UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14581
California Seven Associates Limited Partnership,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 94-2970056
(State of Organization) (I.R.S. Employer Identification No.)
900 Cottage Grove Road, South Building
Bloomfield, Connecticut 06002
(Address of principal executive offices)
Telephone Number: (203) 726-6000
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
Part I - Financial Information
California Seven Associates Limited Partnership,
a California Limited Partnership
Balance Sheets
June 30 December 31
1994 1993
Assets (Unaudited) (Audited)
Property and improvements, at cost:
Land and land improvements $20,562,073 $20,562,073
Buildings 109,678,470 109,659,882
Furniture and fixtures 12,968,727 12,925,199
Machinery and equipment 701,207 681,295
143,910,477 143,828,449
Less accumulated depreciation 46,023,439 43,907,921
Net property and improvements 97,887,038 99,920,528
Cash and cash equivalents 848,195 1,440,476
Accounts receivable 329,161 388,172
Prepaid expenses 75,114 792
Other assets 20,864 19,040
Total $99,160,372 $101,769,008
Liabilities and Partners' Deficit
Liabilities:
Note and mortgages payable $111,983,903 $111,983,903
Accrued interest payable 2,531,018 1,600,118
Accounts payable and accrued expenses 404,350 446,318
Tenant security deposits 437,098 472,865
Unearned income 201,941 303,995
Deferred management fees 2,000,000 2,000,000
Fees and reimbursements payable to the General
Partner and its affiliates 4,018,306 3,848,505
Other liabilities 101,093 33,957
Total liabilities 121,677,709 120,689,661
Partners' deficit:
General Partner (768,421) (732,454)
Limited partners (362 Class A Units
and 3 Class B Units): (21,748,916) (18,188,199)
Total partners' deficit (22,517,337) (18,920,653)
Total $99,160,372 $101,769,008
<FN>
The Notes to Financial Statements are an integral part of these statements.
California Seven Associates Limited Partnership,
a California Limited Partnership
Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
Property operating revenues:
Rental income $3,324,545 $4,119,466 $6,996,643 $8,427,546
Other 121,708 239,543 262,967 418,742
3,446,253 4,359,009 7,259,610 8,846,288
Operating expenses:
Maintenance and repairs,
furniture rental, insurance,
and other property operations 702,119 805,429 1,416,435 1,667,972
Real estate taxes 343,786 369,209 694,516 738,418
Management fees 138,505 139,301 281,690 273,769
Property administrative 641,351 917,880 1,353,228 1,876,748
1,825,761 2,231,819 3,745,869 4,556,907
Net property revenue 1,620,492 2,127,190 3,513,741 4,289,381
Other operating costs and (income) expenses:
Depreciation and amortization 1,056,298 1,117,542 2,115,518 2,231,007
Management and administrative
fees to affiliates 79,462 82,864 155,096 164,372
Partnership administrative 39,130 30,344 82,573 56,632
Net recovery on business
interruption resulting from
California earthquake (465,469) -- (465,469) --
709,421 1,230,750 1,887,718 2,452,011
Net partnership operating income 911,071 896,440 1,626,023 1,837,370
Interest income 3,376 10,034 8,193 26,156
Interest expense (2,615,450)(2,615,450) (5,230,900)(5,230,900)
Net loss $(1,701,003)$(1,708,976)$(3,596,684)$(3,367,374)
Net loss:
General Partner $(17,010) $(17,090) $ (35,967) $(33,674)
Limited partners (1,683,993)(1,691,886) (3,560,717)(3,333,700)
$(1,701,003)$(1,708,976)$(3,596,684)$(3,367,374)
Net loss per Class A Unit $ (4,652) $ (4,674) $ (9,836) $ (9,209)
<FN>
The Notes to Financial Statements are an integral part of these statements.
