UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number : 0-17148
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-2921780
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 1996 and September 30, 1995 (Unaudited)
(In thousands)
ASSETS
March 31 September 30
Operating investment property:
Land $ 5,488 $ 5,488
Buildings, equipment and improvements 24,321 24,245
--------- --------
29,809 29,733
Less accumulated depreciation (10,170) (9,733)
--------- ---------
19,639 20,000
Investments in joint ventures, at equity 93 412
Cash and cash equivalents 1,138 1,362
Cash reserved for capital expenditures 734 618
Accounts receivable 418 240
Due from Marriott Corporation - 680
Inventories 116 124
Other assets 51 50
Deferred expenses, net 125 137
-------- ---------
$ 22,314 $ 23,623
======== ========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 212 $ 182
Accounts payable - affiliates 2 2
Accrued interest payable 1,283 1,242
Due to Marriott Corporation 215 -
Loan payable to Marriott Corporation 6,651 6,328
Mortgage debt payable 36,060 36,060
Partners' deficit (22,109) (20,191)
--------- --------
$ 22,314 $ 23,623
======== ========
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the six months ended March 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
Balance at September 30, 1994 $ (495) $(10,162)
Net loss (17) (1,628)
------ ---------
Balance at March 31, 1995 $ (512) $(11,790)
====== ========
Balance at September 30, 1995 $ (595) $(19,596)
Net loss (20) (1,898)
------ --------
Balance at March 31, 1996 $ (615) $(21,494)
====== ========
See accompanying notes.
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Hotel revenues $ 2,268 $ 1,986 $ 4,217 $ 3,633
Interest and other income 17 66 37 89
------- ------- ------- -------
2,285 2,052 4,254 3,722
Expenses:
Hotel operating expenses 1,474 1,492 2,865 2,800
Interest expense 1,012 923 2,303 1,686
Depreciation and amortization 209 240 449 481
General and administrative 68 39 159 102
-------- ------- -------- -------
2,763 2,694 5,776 5,069
-------- ------- -------- -------
Operating loss (478) (642) (1,522) (1,347)
Partnership's share of
ventures' losses (259) (23) (396) (298)
-------- ------- -------- -------
Net loss $ (737) $ (665) $ (1,918) $(1,645)
========= ======= ======== =======
Net loss per 1,000 Limited
Partnership Units $ (20.50) $(18.50) $ (53.38) $(45.79)
======== ======= ========= =======
The above net loss per 1,000 Limited Partnership Units is based upon the
35,548,976 Limited Partnership Units outstanding during each period.
See accompanying notes.
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the six months ended March 31, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(1,918) $(1,645)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Interest expense on loan payable
to Marriott Corporation 323 292
Partnership's share of ventures' losses 396 298
Depreciation and amortization 449 481
Amortization of deferred gain on
forgiveness of debt - (323)
Changes in assets and liabilities:
Accounts receivable (178) (34)
Due to/from Marriott Corporation 895 (112)
Inventories 8 12
Other assets (1) (8)
Accounts payable and accrued expenses 30 (256)
Accrued interest payable 41 (156)
-------- ---------
Total adjustments 1,963 194
-------- ---------
Net cash provide by (used for)
operating activities 45 (1,451)
Cash flows from investing activities:
Distributions from joint ventures - 221
Additional investments in joint ventures (77) (134)
Additions to operating investment property (76) (128)
Net (deposits to) withdrawals from capital
expenditure reserve (116) 222
------- -------
Net cash (used for) provided by
investing activities (269) 181
Cash flows from financing activities:
Proceeds from issuance of notes payable - 1,147
------- --------
Net decrease in cash and cash equivalents (224) (123)
Cash and cash equivalents, beginning of period 1,362 1,496
-------- -------
Cash and cash equivalents, end of period $ 1,138 $1,373
======= ======
Cash paid during the period for interest $ 1,939 $1,873
======= ======
See accompanying notes.
<PAGE>
PAINEWEBBER INCOME PROPERTIES
EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended September 30, 1995.
