UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1998
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant dated Part IV
May 14, 1985, as supplemented
Current Reports on Form 8-K of registrant Part IV
dated November 10, 1998 and November 17, 1998
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
1998 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-4
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-4
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-8
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-8
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-2
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-31
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-7 of
this Form 10-K.
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, comprised of five multi-family apartment complexes, one mixed-use
office and retail property and one shopping center. As discussed further below,
during fiscal 1997 three of the multi-family properties were sold. A fourth
multi-family property was sold on December 18, 1997. In addition, subsequent to
the end of fiscal 1998, on November 10, 1998, the retail portion of the
Concourse property was sold. The office portion of this mixed-use property had
been lost through foreclosure proceedings on December 17, 1992. The shopping
center property was also sold subsequent to year-end, on November 17, 1998.
Subsequent to these transactions, the Partnership has only one remaining real
estate investment, the Colony Apartments. As of September 30, 1998, the
Partnership owned, through joint venture partnerships, interests in the
operating properties set forth in the following table:
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- -------- ---- ----------- ---------------------
Chicago Colony Apartments 783 12/27/85 Fee ownership of land
Associates units and improvements
The Colony Apartments (through joint venture)
Mount Prospect, Illinois
West Palm Beach Concourse 30,473 7/31/85 Fee ownership of land
Associates (2) (3) gross and improvements
The Concourse leasable through joint venture)
Retail Plaza sq. ft.
West Palm Beach, Florida
Chicago Colony Square 39,572 12/27/85 Fee ownership of land
Associates (4) gross and improvements
Colony Square Shopping Center leasable (through joint venture)
Mount Prospect, Illinois sq. ft.
(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.
(3) Subsequent to year-end, on November 10, 1998, West Palm Beach Concourse
Associates sold its operating investment property, The Concourse Retail
Plaza, to an unrelated party for $2 million. The sale generated net proceeds
of approximately $225,000, after the assumption of the outstanding first
mortgage loan of approximately $1,539,000, accrued interest of approximately
$4,000, net closing proration adjustments of approximately $2,000 and
closing costs of approximately $230,000. The Partnership received 100% of
the net proceeds in accordance with the terms of the joint venture
agreement.
(4) Subsequent to year-end, on November 17, 1998, Chicago Colony Square
Associates sold its operating investment property, the Colony Square
Shopping Center, to an unrelated party for $2.3 million. The sale generated
net proceeds of approximately $1,014,000, after the repayment of the
outstanding first mortgage loan of approximately $864,000, accrued interest
of approximately $13,000 (including a prepayment penalty of $9,000), closing
proration adjustments of approximately $221,000 and closing costs of
approximately $188,000. The Partnership received 100% of the net proceeds in
accordance with the terms of the joint venture agreement.
The Partnership previously had an interest in HMF Associates, a joint
venture which owned three multi-family apartment properties and Daniels Meadows
Partnership, a joint venture which owned the Meadows on the Lakes Apartments. On
June 27, 1997, HMF Associates sold the properties known as The Hunt Club
Apartments located in Seattle, Washington and The 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. On September 9, 1997, HMF Associates sold the property
known as The Enchanted Woods Apartments located in Federal Way, Washington to an
unrelated third party for approximately $9.2 million. The Partnership received
net proceeds of approximately $261,000 in connection with the sale in accordance
with the discounted mortgage loan payoff agreement. On December 18, 1997, Daniel
Meadows Partnership sold its operating investment property, The Meadows on the
Lakes Apartments, to an unrelated party for $9.525 million. The sale generated
net proceeds of approximately $4.4 million after repayment of the outstanding
first mortgage loan of approximately $4.7 million and closing costs of
approximately $310,000. The Partnership received 100% of the net proceeds in
accordance with the terms of the joint venture agreement.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some
extent, would 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, which had
been suspended in 1990, were reinstated during fiscal 1997. Through September
30, 1998, the Limited Partners had received cumulative cash distributions
totalling approximately $18,928,000, or approximately $515 per original $1,000
investment for the Partnership's earliest investors. Of this total, $40 per
original $1,000 investment represents a distribution made in February 1997 of an
amount of Partnership cash reserves which exceeded expected future requirements,
$50 per original investment represents a Special Capital Distribution made on
August 15, 1997 to unitholders of record as of June 27, 1997 and $165 per
original investment represents a special distribution made on February 13, 1998
to unitholders of record on December 18, 1997. Of the August 15, 1997 special
distribution amount, $7.60 per original $1,000 investment represented net sale
proceeds from the disposition of The Hunt Club Apartments and The Marina Club
Apartments, $41.48 per original $1,000 investment represented proceeds from the
settlements of litigation covering construction-related defects at the Hunt
Club, Marina Club and Enchanted Woods properties and $0.92 per original $1,000
investment represented an additional amount of cash reserves that exceeded
expected future requirements. Of the February 13, 1998 special distribution
amount, $116.39 per original $1,000 investment represented net proceeds from the
sale of The Meadows on the Lake Apartments, $13.52 per original $1,000
investment represented net proceeds from the sale of the Enchanted Woods
Apartments and $35.09 per original $1,000 investment represented Partnership
reserves that exceeded future requirements. The remaining distributions made
through September 30, 1998 have been from operating cash flow of the
Partnership. A substantial portion of such cash distributions has been sheltered
from current taxable income. Subsequent to year-end, on December 15, 1998, the
Partnership distributed approximately $1,253,000, or $33 per original $1,000
investment, which included the net proceeds from the sales of The Concourse
Retail Plaza ($5.92 per Unit) and the Colony Square Shopping Center ($26.69 per
Unit) and an amount of reserves that exceeded future requirements ($0.39 per
Unit).
The loss of the Concourse Office Towers to foreclosure in fiscal 1993 and
the minimal proceeds from the sale 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 comprised another 13% of the
original investment portfolio. The amount of capital which will be returned will
depend upon the proceeds received from the final liquidation of the remaining
investment. The amount of such proceeds will ultimately depend upon the value of
the underlying investment property at the time of its final disposition, which
cannot be determined with certainty at the present time. The Partnership is
currently focusing on potential disposition strategies for the remaining
investment in its portfolio. Although no assurances can be given, it is
currently contemplated that the sale of the Partnership's Colony Apartments
investment could be completed during the first half of calendar year 1999. The
sale of the remaining property would be followed by an orderly liquidation of
the Partnership.
Colony Apartments is located in a real estate market in which it faces
significant competition for the revenues it generates. It competes with numerous
projects of similar types generally on the basis of price, location and
amenities as well as 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. Over the past 2 years, development activity for multi-family properties
in many markets has escalated significantly.
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.
Item 2. Properties
As of September 30, 1998, the Partnership owned interests in three
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 1998, along with an
average for the year, are presented below for each property.
Percent Occupied At
-------------------------------------------------
Fiscal
1998
12/31/97 3/31/98 6/30/98 9/30/98 Average
-------- ------- ------- ------- -------
The Colony Apartments 97% 97% 97% 97% 97%
The Concourse Retail Plaza 90% 90% 34% 34% 62%
Colony Square Shopping Center 100% 92% 92% 92% 94%
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and Related
Security Holder Matters
At September 30, 1998 there were 2,228 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. Upon request, the
Managing General Partner will endeavor to assist a Unitholder desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the Unitholder. The
Managing General Partner will not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of the amount of cash
distributions made to the Limited Partners during fiscal 1998.
