UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17148
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-2921780
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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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
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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant dated Part IV
September 17, 1986, as supplemented
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
1996 FORM 10-K
TABLE OF CONTENTS
PART I Page
- ------ ----
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests 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-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-38
<PAGE>
PART I
Item 1. Business
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Paine Webber Income Properties Eight Limited Partnership (the "Partnership")
is a limited partnership formed in April 1986 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of existing income-producing real properties such as
apartments, shopping centers, office buildings, industrial buildings and hotels.
The Partnership sold $35,548,976 in Limited Partnership units (the "Units"), at
$1 per Unit, from September 17, 1986 to September 16, 1988 pursuant to an
Amended Registration Statement on Form S-11 filed under the Securities Act of
1933 (Registration No. 33-5179). Limited Partners will not be required to make
any additional capital contributions.
The Partnership originally invested the net proceeds of the public offering,
either directly or through joint venture partnerships, in seven operating
properties. As discussed further below, through September 30, 1996 two of the
Partnership's original investments had been lost through foreclosure
proceedings. As of September 30, 1996, the Partnership owned, through joint
venture partnerships, interests in the operating properties set forth in the
following table:
<TABLE>
<CAPTION>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- --------------------------------------- ---- ----------- ---------------------
<S> <C> <C> <C>
Daniel Meadows II General Partnership 200 10/15/87 Fee ownership of land
The Meadows in the Park units and improvements
Apartments (through joint venture)
Birmingham, Alabama
Maplewood Drive Associates 144 6/14/88 Fee ownership of land
Maplewood Park Apartments units and improvements
Manassas, Virginia (through joint venture)
Spinnaker Bay Associates: Fee ownership of land
Bay Club Apartments 88 units 6/10/88 and improvements
Spinnaker Landing Apartments 66 units 6/10/88 (through joint venture)
Des Moines, Washington
Norman Crossing Associates 52,000 9/15/89 Fee ownership of land
Norman Crossing Shopping square and improvements
Center feet (through joint venture)
Charlotte, North Carolina
</TABLE>
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the long-term 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.
In addition to the five remaining investments described above, the
Partnership originally owned fee simple interests in two Marriott hotels, the
Newport Beach Marriott Suites Hotel, a 254-suite hotel located in Newport Beach,
California, and the Marriott Suites - Perimeter Center, a 224-suite hotel
located in Atlanta, Georgia. As discussed further in Note 4 to the accompanying
financial statements, the Partnership had been in default under the modified
terms of the mortgage loan secured by the Newport Beach Marriott Suites Hotel
since March 1995. 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 subsequently received formal notice of default from this new lender.
Subsequently, the Partnership received a notice of a foreclosure sale scheduled
for August 7, 1996, at which time title to the Newport Beach Marriott Suites
Hotel was transferred to the mortgage lender. On December 3, 1991, the holder of
the mortgage debt secured by the Atlanta Marriott hotel foreclosed on the
operating property due to the Partnership's inability to meet the required debt
service payments. In both cases, the hotels were new developments when acquired
and subsequently failed to generate the average room rates projected at the time
of their acquisitions. Protracted negotiations and modification agreements with
the mortgage lenders ultimately failed to result in economically viable
restructuring plans. As a result of the foreclosure proceedings described above,
the Partnership no longer has any ownership interest in either of the hotel
properties.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some
extent, will not constitute taxable income;
(ii) preserve and protect the Limited Partners' capital;
(iii) obtain long-term appreciation in the value of its properties;
(iv) increase the Limited Partners' return on investment by using
leverage; and
(v) provide a build-up of equity through the reduction of mortgage loans on
its properties.
Regular quarterly distributions of excess operating cash flow were
suspended indefinitely in fiscal 1991. Through September 30, 1996, the Limited
Partners had received cumulative cash distributions from operations totalling
approximately $5,719,000, or $192 per original $1,000 investment for the
Partnership's earliest investors. A substantial portion of the distributions
paid to date has been sheltered from current taxable income. The Partnership
retains its ownership interest in five of its seven original investment
properties, all of which were acquired using leverage of between approximately
60% and 75% of the original purchase price. As stated above, however, the
Partnership has been forced to relinquish ownership of its two hotel investments
as a result of foreclosure actions by the first mortgage lenders. Due to the
foreclosure losses of the Newport Beach and Atlanta Marriott Suites Hotels,
which represented a combined 63% of the Partnership's original investment
portfolio, the Partnership will be unable to return any significant portion of
the original capital contributed by the Limited Partners. The amount of capital
which will be returned will depend upon the proceeds recovered from the final
liquidation of the remaining investments. The amount of such proceeds will
ultimately depend upon the value of the underlying investment properties at the
time of their final disposition, which, for the most part, cannot presently be
determined. As discussed further in Item 7, at the present time the
Partnership's interest in The Meadows in the Park Apartments is the only
investment with any significant value to the Partnership based on the estimated
current market values of the underlying properties. As of September 30, 1996,
the joint venture which owns the Spinnaker Landing and Bay Club Apartments was
in default of the mortgage loans secured by the operating properties. As
discussed further in Item 7, the Partnership expects to either sell these two
properties and receive a nominal amount of net proceeds or to lose the
properties through foreclosure proceedings prior to the end of the second
quarter of fiscal 1997. In addition, subsequent to year-end the joint venture
which owns the Maplewood Park Apartments failed to make a required principal
payment due under the terms of its mortgage loan agreement due to lack of
available funds. If a mutually acceptable resolution of this situation cannot be
reached with the mortgage lender, the Maplewood Park joint venture could be
declared in default of its mortgage indebtedness during fiscal 1997. With
respect to the Norman Crossing Shopping Center, at the present time market
values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. Physical occupancy of the Norman
Crossing property stood at 88% as of September 30, 1996, and the property was
generating net cash flow deficits which were being funded from the Partnership's
cash reserves.
All of the Partnership's investments are located in real estate markets in
which they face significant competition for the revenues they generate. The
apartment complexes compete with numerous projects of similar type generally on
the basis of price, location and amenities. Apartment properties in all markets
also compete with the local single family home market for revenues. The
continued availability of low interest rates on home mortgage loans has
increased the level of this competition in all parts of the country over the
past several years. However, the impact of the competition from the
single-family home market has been offset by the lack of significant new
construction activity in the multi-family apartment market over most of this
period. In the past 12 months, development activity for multi-family properties
in many markets has escalated significantly. The shopping center competes for
long-term commercial tenants with numerous projects of similar type generally on
the basis of location, rental rates, tenant mix and tenant improvement
allowances.
The Partnership has no real property investments located 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.
<PAGE>
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 Eighth
Income Properties Inc. and Properties Associates 1986, L.P. Eighth Income
Properties, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group, Inc., is the managing general partner of the Partnership. The
associate general partner of the Partnership is Properties Associates 1986, L.P.
(the "Associate General Partner"), 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
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As of September 30, 1996, the Partnership owned interests in five operating
properties through joint venture partnerships. Such properties are referred to
under Item 1 above to which reference is hereby made for the name, location and
description of each property.
Leasing levels for each fiscal quarter during 1996, along with an average for
the year, are presented below for each property:
Percent Leased At
----------------------------------------------
Fiscal
1996
12/31/95 3/31/96 6/30/96 9/30/96 Average
-------- ------- ------- ------- -------
The Meadows in the Park
Apartments 81% 83% 96% 96% 89%
Maplewood Park Apartments 96% 95% 93% 98% 96%
Bay Club and Spinnaker
Landing Apartments (1) 94% 94% 93% 94% 94%
Norman Crossing Shopping
Center (2) 100% 100% 100% 100% 100%
(1)Occupancy figures represent the combined occupancy level of the two
apartment properties owned by SBA Associates.
(2)In October 1993, the sole anchor tenant of the Norman Crossing Shopping
Center vacated the center to relocate its operations. This anchor tenant
continues to pay rent on its prior space, which represents 48% of the
property's net rentable area, under the terms of its lease which expires
in the year 2007. As a result of this anchor tenant vacancy, the physical
occupancy of the property as of September 30, 1996 stood at 88% (see Item
7 for a further discussion).
Item 3. Legal Proceedings
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In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including Eighth Income Properties, Inc. and Properties
Associates 1986, L.P. ("PA1986") which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Income Properties
Eight Limited Partnership, PaineWebber, Eighth Income Properties, Inc. and
PA1986 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in PaineWebber
Income Properties Eight Limited Partnership, also alleged that following the
sale of the partnership interests, PaineWebber, Eighth Income Properties, Inc.
and PA1986 misrepresented financial information about the Partnerships value and
performance. The amended complaint alleged that PaineWebber, Eighth Income
Properties, Inc. and PA1986 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
In 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 alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint is substantially similar to the
complaint in the Abbate action described above, and sought compensatory damages
of $3.4 million plus punitive damages.
Mediation with respect to the Abbate and Bandrowski actions described above
was held in December 1996. As a result of such mediation, a tentative settlement
between PaineWebber and the plaintiffs was reached which would provide for
complete resolution of both actions. PaineWebber anticipates that releases and
dismissals with regard to these actions will be received by February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1996, there were 1,666 record holders of Units in the
Partnership. There is no public market for the resale of the Units, and it is
not anticipated that a public market for resale of the Units will develop. The
Managing General Partner will not redeem or repurchase Units.
There were no cash distributions made to the Limited Partners during
fiscal 1996.
Item 6. Selected Financial Data
PaineWebber Income Properties Eight Limited Partnership For the years
ended September 30, 1996, 1995, 1994, 1993 and 1992
(In thousands, except per Unit data)
1996 (1) 1995 1994 1993 1992 (2)
-------- ---- ---- ---- ----
Revenues $ 8,455 $ 8,649 $ 8,195 $ 8,050 $ 8,717
Provision for
possible investment
loss $ (588) - - - -
Loss due to impairment
of long-lived asset - $ (6,369) - - -
Operating loss $ (2,829) $ (8,957) $ (2,940) $ (2,978) $ (5,325)
Partnership's share of
ventures' losses $ (712) $ (577) $ (1,036) $ (1,356) $ (1,246)
Loss on transfer of
assets at
foreclosure $ (137) - - - $ (5,653)
Loss before
extraordinary gain $ (3,678) $ (9,534) $ (3,976) $ (4,334) $(12,224)
Extraordinary gain from
settlement of debt
obligation $ 23,459 - - - $ 11,360
Net income (loss) $ 19,781 $ (9,534) $ (3,976 $ (4,334) $ (864)
Total assets $ 443 $ 23,623 $ 31,090 $ 33,521 $ 36,660
Mortgage debt payable - $ 36,060 $ 35,237 $ 34,634(3) $ 29,400
Per 1,000 Limited
Partnership Units:
Loss before
extraordinary
gain $ (102.56) $ (265.38) $(110.68) $ (120.64) $ (340.23)
Extraordinary
gain from
settlement of
debt obligation $ 652.96 - - - $ 316.19
Net income
(loss) $ 550.40 $ (265.38) $(110.68) $(120.64) $ (24.04)
(1) The fiscal 1996 amounts reflect the foreclosure of the wholly-owned
Newport Beach Marriott Suites Hotel which occurred on August 7, 1996. A loss
to write down the book value of the operating investment property to
estimated fair value had been recorded in the prior year. The extraordinary
gain from settlement of debt obligation recognized in fiscal 1996 represents
the amount by which the carrying value of the debt obligations exceeded the
fair value of the property transferred to the lender at the time of the
foreclosure.
(2) The loss on transfer of assets at foreclosure and the extraordinary gain on
settlement of debt obligation recognized in fiscal 1992 resulted from the
foreclosure, on December 3, 1991, of the wholly-owned Atlanta Marriott
Suites Hotel.
(3) The increase in long-term debt as of September 30, 1993 resulted from the
modification of the mortgage note payable secured by the Newport Beach
Marriott operating investment property. As more fully explained in Note 6 to
the accompanying financial statements, accrued interest payable as of August
11, 1992 was added to the outstanding principal balance in accordance with
the modification agreement which also permitted the future deferral of a
portion of the debt service obligation (see Item 7).
The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this Annual
Report.
The above per 1,000 Limited Partnership Units information is based upon
the 35,548,976 Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered Units of Limited Partnership interests to the
public from September 17, 1986 to September 16, 1988 pursuant to a Registration
Statement filed under the Securities Act of 1933. Gross proceeds of $35,548,976
were received by the Partnership from the sale of Partnership Units and, after
deducting selling expenses and offering costs, approximately $28,474,000 was
originally invested in seven operating investment properties. The Partnership
originally owned two hotel properties directly and made investments in four
joint venture partnerships which own five operating investment properties. To
date, the Partnership has lost its two hotel investments through foreclosure
proceedings by the first mortgage lenders, including one during fiscal 1996. As
of September 30, 1996, the Partnership retains its interests in the five joint
venture operating properties, which consist of four multi-family apartment
complexes and one retail shopping center. However, as discussed further below,
two of the joint ventures which own three of the apartment complexes are
currently in default of their mortgage debt obligations and are in jeopardy of
having their properties foreclosed upon. In addition, the retail shopping center
is currently generating cash flow deficits which have been funded to date from
the Partnership's cash reserves.
The Partnership originally owned fee simple interests in two Marriott
hotels, the Newport Beach Marriott Suites Hotel, a 254-suite hotel located in
Newport Beach, California, and the Marriott Suites - Perimeter Center, a
224-suite hotel located in Atlanta, Georgia. As previously reported, the
Partnership had been in default under the modified terms of the mortgage loan
secured by the Newport Beach Marriott Suites Hotel since March 1995. 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 subsequently received
formal notice of default from this new lender. Subsequently, the Partnership
received a notice of a foreclosure sale scheduled for August 7, 1996, at which
time title to the Newport Beach Marriott Suites Hotel was transferred to the
mortgage lender. Despite an improvement in the Hotel's operating results over
the last year, the estimated value of the Hotel property remained substantially
less than the obligation to the mortgage lender. Given the significant
deficiency which existed between the estimated fair value of the Hotel and the
outstanding debt obligation payable to the mortgage lender, management believed
that it would not be prudent to use any of the Partnership's capital resources
to cure the default or contest the foreclosure 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. The new mortgage lender was not willing to grant the required
concessions. On December 3, 1991, the holder of the mortgage debt secured by the
Atlanta Marriott hotel foreclosed on the operating property due to the
Partnership's inability to meet the required debt service payments. In both
cases, the hotels were new developments when acquired and subsequently failed to
generate the average room rates projected at the time of their acquisitions.