In the opinion of management, the accompanying financial statements, which
have not been audited, reflect all adjustments necessary to present fairly
the results for the interim period. All of the accounting adjustments
reflected in the accompanying interim financial statements are of a normal
recurring nature.
2. Related Party Transactions
Included in general and administrative expenses for six months ended March
31, 1996 and 1995 is $47,000 and $44,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the six months ended
March 31, 1996 and 1995 is $1,000 and $2,000, respectively of fees paid to
Mitchell Hutchins Institutional Investors, Inc. for managing the
Partnership's cash assets.
3. Operating Investment Property
The Partnership directly owns one operating investment property, the
Newport Beach Marriott Suites Hotel. The Partnership acquired a 100%
interest in the Marriott Suites Hotel located in Newport Beach, California
from the Marriott Corporation on August 10, 1988. The Hotel consists of 254
two-room suites encompassing 201,606 square feet located on approximately
4.8 acres of land. It is managed by Marriott and its affiliates. As
discussed further in the Annual Report, the Hotel has experienced
substantial recurring losses after debt service. During fiscal 1995, the
Partnership reached the limit on the debt service deferrals imposed by the
fiscal 1993 loan modification agreement. As of March 31, 1996, the
Partnership was in default of the mortgage loan secured by the operating
investment property (see Note 5). The Partnership's ability to realize its
investment in the Newport Beach Marriott Suites Hotel is dependent upon
future events, including restructuring of the outstanding mortgage
indebtedness and improved Hotel operations.
The Partnership elected early application of SFAS 121 effective for fiscal
1995. The effect of such application was the recognition of an impairment
loss on the wholly-owned Hotel property. The impairment loss resulted
because, in management's judgment, the current default status of the
mortgage loan secured by the property, combined with the lack of near-term
prospects for sufficient future improvement in market conditions in the
Orange County market in which the property is located, are not expected to
enable the Partnership to recover the adjusted cost basis of the property.
The Partnership recognized an impairment loss of $6,369,000 to write down
the operating investment property to its estimated fair value of $20,000,000
as of September 30, 1995. Fair value was estimated using an independent
appraisal of the operating property. Because the net carrying value of the
Hotel is below the balance of the nonrecourse debt obligation secured by the
property as of March 31, 1996, the Partnership would recognize a sizable net
gain for financial reporting purposes upon a foreclosure of the operating
investment property and settlement of the debt obligation.
<PAGE>
The following is a summary of Hotel revenues and operating expenses for
the three and six months ended March 31, 1996 and 1995 (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Guest rooms $1,749 $1,482 $3,232 $2,717
Food and beverage 406 316 772 728
Other revenue 113 188 213 188
------ ------ ------ ------
$2,268 $1,986 $4,217 $3,633
====== ====== ====== ======
Operating expenses:
Guest rooms $ 440 $ 414 $ 860 $ 782
Food and beverage 381 410 691 710
Other operating expenses 452 471 990 1,012
Management fees - Manager 45 40 84 71
Selling, general and
administration 69 64 69 65
Real estate taxes 87 92 171 160
------- ------ ------ ------
$1,474 $1,491 $2,865 $2,800
====== ====== ====== ======
The operating expenses of the Hotel noted above include significant
transactions with the Manager. All Hotel employees are employees of the
Manager and the related payroll costs are allocated to the Hotel operations
by the Manager. A majority of the supplies and food purchased during both
periods were purchased from an affiliate of the Manager. In addition, the
Manager also allocates employee benefit costs, advertising costs and
management training costs to the Hotel.
4. Investments in Joint Venture Partnerships
The Partnership has investments in four joint ventures which own five
operating properties as more fully described in the Partnership's Annual
Report. The joint ventures are accounted for under the equity method in the
Partnership's financial statements because the Partnership does not have a
voting control interest in the ventures. Under the equity method, the
investment in a joint venture is carried at cost adjusted for the
Partnership's share of the venture's earnings, losses and distributions.