Item 6. Selected Financial Data
Paine Webber Income Properties Seven Limited Partnership
(In thousands except per unit data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 968 $ 808 $ 773 $ 835 $ 561
Operating loss $ (514) (2) $ (1,214) (1) $ (128) $ (101) $ (401)
Partnership's share of
unconsolidated ventures'
income (losses) $ 966 $ 36 $ (276) $(1,100) $(1,592)
Partnership's share of gains on
sale of operating investment
properties $ 4,591 $ 4,210 - - -
Income (loss) before
extraordinary gain $ 5,048 $ 3,033 $ (404) $(1,200) $(1,992)
Partnership's share of
extraordinary gain from
settlement of debt obligations - $ 7,463 - $ 1,600 -
Net income (loss) $ 5,048 $ 10,496 $ (404) $ 400 $(1,992)
Per Limited Partnership Unit:
Income (loss) before
extraordinary gain $131.57 $ 79.04 $(10.53) $(31.29) $(51.90)
Partnership's share of
extraordinary gain
from settlement of
debt obligations - $ 194.50 - $ 41.72 -
Net income (loss) $131.57 $ 273.54 $(10.53) $ 10.43 $(51.90)
Cash distributions
from operations $ 22.30 $ 18.25 - - -
Cash distributions from
capital transactions $165.00 $ 90.00 - - -
Total assets $ 4,656 $ 6,789 $ 8,852 $ 7,148 $ 6,347
Mortgage notes payable $ 1,550 $ 1,614 $ 1,671 $ 1,723 $ 2,499
</TABLE>
(1) The Partnership's operating loss for the year ended September 30, 1997
includes an impairment loss of $1,000,000 related to the consolidated
Concourse Retail Plaza. See Note 2 to the accompanying financial
statements for a further discussion of this writedown.
(2) The Partnership's operating loss for the year ended September 30, 1998
includes an impairment loss of $418,000 related to the consolidated
Concourse Retail Plaza. See Note 2 to the accompanying financial
statements for a further discussion of this writedown.
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
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below under the heading "Certain Factors Affecting Future Operating
Results", which could cause actual results to differ materially from historical
results or those anticipated. The words "believe," "expect," "anticipate," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership offered units of limited partnership interests to the
public from 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.
During fiscal 1997 three of the multi-family properties were sold. A fourth
multi-family property was sold on December 18, 1997. In addition, subsequent to
year-end, on November 10, 1998, the retail portion of the Concourse property was
sold. As previously reported, the office portion of this mixed-use property had
been lost through foreclosure proceedings on December 17, 1992. In addition, the
Colony Square Shopping Center property was sold on November 17, 1998. Subsequent
to these transactions, the Partnership has only one remaining real estate
investment, the Colony Apartments. 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 investment in accordance with the
joint venture agreement.
As previously reported, in early fiscal 1997 the Partnership and its
co-venture partner had received unsolicited offers from prospective purchasers
to acquire The Meadows on the Lake Apartments, located in Birmingham, Alabama.
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. During the fourth quarter of fiscal 1997, several
offers were received. One of these offers was from a qualified buyer and met the
Partnership's sale criteria. This offer was accepted by the Partnership and its
co-venture partner; however, a sale agreement could not be finalized with this
prospective buyer. Negotiations were then undertaken with one of the other
potential buyers, resulting in a purchase and sale agreement which was signed on
November 12, 1997. On December 18, 1997, The Meadows on the Lake Apartments was
sold to an unrelated third party for $9.525 million. The sale generated net
proceeds of approximately $4.4 million, after repayment of the outstanding first
mortgage loan of approximately $4.7 million and closing costs of approximately
$310,000. The Partnership received 100% of the net proceeds in accordance with
the terms of the joint venture agreement. The Partnership made a special
distribution to the Limited Partners totalling approximately $6,265,000, or $165
per original $1,000 investment, on February 13, 1998. Of this amount, $116.39
per original $1,000 investment represented the net proceeds from the sale of The
Meadows on the Lake Apartments, $13.52 per original $1,000 investment
represented net proceeds from the disposition of the Enchanted Woods Apartments,
which was sold on September 9, 1997, and $35.09 per original $1,000 investment
represented Partnership reserves that exceeded expected future requirements.
As previously reported, the Partnership had reviewed its options for The
Concourse Retail Plaza at the beginning of fiscal 1998 and determined that it
was the appropriate time to market the property for sale. For the past several
years, 80% of the Plaza's 30,473 square feet has been leased to four restaurant
operators which have performed poorly. One of these restaurant tenants was
paying rent on space that was vacated in 1996 under a lease that can be
terminated in July 1999. Two other of these restaurant tenants closed their
operations at the property during the quarter ended September 30, 1998 as a
result of poor sales. One of the options reviewed for the property was the
development of a leasing plan that would put an emphasis on a greater mixture of
office and retail uses. This would have involved the likely conversion of one of
the larger restaurant out parcel buildings into professional/service office
space. Another option was to market the property for sale currently, with the
net proceeds from any such potential sale transaction being carefully evaluated
in comparison to the risks of holding the property and completing the
conversion. The Partnership decided on the second option and began marketing the
property for sale. During the second quarter of fiscal 1998, the Partnership
initiated discussions with area real estate firms concerning potential marketing
strategies for selling The Concourse and solicited marketing proposals from
several of these firms. After reviewing their respective proposals and
conducting interviews to determine their expertise and track record in selling
properties similar to The Concourse, the Partnership selected a Florida-based
firm. During the third quarter, a marketing package was finalized and
comprehensive sale efforts began in early May. On August 14, 1998, a purchase
and sale agreement was signed with an unrelated third party. Subsequent to
year-end, on November 10, 1998, West Palm Beach Concourse Associates sold The
Concourse Retail Plaza property to this unrelated party for $2 million. The sale
generated net proceeds of approximately $225,000, after the assumption of the
outstanding first mortgage loan of approximately $1,539,000, accrued interest of
approximately $4,000, net closing proration adjustments of approximately $2,000
and closing costs of approximately $231,000. The Partnership received 100% of
the net proceeds in accordance with the terms of the joint venture agreement.
The mortgage loan, which was assumable, contains a prohibition on prepayment
through January 10, 2000. As a result, any sale transaction completed prior to
such date had to involve an assumption of this mortgage loan which carries an
interest rate of 11.12% per annum. The sale price was discounted to reflect this
above-market interest rate. Nonetheless, the Managing General Partner believed
that a current sale was in the best interests of the Limited Partners. As
discussed further below, the Partnership has recorded an impairment writedown of
$418,000 in fiscal 1998 to reflect the net proceeds received from the sale
subsequent to year-end.
As previously reported, the Partnership and its co-venture partner had
begun exploring potential opportunities for the sale of the Colony Square
property in early fiscal 1998. As part of that plan, discussions were held with
real estate brokerage firms with a specialty in small retail centers like Colony
Square. During the third quarter of fiscal 1998, the Partnership and its
co-venture partner selected a real estate brokerage firm to begin marketing this
asset for sale. Subsequently, an offer was received to purchase the Colony
Square Shopping Center from a prospective third-party buyer that met the
Partnership's and co-venture partner's sale criteria. A purchase and sale
agreement was signed on July 9, 1998 with this prospective buyer. On November
17, 1998, Chicago Colony Square Associates sold the Colony Square Shopping
Center to this unrelated party for $2.3 million. The sale generated net proceeds
of approximately $1,014,000, after the repayment of the outstanding first
mortgage loan of approximately $864,000, accrued interest of approximately
$13,000 (including a prepayment penalty of $9,000), closing proration
adjustments of approximately $221,000 and closing costs of approximately
$188,000. The Partnership received 100% of the net proceeds in accordance with
the terms of the joint venture agreement. As a result of the sales of The
Concourse Retail Plaza and Colony Square Shopping Center, a Special Distribution
of approximately $1,253,000, or $33 per original $1,000 investment, was made on
December 15, 1998. Of this total, $5.92 represented net proceeds from the sale
of The Concourse Retail Plaza, $26.69 represented net proceeds from the sale of
Colony Square Shopping Center and $0.39 represented Partnership reserves that
exceeded future requirements.