Protracted negotiations and modification agreements with the mortgage lenders
ultimately failed to result in economically viable restructuring plans. As a
result of the foreclosure proceedings described above, the Partnership no longer
has any ownership interest in either of the hotel properties.
Due to the foreclosure losses of the Newport Beach and Atlanta Marriott
Suites Hotels, which represented a combined 63% of the Partnership's original
investment portfolio, the Partnership will be unable to return any significant
portion of the original capital contributed by the Limited Partners. The amount
of capital which will be returned will depend upon the proceeds recovered from
the final liquidation of the remaining investments. The amount of such proceeds
will ultimately depend upon the value of the underlying investment properties at
the time of their final disposition, which, for the most part, cannot presently
be determined. Nonetheless, at the present time the Partnership's interest in
The Meadows in the Park Apartments is the only investment with any significant
value to the Partnership based on the estimated current market values of the
underlying properties. The status of the remaining investments is discussed in
more detail below.
The loans secured by the Spinnaker Landing and Bay Club Apartments were
scheduled to mature in December 1996. During fiscal 1995, management had
evaluated a proposal from the existing mortgage lender to repay the outstanding
debt at a significant discount. Such a plan would have required a sizable equity
contribution by the Partnership. Management evaluated whether an additional
investment of funds in the venture would be economically prudent in light of the
future appreciation potential of the properties and concluded, based on
negotiations with the lender, that an economically viable refinancing
transaction could not be accomplished. During the third quarter of fiscal 1996,
the Partnership was notified that Spinnaker Bay's first mortgage lender and the
related loans were purchased by another financial institution. Due to
semi-annual real estate tax payments made during the third fiscal quarter, as
well as the payment of ongoing operating expenses, the monthly cash flow
available from the properties was insufficient to pay the minimum debt service
required in May 1996. A notice of default was issued by the mortgage lender in
the fourth quarter of fiscal 1996. As of September 30, 1996, the combined debt
obligation to the first mortgage holder for both properties totalled $6,153,000.
The estimated combined fair value of the properties, while higher than their net
carrying values, is significantly less than this debt balance. In light of these
circumstances, effective in September 1996 the venture partners entered into a
Property Disposition Agreement with the lender. Under the terms of the
agreement, the lender agreed to delay foreclosure of the properties for five
months to provide the venture with an opportunity to complete a sale. Any sale
of the properties is expected to be for an amount significantly below the
outstanding debt balance. However, under the terms of the agreement with the
lender, the Partnership and the co-venture partner can qualify to receive a
nominal payment from the sales proceeds if a sale is completed by the end of the
second quarter of fiscal 1997 and certain other conditions are met. As part of
the agreement, a receiver was appointed for the property and will be responsible
for the collection of rents and the payment of operating expenses through the
end of the forbearance period.
In December 1996, the Spinnaker Bay joint venture executed a purchase and
sale agreement with an unrelated third party to sell the properties for an
amount less than the total debt obligation. If the transaction were to close and
the conditions referred to above were met, the Partnership could end up
receiving a nomimal amount from the proceeds of the sale transaction. However,
the sale remains contingent upon the buyer's due diligence and the receipt of a
financing commitment. Accordingly, there are no assurances that the transaction
will be consummated. The Partnership has a large negative carrying value for its
investment in Spinnaker Bay Associates as of September 30, 1996 because prior
year equity method losses and distributions have exceeded the Partnership's
investments in the venture. Consequently, the Partnership will recognize a gain
upon either the sale or the foreclosure of the operating investment properties.
During the first quarter of fiscal 1996, the Partnership funded $63,000 to
the Maplewood joint venture to cover its share of the venture's annual debt
service principal payment. Similar advances had been made in each of the two
preceding years. Subsequent to the end of fiscal 1996, the Partnership's
co-venture partner made another request for the Partnership to fund 70% of the
$95,000 principal payment due on the venture's mortgage loan on December 2,
1996. Based on its current analysis, management has concluded that it would not
be in the Partnership's best interests to continue to fund its share of the
Maplewood venture's cash flow deficits. Accordingly, management has informed the
co-venture partner that the Partnership will not be making the requested capital
contribution. The mortgage debt secured by the Maplewood Park Apartments was
provided with tax-exempt revenue bonds issued by a local housing authority. The
bonds are secured by a standby letter of credit issued to the joint venture by a
bank. The letter of credit, which is scheduled to expire in October 1998, is
secured by a first mortgage on the venture's operating property. The revenue
bonds bear interest at a floating rate that is determined daily by a remarketing
agent based on comparable market rates for similar tax-exempt obligations. Such
rates generally fluctuated between 3.5% and 4.5% per annum during fiscal 1996.
In addition, the venture is obligated to pay a letter of credit fee, a
remarketing fee and a housing authority fee under the terms of the financing
agreement. The operating property produces excess net cash flow after the debt
service and related fees due under the terms of the bond financing arrangement
because of the low tax-exempt interest rate paid on the bonds. However, as part
of the joint venture agreement the Partnership's co-venture partner receives a
guaranteed cash distribution on a monthly basis to the extent that the interest
cost of the venture's debt is less than 8.25% per annum. Conversely, the
co-venture partner is obligated to contribute funds to the venture to the extent
that the interest cost exceeds 8.25%. Over the past three years, the interest
rate differential distributions to the co-venturer under the foregoing
arrangement have averaged $189,000 per year. As of September 30, 1996, the
Partnership and the co-venturer were not in agreement regarding the cumulative
cash flow distributed to the co-venturer pursuant to this interest rate
differential calculation. The Partnership believes that the co-venturer has
received an additional $79,000 over the amount it is entitled to under the terms
of the joint venture agreement through September 30, 1996. The ultimate
resolution of this dispute cannot be determined at the present time.
Since all of the economic benefits of the Maplewood joint venture currently
accrue to the co-venture partner in the form of the interest rate differential
payments described above, management concluded that continued funding of the
venture's annual cash flow deficits would not be prudent in light of the
Partnership's limited remaining cash reserves. Subsequently, management has made
a proposal to the co-venture partner to sell the Partnership's interest in the
joint venture, but no agreement has been reached to date. Furthermore, at the
present time the co-venture partner has not funded the required December 1996
principal payment, which could result in the venture being declared in default
of the mortgage loan agreement. The current estimated market value of the
Maplewood property, while higher than the property's carrying value, is at or
below the amount of the outstanding principal balance owed on the first mortgage
loan. As a result, even if the payment default were to be cured, there are no
assurances that the letter of credit underlying the mortgage loan will be
renewed upon its expiration. The ultimate outcome of this situation cannot be
determined at the present time. The net carrying value of the Partnership's
investment in the Maplewood joint venture was $428,000 as of September 30, 1996.
Management believes that this net carrying value is recoverable if a sale
agreement can be reached with the co-venture partner or if the co-venture
partner cures the principal payment deliquency and the letter of credit can be
extended. If, however, a sale agreement cannot be achieved and a foreclosure of
the operating property results, the Partnership would recognize a loss equal to
its remaining investment balance.
In October 1993, the sole anchor tenant of the Norman Crossing Shopping
Center vacated the center to relocate its operations. The tenant, which occupied
26,752 square feet of the property's net leasable area, is a national credit
grocery store chain which 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. 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
20,552 square feet of the former anchor's space and will sublease the remaining
6,200 square feet. As a result of the new health club 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 this time.
The joint venture may have to continue to make tenant improvements and grant
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 re-stabilization for the shopping center, would be provided primarily
by the Partnership. During fiscal 1996, the Partnership funded cash flow
deficits of approximately $16,000 to the Norman Crossing joint venture. The
Partnership is prepared to fund any additional operating deficits of the Norman
Crossing joint venture in the near-term. However, given the Partnership's
limited capital resources, the Partnership cannot fund such deficits
indefinitely. Consequently, the Partnership may look to sell the operating
property or its interest in the joint venture in the near future. At the present
time, market values for retail shopping centers in certain markets are being
adversely impacted by the effects of overbuilding and consolidations among
retailers which have resulted in an oversupply of space. Based on the current
estimated fair value of the Norman Crossing Shopping Center, a sale under the
existing market conditions would not result in any significant proceeds above
the mortgage loan balance. In light of the above circumstances and a resulting
reassessment of the Partnership's likely remaining holding period for the Norman
Crossing investment, the Partnership recorded an allowance for possible
investment loss of $588,000 in fiscal 1996 to write down the net carrying value
of the equity interest to management's estimate of its net realizable value as
of September 30, 1996.
Repairs to the construction defects at the Meadows in the Park Apartments,
in Birmingham, Alabama, were substantially completed during the third quarter of
fiscal 1996 using the proceeds of the insurance settlement which were escrowed
with the venture's mortgage lender. The average occupancy level at the Meadows
property had increased to 96% for the quarter ended September 30, 1996 after
starting the year in the low 80% range. The dramatic increase in occupancy is
the result of the completion of the structural repairs in May 1996. As
previously reported, during the structural repair program certain apartment
units were taken out of service each month, which depressed average occupancy
levels. With the completion of the construction repairs at the Meadows, average
occupancy levels and rental rates now compare favorably to other apartment
communities in its sub-market. 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 during fiscal 1997.
In light of the expected fiscal 1997 disposition of the Partnership's
interests in the Spinnaker Landing and Bay Club Apartments, the potential
disposition of the Maplewood joint venture investment, and the possible
near-term sales of the Norman Crossing Shopping Center and the Meadows on the
Lake Apartments, the Partnership could be positioned for a possible liquidation
within the next two years. However, there are no assurances that the Partnership
will be able to dispose of its remaining investments within this time frame. At
September 30, 1996, the Partnership had available cash and cash equivalents of
$433,000. 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 or operating deficits, to the
extent economically justified. 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 only on a short-term
basis. If the Partnership is able to dispose of its remaining investments and
complete a liquidation within the next two years, as discussed further above,
the Partnership should have sufficient liquidity to meet its obligations.
<PAGE>
Results of Operations
1996 Compared to 1995
- ---------------------
The Partnership had net income of $19,781,000 for fiscal 1996, as compared
to a net loss of $9,534,000 in the prior year. The current year net income
resulted from the foreclosure of the Newport Beach Marriott Suites Hotel on
August 7, 1996 which, as explained below, resulted in an extraordinary gain from
settlement of debt obligation of $23,459,000. The extraordinary gain was
partially offset by a loss on transfer of assets at foreclosure of $137,000. The
transfer of the Hotel's title to the lender through foreclosure proceedings was
accounted for as a troubled debt restructuring in accordance with Statement of
Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." The extraordinary gain arises due to the fact
that the balance of the mortgage loan and related accrued interest exceeded the
estimated fair value of the hotel investment and other assets transferred to the
lender at the time of the foreclosure. The loss on transfer of assets results
from the fact that the net carrying value of the Hotel exceeded the Hotel's
estimated fair value at the time of foreclosure. An impairment writedown of
$6,369,000 had been recorded in fiscal 1995 to adjust the carrying value of the
Newport Beach Marriott Suites Hotel to management's estimate of the property's
fair market value as of September 30, 1995. In fiscal 1996, the Partnership
recognized a provision for possible impairment loss of $588,000 to adjust the
carrying value of its investment in the Norman Crossing Shopping Center to its
estimated net realizable value, as discussed further above.
The Partnership's net loss, excluding all of the revenues, expenses, gains
and losses related to the Newport Beach Hotel, increased by $141,000 in fiscal
1996. This unfavorable change in net operating results was the result of a
decrease in interest income and an increase in the Partnership's share of
ventures' losses which were partially offset by a decline in general and
administrative expenses. The decrease in interest income can be attributed to a
decline in the average outstanding balance of the Partnership's cash reserves.
The Partnership's share of ventures' losses increased by $135,000 during fiscal
1996, as compared to 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 $115,000 for fiscal 1996. Operating losses
also increased at the Meadows and Spinnaker/Bay joint ventures in fiscal 1996.
The net operating results of the Meadows joint venture declined, despite a
decrease in interest expense resulting from the fiscal 1995 refinancing of the
venture's long-term debt, as a result of increases in repairs and maintenance
and marketing expenses. The net loss of the joint venture which owns the Bay
Club and Spinnaker Landing Apartments increased primarily due to an increase in
interest expense resulting from the addition of unpaid interest to the principal
balance of the venture's outstanding mortgage indebtedness. The decrease in
Partnership general and administrative expenses, of $69,000, was mainly due to
additional professional fees incurred in fiscal 1995 related to an independent
valuation of the Partnership's portfolio of operating investment properties.
1995 Compared to 1994
- ---------------------
The Partnership had a net loss of $9,534,000 for fiscal 1995, as compared
to a net loss of $3,976,000 in the prior year. This significant increase in net
loss was primarily due to the $6,369,000 impairment write-down recorded on the
Newport Beach Marriott Suites Hotel in fiscal 1995, as discussed further above.
In addition, an increase in interest expense on the Marriott loan arrangements
of $1,421,000 also contributed to the increase in net loss for fiscal 1995. The
increase in interest expense was the result of default interest being accrued on
the outstanding mortgage loan and additional loan facility secured by the
Newport Beach Marriott Suites Hotel beginning in April 1995, along with the
increase in the outstanding amount of the additional loan facility during fiscal
1994 and 1995. The increase in net loss was partially offset by a decrease in
Hotel operating expenses of $716,000, an increase in Hotel revenues of $390,000,
a decrease in depreciation and amortization expense of $567,000 and a decline in
the Partnership's share of ventures' losses of $459,000. The decrease in
expenses at the wholly-owned Marriott Hotel was mainly due to a substantial real
estate tax refund received in fiscal 1995 as a result of a successful appeal of
prior year assessments. The refund, which totalled $731,000, was received late
in fiscal 1995 and, subsequent to year-end, was remitted to the mortgage lender
as additional debt service owed under the terms of the modified loan agreement.
