UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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
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(Exact name of registrant as specified in its charter)
Delaware 04-2870345
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_| .
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and September 30, 1996 (Unaudited)
(In thousands)
ASSETS
June 30 September 30
------- ------------
Operating investment property:
Land $ 698 $ 698
Buildings and improvements 4,294 4,294
Equipment and fixtures 107 107
---------- ---------
5,099 5,099
Less accumulated depreciation (1,750) (1,651)
---------- ---------
3,349 3,448
Cash and cash equivalents 4,445 5,067
Escrowed funds 56 74
Accounts receivable 113 107
Accounts receivable - affiliates - 2
Deferred expenses, net 108 122
Other assets 28 32
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$ 8,099 $ 8,852
========== =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Equity in losses from unconsolidated joint
ventures in excess of investments and
advances $ 5,182 $ 8,413
Mortgage note payable 1,629 1,671
Accounts payable and accrued expenses 98 135
Accounts payable - affiliates 7 -
Other liabilities 10 10
Partners' capital (deficit) 1,173 (1,377)
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$ 8,099 $ 8,852
========== ========
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended June 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
--------- --------
Balance at September 30, 1995 $ (752) $ (221)
Net loss (2) (198)
--------- ---------
Balance at June 30, 1996 $ (754) $ (419)
========= ==========
Balance at September 30, 1996 $ (756) $ (621)
Cash distributions (5) (1,984)
Net income 48 4,491
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Balance at June 30, 1997 $ (713) $ 1,886
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income and expense
recoveries $ 122 $ 131 $ 364 $ 393
Interest and other income 63 65 213 179
------- ------- ------ -------
185 196 577 572
Expenses:
Mortgage interest 47 50 142 150
Property operating expenses 20 18 83 96
Depreciation and amortization 36 38 109 115
Real estate taxes 20 20 61 57
Partnership management fees 24 - 42 -
General and administrative 76 64 174 242
------- ------- ------ -------
223 190 611 660
------- ------- ------ -------
Operating income (loss) (38) 6 (34) (88)
Partnership's share of
unconsolidated ventures'
income (losses) 4,691 13 4,573 (112)
------- ------- ------ -------
Net income (loss) $ 4,653 $ 19 $4,539 $ (200)
======= ====== ====== =======
Net income (loss) per Limited
Partnership Unit $121.28 $ 0.52 $118.29 $ (5.19)
======= ====== ======= =======
Cash distributions per Limited
Partnership Unit $ 6.00 $ - $ 52.25 $ -
======= ====== ======= =======
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 37,969 Limited Partnership Units outstanding during each
period.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 4,539 $ (200)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 109 115
Amortization of deferred financing costs 4 8
Partnership's share of unconsolidated ventures'
income (losses) (4,573) 112
Changes in assets and liabilities:
Escrow deposits 18 14
Accounts receivable (6) (42)
Accounts receivable - affiliates 2 -
Other assets 4 2
Accounts payable and accrued expenses (37) (27)
Accounts payable - affiliate 7 -
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Total adjustments (4,472) 182
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Net cash provided by (used in) operating
activities 67 (18)
Cash flows from investing activities:
Distributions from unconsolidated joint ventures 1,342 1,500
Cash flows from financing activities:
Principal payments on long-term debt (42) (38)
Distributions to partners (1,989) -
-------- ------
Net cash used in financing activities (2,031) (38)
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Net (decrease) increase in cash and cash equivalents (622) 1,444
Cash and cash equivalents, beginning of period 5,067 3,252
-------- ------
Cash and cash equivalents, end of period $ 4,445 $4,696
======== ======
Cash paid during the period for interest $ 138 $ 142
======== ======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES
SEVEN LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended September 30, 1996. In the
opinion of management, the accompanying consolidated financial statements,
which have not been audited, reflect all adjustments necessary to present
fairly the results for the interim period. All of the accounting adjustments
reflected in the accompanying interim financial statements are of a normal
recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of June 30, 1997 and September 30, 1996
and revenues and expenses for the three and nine months ended June 30, 1997
and 1996. Actual results could differ from the estimates and assumptions
used.
2. Related Party Transactions
Accounts receivable - affiliates at September 30, 1996 consisted of
investor service fees due from the Daniel Meadows Partnership of $2,000.