With the sales of The Concourse and Colony Square, the Partnership now has
one remaining real estate investment, the Colony Apartments, a 783-unit complex
located in Mount Prospect, Illinois. The occupancy level at Colony Apartments
averaged 97% for fiscal 1998, up from the average occupancy level of 96% for the
prior fiscal year. In addition, the average monthly rental rate per apartment
unit has increased by approximately 4% over the past twelve months. With the
improvements in the apartment segment of the real estate market and the strong
local job market in this northwest Chicago suburb, the Partnership and its
co-venture partner decided to market the Colony Apartments for sale during the
third quarter of fiscal 1998. A national real estate firm was selected to market
the property and comprehensive sale efforts began in late June. As a result of
these sale efforts, ten offers were received. As part of the Partnership's sale
efforts to reduce the prospective buyers' due diligence work and the time
required to complete it, updated operating reports as well as building
evaluation and environmental information of the property were provided to the
top six prospective buyers, who were asked to submit best and final offers and
did so. Subsequent to year-end, the Partnership and its co-venture partner
selected an offer and are currently negotiating a purchase and sale agreement.
The Partnership currently expects to have a signed purchase and sale agreement
by January 31, 1999 and to close on the sale transaction shortly thereafter.
This should allow the Partnership to complete a liquidation of the Partnership
by March 31, 1999. However, since the sale of the Colony Apartments property
remains contingent upon, among other things, negotiation of a definitive sales
agreement and satisfactory completion of the buyer's due diligence, there are no
assurances that the sale of the final asset and the liquidation of the
Partnership will be completed within this time frame.
At September 30, 1998, the Partnership and its consolidated venture had
cash and cash equivalents of approximately $1,530,000. 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
remaining joint venture, in accordance with the terms of the joint venture
agreement. 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 property and from the net proceeds from the sale or
refinancing of such property. Such sources of liquidity are expected to be
sufficient to meet the Partnership's needs on both a short-term and long-term
basis.
As noted above, the Partnership expects to be liquidated by the end of
calendar year 1999. Notwithstanding this, the Partnership believes that it has
made all necessary modifications to its existing systems to make them year 2000
compliant and does not expect that additional costs associated with year 2000
compliance, if any, will be material to the Partnership's results of operations
or financial position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership reported net income of $5,048,000 for the year ended
September 30, 1998, as compared to net income of $10,496,000 for the prior year.
This unfavorable change in the Partnership's net operating results is primarily
attributable to the gains recognized by the Partnership in fiscal 1997 on the
sales of the Hunt Club, Marina Club and the Enchanted Woods Apartments and the
related extraordinary gains from settlement of debt obligations. The Partnership
recognized gains from the forgiveness of indebtedness in connection with the
sales of the Enchanted Woods, Hunt Club and Marina Club properties in the
aggregate amount of $7,463,000 as a result of the fiscal 1997 sale transactions
and the discounted loan payoff agreement with the lender. The venture also
recognized gains in the aggregate amount of $4,210,000 for the amount by which
the sales prices, net of closing costs, exceeded the net carrying values of the
operating investment properties. During fiscal 1998, the Partnership recognized
a gain of $4,591,000 on the sale of the Meadows on the Lake Apartments.
The impact of the fiscal 1997 extraordinary gains from forgiveness of debt
was partially offset by an increase in the Partnership's share of unconsolidated
ventures' income of $930,000 and a decrease in the Partnership's operating loss
of $700,000 in fiscal 1998. The favorable change in the Partnership's share of
unconsolidated ventures' income is primarily attributable to the sale of the
properties owned by the HMF joint venture during the third and fourth quarters
of fiscal 1997. The HMF joint venture had been generating sizable operating
losses prior to the sales of its assets. In addition, net income increased by
$349,000 at the Colony Apartments joint venture for the current year mainly due
to an increase in rental income as a result of the improved occupancy and rental
rates discussed further above.
The decrease in the Partnership's operating loss was primarily
attributable to a $582,000 decrease in the impairment loss recognized by the
consolidated Concourse Retail Plaza in the current year. The Partnership
recognized an impairment loss of $418,000 during fiscal 1998 in order to write
down the net carrying value of the Concourse property to $1,769,000, which is
equal to the $2 million sales price for the property on November 10, 1998 less
selling costs of $231,000. An impairment loss of $1,000,000 had been recorded by
the consolidated venture in fiscal 1997 to write down the property to
management's estimate of its then current market value. An increase in interest
and other income of $158,000 as well as a decrease in depreciation expense of
$47,000 also contributed to the reduction in the Partnership's operating loss
for fiscal 1998. The increase in interest and other income was attributable to
the receipt of a residual cash distribution from the HMF joint venture of
$272,000 in the current year in connection with the final liquidation of the
joint venture. The reduction in depreciation expense was attributable to the
decrease in the asset value of the consolidated operating investment property as
a result of the impairment write down recognized at the end of fiscal 1997. An
increase of $64,000 in interest expense in fiscal 1998 partially offset the
favorable changes in the Partnership's operating loss. The increase in interest
expense was the result of the write-off of the unamortized balance of the
deferred financing costs related to the consolidated Concourse joint venture in
the current year due to the subsequent sale of the venture's operating property.
1997 Compared to 1996
- ---------------------
The Partnership reported net income of $10,496,000 for the year ended
September 30, 1997, as compared to a net loss of $404,000 in fiscal 1996. This
favorable change in the Partnership's net operating results was primarily
attributable to the gains recognized by the Partnership on the sale of the Hunt
Club, Marina Club and the Enchanted Woods Apartments and the related
extraordinary gains from settlement of debt obligations, as discussed further
above. The HMF joint venture recognized gains from the forgiveness of
indebtedness in connection with the sales of the Enchanted Woods, Hunt Club and
Marina Club properties in the aggregate amount of $7,552,000 as a result of the
fiscal 1997 sale transactions. The venture also recognized gains in the
aggregate amount of $4,291,000 for the amount by which the sales prices, net of
closing costs, exceeded the net carrying values of the operating investment
properties. The Partnership's share of such gains totalled approximately
$7,463,000 and $4,210,000, respectively. The Partnership's net loss, prior to
the effect of these gains, increased by $773,000 for the year ended September
30, 1997 mainly as a result of the impairment loss of $1,000,000 recognized on
the Concourse operating property in fiscal 1997, as discussed further above. The
impact of the impairment loss was partially offset as a result of the
Partnership realizing income of $36,000 from its share of unconsolidated
ventures' operations in fiscal 1997 as compared to losses of $276,000 during
fiscal 1996.
The favorable change in the operations of the unconsolidated joint
ventures was primarily a result of the sale of the HMF Associates properties
during fiscal 1997. HMF Associates had been generating net losses from
operations prior to the sale transactions. The elimination of the net losses
from HMF Associates was partially offset by the recognition of a gain on
settlement of insurance proceeds by the Meadows joint venture during fiscal 1996
of $197,000. This gain was recognized due to a change in the original estimate
for the completion of required structural repairs to the Meadows on the Lake
Apartments.
An increase in bad debt expense of the consolidated Concourse Retail Plaza
of $61,000 and an increase in management fee expense of $58,000 also contributed
to the increase in the Partnership's net loss prior to the effect of the HMF
gains in fiscal 1997. Bad debt expense increased due to a financially troubled
tenant at Concourse defaulting on a previous workout arrangement during fiscal
1997. Management fee expense increased due to the reinstatement of distributions
during fiscal 1997, upon which management fees are based. The increases in bad
debt expense and management fee expense were partially offset by an increase in
interest and other income of $23,000. Interest and other income increased
primarily as a result of a larger average outstanding balance of cash and cash
equivalents during fiscal 1997 prior to the distribution of excess reserves to
the Limited Partners in February 1997.