Summarized operations of the four joint ventures for the three and six
months ended March 31, 1996 and 1995 are as follows:
<PAGE>
Condensed Combined Summary of Operations
For the three and six months ended March 31, 1996 and 1995
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
Rental revenues $ 927 $ 909 $1,854 $1,855
Other income (20) 53 42 94
------- ------ ------ ------
907 962 1,896 1,949
Property operating expenses 552 417 1,102 1,030
Interest expense 377 424 767 809
Depreciation and amortization 229 243 456 482
-------- ------ ------- --------
1,158 1,084 2,325 2,321
-------- ------ ------- --------
Net loss $ (251) $ (122) $ (429) $ (372)
======== ======= ======== ========
Net loss:
Partnership's share of
combined income (loss) $ (199) $ (20) $ (333) $ (292)
Co-venturers' share of
combined income (loss) (52) (102) (96) (80)
--------- -------- ------- -------
$ (251) $ (122) $ (429) $ (372)
========= ======= ======= =======
Reconciliation of Partnership's Share of Operations
Partnership's share of combined
loss, as shown above $ (199) $ (20) $ (333) $ (292)
Amortization of excess basis (60) (3) (63) (6)
--------- -------- -------- -------
Partnership's share of
ventures' losses $ (259) $ (23) $ (396) $ (298)
======= ====== ======== ======
5. Mortgage Notes Payable in Default
Mortgage notes payable at March 31, 1996 and September 30, 1995 consists of
the following (in thousands):
March 31 September 30
Permanent mortgage loan secured by
the Marriott Suites Hotel-Newport Beach,
bearing interest at 10.09% per annum
from disbursement through August 10,
1992. Interest accrues at 9.59% per
annum from August 11, 1992 through
August 10, 1995 and at a variable rate
of adjusted LIBOR (6.2% and 5.91% at
March 31, 1996 and September 30, 1995,
respectively), as defined, plus 2.5% per
annum from August 11, 1995 until
maturity. On August 11, 1996 the balance
of principal together with all accrued
but unpaid interest thereon shall be
due. See discussion regarding
modification and default below. $ 32,060 $ 32,060
Nonrecourse senior promissory notes
payable, bearing interest at a variable
rate of adjusted LIBOR (6.2% and 5.91%
at March 31, 1996 and September 30,
1995, respectively), as defined, plus
one percent per annum. Payments on the
loan are to be made from available cash
flow of the Newport Beach Marriott
Suites Hotel (see discussion below). 4,000 4,000
-------- --------
$36,060 $ 36,060
======== ========
As discussed in the Annual Report, the Partnership was in default under the
terms of the Newport Beach Marriott loan agreement from the second quarter of
fiscal 1991 through the first quarter of fiscal 1993. On January 25, 1993, the
Managing General Partner and the lender finalized an agreement on a modification
of the first mortgage loan secured by the Hotel which was retroactive to August
11, 1992. Per the terms of the modification, the maturity date of the loan was
extended one year to August 11, 1996. The new loan amount of $32,060,518 is
comprised of the original principal of $29,400,000 plus $2,660,518 of unpaid
interest and fees. The Partnership is obligated to pay to the lender on a
monthly basis as debt service, an amount equal to Hotel Net Cash, as defined in
the Hotel management agreement. In order to increase Hotel Net Cash, Marriott
agreed to reduce its Base Management Fee by one percent of total revenue through
calendar year 1996. In addition, the reserve for the replacement of equipment
and improvements, which is funded out of a percentage of gross revenues
generated by the Hotel, was reduced to two percent of gross revenues in 1992 and
to three percent of gross revenues thereafter. As part of the modification
agreement, the Partnership agreed to make additional debt service contributions
to the lender of $400,000, of which $50,000 was paid at the closing of the
modification and the balance is to be contributed $100,000 per year, payable on
a monthly basis in arrears for forty-two months. Under the terms of the
modification, events of default include payment default with respect to the
Partnership's additional debt service contributions to the lender, failure of
the Hotel to meet certain performance tests, as defined, plus additional default
provisions as specified in the modification agreement.