The Adviser earns a basic management fee equal to 3% of the Partnership's
adjusted cash flow, as defined. The Adviser also earns an asset management
fee equal to 3.99% of distributable cash. Management fees totalled $42,000
for the nine months ended June 30, 1997. No management fees were earned for
the nine months ended June 30, 1996.
Included in general and administrative expenses for the nine months ended
June 30, 1997 and 1996 is $64,000 and $65,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the nine months
ended June 30, 1997 and 1996 is $12,000 and $13,000, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
3. Investments in Unconsolidated Joint Venture Partnerships
As of June 30, 1997, the Partnership has investments in four
unconsolidated joint ventures which own four operating properties (six at
September 30, 1996), as more fully described in the Partnership's Annual
Report. On June 27, 1997, HMF Associates sold the properties known as The
Hunt Club Apartments, located in Seattle, Washington, and Marina Club
Apartments, located in Des Moines, Washington, to an unrelated third party
for approximately $5.3 million and $3.1 million, respectively. The
Partnership received net proceeds of approximately $288,000 in connection
with the sale of these two assets in accordance with a discounted mortgage
loan payoff agreement reached with the lender in April 1997. The third
property owned by the joint venture, the Enchanted Woods Apartments, located
in Federal Way, Washington, had been under contract for sale to the same
buyer that purchased The Hunt Club and Marina Club properties, however, the
buyer subsequently withdrew the offer to purchase Enchanted Woods. A Special
Capital Distribution of $1,898,450, or $50 per original $1,000 investment,
will be made on August 15, 1997, to unit holders of record as of June 27,
1997. Of this amount, $7.60 per original $1,000 investment represents net
sale proceeds from the disposition of The Hunt Club Apartments and the Marina
Club Apartments, $41.48 per original $1,000 investment represents proceeds
from the settlements of litigation covering construction-related defects at
the Hunt Club, Marina Club and Enchanted Woods properties as discussed
further in the Annual Report, and $0.92 per original $1,000 investment
represents Partnership reserves that exceed future requirements.
Despite the successful lease-up of all three properties owned by HMF
Associates following the completion of the construction-related repairs
discussed further in the Annual Report, the net operating income from the
properties was not sufficient to fully cover the interest accruing on the
outstanding debt obligations which matured on June 1, 1997 and July 1, 1997.
As a result, the total obligation due to the mortgage lender had continued to
increase since the date of a fiscal 1992 loan modification agreement. The
balance of the original mortgage loans on the Hunt Club, Marina Club and
Enchanted Woods properties at the time of their fiscal 1987 acquisition dates
totalled $13,035,000. After advances from the lender to pay for costs to
repair the construction defects of approximately $4.8 million and interest
deferrals totalling approximately $6.2 million, the total obligation to the
mortgage lender totalled approximately $24 million as of the fiscal 1997
maturity dates. As a result, the aggregate estimated fair value of each of
the operating investment properties was substantially lower than the
outstanding obligations to the first mortgage holder. In April 1997, the
lender agreed to another modification agreement which provided the joint
venture with an opportunity to complete a sale transaction prior to the loan
maturity dates. Under the terms of the agreement, the Partnership and the
co-venture partner could qualify to receive a nominal payment from the sales
proceeds at a specified level if a sale was completed by June 30, 1997 and
certain other conditions were met. In May 1997, the agreement with the lender
was modified to reflect the terms and conditions of a sale involving only the
Hunt Club and Marina Club properties. The June 27, 1997 sale satisfied the
conditions in the loan modification agreement which allowed the Partnership
and the co-venturer to share in the net proceeds from the sale transaction.
The co-venturer received a payment of $50,000 in connection with the sale of
the Hunt Club and Marina Club properties. The joint venture has also obtained
a four-month extension from the lender of the discounted loan pay off
agreement with respect to the Enchanted Woods Apartments, and, in July 1997,
entered into an agreement with another third-party prospective buyer for the
possible sale of this remaining asset. As with the recently completed
transaction, if this sale were to close prior to October 31, 1997 and the
required conditions were met, the Partnership could end up receiving a
nominal amount from the proceeds of the sale transaction. However, the sale
remains subject to, among other things, the satisfactory completion of the
buyer's due diligence. Accordingly, there are no assurances that the
transaction will be consummated. In any event, it is likely that ownership
title to the Enchanted Woods Apartments will be transferred either by a sale
or a foreclosure action prior to the end of calendar 1997. The joint venture
recognized gains from the forgiveness of indebtedness and on the sale of the
Hunt Club and Marina Club properties in the aggregate amount of approximately
$4,841,000 as a result of the June 1997 sale transaction. The Partnership's
share of such gains totalled approximately $4,605,000. Additional gains will
be recognized upon the ultimate sale or foreclosure of the Enchanted Woods
Apartments.
