $20,319 $18,668 $17,139
Depreciation expense 1,766 1,651 1,529
------- ------- -------
Balance at end of year $22,085 $20,319 $18,668
======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended September 30,
1996 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> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,067
<SECURITIES> 0
<RECEIVABLES> 109
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,250
<PP&E> 5,099
<DEPRECIATION> 1,651
<TOTAL-ASSETS> 8,852
<CURRENT-LIABILITIES> 145
<BONDS> 1,671
0
0
<COMMON> 0
<OTHER-SE> (1,377)
<TOTAL-LIABILITY-AND-EQUITY> 8,852
<SALES> 0
<TOTAL-REVENUES> 773
<CGS> 0
<TOTAL-COSTS> 706
<OTHER-EXPENSES> 276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195
<INCOME-PRETAX> (404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (404)
<EPS-PRIMARY> (10.53)
<EPS-DILUTED> 0
</TABLE>