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 was 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 an August 1995 refinancing
transaction. 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 was 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 was
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. 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 during fiscal
1995 and 1996. 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 fiscal 1996. General and administrative expenses decreased by $79,000
primarily due to 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 a rental obligation forgiveness. The fiscal 1996 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.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
remaining property with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at its remaining property that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investment will be significantly impacted by the competition from
comparable properties in its local market area. The occupancy levels and rental
rates achievable at the property are largely a function of supply and demand in
the market. In many markets across the country, development of new multi-family
properties has increased significantly over the past 2 years. Existing apartment
properties in such markets could be expected to experience increased vacancy
levels, declines in effective rental rates and, in some cases, declines in
estimated market values as a result of the increased competition. There are no
assurances that these competitive pressures will not adversely affect the
operations and/or market value of the Partnership's remaining investment
property in the future.
Impact of Joint Venture Structure. The ownership of the remaining
investment through a joint venture partnership could adversely impact the timing
of the Partnership's planned disposition of the remaining asset and the amount
of proceeds received from such a disposition. It is possible that the
Partnership's co-venture partner could have economic or business interests which
are inconsistent with those of the Partnership. Given the rights which both
parties have under the terms of the joint venture agreement, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining asset is
critical to the Partnership's ability to realize the estimated fair market value
of such property at the time of its final disposition. Demand by buyers of
multi-family apartment properties is affected by many factors, including the
size, quality, age, condition and location of the subject property, the quality
and stability of the tenant roster, potential environmental liability concerns,
the existing debt structure, the liquidity in the debt and equity markets for
asset acquisitions, the general level of market interest rates and the general
and local economic climates.
Inflation
- ---------
The Partnership completed its thirteenth full year of operations in fiscal
1998 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. Tenants at the
Partnership's remaining apartment property have short-term leases, generally of
six-to-twelve months in duration. Rental rates at this property 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 39 8/22/96
Terrence E. Fancher Director 45 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 51 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 56 1/15/85*
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President and Controller 36 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
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.
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 and Controller of the Managing General
Partner and a Vice President and Controller 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, 1998, 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 were reinstated at
an annual rate of 2.5% on remaining invested capital effective for the first
quarter of fiscal 1997. Distributions were increased to an annual rate of 2.65%
for the fourth quarter of fiscal 1997 and increased again to an annual rate of
2.75% effective for the second quarter of fiscal 1998. 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.
(c) There exists no arrangement, known to the Partnership, the operation
of which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are 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. Basic and asset
management fees totalling $61,000 were earned by the Adviser for the year ended
September 30, 1998.
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, 1998 is $88,000, 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 $8,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended September 30, 1998. 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 1998. Current Reports on Form 8-K dated November 10, 1998 and
November 17, 1998 were filed subsequent to year-end to report the sales
of The Concourse Retail Plaza and the Colony Square Shopping Center,
respectively, and are hereby incorporated herein by reference.
(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 and Controller
Dated: January 13, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1999
----------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 13, 1999
----------------------- ----------------
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>
<CAPTION>
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, 1998 has
been sent to the Limited Partners.
An Annual Report will be sent to
the Limited Partners subsequent to
this filing.
(21) List of Subsidiaries Included in Item 1 of Part I of this
Report Page I-1, to which reference
is hereby made.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule as 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, 1998 and 1997 F-3
Consolidated statements of operations for the years ended
September 30, 1998, 1997 and 1996 F-4
Consolidated statements of changes in partners' capital (deficit)
for the years ended September 30, 1998, 1997 and 1996 F-5
Consolidated statements of cash flows for the years ended
September 30, 1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7
Schedule III - Real estate and accumulated depreciation F-19
Combined Joint Ventures of Paine Webber Income Properties Seven Limited
Partnership:
Report of independent auditors F-20
Combined balance sheets as of September 30, 1998 and 1997 F-21
Combined statements of operations and changes in venturers'
capital (deficit) for the years ended September 30, 1998,
1997 and 1996 F-22
Combined statements of cash flows for the years ended September
30, 1998, 1997 and 1996 F-23
Notes to combined financial statements F-24
Schedule III - Real estate and accumulated depreciation F-31
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, 1998 and
1997, 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, 1998. 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, 1998
and 1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 30, 1998, 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
December 18, 1998
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
(In thousands, except per Unit amounts)
ASSETS
1998 1997
---- ----
Operating investment property:
Land $ 391 $ 486
Buildings and improvements 2,421 2,990
Equipment and fixtures 61 75
-------- --------
2,873 3,551
Less accumulated depreciation (1,104) (1,257)
-------- --------
1,769 2,294
Investments in unconsolidated ventures, at equity 1,239 1,406
Cash and cash equivalents 1,530 2,856
Escrowed funds 76 72
Accounts receivable, net 8 26
Deferred expenses, net of accumulated amortization
of $75 in 1997 - 103
Other assets 34 32
------- --------
$ 4,656 $ 6,789
======= ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage note payable $ 1,550 $ 1,614
Accounts payable and accrued expenses 90 84
Accounts payable - affiliates 7 7
Accrued interest payable 14 15
Accrued real estate taxes 62 58
Other liabilities 4 9
-------- --------
Total liabilities 1,727 1,787
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net loss (312) (365)
Cumulative cash distributions (298) (289)
Limited Partners ($1,000 per Unit;
37,969 Units issued):
Capital contributions, net of offering costs 33,529 33,529
Cumulative net loss (11,063) (16,058)
Cumulative cash distributions (18,928) (11,816)
-------- --------
Total partners' capital 2,929 5,002
-------- --------
$ 4,656 $ 6,789
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1998, 1997 and 1996
(In thousands, except per Unit amounts)
1998 1997 1996
---- ---- ----
Revenues:
Rental income and expense recoveries $ 537 $ 535 $ 523
Interest and other income 431 273 250
-------- ------- -------
968 808 773
Expenses:
Loss on impairment of operating
investment property 418 1,000 -
Mortgage interest 252 188 195
Property operating expenses 102 92 103
Depreciation expense 107 154 139
Real estate taxes 84 80 77
General and administrative 285 287 285
Bad debt expense 147 150 89
Management fee expense 61 58 -
Amortization expense 26 13 13
-------- ------- -------
1,482 2,022 901
-------- ------- -------
Operating loss (514) (1,214) (128)
Partnership's share of unconsolidated
ventures' income (losses) 966 36 (276)
Partnership's share of gains on sale of
operating investment properties 4,591 4,210 -
Venture partner's share of consolidated
venture's operations 5 1 -
-------- ------- -------
Income (loss) before extraordinary gain 5,048 3,033 (404)
Partnership's share of extraordinary gain
from settlement of debt obligations - 7,463 -
-------- ------- -------
Net income (loss) $ 5,048 $10,496 $ (404)
======== ======= =======
Net income (loss) per Limited
Partnership Unit:
Income (loss) before extraordinary
gain $ 131.57 $ 79.04 $(10.53)
Partnership's share of extraordinary