An additional loan facility from the existing lender of up to $4,000,000 was
available to be used to pay expected debt service shortfalls after August 11,
1992. Interest on the new loan facility is payable currently to the extent of
available cash flow from Hotel operations. Interest deferred due to the lack of
available cash flow could be added to the principal balance of the new loan
until the loan balance reached the $4,000,000 limitation. As of March 31, 1995,
the Partnership had exhausted the entire $4,000,000 of this additional loan
facility. On April 11, 1995, the Partnership received a default notice from the
lender. Under the terms of the loan agreement, as of April 25, 1995 additional
default interest accrues at a rate of 4% per annum on the loan amount of
$32,060,518 and the additional loan facility of $4,000,000. At March 31, 1996,
approximately $1,283,000 of accrued interest on the mortgage loan and the
additional loan facility remained unpaid. The Partnership continues to remit the
net cash flow produced by the Hotel to the lender. However, subsequent to the
date of the default, the Partnership suspended the monthly supplemental payments
referred to above. On February 19, 1996, the first mortgage loan on the property
was purchased by a new lender, and the Partnership has since received formal
notice of default from this new lender. It is unclear whether the new lender
will be willing to allow for further modifications to the loan and an extension
of the August 1996 maturity date. Given the significant deficiency which exists
between the estimated fair value of the Hotel and the outstanding indebtedness,
management believes that it would not be prudent to use the Partnership's
reserves to cure the default without substantial modifications to the loan terms
which would afford the Partnership the opportunity to recover such additional
investments plus a portion of its original investment in the Hotel. In the event
that an agreement with the new lender cannot be reached, the result could be a
foreclosure on the operating investment property. The eventual outcome of this
matter cannot be determined at this time, but management believes that a
foreclosure of the property by the new lender is likely.
The restructuring of the mortgage note payable completed in fiscal 1993 was
accounted for in accordance with Statement of Financial Accounting Standards No.
15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Accordingly, the forgiveness of debt, aggregating $1,766,609, which represented
the difference between accrued interest and fees recorded under the original
loan agreement and the agreed upon amount of the outstanding interest and fees
of $2,660,518 per the terms of the modification at September 30, 1992, was
deferred and amortized as a reduction of interest expense prospectively, using
the effective interest method. During fiscal 1995, this deferred gain was fully
amortized.
6. Contingencies
The Partnership is involved in certain legal actions. At the present time, the
Managing General Partner cannot estimate the impact, if any, of these matters on
the Partnership's financial statements, taken as a whole.
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As previously reported, on January 25, 1993 the Managing General Partner
and the lender on the Newport Beach Marriott Suites Hotel finalized an agreement
on a modification of the first mortgage loan secured by the Hotel which was
retroactive to August 11, 1992. Per the terms of the modification, the maturity
date of the loan was extended one year to August 11, 1996. The principal amount
of the loan was adjusted to $32,060,518 (the original principal of $29,400,000
plus $2,660,518 of unpaid interest and fees). The outstanding balance of the
loan bears interest at a rate of 9.59% through August 11, 1995 and at a variable
rate of the adjusted LIBOR index, as defined (6.2% at March 31, 1996), plus 2.5%
from August 11, 1995 through the final maturity date. The Partnership is
obligated to pay the lender on a monthly basis as debt service an amount equal
to Hotel Net Cash, as defined in the Hotel management agreement. In order to
increase Hotel Net Cash, Marriott agreed to reduce its Base Management Fee by
one percent of total revenue through January 3, 1997. In addition, the reserve
for the replacement of equipment and improvements, which is funded out of a
percentage of gross revenues generated by the Hotel, was reduced to two percent
of gross revenues in 1992 and is equal to three percent of gross revenues
thereafter through January 3, 1997. As part of the modification agreement, the
Partnership agreed to make additional debt service contributions to the lender
of $400,000, of which $50,000 was paid at the closing of the modification and
the balance was to be payable on a monthly basis in arrears for forty-two
months.