Room revenues at the Newport Beach Hotel were up by $344,000, or 6%, for fiscal
1995 as a result of an increase in average occupancy. The increase in room
revenues resulted from an improvement in the Hotel's average occupancy level
from 75% for fiscal 1994 to 78% for fiscal 1995. Amortization expense was
significantly lower in fiscal 1995 as a result of certain fees becoming fully
amortized in the prior year. In addition, an increase of $64,000 in interest and
other income and a decrease of $36,000 in Partnership general and administrative
expenses also offset the increase in net loss for fiscal 1995. Interest income
in fiscal 1995 reflected interest received on certain advances to one of the
Partnership's joint ventures.
The decrease in the Partnership's share of ventures' losses was mainly the
result of increases in revenues at the Meadows, Spinnaker Landing and Bay Club
Apartments, a decrease in depreciation expense at the Meadows joint venture and
a decrease in combined property operating expenses. Rental income at Bay Club
and Spinnaker Landing increased as a result of the lease-up achieved at the
renovated apartments during fiscal 1994 and 1995. Revenues were higher at the
Meadows joint venture, despite a decrease in occupancy, as a result of the
designation of the excess of the settlement proceeds received over the estimated
repair costs as rental interruption compensation, which was recorded as income
in fiscal 1995. Depreciation expense at the Meadows joint venture decreased by
$100,000 as a result of certain assets being fully depreciated during fiscal
1994. The decline in combined property operating expenses could be primarily
attributed to a decrease in repairs and maintenance expenses at the Meadows
joint venture.
1994 Compared to 1993
- ---------------------
The Partnership had a net loss of $3,976,000 for fiscal 1994, as compared
to a net loss of $4,334,000 in the prior year. The primary reason for this
decrease in net loss of $358,000 was a decrease in the Partnership's share of
ventures' losses in fiscal 1994. The Partnership's share of ventures' losses
decreased by $320,000 mainly due to an increase in rental income resulting from
a significant increase in occupancy at the Spinnaker Landing and Bay Club
Apartments as a result of the renewal of leasing efforts subsequent to the
renovations of the properties. The increase in rental income was partially
offset by an increase in interest expense on the Spinnaker Landing and Bay Club
mortgage loans as a result of the accrual of interest on debt service payments
deferred by the lender during fiscal 1993. The Partnership's operating loss
decreased by $38,000 in fiscal 1994 primarily as a result of an increase in net
operating income from the Newport Beach Marriott Suites Hotel, due to the higher
occupancy levels achieved at the Hotel in fiscal 1994, and a decrease in
depreciation and amortization expense, due to certain deferred fees being fully
amortized in the prior year. The increase in hotel net operating income and the
decrease in depreciation and amortization expense were partially offset by
increases in interest expense and general and administrative expenses in 1994.
Interest expense increased due to the advances under the additional loan
facility from the Hotel's mortgage lender to pay debt service shortfalls and an
increase in the variable interest rate on this loan facility. The increase in
Partnership general and administrative expenses reflected certain costs incurred
in connection with an independent valuation of the Partnership's operating
properties which was commissioned during fiscal 1994 in conjunction with
management's ongoing refinancing efforts and portfolio management
responsibilities.
Inflation
- ---------
The Partnership completed its ninth full year of operations in fiscal
1996. The effects of inflation and changes in prices on the Partnership's
operating results to date have not been significant.
Inflation in future periods may increase revenues, as well as operating
expenses at the Partnership's operating investment properties. Some of the
existing leases with tenants at the Partnership's commercial investment property
contain rental escalation and/or expense reimbursement clauses based on
increases in tenant sales or property operating expenses. Tenants at the
Partnership's apartment properties have short-term leases, generally of
six-to-twelve months in duration. Rental rates at these properties can be
adjusted to keep pace with inflation, to the extent market conditions allow,
when 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 resulting from 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 Eighth Income
Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1986, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation; however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date
elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and
Assistant Treasurer 54 8/27/85 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and principal executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
and principal executive officers of the Managing General Partner of the
Partnership. All of the foregoing directors and principal executive officers
have been elected to serve until the annual meeting of the Managing General
Partner.
(e) All of the directors and executive 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.
<PAGE>
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 Senior Vice President and Chief Financial Officer of
the Managing General Partner and Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr.
Arnold is a Certified Public Accountant licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and Vice President and Treasurer of the Adviser which he joined
in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of
the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner
and a Vice President and Manager of Financial Reporting of the Adviser which
he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended September 30, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed 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.
The Partnership paid cash distributions to the Limited Partners on a
quarterly basis at a rate equal to 5% per annum on invested capital from
inception through the first quarter of fiscal 1991. Effective for the quarter
ended March 31, 1991, such distributions were suspended indefinitely.
Furthermore, the Partnership's Limited Partnership Units 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, Eighth Income Properties, Inc., is owned by
PaineWebber. Properties Associates 1986, L.P., the Associate General Partner, is
a Virginia limited partnership, the limited partners of which are also officers
of the Adviser and the Managing General Partner. Properties Associates 1986,
L.P. also is the Initial Limited Partner. An affiliate of the Managing General
Partner referred to below owned either directly or beneficially more than 5% of
the outstanding Units of limited partnership interest in the Partnership as of
September 30, 1996.
Amount
Name and Address Beneficially Percent
Title of Class of Beneficial Owner Owned of Class
- -------------- ------------------- ----- --------
Units of Limited PaineWebber Incorporated 5,705,002 16%
Partnership 1285 Avenue of the Americas Units
New York, NY 10019
(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 Eighth Income Properties, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group, Inc. ("PaineWebber"), and Properties Associates 1986, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain limited
partners of which are also officers of the Managing General Partner. 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 of 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 not greater than 5% of the gross proceeds from the
sale of Partnership Units. In connection with the sale of each property, the
Adviser may receive a disposition fee, payable upon liquidation of the
Partnership, 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.
Pursuant to 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 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 5% based upon their adjusted capital contributions),
in addition to the asset management fee referred to above, for services
rendered. The Adviser earned no management fees during the year ended September
30, 1996.
Both the Managing General Partner and the Adviser will receive
reimbursements for actual amounts paid on the Partnership's behalf including
offering and organization costs (not to exceed 5% of the gross offering proceeds
of the offering), acquisition expenses incurred in investigating or acquiring
real property investments and any other costs for goods or services used for or
by the Partnership.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended September 30, 1996 is $90,000, 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"), an affiliate of the Managing General
Partner, 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 $2,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996. Fees charged by Mitchell Hutchins are based on a percentage of
invested cash reserves which varies based on the total amount of invested cash
which Mitchell Hutchins manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as
a separate section of this report. See Index to
Financial Statements and Financial Statement
Schedules at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to
exhibits at Page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(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 EIGHT
LIMITED PARTNERSHIP
By: Eighth Income Properties, Inc.
------------------------------
Managing General Partner
By: /s/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
---------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President
Dated: January 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1997
----------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 13, 1997
----------------------- ----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
Page Number in the Report or
Exhibit No. Description of Document Other Reference
- ----------- ----------------------- ---------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant dated Filed with the Commission pursuant
September 17, 1986, as supplemented, to Rule 424(c) and incorporated
with particular reference to the herein by reference.
Restated Certificate and Agreement
of Limited Partnership
(10) Material contracts previously filed as Filed with the Commission pursuant
exhibits to registration statements to Section 13 or 15(d) of the Securities
and amendments thereto of the Exchange Act of 1934 and incorporated
registrant together with all such herein by reference.
contracts filed as exhibits of previously
filed Forms 8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the year ended
September 30, 1996 has been sent to the
Limited Partners. An Annual Report will
be sent to the Limited Partners subsequent
to this filing.
(22) 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 the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
Paine Webber Income Properties Eight Limited Partnership:
Report of independent auditors F-2
Balance sheets as of September 30, 1996 and 1995 F-3
Statements of operations for the years ended September 30, 1996,
1995 and 1994 F-4
Statements of changes in partners' deficit for the years ended
September 30, 1996, 1995 and 1994 F-5
Statements of cash flows for the years ended September 30, 1996,
1995 and 1994 F-6
Notes to financial statements F-7
Combined Joint Ventures of PaineWebber Income Properties Eight Limited
Partnership:
Report of independent auditors F-24
Combined balance sheets as of September 30, 1996 and 1995 F-25
Combined statements of operations and changes in ventures'
deficit for the years ended September 30, 1996, 1995 and 1994 F-26
Combined statements of cash flows for the years ended
September 30, 1996, 1995 and 1994 F-27
Notes to combined financial statements F-28
Schedule III - Real estate and accumulated depreciation F-38
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
PaineWebber Income Properties Eight Limited Partnership:
We have audited the accompanying balance sheets of PaineWebber Income
Properties Eight Limited Partnership as of September 30, 1996 and 1995, and the
related statements of operations, changes in partners' capital(deficit), and
cash flows for each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of PaineWebber Income
Properties Eight Limited Partnership at September 30, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in Notes 2 and 4 to the financial statements, in fiscal 1995
the Partnership adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
December 26, 1996
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1996 and 1995
(In thousands, except per Unit amounts)
ASSETS
------
1996 1995
---- ----
Operating investment property:
Land $ - $ 5,488
Buildings - 21,377
Equipment and improvements - 2,868
--------- --------
- 29,733
Less accumulated depreciation - (9,733)
--------- --------
- 20,000
Investments in joint ventures, at equity - 412
Cash and cash equivalents 433 1,362
Cash reserved for capital expenditures - 618
Accounts receivable 1 240
Due from Marriott Corporation - 680
Inventories - 124
Other assets 9 50
Deferred expenses, net of accumulated amortization
of $2,425 in 1995 - 137
--------- --------
$ 443 $ 23,623
========= ========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
Accounts payable and accrued expenses $ 41 $ 182
Accounts payable - affiliates 2 2
Accrued interest payable - 1,242
Equity in losses of joint ventures in
excess of investments and advances 810 -
Loan payable to Marriott Corporation - 6,328
Mortgage debt payable - 36,060
--------- --------
Total liabilities 853 43,814
Partners' deficit:
General Partners:
Capital contributions 1 1
Cumulative net loss (302) (510)
Cumulative cash distributions (86) (86)
Limited Partners ($1 per Unit; 35,548,976
Units subscribed and issued):
Capital contributions, net of offering
costs of $4,791 30,758 30,758
Cumulative net loss (25,062) (44,635)
Cumulative cash distributions (5,719) (5,719)
---------- ---------
Total partners' deficit (410) (20,191)
--------- ---------
$ 443 $ 23,623
========= =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the years ended September 30, 1996, 1995 and 1994
(In thousands, except per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Hotel revenues $ 8,393 $ 8,512 $ 8,122
Interest and other income 62 137 73
--------- -------- --------
8,455 8,649 8,195
Expenses:
Hotel operating expenses 5,631 5,550 6,266
Interest expense 4,050 4,389 2,968
Depreciation expense 727 893 1,406
General and administrative 267 336 372
Provision for possible
investment loss 588 - -
Loss due to impairment of long-lived
assets - 6,369 -
Amortization expense 21 69 123
--------- -------- ---------
11,284 17,606 11,135
--------- -------- ---------
Operating loss (2,829) (8,957) (2,940)
Partnership's share of ventures' losses (712) (577) (1,036)
Loss on transfer of assets at foreclosure (137) - -
---------- -------- ---------
Loss before extraordinary gain (3,678) (9,534) (3,976)
Extraordinary gain from settlement
of debt obligation 23,459 - -
---------- -------- ---------
Net income (loss) $ 19,781 $ (9,534) $ (3,976)
========== ======== =========
Net income (loss) per 1,000
Limited Partnership Unit:
Loss before extraordinary gain $ (102.56) $(265.38) $ (110.68)
Extraordinary gain 652.96 - -
--------- -------- ---------
Net income (loss) $ 550.40 $(265.38) $ (110.68)
========= ======== ========
The above per 1,000 Limited Partnership Units information is based upon the
35,548,976 Limited Partnership Units outstanding during each year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at September 30, 1993 $ (453) $ (6,228) $ (6,681)
Net loss (42) (3,934) (3,976)
------- -------- --------
Balance at September 30, 1994 (495) (10,162) (10,657)
Net loss (100) (9,434) (9,534)
------ -------- --------
Balance at September 30, 1995 (595) (19,596) (20,191)
Net income 208 19,573 19,781
------ -------- ---------
Balance at September 30, 1996 $ (387) $ (23) $ (410)
====== ======== =========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 19,781 $(9,534) $(3,976)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Interest expense 547 600 543
Depreciation and amortization 748 962 1,529
Amortization of deferred gain on
forgiveness of debt - (324) (768)
Partnership's share of ventures' losses 712 577 1,036
Provision for possible investment loss 588 - -
Loss due to impairment of long-lived assets - 6,369 -
Loss on transfer of assets at foreclosure 137 - -
Extraordinary gain from settlement of debt
obligation (23,459) - -
Changes in assets and liabilities:
Cash subject to transfer at foreclosure (516) - -
Accounts receivable (37) 46 (68)
Due to/from Marriott Corporation 460 (692) 47
Inventories 27 14 (6)
Other assets (21) 1 5
Accounts payable and accrued expenses 128 (299) 263
Accounts payable - affiliates - - (21)
Accrued interest payable 373 955 144
-------- ------ -------
Total adjustments (20,313) 8,209 2,704
-------- ------ -------
Net cash used in operating activities (532) (1,325) (1,272)
Cash flows from investing activities:
Additions to operating investment property (467) (165) (536)
Net withdrawals from capital expenditure
reserve 149 140 53
Investments in joint ventures (79) (152) -
Distributions from joint ventures - 221 398
-------- ------ -------
Net cash provided by (used in)
investing activities (397) 44 (85)
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 1,147 1,371
--------- ------- -------
Net cash provided by
financing activities - 1,147 1,371
--------- ------ -------
Net (decrease) increase in cash and
cash equivalents (929) (134) 14
Cash and cash equivalents, beginning of year 1,362 1,496 1,482
--------- ------ -------
Cash and cash equivalents, end of year $ 433 $1,362 $ 1,496
======== ====== =======
Cash paid during the year for interest $ 3,130 $3,157 $ 3,049
======== ====== =======
See accompanying notes.