gain from settlement of debt
obligations - 194.50 -
-------- ------- -------
Net income (loss) $ 131.57 $273.54 $(10.53)
======== ======= =======
Cash distributions per Limited
Partnership Unit $ 187.30 $108.25 $ -
======== ======= =======
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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at September 30, 1995 $ (752) $ (221) $ (973)
Net loss (4) (400) (404)
------- -------- ---------
Balance at September 30, 1996 (756) (621) (1,377)
Net income 110 10,386 10,496
Cash distributions (7) (4,110) (4,117)
------- -------- ---------
Balance at September 30, 1997 (653) 5,655 5,002
Net income 53 4,995 5,048
Cash distributions (9) (7,112) (7,121)
------- -------- ---------
Balance at September 30, 1998 $ (609) $ 3,538 $ 2,929
======= ======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,048 $ 10,496 $ (404)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss on impairment of operating investment property 418 1,000 -
Depreciation and amortization 133 167 152
Amortization of deferred financing costs 77 6 6
Partnership's share of unconsolidated ventures'
income (losses) (966) (36) 276
Venture partner's share of consolidated venture's
operations (5) (1) -
Partnership's share of gains on sale
of operating investment properties (4,591) (4,210) -
Partnership's share of extraordinary gain
from settlement of debt obligations - (7,463) -
Changes in assets and liabilities:
Escrowed funds (4) 2 1
Accounts receivable 18 81 (23)
Accounts receivable - affiliates - 2 -
Other assets (2) - -
Accounts payable - affiliates - 7 -
Accounts payable and accrued expenses 6 23 24
Accrued interest payable (1) - (1)
Accrued real estate taxes 4 (1) (1)
-------- --------- -------
Total adjustments (4,913) (10,423) 434
-------- --------- -------
Net cash provided by operating activities 135 73 30
-------- --------- -------
Cash flows from investing activities:
Additions to operating investment property - - (25)
Distributions from unconsolidated joint ventures 5,724 1,890 1,862
-------- --------- -------
Net cash provided by investing activities 5,724 1,890 1,837
-------- --------- -------
Cash flows from financing activities:
Repayment of mortgage notes payable (64) (57) (52)
Distributions to partners (7,121) (4,117) -
-------- --------- -------
Net cash used in financing activities (7,185) (4,174) (52)
-------- --------- --------
Net (decrease) increase in cash and cash equivalents (1,326) (2,211) 1,815
Cash and cash equivalents, beginning of year 2,856 5,067 3,252
-------- --------- -------
Cash and cash equivalents, end of year $ 1,530 $ 2,856 $ 5,067
======== ========= =======
Cash paid during the year for interest $ 176 $ 182 $ 190
======== ========= =======
</TABLE>
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES SEVEN
LIMITED PARTNERSHIP
Notes to Consolidated 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. During fiscal 1997, three of
the multi-family properties were sold. A fourth multi-family property was sold
on December 18, 1997. In addition, subsequent to the end of fiscal 1998, on
November 10, 1998, the retail portion of the Concourse property was sold. The
office portion of this mixed-use property had been lost through foreclosure
proceedings on December 17, 1992. The shopping center property was also sold
subsequent to year-end, on November 17, 1998. Subsequent to these transactions,
the Partnership has only one remaining real estate investment, the Colony
Apartments. See Notes 4 and 5 for a description of these transactions and of the
remaining real estate investment. The Partnership is currently focusing on
potential disposition strategies for the remaining investment in its portfolio.
Although no assurances can be given, it is currently contemplated that the sale
of the Partnership's Colony Apartments investment could be completed during the
first half of calendar year 1999. The sale of the remaining property would be
followed by an orderly liquidation of the Partnership.
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, 1998 and 1997 and revenues
and expenses for each of the three years in the period ended September 30, 1998.
Actual results could differ from the estimates and assumptions used.
As of September 30, 1998, the accompanying consolidated financial
statements include the Partnership's investments in three joint venture
partnerships (four at September 30, 1997) which own operating investment
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 owned by the consolidated joint venture
is carried at cost, net of accumulated depreciation and certain guaranteed
payments, or an amount less than cost if indicators of impairment are present in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which was adopted in fiscal 1997. SFAS 121 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The Partnership
generally assesses indicators of impairment by a review of independent appraisal
reports on the operating investment property. Such appraisals make use of a
combination of certain generally accepted valuation techniques, including direct
capitalization, discounted cash flows and comparable sales analysis. During
fiscal 1997, the independent appraisal of the Concourse operating investment
property indicated that certain operating assets, consisting of land, buildings
and improvements, and equipment and fixtures were impaired. In accordance with
SFAS No. 121, the consolidated Concourse joint venture recorded a reduction in
the net carrying value of such assets amounting to $1,000,000 relating to the
land ($212,000), buildings and improvements ($1,304,000), equipment and fixtures
($32,000) and accumulated depreciation ($548,000). During fiscal 1998, the
consolidated Concourse joint venture recorded an additional reduction in the net
carrying value of such assets amounting to $418,000 relating to land ($95,000),
buildings and improvements ($569,000), equipment and fixtures ($14,000) and
accumulated depreciation ($260,000). The resulting net carrying value of such
assets of $1,769,000 equals the net proceeds after closing costs realized from
the sale of the Concourse property on November 10, 1998 (see Note 4).
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, 1997 included leasing commissions and
deferred refinancing costs related to The Concourse Retail Plaza. The leasing
commissions were being amortized on a straight-line basis over the terms of the
related leases. The deferred refinancing costs were being amortized on the
effective interest method. Amortization of deferred refinancing costs is
included in interest expense on the accompanying statements of operations.
Unamortized deferred expenses were written off in fiscal 1998 in connection with
the subsequent sale of The Concourse Retail Plaza (see Note 4).
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 and escrowed funds 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
approximates their fair value as of September 30, 1998 and 1997 due to the
short-term maturities of these instruments. The mortgage note payable is also a
financial instrument for purposes of SFAS 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. The principal difference between the Partnership's accounting on a
federal income tax basis and the accompanying financial statements prepared in
accordance with generally accepted accounting principals (GAAP) relates to the
methods used to determine the depreciation expense on the consolidated and
unconsolidated operating investment properties. As a result of the difference in
depreciation, the gains calculated upon the sale of the operating investment
properties for GAAP purposes differ from those calculated for federal income tax
purposes.
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 reinstated its quarterly distribution payments in fiscal 1997. Such
distributions had been suspended since 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. The Adviser earned basic
and asset management fees totalling $61,000 and $58,000 for the years ended
September 30, 1998 and 1997, respectively. No basic or asset management fees
were earned by the Adviser for the year 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, 1998, 1997 and 1996 is $88,000, $86,000 and $81,000, 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 $8,000, $17,000 and $13,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1998, 1997 and 1996,
respectively.
4. Operating Investment Property
-----------------------------
Operating investment property at September 30, 1998 and 1997 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. 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.
Subsequent to the end of fiscal 1998, on November 10, 1998, West Palm
Beach Concourse Associates sold its operating investment property, The Concourse
Retail Plaza, to an unrelated party for $2 million. The sale generated net
proceeds of approximately $225,000, after the assumption of the outstanding
first mortgage loan of approximately $1,539,000, accrued interest of
approximately $4,000, net closing proration adjustments of approximately $2,000
and closing costs of approximately $230,000. The Partnership received 100% of
the net proceeds in accordance with the terms of the joint venture agreement.
The mortgage loan, which was assumable, contains a prohibition on prepayment
through January 10, 2000. As a result, any sale transaction completed prior to
such date had to involve an assumption of this mortgage loan which carries an
interest rate of 11.12% per annum. The sale price was discounted to reflect this
above-market interest rate. Nonetheless, the Managing General Partner believed
that a current sale was in the best interests of the Limited Partners.