The unconsolidated joint venture investments are accounted for using the
equity method because the Partnership does not have a voting control interest
in the ventures. Under the equity method, the assets, liabilities, revenues
and expenses of the joint ventures do not appear in the Partnership's
financial statements. Instead, the investments are carried at cost adjusted
for the Partnership's share of the ventures' earnings and losses and
distributions.
<PAGE>
Summarized operations of the four unconsolidated joint ventures for the
three and nine months ended June 30, 1997 and 1996 are as follows:
Condensed Combined Summary of Operations
For the three and nine months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ --------------------
1997 1996 1997 1996
---- ---- ---- ----
Rental revenues and expense
recoveries $2,745 $2,589 $8,094 $7,792
Interest and other income 96 124 322 311
------ ------ ------ ------
2,841 2,713 8,416 8,103
Property operating expenses 889 948 2,822 2,720
Interest expense 1,010 957 2,992 2,893
Real estate taxes 466 462 1,405 1,408
Depreciation and amortization 392 396 1,234 1,211
------ ------ ------ ------
2,757 2,763 8,453 8,232
------ ------ ------ ------
Operating income (loss) 84 (50) (37) (129)
Gain on forgiveness of
indebtedness 2,866 - 2,866 -
Gain on sale of operating
investment properties 1,975 - 1,975 -
------ ------ ------ ------
Net income (loss) $4,925 $ (50) $4,804 $ (129)
====== ===== ====== ======
Net income (loss):
Partnership's share of
combined income (losses) $4,693 $ 15 $4,578 $ (107)
Co-venturers' share of
combined income (losses) 232 (65) 226 (22)
------ ----- ------ ------
$4,925 $ (50) $4,804 $ (129)
====== ====== ====== ======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
combined income (losses),
as shown above $4,693 $ 15 $ 4,578 $ (107)
Amortization of excess basis (2) (2) (5) (5)
Partnership's share of ------ ---- ------- ------
unconsolidated ventures'
income (losses) $4,691 $ 13 $ 4,573 $ (112)
====== ==== ======= ======
<PAGE>
4. Operating Investment Property
The Partnership has a controlling interest in one joint venture, West Palm
Beach Concourse Associates, which owns the Concourse Retail Plaza. The Retail
Plaza consists of 30,473 net rentable square feet located in West Palm Beach
Florida. Subsequent to a settlement and assignment agreement executed in
fiscal 1990, the Partnership's co-venture partner is Seventh Income
Properties Fund, Inc., the Managing General Partner of the Partnership. The
amended and restated terms of the joint venture agreement are more fully
described in the Partnership's Annual Report. The Partnership employs the
services of a local unaffiliated property management company to administer
the day-to-day operations of the investment property.
The following is a summary of property operating expenses for the three-
and nine-month periods ended June 30, 1997 and 1996 (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Repairs and maintenance $ 4 $ 7 $ 18 $ 13
Utilities 1 2 3 4
Insurance 1 1 4 4
Administrative and other 11 4 47 40
Bad debt - - - 24
Management fees 3 4 11 11
------ ------ ------- -----
$ 20 $ 18 $ 83 $ 96
====== ====== ======= =====
5. 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
June 30, 1997 and September 30, 1996, mortgage note payable
consists of the following (in thousands):
June 30 September 30
------- ------------
11.12% first mortgage, payable in
installments of $20 per month,
including interest, through January
1, 2005. All outstanding principal
and accrued interest is due on
January 10, 2005. The fair value of
this note payable approximated its
carrying value as of June 30, 1997
and September 30, 1996. $ 1,629 $ 1,671
======= ========
In accordance with the Concourse mortgage loan agreements, certain
insurance premiums and real estate taxes are required to be held in escrow.