<PAGE>
PAINEWEBBER INCOME PROPERTIES EIGHT
LIMITED PARTNERSHP
Notes to Financial Statements
1. Organization and Nature of Operations
-------------------------------------
PaineWebber Income Properties Eight Limited Partnership (the
"Partnership") is a limited partnership organized in April 1986 for the
purpose of investing in a diversified portfolio of income-producing real
properties. The Partnership authorized the issuance of Partnership units
(the "Units"), at $1 per Unit, of which 35,548,976 were subscribed and
issued between September 17, 1986 and September 16, 1988.
The Partnership originally owned two hotel properties directly and made
investments in four joint venture partnerships which own five operating
investment properties. To date, the Partnership has lost its two hotel
investments through foreclosure proceedings by the first mortgage lenders,
including one during fiscal 1996. As of September 30, 1996, the Partnership
retains its interests in the five joint venture operating properties, which
consist of four multi-family apartment complexes and one retail shopping
center. However, as discussed further in Note 5, two of the joint ventures
which own three of the apartment complexes are currently in default of
their mortgage debt obligations and are in jeopardy of having their
properties foreclosed upon. In addition, the retail shopping center is
currently generating cash flow deficits which have been funded to date from
the Partnership's cash reserves. See Notes 4, 5 and 6 for a further
discussion of the Partnership's real estate investments.
2. Use of Estimates and Summary of Significant Accounting Policies
--------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of September 30, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended
September 30, 1996. Actual results could differ from the estimates and
assumptions used.
The accompanying financial statements include the Partnership's
investments in four joint venture partnerships which own five operating
properties. The Partnership accounts for its investments in joint ventures
using the equity method because the Partnership does not have a voting
control interest in the ventures. Under the equity method the ventures are
carried at cost adjusted for the Partnership's share of the ventures'
earnings and losses and distributions. See Note 5 for a description of the
joint venture investments.
Through September 30, 1994, the Partnership carried its operating
investment property at the lower of cost, reduced by accumulated
depreciation and guaranteed payments received from Marriott Corporation
(see Note 4), or net realizable value. Effective for fiscal 1995, the
Partnership adopted Statement of Financial Accounting Standards No. 121
(SFAS 121), "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," to account for its operating
investment properties, including those owned through joint venture
partnerships. 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, an impairment loss on the Partnership's
wholly-owned Hotel investment property was recognized in fiscal 1995 (see
Note 4.)
Depreciation expense on the operating investment property was computed
using the straight-line method over an estimated useful life of thirty
years for the buildings, and seven years for equipment and improvements.
Acquisition expenses, including professional fees and guaranty fees, were
capitalized and had been included in the cost of the operating investment
property prior to its foreclosure in fiscal 1996 (see Note 4).
Inventories were valued at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventories consisted of supply inventories of
$111,000 and food and beverage inventories of $13,000 at September 30,
1995. The inventories related to hotel operations and were transferred to
the mortgage lender as a result of the fiscal 1996 foreclosure of the
wholly-owned operating investment property (see Note 4).
Deferred expenses had included capitalized pre-opening costs related to
the Newport Beach hotel property, prepaid management fees, non-competition
fees paid to Marriott Corporation (see Note 4), and financing costs
associated with the Partnership's mortgage note payable. These expenses
were being amortized using the straight-line method primarily over three-
to seven-year periods. Certain closing costs associated with the
modification of the mortgage note payable secured by the Newport Beach
Marriott were being amortized over the remaining term of the loan. All
unamortized deferred expenses were written off upon the foreclosure of the
hotel property in fiscal 1996 (see Note 4).
For the purposes of reporting cash flows, cash and cash equivalents
include all highly liquid investments which have original maturities of 90
days or less.
The cash and cash equivalents, receivables, accounts payable affiliates
and accounts payable and accrued expenses appearing on the accompanying
balance sheets represent financial instruments for purposes of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The carrying amount of these assets and liabilities
approximates their fair value as of September 30, 1996 due to the
short-term maturities of these instruments.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
No provision for income taxes has been made as the liability for such
taxes is that of the individual partners rather than the Partnership. Upon
sale or disposition of the Partnership's investments, the taxable gain or
the tax loss incurred will be allocated among the partners. In cases where
the disposition of the investment involves the lender foreclosing on the
investment, taxable income could occur without distribution of cash. This
income would represent passive income to the partners which could be
offset by each partners' existing passive losses, including any passive
loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
-------------------------------------------------------
The General Partners of the Partnership are Eighth Income Properties, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group, Inc. ("PaineWebber"), and Properties Associates 1986, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General
Partner. 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 of 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 not greater than 5% of the gross proceeds
from the sale of Partnership Units. In connection with the sale of each
property, the Adviser may receive a disposition fee, payable upon
liquidation of the Partnership, 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.
Pursuant to 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 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 5% based upon
their adjusted capital contributions), in addition to the asset management
fee referred to above, for services rendered. The Adviser earned no
management fees during the three-year period ended September 30, 1996.
Both the Managing General Partner and the Adviser receive reimbursements
for actual amounts paid on the Partnership's behalf including offering and
organization costs (not to exceed 5% of the gross offering proceeds of the
offering), acquisition expenses incurred in investigating or acquiring real
property investments and any other costs for goods or services used for or
by the Partnership.
Included in general and administrative expenses for the years ended
September 30, 1996, 1995 and 1994 is $90,000, $91,000 and $111,000,
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"), an affiliate of the Managing General
Partner, 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 $2,000, $4,000
and $3,000 (included in general and administrative expenses) for managing
the Partnership's cash assets during fiscal 1996, 1995 and 1994,
respectively.
4. Operating Investment Property
-----------------------------
The Partnership acquired a 100% interest in the Marriott Suites Hotel
located in Newport Beach, California from the Marriott Corporation
("Marriott") 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.
The Hotel was managed for the Partnership by Marriott and its affiliates
(the "Manager"), as described below. The Partnership purchased the operating
investment property for approximately $39,946,000, including an acquisition
fee paid by Marriott to the Adviser of $580,000 and a $325,000 guaranty fee
paid to Marriott. The Hotel was acquired subject to a first mortgage loan
with an initial principal balance of $29,400,000 (see Note 6). In addition,
the Partnership provided an initial working capital reserve of approximately
$554,000 to the Manager for Hotel operations.
Since the time of its acquisition, the Hotel experienced substantial
recurring losses after debt service. Through September 30, 1991, the Hotel's
cash flow deficits were funded by Marriott, as discussed further below.
After Marriott had fulfilled its obligation to fund deficits, the
Partnership and the lender reached an agreement, which was finalized in
fiscal 1993, to modify the terms of the first mortgage loan. As discussed
further in Note 6, the Partnership was in default of the modified terms of
the first mortgage loan agreement secured by the Newport Beach Marriott
Suites Hotel as of September 30, 1995. During fiscal 1995, the Partnership
reached the limit on the debt service deferrals imposed by the 1993 loan
modification agreement. 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 subsequently received formal notice of default
from this new lender. Subsequently, the Partnership received a notice of a
foreclosure sale scheduled for August 7, 1996, at which time title to the
Newport Beach Marriott Suites Hotel was transferred to the mortgage lender.
The transfer of the Hotel's title to the lender was accounted for as a
troubled debt restructuring in accordance with Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." As a result, the Partnership recorded an
extraordinary gain from settlement of debt obligation of approximately
$23,459,000, partially offset by a loss on transfer of assets at foreclosure
of approximately $137,000. The extraordinary gain arises due to the fact
that the balance of the mortgage loan and related accrued interest exceeded
the estimated fair market value of the Hotel investment, and other assets
transferred to the lender, at the time of the foreclosure. The loss on
transfer of assets results from the fact that the net carrying value of the
Hotel exceeded its estimated fair value at the time of the foreclosure.
As discussed in Note 2, 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 in
fiscal 1995. The impairment loss resulted because, in management's judgment,
the 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, were 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. Such appraisals
make use of a combination of certain generally accepted valuation
techniques, including direct capitalization, discounted cash flows and
comparable sales analysis.
The guaranty fee referred to above was paid in exchange for an agreement
(the "Payment Agreement") by Marriott to fund, for a four-year period, the
amounts necessary in the event that revenues generated by the Hotel were not
sufficient to pay: (1) debt service payments on the mortgage loan; (2) a
cumulative preferred return to the Partnership equal to 7.5% of the
Partnership's Net Investment, as defined (the "Preferred Return"); and (3)
operating losses incurred by the Hotel; if any, up to $5,000,000. The
Partnership had no obligation to reimburse Marriott for the first $1,500,000
of funds so advanced. The payment by Marriott Corporation of the $1,500,000
non-refundable advance was accounted for as a reduction to the basis of the
operating investment property. Funds advanced in excess of $1,500,000 were
in the form of non-recourse loans (the "Loans"). The Loans were payable to
Marriott, with interest on the amounts advanced calculated at a monthly
compounded rate of 10% per annum, only under certain circumstances, out of
excess proceeds generated by any sale or refinancing of the Hotel. At the
date of foreclosure, August 7, 1996, the loan payable to Marriott
Corporation totalled $6,875,000, including accrued interest. Since the loans
were only payable out of sale or refinancing proceeds, the foreclosure of
the Hotel resulted in the cancellation of this debt obligation, which is
included in the extraordinary gain discussed further above.
The following is a summary of the Newport Beach Hotel's revenues and
operating expenses from October 1, 1995 through the date of foreclosure,
August 7, 1996 and for the years ended September 30, 1995 and 1994,
respectively (in thousands):
1996 1995 1994
---- ---- ----
Revenues:
Guest rooms $6,187 $6,465 $6,121
Food and beverage 1,449 1,621 1,604
Other revenues 757 426 397
------ ------ ------
$8,393 $8,512 $8,122
====== ====== ======
Operating expenses:
Guest rooms $1,622 $1,772 $1,681
Food and beverage:
Cost of sales 390 443 426
Operating expenses 753 883 928
Other operating expenses 659 850 913
Management fees - Manager 161 170 162
Selling, general and administrative 1,340 1,370 1,325
Repairs and maintenance 381 424 421
Real estate taxes, net of refunds
of $731 in 1995 325 (362) 410
------ ------ ------
$5,631 $5,550 $6,266
====== ====== ======
The base management fee paid to the Manager was equal to 2% of the gross
revenues generated by the Hotel. The operating expenses of the Hotel noted
above included significant transactions with the Manager. All Hotel
employees were employees of the Manager and the related payroll costs were
allocated to the Hotel operations by the Manager. A majority of the supplies
and food purchased during fiscal 1996, 1995 and 1994 were purchased from an
affiliate of the Manager. In addition, the Manager also allocated certain
central reservation center expenses, employee benefit costs, advertising
costs and management training costs to the Hotel.
Due from Marriott Corporation at September 30, 1995 consisted principally of
a real estate tax refund received by Marriott Corporation on behalf of the
Partnership. During fiscal 1996, this amount was remitted to the mortgage
holder as additional debt service (see Note 6).
<PAGE>
5. Investments in Joint Venture Partnerships
-----------------------------------------
The Partnership has investments in four joint ventures that own five
operating investment properties. These joint ventures are accounted for
under the equity method in the Partnership's financial statements. Under
the equity method the investment in a joint venture is carried at cost
adjusted for the Partnership's share of the ventures' earnings and losses
and distributions. Condensed combined financial statements of these joint
ventures follow.
Condensed Combined Balance Sheets
---------------------------------
September 30, 1996 and 1995
(in thousands)
Assets
------
1996 1995
---- ----
Current assets $ 5,422 $ 391
Operating investment properties, net 14,255 19,741
Other assets 416 1,226
-------- ---------
$ 20,093 $ 21,358
======== =========
Liabilities and Partners' Capital (Deficit)
-------------------------------------------
Current liabilities $ 12,213 $ 1,199
Other liabilities 295 272
Long-term debt, less current portion 8,031 19,600
Partnership's share of combined capital
(deficit) (349) 160
Co-venturers' share of combined capital
(deficit) (97) 127
------- ---------
$20,093 $ 21,358
======= =========
Reconciliation of Partnership's Investment
------------------------------------------
1996 1995
---- ----
Partnership's share of capital
(deficit), as shown above $ (349) $ 160
Excess basis due to investment in
ventures, net (1) 127 252
Allowance for possible investment
loss recorded by Partnership (2) (588) -
------- ---------
Investment in joint ventures, at equity $ (810) $ 412
======= =========
(1) At September 30, 1996 and 1995, the Partnership's investment exceeds its
share of the combined joint venture capital accounts and liabilities by
approximately $127,000 and $252,000, respectively. These amounts, which
relate to certain expenses incurred by the Partnership in connection with
acquiring its joint venture investments, are being amortized on a
straight-line basis over the estimated remaining holding period of the
properties.
(2) During fiscal 1996, the Partnership recognized a provision for possible
investment loss of $588,000 to adjust the carrying value of its joint
venture investment in the Norman Crossing Shopping Center to its estimated
net realizable value (see discussion below).
<PAGE>
Condensed Combined Summary of Operations
For the years ended September 30, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Rental revenues and expense recoveries $ 3,864 $ 3,786 $ 3,668
Interest and other income 176 170 155
------- ------- -------
4,040 3,956 3,823
Interest expense 1,516 1,609 1,559
Property operating expenses 2,334 2,048 2,177
Depreciation and amortization 853 864 976
-------- -------- --------
4,703 4,521 4,712
-------- -------- --------
Net loss $ (663) $ (565) $ (889)
======== ========= ========
Net loss:
Partnership's share of combined
operations $ (586) $ (566) $ (1,025)
Co-venturers' share of combined
operations (77) 1 136
-------- -------- --------
$ (663) $ (565) $ (889)
======== ========= ========
Reconciliation of Partnership's Share of Operations
---------------------------------------------------
1996 1995 1994
---- ---- ----
Partnership's share of combined operations,
as shown above $ (586) $ (566) $(1,025)
Amortization of excess basis (126) (11) (11)
------- --------- --------
Partnership's share of ventures' losses $ (712) $ (577) $ (1,036)
======= ========= ========
The 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 joint ventures are restricted as to distributions.