The following is a summary of property operating expenses for the years
ended September 30, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 42 $ 50 $ 59
Utilities 4 5 5
Insurance 5 6 6
General and administrative 36 16 18
Management fees 15 15 15
------- ------- ------
$ 102 $ 92 $ 103
======= ======= ======
5. Investments in Unconsolidated Joint Venture Partnerships
--------------------------------------------------------
At September 30, 1998, the Partnership had investments in two
unconsolidated joint ventures (three at September 30, 1997) which owned
operating investment properties. On December 18, 1997, the Daniel Meadows
Partnership sold the The Meadows on the Lake Apartments. Subsequent to the end
of fiscal 1998, on November 17, 1998, the Chicago Colony Square Associates sold
the Colony Square Shopping Center. HMF Associates, a joint venture in which the
Partnership had an interest, owned three multi-family apartment properties
located in the Seattle, Washington area. On June 27, 1997, HMF Associates sold
the properties known as The Hunt Club Apartments and The Marina Club Apartments,
and then, on September 9, 1997, HMF Associates sold the remaining property known
as The Enchanted Woods Apartments. Subsequent to the sale of Enchanted Woods,
HMF Associates was liquidated. See below for a further discussion of these sale
transactions. 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:
Condensed Combined Balance Sheets
September 30, 1998 and 1997
(in thousands)
Assets 1998 1997
---- ----
Current assets $ 3,193 $ 3,445
Operating investment properties, net 17,840 22,481
Other assets, net 135 238
-------- -------
$ 21,168 $26,164
======== =======
Liabilities and Partners' Capital (Deficit)
-------------------------------------------
Current liabilities $ 3,434 $ 3,069
Long-term debt, less current portion 17,138 22,185
Partnership's share of combined capital (deficit) 795 1,167
Co-venturers' share of combined capital (deficit) (199) (257)
-------- -------
$ 21,168 $26,164
========= =======
Reconciliation of Partnership's Investment
------------------------------------------
1998 1997
---- ----
Partnership's share of combined capital
(deficit), as shown above $ 795 $ 1,167
Prepaid distributions to Partnership - (76)
Partnership's share of distributions payable
to venturers 427 168
Excess basis due to investment in ventures, net (1) 17 147
-------- --------
Investment in unconsolidated ventures, at equity $ 1,239 $ 1,406
======== ========
(1) At September 30, 1998 and 1997, the Partnership's investment exceeded
its share of the joint venture partnerships' capital accounts by
approximately $17,000 and $147,000, 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.
Condensed Combined Summary of Operations
For the years ended September 30, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Rental revenues and expense recoveries $ 7,348 $ 10,391 $ 10,372
Interest and other income 315 466 521
Gain on insurance settlement - - 197
-------- --------- --------
7,663 10,857 11,090
Mortgage interest 1,532 3,652 3,961
Property operating expenses 3,642 5,539 5,609
Depreciation and amortization 1,109 1,649 1,780
-------- --------- --------
6,283 10,840 11,350
-------- --------- --------
Operating income (loss) 1,380 17 (260)
Gain on sale of operating investment
properties 4,992 4,291 -
Income (loss) before extraordinary gain 6,372 4,308 (260)
Extraordinary gain from settlement of
debt obligations - 7,552 -
-------- --------- --------
Net income (loss) $ 6,372 $ 11,860 $ (260)
======== ========= ========
Net income (loss):
Partnership's share of combined
net income (loss) $ 5,687 $ 11,746 $ (269)
Co-venturers' share of combined
net income (loss) 685 114 9
------- --------- --------
$ 6,372 $ 11,860 $ (260)
======= ========= ========
Reconciliation of Partnership's Share of Operations
(in thousands)
1998 1997 1996
---- ---- ----
Partnership's share of combined net
income (loss), as shown above $ 5,687 $ 11,746 $ (269)
Amortization of excess basis (130) (37) (7)
------- --------- --------
Partnership's share of unconsolidated
ventures' net income (losses) $ 5,557 $ 11,709 $ (276)
======= ========= ========
<PAGE>
The Partnership's share of the unconsolidated ventures' net income
(losses) is presented as follows in the consolidated statements of operations
(in thousands):
Partnership's share of unconsolidated
ventures' income (losses) $ 966 $ 36 $ (276)
Partnership's share of gains on sale
of operating investment properties 4,591 4,210 -
Partnership's share of extraordinary
gain on settlement of debt
obligations - 7,463 -
------- --------- --------
$ 5,557 $ 11,709 $ (276)
======= ========= ========
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.
Investments in unconsolidated joint ventures, at equity, on the balance
sheet is comprised of the following equity method carrying values (in
thousands):
1998 1997
---- ----
Chicago Colony Apartments Associates $ 11 $ 77
Chicago Colony Square Associates 1,228 1,256
Daniel Meadows Partnership - 73
-------- --------
$ 1,239 $ 1,406
======== ========
The Partnership received cash distributions from the unconsolidated joint
ventures during fiscal 1998, 1997 and 1996 as set forth below (in thousands):
1998 1997 1996
---- ---- ----
Chicago Colony Apartments Associates $ 1,100 $ 774 $ 1,517
Chicago Colony Square 142 - -
Daniel Meadows Partnership 4,482 567 345
HMF Associates - 549 -
-------- ------- -------
$ 5,724 $ 1,890 $ 1,862
======== ======= =======
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 $16,589,000 as of September 30, 1998.
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.
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 originally 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 payable to
this affiliated manager was 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, 1998 totalled approximately
$275,000. On April 1, 1997, management of the property was transferred to an
unrelated third party.
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 was 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 $937,000 at September 30, 1998.
This mortgage loan was scheduled to mature in November 2006.
Subsequent to the end of fiscal 1998, on November 17, 1998, Chicago Colony
Square Associates sold its operating investment property, the Colony Square
Shopping Center to an unrelated party for $2.3 million. The sale generated net
proceeds of approximately $1,014,000, after the repayment of the outstanding
first mortgage loan of approximately $864,000, accrued interest of approximately
$13,000 (including a prepayment penalty of $9,000), closing proration
adjustments of approximately $221,000 and closing costs of approximately
$188,000. The Partnership received 100% of the net proceeds in accordance with
the terms of the joint venture agreement.
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 was 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 was 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 was encumbered by a mortgage note with a balance of
approximately $4,719,000 at September 30, 1997. The mortgage debt, in the
initial principal amount of $4,850,000, bore interest at a variable rate of
2.25% over the 30-day LIBOR rate (equivalent to a rate of approximately 7.90625%
per annum as of September 30, 1997). The loan required monthly interest and
principal payments based on a 25-year amortization schedule and was scheduled to
mature on February 5, 2000.
On December 18, 1997, the Joint Venture sold the operating investment
property to an unrelated third party for $9,525,000. The Partnership received
net proceeds of approximately $4.4 million after paying off the outstanding
mortgage loan of approximately $4.7 million and closing costs of approximately
$310,000. The Partnership received 100% of the net proceeds in accordance with
the terms of the Joint Venture Agreement. On February 13, 1998, the net proceeds
from the sale of The Meadows property was distributed to the Limited Partners of
record on December 18, 1997 in the amount of $116.39 per original $1,000
investment.
During fiscal 1991, the Partnership discovered that certain materials used
to construct The Meadows on the Lake Apartments 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. Through
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
was reflected in the venture's fiscal 1996 income statement.
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 operated 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. 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 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. The
loans and additional advances bore interest at a rate of 9% per annum. Monthly
payments were made in an amount equal to the "net operating income', as defined,
for the prior month. Unpaid interest was 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 was June 1, 1997, while the maturity date of the
loans secured by the Hunt Club and Marina Club properties was July 1, 1997, at
which time all unpaid principal, interest and advances were due. Despite the
successful lease-up of all three properties owned by HMF Associates following
the completion of the construction-related repairs, the net operating income
from the properties was not sufficient to fully cover the interest accruing on
the outstanding debt obligations. As a result, the total obligation due to the
mortgage lender had continued to increase since the date of the 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
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. On June 27, 1997, HMF Associates sold The Hunt Club
Apartments and The Marina Club Apartments 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 the discounted mortgage loan payoff
agreement. The joint venture 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 buyer for the sale of this remaining asset for $9.2 million. The
sale, which closed on September 9, 1997, satisfied the conditions in the loan
modification agreement which allowed the Partnership to share in the net
proceeds from the sale transaction even though the sale price was below the
amount of the debt obligation. The Partnership received net proceeds of
approximately $261,000 from the sale of Enchanted Woods. As a result of these
sale transactions, the Partnership no longer has any interest in these
properties.