California Seven Associates Limited Partnership,
a California Limited Partnership
Statements of Cash Flows
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
1994 1993
Cash flows from operating activities:
Net loss $(3,596,684) $(3,367,374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,115,518 2,231,007
Accounts receivable 59,011 (6,997)
Accrued interest payable 930,900 760,667
Accounts payable and accrued expenses (39,625) (99,602)
Fees and reimbursements payable to the
General Partner and its affiliates 169,801 178,369
Other, net (146,831) 255,304
Net cash used in operating activities (507,910) (48,626)
Cash flows from investing activities:
Purchase of property and improvements (82,028) (243,649)
Cash flows from financing activities:
Cash distribution to limited partners (2,343) (6,322)
Net decrease in cash and cash equivalents (592,281) (298,597)
Cash and cash equivalents, beginning of year 1,440,476 2,268,544
Cash and cash equivalents, end of period $ 848,195 $1,969,947
Supplemental disclosure of cash information:
Interest paid during period $4,300,000 $4,470,233
<FN>
The Notes to Financial Statements are an integral part of these statements.
California Seven Associates Limited Partnership,
a California Limited Partnership
Notes to Financial Statements
(Unaudited)
Readers of this quarterly report should refer to the audited financial
statements for California Seven Associates Limited Partnership, a
California Limited Partnership ("the Partnership"), for the year ended
December 31, 1993 which are included in the Partnership's 1993 Annual
Report, as certain footnote disclosures which would substantially duplicate
those contained in such audited financial statements have been omitted from
this report.
1. Basis of Accounting
a) Basis of Presentation: The accompanying financial statements were
prepared in accordance with generally accepted accounting principles.
It is the opinion of management that the financial statements
presented reflect all the adjustments necessary for a fair
presentation of the financial condition and results of operations.
b) Cash and Cash Equivalents: Short-term investments with a maturity of
three months or less at the time of purchase are reported as cash
equivalents.
2. Property and Improvements and Note and Mortgages Payable
At June 30, 1994 the Partnership owned six properties located in
California totaling 2,135 units with leases generally for a term of one
year or less. All properties are pledged as security for the long-term
debt.
The Partnership is currently in default on its second mortgage loan
obligation and could lose its investment in property and improvements
through foreclosure. The balance of the second mortgage note at June 30,
1994 was $14,000,000 plus $1,330,350 of accrued and unpaid interest.
Although the second mortgage holder has acknowledged the default, the
Partnership has not received a notice of acceleration.
The Sherman Oaks property sustained extensive damage from the January
17, 1994 Southern California earthquake. The property was "red-tagged" by
city inspectors which means that the property is unsafe for use. It is
currently unoccupied. The Partnership's properties are covered by
insurance, including earthquake and business interruption; although the
policy carries a 5% deductible. The Partnership is working with the
insurance company, the first mortgage lender and the appropriate hired
professionals and has completed surveys and cost estimates. The first
mortgage lender has discretion as to the decision to rebuild or apply the
net insurance proceeds to reduce the outstanding debt obligation. The
first mortgage lender has not yet informed the Partnership as to their
preference to repair/rebuild or collect net insurance proceeds. The
carrying value of the Sherman Oaks property at June 30, 1994 was
$17,315,911. The financial statements do not include any adjustments for
possible losses resulting from the earthquake.
On April 24, 1994, the Partnership received a $750,000 advance on the
business interruption policy for the earthquake damaged property. During
July 1994, a claim for $1,215,000, representing the first six months of
1994 business interruption, was submitted to the insurance company.
Included in the income statement as "Net recovery on business interruption
resulting from California earthquake" for the three and six months ended
June 30, 1994 is the insurance advance less costs specifically associated
with the earthquake. All other income statement lines for 1994 as they
relate to the Sherman Oaks property only include activity related to the
period from January 1, 1994 to January 16, 1994, if applicable. The income
statement does not include any other amounts relating to the pending claim
with the insurance company for the first six months of 1994 operations.