Investment in joint ventures, at equity on the balance sheet is comprised of
the following joint venture investments (in thousands):
1996 1995
---- ----
Daniel Meadows II General Partnership $ 10 $ 19
Spinnaker Bay Associates (1,498) (1,082)
Maplewood Drive Associates 428 548
Norman Crossing Associates 250 927
-------- --------
$ (810) $ 412
======== ========
<PAGE>
The Partnership received cash distributions from the ventures as set forth
below (in thousands):
1996 1995 1994
---- ---- ----
Daniel Meadows II General Partnership $ - $ 61 $ 200
Spinnaker Bay Associates - 160 -
Maplewood Drive Associates - - 198
Norman Crossing Associates - - -
------- -------- -------
$ - $ 221 $ 398
====== ======== =======
A description of the ventures' properties and the terms of the joint venture
agreements are summarized as follows:
Daniel Meadows II General Partnership
-------------------------------------
On October 15, 1987, the Partnership acquired a general partnership interest
in Daniel Meadows II General Partnership (the "Joint Venture"), a Virginia
general partnership which was formed to develop, own and operate The Meadows
in the Park Apartments, a 200-unit apartment complex located in Birmingham,
Alabama. The Partnership's co-venture partner is an affiliate of Daniel
Realty Company.
The aggregate cash investment by the Partnership for its interest was
approximately $3,754,000 (including an acquisition fee of $223,000 paid to
the Adviser). On July 20, 1989, the Partnership paid $215,000 in additional
capital contributions to the joint venture pursuant to the terms of the
Partnership agreement. These funds were subsequently paid to Daniel Realty
Company in final settlement of the contingent portion of the purchase price
of the property. The project is encumbered by a nonrecourse first mortgage
loan with a principal balance of approximately $5,411,000 at September 30,
1996. The mortgage debt, in the initial principal amount of $5,500,000,
bears interest at a variable rate equal to the 30-day LIBOR rate plus 2.25%
(equivalent to a rate of approximately 7.6875% per annum as of September 30,
1996). The loan requires monthly interest and principal payments based on a
25-year amortization schedule and is scheduled to mature on February 5,
2000.
During fiscal 1991, the Partnership discovered that certain materials used
to construct the operating property were manufactured 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 between $1.6 and $2.1 million, not
including legal fees and other incidental costs. During fiscal 1993, the
insurance carrier deposited approximately $522,000 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 $1,714,000, which was
in addition to the $522,000 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, $1,491,000 had been
disbursed from the fiscal 1995 settlement proceeds for the renovations,
which were completed during fiscal 1996. In addition, included in rental
income in the above condensed combined summary of ventures' operations is
$109,000 and $165,000 during fiscal 1996 and 1995, respectively, of income
attributed to rent loss recovery for the apartment units taken out of
service to complete interior renovations. The cost of all structural
renovations including rent losses sustained during completion of the
renovations exceeded the insurance proceeds received by $51,000, which was
recorded as a loss in the venture's financial statements during fiscal 1996.
The Joint Venture Agreement provides that from available cash flow, after
the repayment of any optional loans made by the partners, the Partnership
will receive an 8% per annum cumulative preferred return on its funded
capital contributions ($3,788,000 at September 30, 1996) during the period
from October 14, 1987 to April 30, 1990 (the "Guaranty Period"), a
cumulative preferred return of 8% from May 1, 1990 to September 30, 1990; a
cumulative preferred return of 9% from October 1, 1990 to September 30, 1992
and a 10% cumulative preferred return thereafter. The general partners of
the co-venturer personally guaranteed payment of the Partnership's return
through April 30, 1990. Under the terms of the Agreement, the general
partners of the co-venturer were required to contribute capital of $141,562
to fund deficits in the Partnership's preference return during fiscal 1990
(through the end of the Guaranty Period). As of September 30, 1996, the
co-venturer was obligated to make additional capital contributions of
$96,822 with respect to shortfalls which accumulated through the expiration
of the Guaranty Period. Such amount is not recorded in the venture's
financial statements. Any excess cash remaining, after payment to the
Partnership of its preferred distribution, will be distributed 60% to the
Partnership and 40% to the co-venturer. In addition, the Partnership is
entitled to receive $2,500 annually as an investor servicing fee.
The Joint Venture Agreement generally provides that net sale proceeds, as
defined, shall be distributed (after payment of mortgage debt and other
indebtedness of the Joint Venture) as follows and in the following order of
priority: (1) to repay accrued interest and principal, in that order, on any
optional loans made by the partners, (2) to the Partnership in the amount of
any unpaid cumulative preferred return ($2,150,000 as of September 30,
1996), (3) to the Partnership until it has received cumulative distributions
equal to 115% of its funded capital contributions, (4) 100% to co-venturer
until they receive distributions equal to $375,000, (5) 70% to the
Partnership and 30% to co-venturer until $2,000,000 has been cumulatively
distributed and (6) thereafter, the balance, if any, 60% to the Partnership
and 40% to the co-venturer.
Taxable income from operations in each year shall be allocated to the
Partnership and the co-venturer in accordance with distributions of cash, to
the extent of such distributions, and then 60% to the Partnership and 40% to
the co-venturer, respectively. Through the date upon which the Partnership
has been allocated tax losses equal to $3,515,000, losses will be allocated
98% to the Partnership and 2% to the co-venturer, respectively. However, if
the co-venturer has a positive capital balance and the Partnership has a
zero or negative capital balance, then 100% of the tax losses will be
allocated to the co-venturer until its capital balance is reduced to zero.
Thereafter, net tax losses are allocated 60% to the Partnership and 40% to
the co-venturer. Allocations of income and loss for financial accounting
purposes have been made in conformity with the allocations of taxable income
or tax loss.
Generally, gains and losses arising from the sale or disposition of the
property are allocated first on the basis of the partners' capital balances
after consideration of any cash distributions generated from the sale or
disposition; thereafter, remaining gains and losses are allocated 60% to the
Partnership and 40% to the co-venturer.
If additional working capital is required in connection with the operating
property, it may be provided as optional loans by the Partnership and the
co-venturer in the proportion of 60% and 40%, respectively.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership
upon the occurrence of certain events. The management fee is 5% of rents
collected from the property and certain other income, as defined in the
management agreement.
Spinnaker Bay Associates
------------------------
On June 10, 1988, the Partnership acquired a general partnership interest in
Spinnaker Bay Associates (the "Joint Venture"), a California general
partnership, which was formed to own and operate the Bay Club Apartments and
Spinnaker Landing Apartments, two complexes located in Des Moines,
Washington comprised of 88 units and 66 units, respectively. The
Partnership's co-venture partner is an affiliate of Pacific Union Investment
Corporation.
The aggregate cash investment by the Partnership for its interest was
approximately $2,415,000 (including an acquisition fee of $310,000 paid to
the Adviser). Construction-related defects were discovered at both the Bay
Club and Spinnaker Landing apartment complexes during fiscal 1991. The
deficiencies and damages included lack of adequate fire blocking materials
in the walls and other areas and insufficient structural support, as
required by the Uniform Building Code. During 1991, Spinnaker Bay Associates
participated as a plaintiff in a lawsuit filed against the developer, which
also involved certain other properties constructed by the developer. The
suit alleged, among other things, that the developer failed to construct the
buildings in accordance with the plans and specifications, as warranted,
used substandard materials and provided inadequate workmanship. The joint
venture's claim against the developer was settled during fiscal 1991 for
$1,350,000. Such funds were received in December of 1991 and were recorded
by the joint venture as a reduction in the basis of the operating
properties. From the proceeds of this settlement, $450,000 was paid to legal
counsel in connection with the litigation and was capitalized as an addition
to the carrying value of the operating properties. In addition to the cash
received at the time of the settlement, the venture received a note in the
amount of $161,500 from the developer which was due in 1994. During fiscal
1993, the venture agreed to accept a discounted payment of $113,050 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 $351,000 from its
pursuit of claims against certain subcontractors of the development company
and other responsible parties. Additional settlement proceeds totalling
approximately $402,000 were collected during fiscal 1995. As of September
30, 1995, all claims had been settled and no additional proceeds were
anticipated.
As part of the initial settlement, the venture also negotiated a loan
modification agreement which provided the majority of the additional funds
needed to complete the repairs to the operating properties and extended the
maturity date for repayment of the obligation to December 1996. Under the
terms of the loan modification, which was executed in December 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, totalled approximately $1,300,000 as of September 30, 1996. The
total obligation to the first mortgage holder for both properties totalled
$6,153,000 as of September 30, 1996. 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.
In May 1996, Spinnaker Bay Associates did not make its required debt
service payments under the mortgage loan agreements and the loans went into
default. Effective September 18, 1996, the venture partners entered into a
Property Disposition Agreement with the lender. Under the terms of the
agreement, the lender agreed to delay foreclosure of the properties for
five months to provide the venture with an opportunity to complete a sale.
Any sale of the properties is expected to be for an amount significantly
below the outstanding debt balance. However, under the terms of the
agreement with the lender, the Partnership and the co-venture partner can
qualify to receive a nominal payment from the sales proceeds if a sale is
completed by the end of the second quarter of fiscal 1997 and certain other
conditions are met. As part of the agreement, a receiver was appointed for
the property and will be responsible for the collection of rents and the
payment of operating expenses through the end of the forbearance period.
These conditions raise substantial doubt about the venture's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The total assets, total liabilities, gross revenues and total
expenses of Spinnaker Bay Associates included in the above condensed
combined balance sheet and summary of operations as of and for the year
ended September 30, 1996 amounted to $4,871,000, $6,489,000, $950,000 and
$1,358,000, respectively.
In December 1996, the Spinnaker Bay joint venture executed a purchase and
sale agreement with an unrelated third party to sell the properties for an
amount less than the total debt obligation. If the transaction were to
close and the conditions referred to above were met, the Partnership could
end up receiving a nomimal amount from the proceeds of the sale
transaction. However, the sale remains contingent upon the buyer's due
diligence and the receipt of a financing commitment. Accordingly, there are
no assurances that the transaction will be consummated. The Partnership has
a large negative carrying value for its investment in Spinnaker Bay
Associates as of September 30, 1996 because prior year equity method losses
and distributions have exceeded the Partnership's investments in the
venture. Consequently, the Partnership will recognize a gain upon either
the sale or the foreclosure of the operating investment properties.
Taxable income from operations is to be allocated in accordance with the net
cash flow distributions described above. Tax losses from operations are to
be allocated between the Partnership and the co-venturer in proportion to
net cash flow actually distributed or distributable during any fiscal year.
Interest expense on loans from the venture partners are specifically
allocated to the respective venture partners. Allocations of income and loss
for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss. Generally, gains and losses
arising from a sale of the property are to be allocated first on the basis
of the partners' capital balances; thereafter, remaining gains and losses
are to be allocated 80% to the Partnership and 20% to the co-venturer.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership
upon the occurrence of certain events. The management fee is equal to the
greater of 5% of gross rents collected from the property or $3,000 a month.
In addition, under an amendment to the joint venture agreement and as
consideration for services provided in conjunction with the litigation
discussed above, the venture paid the manager a fee of $29,000 and $21,000
during fiscal 1995 and 1994, respectively. No such fee was paid during 1996.
Maplewood Drive Associates
--------------------------
On June 14, 1988, the Partnership acquired a general partnership interest in
Maplewood Drive Associate (the "Joint Venture") which was formed to own and
operate Maplewood Park Apartments, a 144-unit apartment complex located in
Manassas, Virginia. The Partnership's co-venture partner is Maplewood
Associates Limited Partnership, an affiliate of Amurcon
Corporation of Virginia.
The original aggregate cash investment by the Partnership for its interest
was approximately $2,563,000 paid to the Joint Venture. Approximately
$800,000 of such amount was used to fund the Guaranty Escrow, $50,000 was
placed in a reserve to pay for the cost of certain improvements and the
remaining portion of such amount was distributed to the co-venturer. The
Partnership also paid the Adviser an acquisition fee in the amount of
$143,000 in connection with acquiring the investment. The property is
encumbered by a nonrecourse first mortgage note with a balance of
$5,545,000 at September 30, 1996. The mortgage debt secured by the
Maplewood Park Apartments was provided with tax-exempt revenue bonds issued
by a local housing authority. The bonds are secured by a standby letter of
credit issued to the joint venture by a bank. The letter of credit, which
is scheduled to expire in October 1998, is secured by a first mortgage on
the venture's operating property. The revenue bonds bear interest at a
floating rate that is determined daily by a remarketing agent based on
comparable market rates for similar tax-exempt obligations. Such rates
generally fluctuated between 3.5% and 4.5% per annum during fiscal 1996. In
addition, the venture is obligated to pay a letter of credit fee, a
remarketing fee and a housing authority fee under the terms of the
financing agreement. The operating property produces excess net cash flow
after the debt service and related fees due under the terms of the bond
financing arrangement because of the low tax-exempt interest rate paid on
the bonds. However, as part of the joint venture agreement the
Partnership's co-venture partner receives a guaranteed cash distribution on
a monthly basis to the extent that the interest cost of the venture's debt
is less than 8.25% per annum. Conversely, the co-venture partner is
obligated to contribute funds to the venture to the extent that the
interest cost exceeds 8.25%. Over the past three years, the interest rate
differential distributions to the co-venturer under the foregoing
arrangement have averaged $189,000 per year. As of September 30, 1996, the
Partnership and the co-venturer were not in agreement regarding the
cumulative cash flow distributed to the co-venturer pursuant to this
interest rate differential calculation. The Partnership believes that the
co-venturer has received an additional $79,000 over the amount it is
entitled to under the terms of the joint venture agreement through
September 30, 1996. The ultimate resolution of this dispute cannot be
determined at the present time.