The joint venture recognized gains from the forgiveness of indebtedness in
connection with the sales of the Enchanted Woods, Hunt Club and Marina Club
properties in the aggregate amount of $7,552,000 as a result of the fiscal 1997
sale transactions. The venture also recognized gains in the aggregate amount of
$4,291,000 for the amount by which the sales prices, net of closing costs,
exceeded the net carrying values of the operating investment properties. The
Partnership's share of such gains totalled approximately $7,463,000 and
$4,210,000, 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 was secured by the venture's operating investment property. At September 30,
1998 and 1997, mortgage note payable consists of the following (in thousands):
1998 1997
---- ----
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 $1,685 as
of September 30, 1998. $ 1,550 $ 1,614
======= =======
<PAGE>
In accordance with the Concourse mortgage loan agreements, certain
insurance premiums and real estate taxes were required to be held in escrow. The
balance of escrowed funds on the accompanying balance sheets at September 30,
1998 and 1997 consist of such escrowed insurance premiums and real estate taxes
in the aggregate amounts of $76,000 and $72,000, respectively. As discussed in
Note 4, subsequent to year-end, on November 10, 1998, the Concourse operating
property was sold and this mortgage loan was assumed by the buyer.
7. Leases
------
The Partnership's consolidated joint venture, West Palm Beach Concourse
Associates, derived 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 were as follows (in
thousands):
1999 $ 334
2000 298
2001 184
2002 134
2003 74
Thereafter 1,173
--------
$ 2,197
========
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. No
percentage rents were received during fiscal 1998, 1997 and 1996.
8. Subsequent event
----------------
On November 13, 1998, the Partnership distributed $194,000 to the Limited
Partners, $2,000 to the General Partners and $8,000 to the Adviser as an asset
management fee for the quarter ended September 30, 1998. In addition, on
December 15, 1998 the Partnership distributed $1,253,000, or $33 per original
$1,000 investment, to the Limited Partners which represented the Partnership's
share of the proceeds from the sales of the Concourse Retail Plaza (see Note 4)
and the Colony Square Shopping Center (see Note 5) and the release of certain
cash reserves that exceeded 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, 1998
(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. $1,550 $ 742 $4,518 $(2,387) $391 $2,482 $2,873 $1,104 1979-80 7/31/85 5-30 yrs.
====== ===== ====== ======= ==== ====== ====== ======
Notes:
(A) The aggregate cost of real estate owned at September 30, 1998 for Federal income tax purposes is approximately $5,416.
(B) See Notes 4 and 6 of Notes to Financial Statements.
(C) Reconciliation of real estate owned:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 3,551 $ 5,099 $ 5,074
Acquisitions and improvements - - 25
Write off due to permanent impairment (see Note 2) (678) (1,548) -
--------- -------- --------
Balance at end of year $ 2,873 $ 3,551 $ 5,099
========= ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 1,257 $ 1,651 $ 1,512
Depreciation expense 107 154 139
Write off due to permanent impairment (see Note 2) (260) (548) -
--------- -------- --------
Balance at end of year $ 1,104 $ 1,257 $ 1,651
========= ======== ========
(E)Costs removed subsequent to acquisition include certain impairment writedowns recognized in fiscal 1998 and 1997
(see Note 2), as well as certain guaranteed payments received from the co-venturer of the consolidated joint venture.
</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, 1998 and 1997, and the related combined statements of operations
and changes in venturers' capital (deficit), and cash flows for each of the
three years in the period ended September 30, 1998. 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, 1998 and 1997, and the combined results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, 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 17, 1998
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
September 30, 1998 and 1997
(In thousands)
Assets
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 2,067 $ 1,844
Escrow deposits 1,057 1,302
Other current assets 69 299
-------- --------
Total current assets 3,193 3,445
Operating investment properties
Land 3,861 4,563
Buildings, improvements and equipment 28,547 35,763
-------- --------
32,408 40,326
Less accumulated depreciation (14,568) (17,845)
-------- --------
Net operating investment properties 17,840 22,481
Deferred expenses, net of accumulated amortization
of $108 ($120 in 1997) 135 173
Other assets - 65
-------- --------
$ 21,168 $ 26,164
======== ========
Liabilities and Venturers' Capital
Current liabilities:
Current portion of long-term debt $ 388 $ 418
Real estate taxes payable 1,952 1,872
Accounts payable and accrued liabilities 73 144
Accounts payable - affiliates - 3
Accrued interest 116 143
Tenant security deposits 281 273
Distributions payable to venturers 624 216
-------- --------
Total current liabilities 3,434 3,069
Long-term debt 17,138 22,185
Venturers' capital 596 910
-------- --------
$ 21,168 $ 26,164
======== ========
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the years ended September 30, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
Revenues:
Rental revenues and expense recoveries $ 7,348 $ 10,391 $ 10,372
Interest and other income 315 466 521
Gain on insurance settlement - - 197
-------- -------- --------
7,663 10,857 11,090
Expenses:
Interest expense 1,532 3,652 3,961
Depreciation expense 1,106 1,635 1,766
Real estate taxes 1,624 1,835 1,830
Repairs and maintenance 383 741 780
Management fees 234 537 541
Utilities 273 607 620
Salaries and related expenses 769 1,026 979
General and administrative 359 793 859
Amortization expense 3 14 14
-------- -------- --------
6,283 10,840 11,350
-------- -------- --------
Operating income (loss) 1,380 17 (260)
Gains on sale of operating
investment properties 4,992 4,291 -
-------- -------- --------
Income (loss) before extraordinary gain 6,372 4,308 (260)
Extraordinary gain from settlement of
debt obligations - 7,552 -
Net income (loss) 6,372 11,860 (260)
Distributions to venturers (6,686) (2,049) (1,254)
Contributions from partners - 391 -
Venturers' capital (deficit),
beginning of year 910 (9,292) (7,778)
-------- -------- --------
Venturers' capital (deficit), end of year $ 596 $ 910 $ (9,292)
======== ======== ========
See accompanying notes.
<PAGE>
<TABLE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,372 $ 11,860 $ (260)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gains on sale of operating investment properties (4,992) (4,291) -
Extraordinary gain from settlement of debt obligations - (7,552) -
Depreciation and amortization 1,109 1,649 1,780
Amortization of deferred financing costs 90 46 69
Interest added to long-term debt principal - 770 2,053
Interest on loans from venturers - 25 17
Changes in assets and liabilities:
Escrow deposits 245 (406) 1,129
Accounts receivable - 10 -
Prepaid distribution to venturer - 7 -
Other current assets 4 14 70
Deferred expenses - - (13)
Other assets 10 (17) 25
Accounts payable and accrued liabilities (71) (87) (194)
Accounts payable - affiliates (3) (30) 28
Real estate taxes payable 80 690 (753)
Accrued interest (27) 1 (5)
Tenant security deposits 8 (36) 10
Other current liabilities - (30) -
-------- -------- --------
Total adjustments (3,547) (9,237) 4,216
-------- -------- --------
Net cash provided by operating activities 2,825 2,623 3,956
-------- -------- --------
Cash flows from investment activities:
Additions to operating investment properties (687) (800) (1,188)
Proceeds from sale of operating investment properties 9,214 17,013 -
-------- -------- --------
Net cash provided by (used in) investing
activities 8,527 16,213 (1,188)
-------- -------- --------
Cash flows from financing activities:
Increase in deferred financing costs - - (37)
Repayment of long-term debt (5,077) (16,909) (1,412)
Repayment of loans to venturers - - (100)
Distributions to venturers (6,052) (2,041) (1,750)
-------- -------- --------
Net cash used in financing activities (11,129) (18,950) (3,299)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 223 (114) (531)
Cash and cash equivalents, beginning of year 1,844 1,958 2,489
-------- -------- --------
Cash and cash equivalents, end of year $ 2,067 $ 1,844 $ 1,958
======== ======== ========
Cash paid during the year for interest $ 1,469 $ 2,798 $ 1,827
======== ======== ========
</TABLE>
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
On June 27, 1997, HMF Associates sold the properties known as The Hunt
Club Apartments located in Seattle, Washington and The Marina Club Apartments
located in Des Moines, Washington to an unrelated third party for approximately
$5.3 million and $3.1 million, respectively. PWIP 7 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. On September 9, 1997, HMF Associates sold its remaining
asset, the property known as The Enchanted Woods Apartments located in Federal
Way, Washington, to an unrelated third party for approximately $9.2 million.