California Seven Associates Limited Partnership,
a California Limited Partnership
Notes to Financial Statements - Continued
(Unaudited)
3. Transactions with Affiliates
Fees and other expenses required to be paid by the Partnership to the
General Partner or its affiliates are as follows:
Three Months Ended Three Months Ended Unpaid at
June 30, June 30, June 30,
1994 1993 1994 1993 1994
Interest on assignment
note $ 22,000 $ 22,000 $ 44,000 $ 44,000 $ 484,001
Asset management fee 41,962 45,364 80,096 89,372 2,399,141
Administration and
management fee -- -- -- -- 260,050
General partner's
salary 37,500 37,500 75,000 75,000 825,000
Real Estate Advisory
fee -- -- -- -- 518,750
Reimbursement (at cost) for
out of pocket expenses 9,131 9,861 15,676 17,150 15,365
$110,593 $114,725 $214,772 $225,522 $4,502,307
4. Litigation
In California Seven Associates Limited Partnership, et al v. SBD Group,
Inc. et al [Case no. 716034 (Superior Court of the State of California,
Orange County)] Pursuant to a Minute Order granted by the Judge, the Court
has found that the Defendants breached their contract with the Partnership
resulting in damages in the sum of $152,308.84, plus interest. Defendants
counsel has filed a Motion for Reconsideration; thereby asking the Court to
review its prior ruling. The lawsuit stems from Defendants refusal to
forward rent payments which accrued while the Partnership owned the
property (Torrance Oakwood 20900 Anza, City of Torrance).
Plaintiffs in suit brought against the Partnership and its General
Partner [Theodore D. Cohen, et al v. California Seven Associates, et al.,
No. 657925 (Orange County, CA, May 16, 1991)] are class members in a
federal court action in Chicago [In re VMS Securities Litigation, No. 90 c
2412, N.D. Ill.]. Plaintiffs have been notified of the Class Settlement.
As a result of Plaintiffs failure to opt-out of the Class Action, Defendant
has filed a Motion for Summary Judgment. The likelihood of an unfavorable
outcome or the extent of any possible liability cannot be assessed at this
time.
California Seven Associates Limited Partnership,
a California Limited Partnership
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
One of the Partnership's six properties, Sherman Oaks, sustained
extensive damage from the Southern California earthquake on January 17,
1994. The property was evacuated and city inspectors classified the
property as unsafe for use. The Partnership has insurance for the damage
and for business interruption, subject to a 5% deductible. On April 29,
1994, the Partnership received a $750,000 advance from the insurance
company on the business interruption policy. During July, a claim for
$1,215,000, representing the first six months of 1994 business
interruption, was submitted to the insurance company. Payment on that
claim, less the advance previously received and the 5% deductible, is
expected in August.
At June 30, 1994, the Partnership had $848,195 in cash and cash
equivalents which is to be used for working capital and for payment of
accrued liabilities. The Partnership's accrued liabilities at June 30,
1994 include the July 1, 1994 first mortgage debt service payment of
$716,667 and tenant security deposits of $437,000. On July 1, 1994, the
Partnership made the monthly first mortgage payment. The Partnership
collected sufficient rents in July to fund July's monthly recurring
operating expenses and the first mortgage payment for July of $716,667,
paid on August 1, 1994.
The Partnership's cash flow from operations after debt service and
capital improvements has been in a continual deficit position. As a result
of cash flow deficits and the lack of investor equity, the Partnership
began withholding payment of debt service on its second mortgage beginning
November 1, 1993 and remains in default at June 30, 1994. During 1994, the
Partnership has, and intends to continue to, limit capital expenditures to
those needed for safety and structural integrity. Any additional capital
expenditures will be limited to those which can be funded from property
operations after first mortgage debt service. The General Partner has
estimated 1994 operations to be sufficient to cover first mortgage debt
service and necessary capital expenditures, exclusive of Sherman Oaks
normal property operations, but inclusive of collections representing
reimbursement for loss of operations (net operating income) from business
interruption insurance. Dependant on the timing of the insurance
reimbursement, the General Partner may have to take further steps to
preserve the Partnership's cash.
The Partnership continues to face increasing risk of losing the
properties through foreclosure as the second mortgage remains in default
and the General Partner takes steps to maintain the precariously low level
of Partnership reserves. Even if an agreement is reached with the second
mortgage lender to remedy the default, the uncertainty surrounding the
earthquake and satisfaction of the requirements of the first mortgage
remain unresolved.