Since all of the economic benefits of the Maplewood joint venture currently
accrue to the co-venture partner in the form of the interest rate
differential payments described above, management concluded that continued
funding of the venture's annual cash flow deficits would not be prudent in
light of the Partnership's limited remaining cash reserves. Subsequently,
management has made a proposal to the co-venture partner to sell the
Partnership's interest in the joint venture, but no agreement has been
reached to date. Furthermore, at the present time the co-venture partner
has not funded a required December 1996 principal payment on the first
mortgage loan, which could result in the venture being declared in default
of the mortgage loan agreement. The current estimated market value of the
Maplewood property, while higher than the property's carrying value, is at
or below the amount of the outstanding principal balance owed on the first
mortgage loan. As a result, even if the payment default were to be cured,
there are no assurances that the letter of credit underlying the mortgage
loan will be renewed upon its expiration. The ultimate outcome of this
situation cannot be determined at the present time. The net carrying value
of the Partnership's investment in the Maplewood joint venture was $428,000
as of September 30, 1996. Management believes that this net carrying value
is recoverable if a sale agreement can be reached with the co-venture
partner or if the co-venture partner cures the principal payment deliquency
and the letter of credit can be extended. If, however, a sale agreement
cannot be achieved and a foreclosure of the operating property results, the
Partnership would recognize a loss equal to its remaining investment
balance.
The co-venturer unconditionally guaranteed, for a 60-month period (the
Guaranty Period), to fund cash to the Joint Venture in an amount necessary
to fund any Joint Venture negative net cash flows, as defined, and to ensure
that the Joint Venture had sufficient funds to distribute to the
Partnership, on a monthly basis, no less than an 8% per annum preferred
return on the Partnership's Net Investment of $2,350,000. Amounts
contributed by the co-venturer pursuant to the foregoing guaranty through
June 14, 1991 were treated as Non-Refundable Capital Contributions. From
June 15, 1991 to June 14, 1993, amounts contributed by the co-venturer under
the terms of the guaranty are treated as Refundable Guaranty Contributions,
bearing interest at 10% per annum. Refundable Guaranty Contributions
totalled $532,129 through the end of the guaranty period. After June 14,
1993, when the Joint Venture requires funds to meet its cash needs, the
Partnership and the co-venturer were to contribute the funds required
("Additional Contributions") in the proportions of 70% and 30%,
respectively. Such contributions will bear interest at 1% per annum over the
prime rate of a certain bank.
During the life of the joint venture, with certain exceptions, the
co-venturer's share of any distributable funds, as defined in the Joint
Venture Agreement, are to be deposited in an escrow account to be used
solely to make required principal payments on the joint venture's
outstanding debt. Amounts actually used from such escrow account to make
principal payments shall be considered capital contributions ("Mandatory
Capital Contributions"). No Mandatory Contributions were made during the
three-year period ended September 30, 1996. To the extent that the total
cost of debt, as defined in the Joint Venture Agreement, exceeds a simple
interest rate of 8.25% per annum, the co-venturer is obligated to make
contributions in the amount of such excess ("Interest Rate Contributions").
Net cash flow from operations of the Joint Venture is to be distributed
monthly in the following order of priority: (1) 100% to the co-venturer to
the extent that the cost of debt to the Joint Venture is less than 8.25%;
(2) 100% to the Partnership until the Partnership has received distributions
pursuant to the Partnership Agreement equal to an 8% per annum cumulative
return on the Partnership's Net Investment of $2,350,000; (3) during the
Guaranty Period only, 100% to the co-venturer to the extent of the excess,
if any, of $15,667 over the amount distributed to the Partnership during any
month from the Guaranty Escrow; (4) 100% to the Partnership until the
Partnership has received certain cumulative distributions per the
Partnership Agreement; (5) 100% to pay accrued interest on Additional
Contributions and (6) the balance, if any, is to be distributed 70% to the
Partnership and 30% to the co-venturer. As of September 30, 1996, the
Partnership and the co-venturer were not in agreement regarding the
cumulative cash flow distributed to the co-venturer pursuant to (1) above.
The Partnership believes that the co-venturer has received an additional
$79,000 over the amount it is entitled to under the terms of the Joint
Venture Agreement through September 30, 1996. The ultimate resolution of
this dispute cannot be determined at the present time.
Taxable income, after certain specific allocations of income and expense, is
generally allocated to the Partnership and the co-venturer in any year to
the extent of and in the same proportions as actual cash distributions from
operations, with any remaining income being allocated 70% to the Partnership
and 30% to the co-venturer. In the event there are no distributable funds
from operations, net income is allocated 70% to the Partnership and 30% to
the co-venturer. Tax losses are generally allocated 99% to the Partnership
and 1% to the co-venturer. Allocations of income and loss for financial
reporting purposes have been made in conformity with the allocations of
taxable income or loss.
Net proceeds from the sale or refinancing of the Property would be
distributed in the following order of priority: (1) 100% to the venture
partners to repay accrued interest and principal on any Additional
Contributions (2) 100% to repay accrued interest and principal on Refundable
Guaranty Contributions, as defined, made to the Joint Venture; (3) 100% to
the Partnership to the extent of any unpaid cumulative preference return;
(4) 100% to the Partnership in an amount equal to $2,605,000; (5) 100% to
the co-venturer in the amount of any previously unreturned Mandatory Capital
Contributions made to the Joint Venture; (6) 100% to the co-venturer in an
amount equal to $150,000; and (7) the balance, if any, 70% to the
Partnership and 30% to the co-venturer.
The Joint Venture entered into a management contract with Amurcon Realty
Corporation, an affiliate of the co-venturer, which is cancellable at the
option of the Partnership upon the occurrence of certain events. In
consideration for their services, the property manager will receive: (i)
during the Guaranty Period, a base monthly management fee equal to 2 1/2% of
gross rents collected, plus an incentive management fee equal to all Joint
Venture cash flow, calculated on an annualized basis, in excess of $206,800,
but in no event shall such incentive management fee be in excess of 2 1/2%
of gross rents collected for such month, and (ii) after the Guaranty Period,
a monthly management fee equal to 5% of gross rents collected. To the extent
the incentive management fee is not earned in any month, it shall lapse with
respect to such period.
Norman Crossing Associates
--------------------------
On September 15, 1989, the Partnership acquired a general partnership
interest in Norman Crossing Associates (the "Joint Venture"), a North
Carolina general partnership which was formed to own and operate the Norman
Crossing Shopping Center, a 52,000 square foot shopping center located in
Charlotte, North Carolina. The Partnership's co-venture partner is an
affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest in Phase I
was approximately $1,261,000 (including an acquisition fee of $71,000 paid
to the Adviser). The project is encumbered by a nonrecourse first mortgage
loan of approximately $2,715,000 at September 30, 1996. This mortgage loan
is scheduled to mature in November 2002. In October 1993, the property's
anchor tenant vacated the shopping center. The tenant, which occupied 26,752
square feet of the property's net leasable area, is a national credit
grocery store chain which 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. 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 20,552 square feet of the former
anchor's space and will sublease the remaining 6,200 square feet. As a
result of the new health club 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 this time. The joint venture
may have to continue to make tenant improvements and grant 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 re-stabilization for the shopping center, would be provided
primarily by the Partnership. During fiscal 1996, the Partnership funded
cash flow deficits of approximately $16,000 to the joint venture. The
Partnership is prepared to fund any additional operating deficits of the
Norman Crossing joint venture in the near-term. However, given the
Partnership's limited capital resources, the Partnership cannot fund such
deficits indefinitely. Consequently, the Partnership may look to sell the
operating property or its interest in the joint venture in the near future.
At the present time, market values for retail shopping centers in certain
markets are being adversely impacted by the effects of overbuilding and
consolidations among retailers which have resulted in an oversupply of
space. Based on the current estimated fair value of the Norman Crossing
Shopping Center, a sale under the current market conditions would not result
in any significant proceeds above the mortgage loan balance. In light of the
above circumstances and a resulting reassessment of the Partnership's likely
remaining holding period for the Norman Crossing investment, the Partnership
recorded an allowance for possible investment loss of $588,000 in fiscal
1996 to write down the net carrying value of the equity interest to
management's estimate of its net realizable value as of September 30, 1996.
The Joint Venture Agreement provides that from available cash flow the
Partnership will receive an 8% per annum cumulative preference return on
$1,115,000 during the period from September 15, 1989 to September 14, 1992
(the "Guaranty Period"); a cumulative preference return of 9% from September
15, 1992 to September 14, 1993; and a 10% cumulative preference return
thereafter, payable monthly from available cash flow, as defined. The
general partners of the co-venturer have personally guaranteed a 7.5%
minimum return on the Partnership's net investment of $1,115,000 through
September 14, 1992. Any excess cash remaining, after payment to the
Partnership of its distribution, will first be used to pay interest, but not
principal, compounded annually on additional loans made by the Partnership
and the co-venturer. Any remaining cash flow shall be distributed 80% to the
Partnership and 20% to the co-venturer. As of September 30, 1996, there was
a cumulative unpaid distribution of $419,000. The cumulative preferred
distribution will be paid to the Partnership if and when there is available
future cash flow. Accordingly, such amount is not accrued in the venture's
financial statements.
The Joint Venture Agreement generally provides that net sale and refinancing
proceeds, as defined, shall be distributed (after payment of mortgage debt
and other indebtedness of the Joint Venture) as follows and in the following
order of priority: (1) to the Partnership until the Partnership has received
the cumulative annual preference return not previously paid, (2) to the
Partnership until it has received an amount equal to its gross investment,
(3) to the Partnership and to the co-venturer in proportion to additional
loans made until both have received the return of all additional loans plus
unpaid interest and (4) thereafter, the balance, if any, 80% to the
Partnership and 20% to the co-venturer.
Taxable income from operations in each year shall be allocated to the
Partnership and the co-venturer as follows: (1) all deductions for
depreciation with respect to the property shall be allocated to the
Partnership (2) income up to the amount of net cash flow distributed in each
year shall be allocated to the Partnership and the co-venturer in proportion
to the amount of the distributions to each partner for such year. Tax losses
will be allocated each year up to the sum of the positive capital accounts
of the Partnership and co-venturer to the partners with positive capital
accounts in proportion to such positive capital accounts. All other income
and losses will be allocated 80% to the Partnership and 20% to the
co-venturer. Allocations of income and loss for financial accounting
purposes have been made in conformity with the allocations of taxable income
or tax loss.
The Joint Venture entered into a property management contract with an
affiliate of the co-venturer, cancellable at the option of the Partnership
upon the occurrence of certain events. The management fee is 4% of rents
collected from the property and certain other income, as defined in the
management agreement.
6. Mortgage Debt Payable
---------------------
Mortgage debt payable at September 30, 1995 consisted of (in thousands):
1995
----
Permanent mortgage loan secured by
the Marriott Suites Hotel-Newport
Beach (see Note 4), bearing
interest at 10.09% per annum from
disbursement through August 10,
1992. Interest accrued at 9.59% per
annum from August 11, 1992 through
August 10, 1995 and at a variable
rate of adjusted LIBOR (5.9141% at
September 30, 1995), 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 was to be
due. See discussion below. $32,060
Nonrecourse senior promissory notes
payable, bearing interest at a
variable rate of adjusted LIBOR
(5.9141% at September 30, 1996), as
defined, plus one percent per
annum. Payments on the loan were to
be made from available cash flow of
the Newport Beach Marriott Suites
Hotel (see discussion below). 4,000
-------
$36,060
=======
On January 25, 1993, the Managing General Partner and the lender on the
Newport Beach Marriott 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). 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.
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 was 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 accrued at a rate of 4% per annum
on the loan amount of $32,060,518 and the additional loan facility of
$4,000,000. The Partnership continued to remit the net cash flow produced by
the Hotel to the lender after reaching the limitation on the additional loan
facility. 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 subsequently received formal notice of default
from this new lender. Subsequently, the Partnership received a notice of a
foreclosure sale scheduled for August 7, 1996, at which time title to the
Hotel was transferred to the mortgage lender. Given the significant
deficiency which existed between the estimated fair value of the Hotel and
the outstanding indebtedness, management believed that it would not be
prudent to use any of the Partnership's capital resources to cure the
default or contest the foreclosure action 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. See Note 4 for a discussion of the gains and losses
resulting from this foreclosure transaction.
7. Legal Proceedings
-----------------
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court
for the Southern District of New York concerning PaineWebber Incorporated's
sale and sponsorship of various limited partnership investments, including
those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together
"PaineWebber"), among others, by allegedly dissatisfied partnership
investors. In March 1995, after the actions were consolidated under the
title In re PaineWebber Limited Partnership Litigation, the plaintiffs
amended their complaint to assert claims against a variety of other
defendants, including Eighth Income Properties, Inc. and Properties
Associates 1986, L.P. ("PA1986") which are the General Partners of the
Partnership and affiliates of PaineWebber. On May 30, 1995, the court
certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Income
Properties Eight Limited Partnership, PaineWebber, Eighth Income Properties,
Inc. and PA1986 (1) failed to provide adequate disclosure of the risks
involved; (2) made false and misleading representations about the safety of
the investments and the Partnership's anticipated performance; and (3)
marketed the Partnership to investors for whom such investments were not
suitable. The plaintiffs, who purported to be suing on behalf of all persons
who invested in PaineWebber Income Properties Eight Limited Partnership,
also alleged that following the sale of the partnership interests,
PaineWebber, Eighth Income Properties, Inc. and PA1986 misrepresented
financial information about the Partnerships value and performance. The
amended complaint alleged that PaineWebber, Eighth Income Properties, Inc.
and PA1986 violated the Racketeer Influenced and Corrupt Organizations Act
("RICO") and the federal securities laws. The plaintiffs sought unspecified
damages, including reimbursement for all sums invested by them in the
partnerships, as well as disgorgement of all fees and other income derived
by PaineWebber from the limited partnerships. In addition, the plaintiffs
also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms
under which the parties have agreed to settle the case. Pursuant to that
memorandum of understanding, PaineWebber irrevocably deposited $125 million
into an escrow fund under the supervision of the United States District
Court for the Southern District of New York to be used to resolve the
litigation in accordance with a definitive settlement agreement and plan of
allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted
a definitive settlement agreement which has been preliminarily approved by
the court and provides for the complete resolution of the class action
litigation, including releases in favor of the Partnership and the General
Partners, and the allocation of the $125 million settlement fund among
investors in the various partnerships at issue in the case. As part of the
settlement, PaineWebber also agreed to provide class members with certain
financial guarantees relating to some of the partnerships. The details of
the settlement are described in a notice mailed directly to class members at
the direction of the court. A final hearing on the fairness of the proposed
settlement was held in December 1996, and a ruling by the court as a result
of this final hearing is currently pending.