The balance of escrow deposits on the accompanying balance sheets at June 30,
1997 and September 30, 1996 consists of such escrowed insurance premiums and
real estate taxes in the aggregate amounts of $56,000 and $74,000,
respectively.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
On June 27, 1997, HMF Associates sold the properties known as The Hunt
Club Apartments, located in Seattle, Washington, and Marina Club Apartments,
located in Des Moines, Washington, to an unrelated third party for approximately
$5.3 million and $3.1 million, respectively. The Partnership received net
proceeds of approximately $288,000 in connection with the sale of these two
assets in accordance with a discounted mortgage loan payoff agreement reached
with the lender in April 1997. The third property owned by the joint venture,
the Enchanted Woods Apartments, located in Federal Way, Washington, had been
under contract for sale to the same buyer that purchased The Hunt Club and
Marina Club properties, however, the buyer subsequently withdrew the offer to
purchase Enchanted Woods. A Special Capital Distribution of $1,898,450, or $50
per original $1,000 investment, will be made on August 15, 1997, to unit holders
of record as of June 27, 1997. Of this amount, $7.60 per original $1,000
investment represents net sale proceeds from the disposition of The Hunt Club
Apartments and the Marina Club Apartments, $41.48 per original $1,000 investment
represents proceeds from the settlements of litigation covering
construction-related defects at the Hunt Club, Marina Club and Enchanted Woods
properties as discussed further below, and $0.92 per original $1,000 investment
represents Partnership reserves that exceed future requirements.
Despite the successful lease-up of all three properties owned by HMF
Associates following the completion of the construction-related repairs
discussed further in the Annual Report, the net operating income from the
properties was not sufficient to fully cover the interest accruing on the
outstanding debt obligations which matured on June 1, 1997 and July 1, 1997. As
a result, the total obligation due to the mortgage lender had continued to
increase since the date of a fiscal 1992 loan modification agreement. The
balance of the original mortgage loans on the Hunt Club, Marina Club and
Enchanted Woods properties at the time of their fiscal 1987 acquisition dates
totalled $13,035,000. After advances from the lender to pay for costs to repair
the construction defects of approximately $4.8 million and interest deferrals
totalling approximately $6.2 million, the total obligation to the mortgage
lender totalled approximately $24 million as of the fiscal 1997 maturity dates.
As a result, the aggregate estimated fair value of each of the operating
investment properties was substantially lower than the outstanding obligations
to the first mortgage holder. In April 1997, the lender agreed to another
modification agreement which provided the joint venture with an opportunity to
complete a sale transaction prior to the loan maturity dates. Under the terms of
the agreement, the Partnership and the co-venture partner could qualify to
receive a nominal payment from the sales proceeds at a specified level if a sale
was completed by June 30, 1997 and certain other conditions were met. In May
1997, the agreement with the lender was modified to reflect the terms and
conditions of a sale involving only the Hunt Club and Marina Club properties.
The June 27, 1997 sale satisfied the conditions in the loan modification
agreement which allowed the Partnership and the co-venturer to share in the net
proceeds from the sale transaction. The co-venturer received a payment of
$50,000 in connection with the sale of the Hunt Club and Marina Club properties.
The joint venture has also obtained a four-month extension from the lender of
the discounted loan pay off agreement with respect to the Enchanted Woods
Apartments, and, in July 1997, entered into an agreement with another
third-party prospective buyer for the possible sale of this remaining asset. As
with the recently completed transaction, if this sale were to close prior to
October 31, 1997 and the required conditions were met, the Partnership could end
up receiving a nominal amount from the proceeds of the sale transaction.
However, the sale remains subject to, among other things, the satisfactory
completion of the buyer's due diligence. Accordingly, there are no assurances
that the transaction will be consummated. In any event, it is likely that
ownership title to the Enchanted Woods Apartments will be transferred either by
a sale or a foreclosure action prior to the end of calendar 1997. The joint
venture recognized gains from the forgiveness of indebtedness and on the sale of
the Hunt Club and Marina Club properties in the aggregate amount of
approximately $4,841,000 as a result of the June 1997 sale transaction. The
Partnership's share of such gains totalled approximately $4,605,000. Additional
gains will be recognized upon the ultimate sale or foreclosure of the Enchanted
Woods Apartments.