PWIP 7 received net proceeds of approximately $261,000 in connection with the
sale in accordance with the discounted mortgage loan payoff agreement. See Note
5 for a further discussion of these transactions. On December 18, 1997, Daniel
Meadows Partnership sold its operating investment property, The Meadows on the
Lakes Apartments, located in Birmingham, Alabama, to an unrelated party for
$9.525 million. The sale generated net proceeds of approximately $4.4 million
after repayment of the outstanding first mortgage loan of approximately $4.7
million and closing costs of approximately $310,000. PWIP 7 received 100% of the
net proceeds in accordance with the terms of the joint venture agreement.
Subsequent to year-end, on November 17, 1998, Chicago Colony Square Associates
sold its operating investment property, the Colony Square Shopping Center to an
unrelated party for $2.3 million. The sale generated net proceeds of
approximately $1,014,000, after the repayment of the outstanding first mortgage
loan of approximately $864,000, accrued interest of approximately $13,000
(including a prepayment penalty of $9,000), closing proration adjustments of
approximately $221,000 and closing costs of approximately $188,000. The
Partnership received 100% of the net proceeds in accordance with the terms of
the joint venture agreement.
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, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended September 30, 1998. 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 cost, less accumulated
depreciation, certain guaranteed payments from partners (see Note 3) and
insurance proceeds, or an amount less than cost if indicators of impairment are
present in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which was adopted in fiscal 1997. SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Management generally assesses indicators of impairment by a
review of independent appraisal reports on each operating investment property.
Such appraisals make use of a combination of certain generally accepted
valuation techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. 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.
Deferred expenses
-----------------
Deferred expenses consist primarily of loans fees which are being
amortized using the effective interest method 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.
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, 1998 and 1997 are
principally comprised of such escrowed amounts.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and cash equivalents and escrow deposits
approximate their fair values as of September 30, 1998 and 1997 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.
<PAGE>
b. Chicago Colony Square Associates
--------------------------------
The joint venture owned and operated the Colony Square Shopping Center, a
39,572 gross leasable square foot shopping center, located in Mount Prospect,
Illinois. As discussed in Note 1, on November 17, 1998, Chicago Colony Square
Associates sold the Colony Square Shopping Center and distributed the net
proceeds to PWIP7.
c. Daniel Meadows Partnership
--------------------------
The joint venture owned and operated The Meadows on the Lake Apartments, a
200-unit apartment complex, located in Birmingham, Alabama. As discussed in Note
1, on December 18, 1997 the joint venture sold its operating investment property
and distributed the net proceeds to PWIP7.
During fiscal 1991, the venture had 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 owned and operated 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 the Seattle, Washington area. As
discussed in Note 1, during fiscal 1997 the joint venture sold all three of its
operating investment properties and distributed the net proceeds to the venture
partners in accordance with a discounted loan payoff agreement which is
described further in Note 5. The joint venture recognized gains from the
forgiveness of indebtedness in connection with the sales of the Enchanted Woods,
Hunt Club and Marina Club properties in the aggregate amount of $7,552,000 as a
result of the fiscal 1997 sale transactions. The venture also recognized gains
in the aggregate amount of $4,291,000 for the amount by which the sales prices,
net of closing costs, exceeded the net carrying values of the operating
investment properties. PWIP7's share of such gains totalled approximately
$7,463,000 and $4,210,000, respectively.
Construction-related defects had been discovered at all three apartment
complexes owned by HMF Associates prior to fiscal 1991. 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
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, 1998, 1997 and 1996 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.
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 original management
fees were generally equal to 5% of gross receipts, as defined in the agreements.
As of April 1, 1997, the management for Chicago Colony Apartments Associates and
Chicago Colony Square Associates was transferred to an unrelated third party.
The Meadows joint venture was required to pay a yearly investor servicing
fee to PWIP7 of $2,500.
Accounts payable - affiliates at September 30, 1997 consisted primarily of
management fees and reimbursements owed to the property managers of the
operating properties. Included in interest expense for the years ended September
30, 1997 and 1996 is $25,000 and $17,000, respectively, of interest on loans
payable to the partners of the HMF Associates joint venture which were converted
to capital contributions during fiscal 1997 in connection with the liquidation
of the joint venture subsequent to the sale of the venture's operating
properties (see Note 3).
5. Long-term debt
--------------
Long-term debt at September 30, 1998 and 1997 consists of the following (in
thousands):
1998 1997
---- ----
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
approximated its carrying value as
of September 30, 1998 and 1997. $16,589 $16,873
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 approximated its
carrying value as of September 30,
1998 and 1997. This loan was repaid
in full subsequent to year-end in
connection with a sale of the
operating investment property (see
Note 1). 937 1,011
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%
(7.90625% at September 30, 1997),
were due through maturity on
February 5, 2000. The fair value of
this note payable approximated its
carrying value as of September 30,
1997. This loan was repaid in full
in fiscal 1998 in connection with a
sale of the operating investment
property (see Note 1). - 4,719
------- -------
17,526 22,603
Less current portion (388) (418)
------- -------
$17,138 $22,185
======= =======
Scheduled maturities of long-term debt for each of the next five fiscal
years and thereafter are as follows (in thousands):
1999 $ 388
2000 420
2001 455
2002 15,703
2003 118
Thereafter 442
--------
$ 17,526
========
6. Leases
------
Chicago Colony Square Associates leased shopping center space to retail
tenants under operating leases. Lease effective dates ranged from 12 to 192
months. Approximate future minimum payments due to be received by the joint
venture under non-cancelable operating lease agreements were as follows (in
thousands):
1999 $ 521
2000 439
2001 401
2002 184
2003 11
--------
$ 1,557
========
<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, 1998
(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 $16,589 $ 3,132 $25,378 $ 889 $ 2,875 $26,524 $29,399 $13,759 1975 12/27/85 5-30 yrs.
Shopping
Center
Mount
Prospect,
IL 937 1,014 1,883 112 986 2,023 3,009 809 1978 12/27/85 5-30 yrs.
------- ------- ------- ------ ------- ------- ------ -------
$17,526 $ 4,146 $27,261 $1,001 $ 3,861 $28,547 $32,408 $14,568
======= ======= ======= ====== ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at September 30, 1998 for Federal income tax purposes is approximately $34,955.
(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:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 40,326 $ 58,104 $56,916
Acquisitions and improvements 687 800 1,188
Reductions due to dispositions (8,605) (18,578) -
--------- -------- -------
Balance at end of year $ 32,408 $ 40,326 $58,104
========= ======== =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 17,845 $ 22,085 $20,319
Depreciation expense 1,106 1,635 1,766
Decreases due to dispositions (4,383) (5,875) -
--------- -------- -------
Balance at end of year $ 14,568 $ 17,845 $22,085
========= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the year ended September 30,
1998 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-30-1998
<PERIOD-END> Sep-30-1998
<CASH> 1,530
<SECURITIES> 0
<RECEIVABLES> 8
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,614
<PP&E> 4,112
<DEPRECIATION> 1,104
<TOTAL-ASSETS> 4,656
<CURRENT-LIABILITIES> 173
<BONDS> 1,550
0
0
<COMMON> 0
<OTHER-SE> 2,929
<TOTAL-LIABILITY-AND-EQUITY> 4,656
<SALES> 0
<TOTAL-REVENUES> 6,525
<CGS> 0
<TOTAL-COSTS> 807
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 418
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> 5,048
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,048
<EPS-BASIC> 131.57
<EPS-DILUTED> 131.57
</TABLE>