As part of the agreement to modify the Hotel's mortgage debt, an
additional loan facility of up to $4,000,000 was made available from the
existing lender to be used to pay debt service shortfalls. This additional loan
facility bears interest at a variable rate of adjusted LIBOR, as defined, plus
one percent per annum. Interest on the new loan facility is payable currently to
the extent of available cash flow from Hotel operations. Interest deferred due
to the lack of available cash flow could be added to the principal balance of
the new loan until the loan balance reached the $4,000,000 limitation. As of
March 31, 1995, the Partnership had exhausted the entire $4,000,000 of this
additional loan facility. On April 11, 1995, the Partnership received a default
notice from the lender. Under the terms of the loan agreement, as of April 25,
1995 additional default interest accrues at a rate of 4% per annum on the loan
amount of $32,060,518 and the additional loan facility of $4,000,000. At March
31, 1996, approximately $1,283,000 of accrued interest on the mortgage loan and
the additional loan facility remained unpaid. The Partnership continues to remit
the net cash flow produced by the Hotel to the lender. However, subsequent to
the date of the default, the Partnership suspended the monthly additional debt
service contributions of $8,333 referred to above. On February 19, 1996, the
first mortgage loan secured by the Newport Beach Marriott Suites Hotel was
purchased by a new lender, and the Partnership has since received formal notice
of default from this new lender. It is unclear whether the new lender will be
willing to allow for further modifications to the loan and an extension of the
August 1996 maturity date. Despite an improvement in the Hotel's operating
results over the last year, the estimated value of the Hotel property is
substantially less than the obligation to the mortgage lender at the present
time. While increased demand from institutional buyers and an absence of any
significant new construction activity have led to an improvement in the market
for hotel properties in many areas of the country during calendar 1995, it
appears unlikely that continued improvement will occur as rapidly or to the
extent necessary for the Partnership to recover any portion of its original net
investment in the Newport Beach Marriott. Management will continue to make every
prudent effort to preserve the Partnership's ownership of the Hotel property,
but expects that a foreclosure of the Hotel is likely to occur in the near
future.
In light of the circumstances facing the Newport Beach Marriott Hotel,
management reviewed the carrying value of the Hotel for potential impairment as
of September 30, 1995. In conjunction with such review, the Partnership elected
early application of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). In accordance with SFAS 121, an impairment loss with
respect to an operating investment property is recognized when the sum of the
expected future net cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset. An impairment loss is measured as
the amount by which the carrying amount of the asset exceeds its fair value,
where fair value is defined as the amount at which the asset could be bought or
sold in a current transaction between willing parties, that is other than a
forced or liquidation sale. In conjunction with the application of SFAS 121, the
Partnership recognized an impairment loss of $6,369,000 to write down the
Newport Beach Marriott property to its estimated fair value of $20,000,000 as of
September 30, 1995. Fair value was estimated using an independent appraisal of
the operating property. The impairment loss resulted because, in management's
judgment, the current default status of the mortgage loan secured by the
property discussed above, combined with the lack of near-term prospects for
sufficient future improvement in market conditions in the Orange County market
in which the property is located, are not expected to enable the Partnership to
recover the adjusted cost basis of the property. Because the net carrying value
of the Hotel is below the balance of the nonrecourse debt obligation secured by
the property as of March 31, 1996, the Partnership would recognize a sizable net
gain for both book and tax purposes upon a foreclosure of the operating property
and settlement of the debt obligation.