As previously reported, the Partnership received $1,574,903 in fiscal
years 1994 and 1995 in connection with the various settlements of litigation
against the developer and subcontractors covering construction-related defects
at the Hunt Club, Marina Club and Enchanted Woods (formerly Forest Ridge)
apartment complexes. This $1,574,903 had been held in the Partnership's reserves
for potential use in an economically viable workout that the Partnership tried
to negotiate with the lender for these properties. Management had numerous
discussions with the mortgage holder for the properties owned by HMF Associates
over the past several years regarding a possible loan modification aimed at
preventing the further accumulation of deferred interest and reducing the
overall debt obligations. Such a plan would have required a sizable equity
infusion by the joint venture. During fiscal 1996, management of the Partnership
evaluated whether an additional investment 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. With the Hunt Club and
Marina Club properties sold and the Enchanted Woods property under agreement for
sale, the Partnership no longer has a need to retain the litigation proceeds.
Notwithstanding the sales of the properties owned by HMF Associates for
net proceeds which are substantially less than the amounts of the Partnership's
original investments, due to improvements in the Partnership's cash flow during
fiscal 1996 and the expectation that it will continue in the future, the
Partnership reinstated the payment of regular quarterly distributions at the
annual rate of 2.5% on remaining invested capital effective with the payment
made on February 14, 1997 for the quarter ended December 31, 1996. The payment
of quarterly distributions was discontinued in early 1990 primarily due to the
lack of cash flow from several of the Partnership's investments. The plan to
reinstate quarterly distributions is attributable to the improvement in property
operations and the lower debt service costs at the Colony Apartments and The
Meadows on the Lake Apartments, which represent a combined 48% of the
Partnership's original investment portfolio. The Partnership also made a special
distribution of $40 per original $1,000 investment on February 14, 1997 to
Unitholders of record on December 31, 1996. This amount represented a
distribution of Partnership reserves which exceeded expected future
requirements.
Through the third quarter of fiscal 1997, the Partnership had received
cash flow distributions of $550,000 from the Colony Apartments joint venture and
$503,000 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. 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. As previously reported,
the Partnership and its co-venture partner have received unsolicited offers from
prospective purchasers to acquire The Meadows on the Lake Apartments. After
carefully reviewing the offers, the Partnership determined that the property
should sell at a higher price and directed the co-venture partner to market the
property for sale. Subsequent to the end of the quarter, an offer was received
from a qualified buyer which could meet the Partnership's sale criteria. This
offer is currently under review by the Partnership and its co-venture partner.
If approved and completed, this sale of the property for $9,600,000 would result
in net proceeds to the Partnership of approximately $4.5 million after closing
costs and the repayment of the outstanding first mortgage loan. However, this
sale transaction remains subject, among other things, negotiation of definitive
sale documents and satisfactory completion of the potential buyer's due
diligence. Accordingly, there are no assurances that a sale transaction will be
completed. The Partnership is also focusing on potential disposition strategies
for the other investments in its portfolio. Although no assurances can be given,
it is currently contemplated that sales of the Partnership's remaining assets
could be completed within the next 2-to-3 years.
Occupancy levels at the Concourse Retail Plaza and the Colony Square
Shopping Center were 90% and 94%, respectively, as of June 30, 1997. 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 and by the
generally flat rate of growth in retail sales. It remains unclear at this time
what impact, if any, this general trend will have on the operations and/or
market values of the Partnership's retail properties in the near term.