In 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 alleged, among other things,
that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating
the risks and failing to state material facts concerning the investments.
The complaint sought compensatory damages of $15 million plus punitive
damages against PaineWebber.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court
against PaineWebber Incorporated and various affiliated entities concerning
the plaintiff's purchases of various limited partnership interests,
including those offered by the Partnership. The complaint is substantially
similar to the complaint in the Abbate action described above, and sought
compensatory damages of $3.4 million plus punitive damages.
Mediation with respect to the Abbate and Bandrowski actions described
above was held in December 1996. As a result of such mediation, a tentative
settlement between PaineWebber and the plaintiffs was reached which would
provide for complete resolution of both actions. PaineWebber anticipates
that releases and dismissals with regard to these actions will be received
by February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled
to indemnification for expenses and liabilities in connection with the
litigation described above. However, PaineWebber has agreed not to seek
indemnification for any amounts it is required to pay in connection with the
settlement of the New York Limited Partnership Actions. At the present time,
the General Partners cannot estimate the impact, if any, of the potential
indemnification claims on the Partnership's financial statements, taken as a
whole. Accordingly, no provision for any liability which could result from
the eventual outcome of these matters has been made in the accompanying
financial statements.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Eight Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined
Joint Ventures of Paine Webber Income Properties Eight Limited Partnership as of
September 30, 1996 and 1995, 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, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Joint Ventures of Paine Webber Income Properties Eight Limited
Partnership at September 30, 1996 and 1995, and the combined results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
December 26, 1996
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
September 30, 1996 and 1995
(In thousands)
Assets
------
1996 1995
---- ----
Current assets:
Cash and cash equivalents $ 285 $ 116
Escrow deposits 231 206
Accounts receivable 52 31
Prepaid expenses 34 38
Properties held for sale, net 4,820 -
------- -------
Total current assets 5,422 391
Operating investment properties:
Land 4,126 4,882
Buildings, improvements and equipment 17,055 22,749
------- -------
21,181 27,631
Less accumulated depreciation (6,926) (7,890)
------- -------
Net operating investment properties 14,255 19,741
Restricted cash 205 981
Deferred expenses and other assets 211 245
------- -------
$20,093 $21,358
======= =======
Liabilities and Venturers' Capital (Deficit)
--------------------------------------------
Current liabilities:
Current portion of long-term debt $11,793 $ 222
Accounts payable 160 722
Accounts payable - affiliates 48 47
Accrued real estate taxes 54 55
Accrued interest 70 74
Tenant security deposits 58 54
Deferred rental revenue 14 11
Distributions payable to venturers 16 14
------- -------
Total current liabilities 12,213 1,199
Notes payable to venturers 261 248
Other liabilities 34 24
Long-term debt 8,031 19,600
Venturers' capital (deficit) (446) 287
------- -------
$20,093 $21,358
======= =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT)
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Rental income and expense recoveries $3,864 $3,786 $3,668
Interest and other income 176 170 155
------ ------ ------
4,040 3,956 3,823
Expenses:
Interest expense 1,516 1,609 1,559
Depreciation expense 841 860 966
Real estate taxes 356 330 271
Repairs and maintenance 682 537 653
Salaries and related expenses 142 140 138
Utilities 265 246 251
General and administrative 655 613 682
Management fees 183 182 182
Amortization expense 12 4 10
Loss due to structural repairs 51 - -
------ ------ -------
4,703 4,521 4,712
------ ------ -------
Net loss (663) (565) (889)
Contributions from venturers 107 106 70
Distributions to venturers (177) (160) (677)
Venturers' capital, beginning of year 287 906 2,402
------ ------ -------
Venturers' capital (deficit), end of year $ (446) $ 287 $ 906
======= ====== =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (663) $ (565) $ (889)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 853 864 976
Interest converted into note payable 204 108 107
Interest added to partner loans 13 14 90
Changes in assets and liabilities:
Escrow deposits (25) 3 243
Restricted cash 776 (832) 167
Accounts receivable (21) 5 (4)
Prepaid expenses 4 12 (5)
Deferred expenses and other assets 22 26 45
Accounts payable (562) 528 24
Accounts payable - affiliates 1 (1) 1
Accrued real estate taxes (1) 4 3
Distributions payable to partners 2 (3) (4)
Deferred rental revenue 3 (1) 7
Other liabilities 10 (6) (40)
Accrued interest (4) 35 (141)
Tenant security deposits 4 5 5
------ ------ --------
Total adjustments 1,279 761 1,474
------ ------ --------
Net cash provided by
operating activities 616 196 585
------ ------ --------
Cash flows from investing activities:
Receipt of insurance recoveries - 542 464
Additions to operating investment
properties (175) (326) (326)
------ ------ --------
Net cash (used in) provided
by investing activities (175) 216 138
------ ------ --------
Cash flows from financing activities:
Capital contributions 107 89 70
Distributions to venturers (177) (160) (682)
Advances from venturers - 61 84
Repayment of advances from venturers - (315) -
Proceeds from issuance of long-term debt - 5,364 -
Repayment of long-term debt (202) (5,552) (192)
------ ------ -------
Net cash used in financing
activities (272) (513) (720)
------ ------ -------
Net increase (decrease) in cash and
cash equivalents 169 (101) 3
Cash and cash equivalents,
beginning of year 116 217 214
------ ------ -------
Cash and cash equivalents, end of year $ 285 $ 116 $ 217
====== ====== =======
Cash paid during the year for interest $1,303 $1,492 $ 1,465
===== ====== =======
See accompanying notes.
<PAGE>
COMBINED JOINT VENTURES OF
PAINE WEBBER INCOME PROPERTIES EIGHT
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 Eight Limited Partnership (Combined Joint
Ventures) include the accounts of Daniel Meadows II General Partnership, a
Virginia general partnership; Spinnaker Bay Associates, a California general
partnership; Maplewood Drive Associates, a Virginia general partnership and
Norman Crossing Associates, a North Caroling general partnership. The
financial statements of the Combined Joint Ventures are presented in
combined form due to the nature of the relationship between each of the
co-venturers and Paine Webber Income Properties Eight Limited Partnership
(PWIP8) which owns a majority financial interest but does not have voting
control in each joint venture.
The dates of PWIP8's acquisition of interests in the joint ventures are
as follows:
Date of Acquisition
Joint Venture of Interest
------------- -----------
Daniel Meadows II General Partnership 10/15/87
Spinnaker Bay Associates 6/10/88
Maplewood Drive Associates 6/14/88
Norman Crossing Associates 9/15/89
The four joint ventures described above own five operating investment
properties, which consist of four multi-family apartment complexes and one
retail shopping center. However, as discussed further in Note 3, Spinnaker
Bay Associates is currently in default of its mortgage debt obligations and
is in jeopardy of having its properties foreclosed upon. These matters
raise substantial doubt about the ability of Spinnaker Bay Associates to
continue as a going concern. The accompanying financial statements do not
include any adjustments to reflect the classification of assets or the
amounts and classification of liabilities that might result from the
possible inability of Spinnaker Bay Associates to continue as a going
concern.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of September 30, 1996 and revenues and
expenses for the year ended September 30, 1996. Actual results could differ
from the estimates and assumptions used.
Basis of Presentation
---------------------
Certain of the records of the Combined Joint Ventures are maintained on
the income tax basis of accounting and are adjusted, principally for
depreciation, to conform with generally accepted accounting principles for
financial reporting purposes.
Operating Investment Properties
-------------------------------
The operating investment properties are carried at the lower of cost,
reduced by accumulated depreciation and certain insurance proceeds, or net
realizable value. The net realizable value of a property held for long-term
investment purposes is measured by the recoverability of the investment
through expected future cash flows on an undiscounted basis, which may
exceed the property's current market value. The net realizable value of a
property held for sale approximates its market value. Depreciation expense
is computed on a straight-line basis over the estimated useful lives of the
buildings, improvements and equipment, generally, five to forty years.
Professional fees (including acquisition fees paid to an affiliate of
PWIP8), and other costs incurred in connection with the acquisition of the
properties have been capitalized and are included in the cost of the land
and buildings.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" ("Statement 121"), which requires
impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. Statement 121 is effective for
financial statements for years beginning after December 15, 1995. The
Combined Joint Ventures will adopt Statement 121 in fiscal 1997 and, based
on current circumstances, management does not believe the adoption will have
a material effect on results of operations or financial position (see Note 3
for a further discussion.)
Deferred Expenses
-----------------
Deferred expenses consist primarily of loan fees which are being
amortized over the terms of the related loans. Such amortization expense is
included in interest expense on the accompanying statements of operations.
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 highly liquid investments with original maturity dates
of 90 days or less to be cash equivalents.
Escrowed and Restricted Cash
----------------------------
In accordance with the joint venture agreements, certain cash balances are
restricted for insurance, real estate taxes and tenant security deposits.
However, should cash be required for operating expenditures, the partners
may modify the joint venture agreements. Included in the cash and cash
equivalents balance are the following restricted amounts:
1996 1995
---- ----
Reserve for tenant security deposits $ 64 $ 53
Reserve for insurance and tax deposits 157 145
Renovation reserve - 719
Debt service reserve 110 78
Replacement reserve 55 142
General partner reserve 50 50
-------- --------
$ 436 $ 1,187
======== ========
The general partner reserve represents a capital contribution made by PWIP8
during fiscal 1992 to be used, if needed, for future capital requirements of
the Meadows joint venture. Such funds are to be used at the discretion of
PWIP8 and, accordingly, are restricted for such purposes as PWIP8 deems
appropriate. In addition, PWIP8 has the right, based on an agreement between
the partners, to have the remaining unused portion of this capital
contribution returned in full, or in part, at any time.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of cash and cash equivalents, escrow deposits,
tenant receivables, restricted cash and current liabilities approximate
their fair values due to the short-term maturities of these instruments. It
is not practicable for management to estimate the fair value of notes
payable to 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 5).
3. Joint Ventures
--------------
See Note 5 to the financial statements of PWIP8 in this Annual Report for a
more detailed description of the joint venture partnerships. Descriptions of
the ventures' properties are summarized below:
a. Daniel Meadows II General Partnership
-------------------------------------
The joint venture owns and operates The Meadows in the Park Apartments,
a 200-unit apartment complex located in Birmingham, Alabama. During
fiscal 1991, the venture discovered that certain materials used to
construct the operating property were manufactured 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
between $1.6 and $2.1 million, not including legal fees and other
incidental costs. During fiscal 1993, the insurance carrier deposited
approximately $522,000 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 $1,714,000, which
was in addition to the $522,000 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, $1,491,000 had been disbursed from the fiscal 1995
settlement proceeds for the renovations, which were completed during
fiscal 1996. In addition, included in rental income in the accompanying
statements of operations is $109,000 and $165,000 during fiscal 1996
and 1995, respectively, of income attributed to rent loss recovery for
the apartment units taken out of service to complete interior
renovations. The cost of all structural renovations including rent
losses sustained during completion of the renovations exceeded the
insurance proceeds received by $51,000, which was recorded as a loss in
fiscal 1996.
b. Maplewood Drive Associates
--------------------------
The joint venture owns and operates Maplewood Park Apartments, a 144-unit
apartment complex located in Manassas, Virginia. At the present time, the
estimated fair value of the venture's operating investment property, while
higher than its net carrying value, is below the amount of the outstanding
first mortgage loan obligation. Subsequent to year-end, the joint venture
failed to make a required principal payment due under the terms of its
first mortgage loan on December 2, 1996. Failure to make the required
principal payment could result in the venture being declared in default of
the mortgage loan agreement. Even if the payment default were to be cured,
there are no assurances that the letter of credit underlying the mortgage
loan will be renewed upon its expiration in October 1998 (see Note 5).
c. Spinnaker Bay Associates
------------------------
The joint venture owns and operates the Bay Club Apartments, a 88-unit
apartment complex, and the Spinnaker Landing Apartments, a 66-unit
apartment complex, both of which are located in Des Moines, Washington.
Construction-related defects were discovered at both the Bay Club and
Spinnaker Landing apartment complexes during fiscal 1991. The
deficiencies and damages included lack of adequate fire blocking
materials in the walls and other areas and insufficient structural
support, as required by the Uniform Building Code. During 1991,
Spinnaker Bay Associates participated as a plaintiff in a lawsuit filed
against the developer, which also involved certain other properties
constructed by the developer. The suit alleged, among other things,
that the developer failed to construct the buildings in accordance with
the plans and specifications, as warranted, used substandard materials
and provided inadequate workmanship. The joint venture's claim against
the developer was settled during fiscal 1991 for $1,350,000. Such funds
were received in December of 1991 and were recorded by the joint
venture as a reduction in the basis of the operating properties. From
the proceeds of this settlement, $450,000 was paid to legal counsel in
connection with the litigation and was capitalized as an addition to
the carrying value of the operating properties. In addition to the cash
received at the time of the settlement, the venture received a note in
the amount of $161,500 from the developer which was due in 1994. During
fiscal 1993, the venture agreed to accept a discounted payment of
$113,050 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 $351,000 from its pursuit of claims against certain
subcontractors of the development company and other responsible
parties. Additional settlement proceeds totalling approximately
$402,000 were collected during fiscal 1995. As of September 30, 1995,
all claims had been settled and no additional proceeds were
anticipated.
As part of the initial settlement, the venture also negotiated a loan
modification agreement which provided the majority of the additional
funds needed to complete the repairs to the operating properties and
extended the maturity date for repayment of the obligation to December
1996. Under the terms of the loan modification, which was executed in
December 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, totalled
approximately $1,300,000 as of September 30, 1996. The total obligation
to the first mortgage holder for both properties totalled $6,153,000 as
of September 30, 1996. 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.
In May 1996, the joint venture did not make the debt service payments
required under its mortgage loan agreement and the loans went into
default. Management has been conducting negotiations with the lender in
order to sell the properties as satisfaction of the debt and avoid
foreclosure (see Note 5). The partners of the joint venture have
represented the they will not make contributions to the joint venture to
the extent necessary to fund negative cash flows of the joint venture.