The loss of the Atlanta Marriott Suites to foreclosure in fiscal 1992 and
the unlikely prospects for recovery of the Partnership's investment in the
Newport Beach Marriott, as discussed further above, mean that the Partnership
will be unable to return any meaningful portion of the original invested capital
to the Limited Partners. The two hotel investments represented 63% of the
Partnership's original investment portfolio. The amount of capital which will be
returned will depend upon the proceeds received from the disposition of the
Partnership's other investments, which cannot presently be determined. The
Partnership's other investments consist of four multi-family apartment complexes
and one retail shopping center. Based on the current estimated market values of
these investments, only the Partnership's interest in the Meadows in the Park
Apartments has any significant value above the outstanding mortgage indebtedness
secured by the properties. In October 1993, the sole anchor tenant of the Norman
Crossing Shopping Center vacated the center to relocate its operations. This
anchor tenant, which occupied 26,700 square feet of the property's 52,000 net
leasable square feet, is still obligated under the terms of its lease which runs
through the year 2007. To date, all rents due from this tenant have been
collected. Nonetheless, the anchor tenant vacancy resulted in several tenants
receiving rental abatements during fiscal 1995 and has had an adverse effect on
the ability to lease other vacant shop space at the center, which had been 100%
occupied prior to the anchor tenant's departure. The center was 86% occupied as
of March 31, 1996. During the last quarter of fiscal 1995, the former anchor
tenant reached an agreement to sub-lease its space to a new tenant. This new
sublease tenant is a health club operator which occupies 19,000 square feet of
the former anchor's space and will sublease the remaining 7,700 square feet. As
a result of the new sublease tenant opening for business in February 1996, the
rental abatements granted to the other tenants have been terminated. However,
the long-term impact of this subleasing arrangement on the operations of the
property remains uncertain at the present time. The joint venture may have to
continue to make significant tenant improvements and grant further rental
concessions in order to maintain a high occupancy level. Funding for such
improvements, along with any operating cash flow deficits incurred during this
period of restabilization for the shopping center, would be provided primarily
by the Partnership. The Partnership funded cash flow deficits of approximately
$9,000 for the Norman Crossing joint venture during the first six months of
fiscal 1996. The Partnership has also been funding its share of the deficits at
the Maplewood joint venture. While occupancy levels have been maintained in the
mid-90% range at the Maplewood property, gross collections have declined over
the past twelve months due to slightly deteriorating local market conditions.
During the first quarter of fiscal 1996, the Partnership funded an additional
$63,000 to the Maplewood joint venture to cover its share of the venture's
annual debt service principal payment.
As discussed further in the Partnership's Annual Report, despite achieving
stabilized occupancy levels subsequent to the repairs of the construction
defects at the Spinnaker Landing and Bay Club Apartments, the joint venture
which owns the properties continues to operate at a cash flow deficit. Under the
terms of the venture's loan modification, which was executed in March 1991, the
lender agreed to loan to the joint venture 80% of the additional amounts
necessary to complete the repair of the properties up to a maximum of $760,000.
Advances through the completion of the repair work totalled approximately
$617,000. The loan modification agreement also required the lender to defer all
past due interest and all of the interest due through July 1, 1993, which was
added to the loan principal. Additional amounts owed to the lender as a result
of the deferred payments, including accrued interest, total in excess of $1
million. These additional amounts owed to the lender, while critical and
necessary to the process of correcting the construction defects, have further
subordinated the equity position of the Partnership in these investment
properties. The current estimated market values of the two apartment complexes
are below the amount of the outstanding debt obligations. During fiscal 1995,
management evaluated a proposal from the mortgage lender to repay the
outstanding debt at a significant discount. Such a plan would have required a
sizable equity contribution by the Partnership. At the time, management had
determined that the required additional investment of funds in the venture would
not be economically prudent in light of the future appreciation potential of the
properties. The loans secured by Spinnaker Landing and Bay Club are scheduled to
mature in December 1996. The Partnership has been notified that the first
mortgage lender and the related loans were purchased by another financial
institution during the quarter ended March 31, 1996. Upon establishment of a
relationship with the new lender, the Partnership will continue to attempt to
negotiate a repayment of the existing loans at a large enough discount to secure
new first mortgage financing without a significant equity contribution from the
Partnership. Without a significant discount from the lender, an economically
viable workout transaction cannot be structured. Under such circumstances, the
lender may choose to foreclose on the properties. Management continues to
examine alternative value creation scenarios, however, there are no assurances
that the Partnership will realize any future proceeds from the ultimate
disposition of its interests in these two properties.