Management continues to closely monitor the operating performance of the three
restaurant tenants at the Concourse Retail Plaza. Two of these tenants, which
occupy approximately 40% of the property's leasable space, reported declining
sales during fiscal 1996 and fell behind on their rental payments. Management
negotiated agreements with both tenants to cure the rental delinquencies which,
in one of the cases, involved the forgiveness of a portion of the delinquency
and a reduction in the future monthly rent payment in return for an increase in
the term of the lease obligation. One of these tenants is currently meeting the
modified terms of its rental obligations. The Partnership had pursued legal
action against the other tenant, which occupies 28% of the Plaza, because of a
failure to pay the modified rent. Subsequently, a court judgment was entered
against this restaurant tenant. However, this tenant is now experiencing
improved sales and is paying its rent as modified under the court judgement. The
Partnership will continue to collect this tenant's rent while also looking for a
replacement tenant in the event of a default. Subsequent to the end of the third
quarter, the property's leasing team began discussions with a popular south
Florida Caribbean restaurant chain on a lease for a 3,953 square foot vacant
restaurant space. The Partnership believes that the potential addition of this
new restaurant would add stability to the tenant base and make the Plaza
appealing to prospective future buyers. At Colony Square, a lease for a 2,332
square foot martial arts studio, or 6% of the Center's available space, was not
renewed by the tenant upon its expiration during the third quarter of fiscal
1997. However, subsequent to the end of the quarter, a new three-year lease was
signed with a security systems company to occupy this space. Also during the
third quarter, a 2,344 square foot liquor store renewed its lease for five
years. Capital improvements planned at Colony Square for the fourth quarter of
fiscal 1997 include the installation of a main gas line and the conversion of
two spaces from electric to gas heat. One lease is expiring in the upcoming
quarter with an 840 square foot tanning center. The property management team
believes this lease will be renewed.
At June 30, 1997 the Partnership and its consolidated venture had cash and
cash equivalents of approximately $4,445,000. Such cash and cash equivalents
will be utilized as needed for Partnership requirements such as the payment of
operating expenses, 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, and for distributions to
partners. The source of future liquidity and distributions to the partners is
expected to be from available net cash flow generated by the operations of the
Partnership's investment properties and from net proceeds from the sale or
refinancing of such properties. Such sources of liquidity are expected to be
sufficient to meet the Partnership's needs on both a short-term and a long-term
basis.
Results of Operations
Three Months Ended June 30, 1997
- --------------------------------
The Partnership reported net income of $4,653,000 for the three months ended
June 30, 1997, as compared to net income of $19,000 for the same period in the
prior year. This increase in the Partnership's net income is primarily
attributable to the gains totalling $4,605,000 recognized by the Partnership on
the sale of the Hunt Club and Marina Club apartment complexes on June 27, 1997
and the related forgiveness of debt, as discussed further above. Such gains are
included in the Partnership's share of unconsolidated ventures' income for the
current three-month period. The Partnership's net income, prior to the effect of
these gains, increased by $29,000 as a result of an increase in the
Partnership's share of unconsolidated ventures' operating income of $73,000
which was partially offset by a $44,000 unfavorable change in the Partnership's
operating income (loss). The increase in the Partnership's share of
unconsolidated ventures' operating income is primarily due to increases in
rental revenues at all four of the unconsolidated joint ventures. Rental
revenues from Colony Square increased mainly due to higher lease rates obtained
on the new leases signed during the past 18 to 21 months. Rental income from The
Meadows on the Lake Apartments and Colony Apartments increased, despite a
decline in average occupancy, due to the increases in rental rates experienced
at both properties compared to the same period in the prior year. Rental
revenues from the HMF Associates joint venture increased due to a combination of
increases in rental rates and higher average occupancies when compared the same
three-month period in the prior year. Also contributing to the increase in the
Partnership's share of unconsolidated ventures' operating income is a decrease
in property operating expenses which was partially offset by an increase in
interest expense. Property operating expenses decreased mainly due to declines
in marketing and repair and maintenance expenditures of the HMF joint venture
when compared to the same three-month period in the prior year. Interest expense
increased mainly due to the higher mortgage loan balances of the HMF joint
venture due to the interest deferrals referred to above.
The Partnership reported an operating loss of $38,000 for the three months
ended June 30, 1997, compared to operating income of $6,000 for the three months
ended June 30, 1996. This unfavorable change in the Partnership's operating
income (loss) is mainly due to a $24,000 increase in management fees for the
current three-month period. Management fees increased due to the reinstatement
of distributions, upon which management fees are based, beginning with the
distribution made for the quarter ended December 31, 1996. In addition, a
decline of $9,000 in rental revenues from the consolidated Concourse Retail
Plaza and an increase of $12,000 in general and administrative expenses also
contributed to the unfavorable change in operating income (loss) for the current
three-month period.
Nine Months Ended June 30, 1997
- -------------------------------
The Partnership reported net income of $4,539,000 for the nine months ended
June 30, 1997, as compared to a net loss of $200,000 for the same period in the
prior year. This favorable change in the Partnership's net operating results is
primarily attributable to the gains totalling $4,605,000 recognized by the
Partnership on the sale of the Hunt Club and Marina Club apartment complexes on
June 27, 1997 and the related forgiveness of debt, as discussed further above.