These factors, as well as others, indicate that the joint venture may be
unable to continue as a going concern unless it is able to generate
sufficient cash flows to meet its obligations as they come due and
sustain its operations sufficient to recover its investment in real
estate. Other than the classification of the operating investment
properties owned by Spinnaker Bay Associates as held for sale as of
September 30, 1996, the accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Properties held for sale, net on the accompanying balance sheet as of
September 30, 1996 is comprised of the following historical cost basis
amounts, which exceed the estimated fair value of the assets (in
thousands):
Land $ 770
Buildings and improvements 5,855
--------
6,625
Less accumulated depreciation (1,805)
--------
$ 4,820
========
d. Norman Crossing Associates
--------------------------
The joint venture owned and operates Norman Crossing Shopping Center, a
52,000 square foot shopping center located in Charlotte, North
Carolina. In October 1993, the property's anchor tenant vacated the
shopping center. The tenant, which occupied 26,752 square feet of the
property's net leasable area, is a national credit grocery store chain
which 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.
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 20,552 square
feet of the former anchor's space and will sublease the remaining 6,200
square feet. As a result of the new health club 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 this time. The joint venture may have to continue to make
tenant improvements and grant 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
re-stabilization for the shopping center, would be provided primarily
by PWIP8. During fiscal 1996, PWIP8 funded cash flow deficits of
approximately $16,000. Management of PWIP8 is prepared to fund the
joint venture's operating deficits in the near-term. Based on
management's estimates of the venture's future cash flows, the net
carrying value of the operating investment property as of September 30,
1996 is recoverable over the expected remaining holding period.
Allocations of net income and loss
----------------------------------
The agreements generally provide that taxable income and losses (other
than those resulting from sales or other dispositions of the projects) will
be allocated between PWIP8 and the co-venturers in the same proportions as
cash flow distributed from operations, except for certain items which are
specifically allocated to the partners, as set forth in the joint venture
agreements. Gains or losses resulting from sales or other dispositions of
the projects shall be allocated as specified in the joint venture
agreements. Allocations of income and loss for financial accounting purposes
have been made in accordance with the allocations of taxable income and tax
losses as specified in the respective joint venture agreements.
Distributions
-------------
The joint venture agreements generally provide that distributions will be
paid on an annual basis first to PWIP8, in specified amounts ranging from
$111,500 to $565,000 as a preferred return. After payment of PWIP8's
preference return, the agreements generally provide for certain preferred
payments, up to specified amounts, to be paid to the co-venturers. Any
remaining distributable cash will be paid in proportions ranging from 80% to
60% to PWIP8 and 20% to 40% to the co-venturers, as set forth in the joint
venture agreements. See Note 5 to the financial statements of PWIP8 included
in this Annual Report for a further discussion.
As of September 30, 1996, PWIP8 and its co-venture partner in Maplewood
Drive Associates were not in agreement regarding the cumulative cash flow
distributed to the co-venturer. PWIP8 believes that the co-venturer has
received an additional $79,000 over the amount it is entitled to under the
terms of the joint venture agreement through September 30, 1996. The
ultimate resolution of this dispute cannot be determined at the present
time.
Distributions of net proceeds upon the sale or refinancing of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
4. Related party transactions
--------------------------
The Combined Joint Ventures originally executed property management
agreements with affiliates of the co-venturers, cancellable at the joint
ventures' option upon the occurrence of certain events. The management fees
are equal to 4 to 5% of gross receipts, as defined in the agreements.
The accounts payable - affiliates balances at September 30, 1996 and 1995
consist primarily of working capital advances in excess of negative net cash
flows, as defined in the Maplewood Drive Associates joint venture agreement,
and amounts relating to the monthly management fees discussed above.
The notes payable to venturers balances represent advances by the
co-venture partner of Spinnaker Bay Associates. The advances bear interest
at a rate of 10%. This interest expense has been specifically allocated to
the co-venture partner. The joint venture agreement provides that the joint
venture's loans and advances from partners will be repaid from cash
available for distributions if any.
<PAGE>
5. Long-term debt
---------------
Long-term debt at September 30, 1996 and 1995 consists of the following
(in thousands):
1996 1995
---- ----
Nonrecourse mortgage secured by The
Meadows in the Park Apartments.
Principal payments, based on a
25-year amortization period, are
due monthly. Interest is payable
monthly based on an annual floating
rate of 2.25% over the London
Interbank Offered Rate (7.6875% at
September 30, 1996). The joint
venture may convert to a fixed rate
at any time during the loan term at
2.25% over U.S. Treasury security
rates for the remaining term of the
loan. The outstanding principal
balance is due in full on February
5, 2000. The fair value of this
mortgage note approximates its
carrying value as of September 30,
1996. $5,411 $5,468
Note secured by a first deed of
trust on the Maplewood Park
Apartments and an assignment of
rents. Certain co-venturers have
personally guaranteed $1,418 of the
outstanding indebtedness. Interest
on the Note is payable monthly in
arrears. The interest rate is based
on money market conditions and is
determined daily by the lender, and
must not be less than 2% nor
greater than 14.5%. The interest
rate on the Note was 3.85% at
September 30, 1996. It is not
practicable to estimate the fair
value of this mortgage note due to
its current default status (see
discussion below). 5,545 5,635
Mortgage loans secured by first
deeds of trust on the Bay Club
Apartments and Spinnaker Landing
Apartments and related promissory
notes. The loans and notes are
nonrecourse to the joint venture.
The balance of the mortgage loans
at September 30, 1996 and 1995 was
$4,747 and $4,794, respectively.
The mortgage loans bear interest at
a rate of 9.625%. Principal and
interest are payable monthly
through December 31, 1996 based on
a 27-year amortization schedule. In
prior years, the mortgage loans
were modified to convert all unpaid
interest on the mortgage loans to
principal in the form of promissory
notes (the "Notes"). Also, under
the Note Agreement, an amount was
advanced monthly under the Notes to
permit the Partnership to pay the
interest payments coming due on the
above mentioned mortgage loans
through July 1, 1993. The balance
of the Notes at September 30, 1996
and 1995 was $1,300 and $1,181,
respectively. The Notes bear
interest at a rate of 9.625%.
Payments equal to 50% of "net
operating income', as defined, are
due monthly. Unpaid interest is
added to principal. The final
maturity date is December 31, 1996
at which time all unpaid principal
and interest is due. It is not
practicable to estimate the fair
value of these mortgage loans and
promissory notes due to their
current default status (see
discussion below). 6,153 5,975
Mortgage note payable secured by a
deed of trust on the Norman
Crossing Shopping Center. The
mortgage payable bears interest at
10.5% through November 1, 2002.
Monthly payments of principal and
interest amounting to $26 commenced
with the payment due March 1, 1994.
The remaining unpaid principal
balance of $2,459 becomes due on
November 1, 2002. The fair value of
this mortgage note approximates its
carrying value as of September 30,
1996. 2,715 2,744
------- -------
Total long-term debt 19,824 19,822
Less: current portion (11,793) (222)
--------- --------
$ 8,031 $ 19,600
======== ========
Maturities of long-term debt for each of the next five years and
thereafter are as follows:
1997 $ 11,793
1998 105
1999 116
2000 5,245
2001 48
Thereafter 2,517
---------
$ 19,824
=========
In May 1996, Spinnaker Bay Associates did not make its required debt
service payments under the mortgage loan agreements and the loans went into
default. Effective September 18, 1996, the partners entered into a Property
Disposition Agreement with the lender. Under the terms of the agreement, the
lender agreed to delay foreclosure of the properties for five months to
provide the venture with an opportunity to complete a sale. Any sale of the
properties is expected to be for an amount significantly below the
outstanding debt balance. However, under the terms of the agreement with the
lender, PWIP3 and its co-venture partner can qualify to receive a nominal
payment from the sales proceeds if a sale is completed by the end of the
second quarter of fiscal 1997 and certain other conditions are met. As part
of the agreement, a receiver was appointed for the property and will be
responsible for the collection of rents and the payment of operating
expenses through the end of the forbearance period.
In December 1996, the Spinnaker Bay joint venture executed a purchase and
sale agreement with an unrelated third party to sell the properties for an
amount less than the total debt obligation. If the transaction were to close
and the conditions referred to above were met, PWIP3 and its co-venture
partner could end up receiving a nomimal amount from the proceeds of the
sale transaction. However, the sale remains contingent upon the buyer's due
diligence and the receipt of a financing commitment. Accordingly, there are
no assurances that the transaction will be consummated.
In December 1985, Maplewood Drive Associates borrowed $6,100,000 under a
tax-exempt Residential Rental Property Revenue Note (the "Note") issued
through the Harrisonburg Redevelopment and Housing Authority (the Authority)
as issuer and NationsBank, as Note agent. The original principal of the
Authority's Note consisted of 6,100 separate components (the "Components')
of $1,000 each which have been marketed to investors by NationsBank in
return for an annual remarketing fee charged to the Partnership of 3/8 of 1%
on the principal amount of the Note outstanding. The investors have the
right with seven days' notice to put the Components back to NationsBank for
prepayment. Components put back to NationsBank is this way are continuously
remarketed. If the Note is converted to a fixed rate of interest, as
discussed below, the investors rights to put the Components back to
NationsBank terminate.
The balance of the principal on the Maplewood mortgage note, which matures
December 1, 2015, is due in annual installments as stated in the Note
Agreement. So long as the Note has not been converted to a fixed interest
rate, the joint venture may, upon 35 days advance notice to NationsBank,
prepay the Note in whole or in part. Once converted, prepayments are
limited to the scheduled annual principal payments provided for in the Note
Agreement for a period of three years. Three years to six years after the
conversion, at the option of the joint venture and with 30 days' notice to
the Component owners, the joint venture may prepay the Note in whole or in
part at par plus accrued interest and a redemption premium ranging from 2%
to .5%. After the seventh anniversary of the Conversion Date, there is no
prepayment premium. Prior to the Conversion Date, the Note is secured with
a standby letter of credit (the "Letter of Credit") issued by NationsBank
(the "Letter of Credit Bank") pursuant to a Reimbursement and Purchase
Agreement and a Note Purchase and Loan Agreement both dated as of December
1, 1985, between the Letter of Credit Bank and the joint venture. The
Letter of Credit will permit the Note Agent to draw, on behalf of the
owners of Components of the Note, up to $6,600,756. The amount of the
Letter of Credit will be reduced as principal of the Note is paid and will
expire on October 31, 1998, unless renewed or earlier terminated on
the Conversion Date. The joint venture pays an annual letter of credit fee
equal to 1.5% of the amount of the letter of credit outstanding.
The stated maturity date of the Maplewood mortgage note is December 1,
2015; however the Letter of Credit will expire in October 1998, and absent
any instructions to the contrary from owners of the Components, the Note
Agent will arrange for the prepayment of the Note by the joint venture on
or before the expiration date of the Letter of Credit. The expiration date
of the Letter of Credit may be extended on terms satisfactory to the Letter
of Credit Bank and the joint venture. The agreement provides for an
increase in interest rate if an event of taxability (loss of tax-exempt
status of the Note) occurs. As discussed in Note 3, subsequent to year-end
the Maplewood joint venture failed to make a required principal payment due
under the terms of its first mortgage loan on December 2, 1996. Failure to
make the required principal payment could result in the venture being
declared in default of the mortgage loan agreement. Even if the payment
default were to be cured, there are no assurances that the letter of credit
underlying the mortgage loan will be renewed upon its expiration. The
ultimate outcome of this matter cannot presently be determined.
6. Rental Revenues
---------------
Norman Crossing Associates has operating leases with tenants which provide
for fixed minimum rents and reimbursement of certain operating costs.
Minimum rental revenues to be received in the future under noncancellable
leases are approximately as follows (in thousands):
1997 $ 355
1998 314
1999 314
2000 299
2001 275
thereafter 1,694
------
$3,251
======
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES EIGHT LIMITED PARTNERSHIP
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
September 30, 1996
(In thousands)
<CAPTION>
Life on Which
Initial Cost of Costs Gross Amount at Which Carried at Depreciation
Partnership Capitalized Close of period in Latest
Buildings (Removed) Buildings Income
and Subsequent to and Accumulated Date of Date Statement
Description Encumbrances Land Improvements Acquisition(1) Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ -------------- ---- ------------ ----- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED JOINT VENTURES:
Apartment
Complex $5,411 $ 764 $ 8,171 $ 790 $ 779 $ 8,946 $ 9,725 $ 4,032 1987 10/15/87 5-30 yrs.
Birmingham, AL
Apartment
Complex 5,545 1,905 5,660 - 1,905 5,660 7,565 2,446 1987 6/14/88 5-30 yrs.
Manassas, VA
Apartment
Complex 6,153 770 3,263 2,592 770 5,855 6,625 1,805 1987 6/10/88 5-30 yrs.
Des Moines, WA
Shopping
Center 2,715 1,442 2,255 194 1,442 2,449 3,891 448 1988 9/15/89 5-30 yrs.
Charlotte,
NC ------- ------- ------- ------- ------- ------- ------ ------
Total $19,824 $4,881 $19,349 $3,576 $4,896 $22,910 $27,806 $8,731
======= ====== ======= ====== ====== ======= ======= ======
Notes
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $27,830.
(B) See Note 4 to Combined Financial Statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $27,631 $27,847 $27,985
Acquisitions and improvements 175 326 326
Proceeds from settlements of
claims regarding construction damages - (542) (464)
------- ------- -------
Balance at end of period $27,806 $27,631 $27,847
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 7,890 $ 7,030 $ 6,064
Depreciation expense 841 860 966
-------- ------- -------
Balance at end of period $ 8,731 $ 7,890 $ 7,030
======== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended September 30,
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 433
<SECURITIES> 0
<RECEIVABLES> 1
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 434
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 443
<CURRENT-LIABILITIES> 43
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (410)
<TOTAL-LIABILITY-AND-EQUITY> 443
<SALES> 0
<TOTAL-REVENUES> 8,455
<CGS> 0
<TOTAL-COSTS> 6,646
<OTHER-EXPENSES> 849
<LOSS-PROVISION> 588
<INTEREST-EXPENSE> 4,050
<INCOME-PRETAX> (3,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 23,459
<CHANGES> 0
<NET-INCOME> 19,781
<EPS-PRIMARY> 550.40
<EPS-DILUTED> 550.40
</TABLE>