Repairs to the construction defects at the Meadows in the Park Apartments
in Birmingham, Alabama, continued during the current quarter using the proceeds
of the insurance settlement which were escrowed with the venture's new mortgage
lender. As previously reported, the loan will be fully recourse to the joint
venture and to the partners of the joint venture until the repairs are
completed, at which time the entire obligation will become non-recourse. As of
March 31, 1996, approximately $365,000 remains in escrow for future repairs.
Such funds are expected to be sufficient to complete the repair work. All of the
repair work is expected to be completed by the end of fiscal 1996. The average
occupancy level at the Meadows property increased to 83% for the quarter ended
March 31, 1996 from 81% for the previous quarter. However, due to the ongoing
construction activities related to the repair work, which have resulted in
apartment units being taken out of service while the repair work is performed,
occupancy at the Meadows has averaged less than the market's average occupancy
level of 92% to 95%. The overall Birmingham, Alabama market remains strong, and
the occupancy level at the Meadows is expected to increase back to stabilized
levels as repairs to the property are completed. As stated above, the Meadows in
the Park Apartments is the only one of the Partnership's investments which would
appear to have any significant value above the related mortgage loan obligations
based on current estimated market values. Assuming that the overall market for
multi-family apartment properties remains strong in the near term, the Meadows
joint venture may have a favorable opportunity to sell the operating investment
property subsequent to the completion of the repair work discussed above. While
there are no assurances that a sale transaction will be completed, if the
Partnership were to sell its investment in the Meadows property, management
would have to determine whether to distribute all of the net proceeds from such
a transaction to the Limited Partners or to withhold all or a portion of such
proceeds for potential reinvestment in the remaining investment properties as
part of a plan to create value for the Partnership's remaining investment
positions. Under such circumstances, management would base its decisions on an
assessment of the expected overall returns to the Limited Partners. Management
is currently in the process of identifying and evaluating alternative operating
plans for the Partnership in light of the pending resolution of the Newport
Beach Marriott default situation, the impending maturity of the debt secured by
Spinnaker Landing and Bay Club, the potential future sale of the Meadows
property and the status of the Partnership's existing cash reserves.
At March 31, 1996, the Partnership had available cash and cash equivalents
of $1,138,000. Approximately $622,000 of such cash is held at the wholly-owned
Newport Beach Marriott Suites Hotel and is designated for use to pay hotel
operating expenses and required debt service. The balance of such cash and cash
equivalents will be utilized as needed for Partnership requirements such as the
payment of operating expenses and the funding of joint venture capital
improvements, operating deficits or refinancing expenses. In addition, the
Partnership had a cash reserve of approximately $734,000 as of March 31, 1996,
which is held by Marriott Corporation and is available exclusively for repairs
and replacements related to the Newport Beach Marriott Suites Hotel. The source
of future liquidity and distributions to the partners is expected to be through
cash generated from operations of the Partnership's income-producing investment
properties and proceeds received from the sale or refinancing of such
properties. Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on a short-term basis. As discussed further above,
management is currently evaluating alternative operating strategies to address
the Partnership's long-term liquidity needs.
<PAGE>
Results of Operations
Three Months Ended March 31, 1996
The Partnership had a net loss of $737,000 for the three months ended
March 31, 1996, as compared to a net loss of $665,000 for the same period in the
prior year. The primary reason for this increase in net loss is an increase in
the Partnership's share of ventures' losses. The Partnership's share of
ventures' losses increased by $236,000 for the current three-month period. This
increase is primarily attributable to a special allocation of net loss of the
Meadows joint venture to the Partnership's co-venture partner in accordance with
the terms of the joint venture agreement in the prior year. In addition, the
Partnership accelerated the amortization of its excess basis in the joint
venture investments during the current period as a result of the overall
Partnership outlook. Such adjustment resulted in an increase in the amortization
of the Partnership's excess basis by $57,000 for the current three-month period.
Net loss also increased at Norman Crossing due primarily to a decrease in tenant
reimbursement income.