Such gains are included in the Partnership's share of unconsolidated ventures'
income for the current nine-month period. The Partnership's net loss, prior to
the effect of these gains, decreased by $134,000 for the nine months ended June
30, 1997 as a result of a decrease in the Partnership's share of unconsolidated
ventures' operating losses of $80,000 and a $54,000 decrease in the
Partnership's operating loss.
The decrease in the Partnership's share of unconsolidated ventures'
operating losses for the nine months ended June 30, 1997 is primarily due to
increases in rental income from Colony Apartments, Colony Square and the
properties owned by HMF Associates totalling $324,000. Rental revenues at all
three joint ventures improved as a result of increases in rental rates obtained
at the properties over the past 21 months. An increase in average occupancy at
the properties owned by HMF prior to the sale of the Hunt Club and Marina Club
properties on June 27, 1997 also contributed to the increase in rental revenues.
An increase of $221,000 in combined expenses, attributable to increases in
property operating expenses and interest expense, partially offset the
improvement in rental income for the current nine-month period. Property
operating expenses increased by $102,000 primarily due to higher repair and
maintenance, marketing and utility costs at Colony Apartments and the Meadows.
Interest expense increased mainly due to the higher mortgage loan balances of
the HMF joint venture as a result of the interest deferrals referred to above.
The decrease in the Partnership's operating loss is mainly due to an
increase of $34,000 in interest and other income, a $68,000 decline in general
and administrative expenses and a $13,000 decline in property operating
expenses. Interest and other income improved as a result of higher interest
earnings on invested cash reserves due to an increase in the average outstanding
balances of such reserves for the current nine-month period. General and
administrative expenses decreased mainly due to a reduction in certain required
professional services during the current nine-month period. Property operating
expenses for the consolidated Concourse Retail Plaza decreased primarily due to
the inclusion of $24,000 of bad debt expense during the nine-month period ended
June 30, 1996. No bad debt expense was recorded for the current nine-month
period. The increase in interest income and the decreases in general and
administrative expenses and property operating expenses were partially offset by
a decline of $29,000 in rental income from the consolidated Concourse Retail
Plaza and an increase of $42,000 in management fees. Rental income dropped at
the Concourse Retail Plaza mainly as a result of the two lease modification
agreements referred to above. Management fees increased due to the reinstatement
of distributions, upon which management fees are based, beginning with the
distribution made in February 1997 for the quarter ended December 31, 1996.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously reported, the Partnership's General Partners were named as
defendants in a class action lawsuit against PaineWebber Incorporated
("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of
70 direct investment offerings of interests in various limited partnership
investments and REIT stocks, including those offered by the Partnership. In
January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action 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 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 settlement was held in December 1996, and in March 1997 the
court issued a final approval of the settlement. The release of the $125 million
of settlement proceeds has not occurred to date pending the resolution of an
appeal of the settlement agreement by two of the plaintiff class members. As
part of the settlement agreement, PaineWebber has agreed not to seek
indemnification from the related partnerships and real estate investment trusts
at issue in the litigation (including the Partnership) for any amounts that it
is required to pay under the settlement.
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
plaintiffs' 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 $3.4 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation with respect to the
Bandrowski action was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which provided for
the complete resolution of such action. Final releases and dismissals with
regard to this action were received during the quarter ended June 30, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated June 27, 1997 was filed subsequent to
the end of the third quarter to report the sale of two of the properties owned
by HMF Associates.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
By: SEVENTH INCOME PROPERTIES FUND, INC.
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: August 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended June 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,445
<SECURITIES> 0
<RECEIVABLES> 113
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,614
<PP&E> 5,099
<DEPRECIATION> 1,750
<TOTAL-ASSETS> 8,099
<CURRENT-LIABILITIES> 105
<BONDS> 1,629
0
0
<COMMON> 0
<OTHER-SE> 1,173
<TOTAL-LIABILITY-AND-EQUITY> 8,099
<SALES> 0
<TOTAL-REVENUES> 5,150
<CGS> 0
<TOTAL-COSTS> 469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 4,539
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,539
<EPS-PRIMARY> 118.29
<EPS-DILUTED> 118.29
</TABLE>