The increase in the Partnership's share of ventures' losses was partially
offset by a decrease in the Partnership's operating loss of $164,000. Operating
loss decreased due to an increase in Hotel revenues of $282,000, which was the
result of an increase in average occupancy and rental rates over the same period
in the prior year. The Hotel averaged 85% occupancy with an average daily room
rate of $97.51 for the current quarter, as compared to an occupancy level of 78%
and an average room rate of $90.44 during the same period in the prior year.
Six Months Ended March 31, 1996
The Partnership had a net loss of $1,918,000 for the six months ended
March 31, 1996, as compared to a net loss of $1,645,000 for the same period in
the prior year. The primary reason for this increase in net loss is an increase
in the Partnership's operating loss of $175,000. The increase in operating loss
is mainly due to an increase in interest expense of $617,000, which is the
result of default interest being accrued on the outstanding mortgage loan and
accrual loan facility secured by the Newport Beach Marriott Suites Hotel, as
discussed further above. In addition, the average outstanding balance of the
floating rate Hotel loan facility was higher than during the same period in the
prior year. The increase in interest expense was partially offset by an increase
in Hotel revenues of $584,000, which was the result of an increase in average
occupancy and rental rates over the same period in the prior year.
In addition, the Partnership's share of ventures' losses increased by
$98,000 for the six months ended March 31, 1996, as compared to the same period
in the prior year. The primary reason for this increase is that the Partnership
accelerated the amortization of its excess basis in the joint venture
investments during the current period as a result of the overall Partnership
outlook. Such adjustment resulted in an increase in the amortization of the
Partnership's excess basis by $57,000 for the current six-month period.
Operating losses also increased at the Bay Club and Spinnaker Landing Apartments
and at the Norman Crossing Shopping Center. The operating loss increased at the
Bay Club and Spinnaker Landing Apartments primarily due to an increase in
interest expense due to the addition of unpaid interest to the principal of the
outstanding promissory notes. The operating loss increased at Norman Crossing
primarily due to a decrease in tenant reimbursement income and an increase in
real estate tax expense.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, Eighth Income Properties, Inc. and PA1986, the
General Partners of the Partnership, were named as defendants in a class action
lawsuit against PaineWebber Incorporated ("PaineWebber") and a number of its
affiliates relating to PaineWebber's sale of 70 direct investment offerings,
including the offering of interests in the Partnership. In January 1996,
PaineWebber signed a memorandum of understanding with the plaintiffs in the
class action outlining the terms under which the parties have agreed to settle
the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably
deposited $125 million into an escrow fund under the supervision of the United
States District Court for the Southern District of New York to be used to
resolve the litigation in accordance with a definitive settlement agreement and
a plan of allocation which the parties expect to submit to the court for its
consideration and approval within the next several months. Until a definitive
settlement and plan of allocation is approved by the court, there can be no
assurance what, if any, payment or non-monetary benefits will be made available
to unitholders in PaineWebber Income Properties Eight Limited Partnership. Under
certain limited circumstances, pursuant to the Partnership Agreement and other
contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with this litigation.
At the present time, the General Partners cannot estimate the impact, if any, of
this matter on the Partnership's financial statements, taken as a whole.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER INCOME PROPERTIES
EIGHT LIMITED PARTNERSHIP
By: Eighth Income Properties, Inc.
Managing General Partner
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: May 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended March 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 1138
<SECURITIES> 0
<RECEIVABLES> 418
<ALLOWANCES> 0
<INVENTORY> 116
<CURRENT-ASSETS> 2406
<PP&E> 29902
<DEPRECIATION> 10170
<TOTAL-ASSETS> 22314
<CURRENT-LIABILITIES> 1712
<BONDS> 42711
0
0
<COMMON> 0
<OTHER-SE> (22109)
<TOTAL-LIABILITY-AND-EQUITY> 22314
<SALES> 0
<TOTAL-REVENUES> 4254
<CGS> 0
<TOTAL-COSTS> 3473
<OTHER-EXPENSES> 396
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2303
<INCOME-PRETAX> (1918)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1918)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1918)
<EPS-PRIMARY> (53.38)
<EPS-DILUTED> (53.38)
</TABLE>