During July 1994, a meeting was held with the first mortgage lender to
review the status of the earthquake damaged property and the first mortgage
note. Subsequent to the meeting, a written proposal was submitted to the
lender requesting a modification to existing debt terms, including an
extension of the maturity date, an interest rate reduction, and deferment
of monthly payments into an escrow account until enough funds accumulated
to fund the earthquake insurance deductible. In addition, a request was
made for a timely decision on intent to repair/rebuild or apply net
insurance proceeds to the outstanding mortgage balance. The lender
rejected the request for a modification of terms and has not yet indicated
their preference relative to the earthquake damaged property.
As decisions are made to repair/rebuild or apply insurance proceeds to
the outstanding first mortgage obligation, cash flow and Partnership
reserves will be impacted. At the present time, the Partnership's reserves
will not allow funding of the 5% deductible needed to rebuild, possibly
subjecting the properties to foreclosure. If the insurance
proceeds are applied to the outstanding balance of the first mortgage, the
remaining five operating properties may be unable to generate sufficient
cash flow to service the remaining first mortgage obligation. The amount
of insurance
proceeds that will be available and the first mortgage lender's decision as
to the application of the proceeds are unknown at this time. The General
Partner will continue to pursue alternatives to restructure and extend the
mortgage debt. Regardless of how future events transpire, it is unlikely
that any debt restructuring or market improvement will be sufficient to
materially improve the outlook for limited partners. Under any potential
scenario, the likelihood of any cash being available for investors at wrap-
up is doubtful.
Results of Operations
The Sherman Oaks property sustained extensive damage from the Southern
California earthquake on January 17, 1994, following which the property was
evacuated and city inspectors classified the property as unsafe for use.
As a result, the property has generated little revenue for the first
quarter and has had a substantial decrease in operating expenses. Sherman
Oaks' results for the six months ended June 30, 1994, as compared with the
same period in 1993, were effected as follows: Rental income decreased
approximately $1,607,000, other income decreased approximately, $45,000,
property operating expenses decreased approximately $278,000 and property
administrative expenses decreased approximately $342,000. The results for
the three months ended June 30, 1994, as compared with the same period of
1993, were effected as follows: Rental income decreased approximately
$829,000, other income decreased approximately $31,000, property operating
expenses decreased approximately $156,000 and property administrative
expenses decreased approximately $203,000. The following analytical
comments have been limited to the Partnership's five other properties.
The weakness in the Southern California economy and increased
competition, both of which have had an adverse impact on occupancy and,
subsequently, rental rates, have combined to support the Partnership's
decision to convert a number of the properties to conventional apartments,
unfurnish more units at the remaining OAKWOOD properties, and to switch to
an effective rent strategy to maintain occupancy and market share. The
strategies appeared to have worked in 1993; occupancy percentages were
restored and stabilized and rental rates began to pick back up slightly.
Results improved considerably for the first quarter of 1994. Exclusive of
the Sherman Oaks property, net property revenues (property level revenues
less property level operating expenses) increased to $2,097,000, a 15%
increase from 1993's first quarter result of $1,821,000 and a 22% increase
from 1993's fourth quarter result of $1,720,000. Net property revenues for
the second quarter 1994 were down from the first quarter of 1994 and the
comparable quarter of 1993. Typically, the second quarter results have
lagged behind strong first quarter earnings. During the second quarter of
1993, the Partnership collected redecorating fees from new laundry
contracts at Pacifica Club and Arbor Park aggregating to $70,000.
Excluding the one-time fees and exclusive of Sherman Oaks, net property
revenues for the second quarter 1994 totalled $1,762,000 compared with the
$1,709,000 for the same period of 1993. For the six months ended June 30,
1994, results are up 10% exclusive of the laundry contract fees and Sherman
Oaks compared with the same period of 1993.
Effective January 1, 1994, Mission Bay East converted from OAKWOOD
operations to conventional apartment operations. As part of the
conversion, the property is transitioning to a large majority of
unfurnished units. During the second quarter, the property continued
unfurnishing as the post-conversion target for furnished units is 80. At
June 30, 1994, the furnished units stood at 180. Although the property
ended the first quarter with a drop in occupancy percentage, average
occupancy for the first quarter included some leftover corporate rentals
which,
California Seven Associates Limited Partnership,
a California Limited Partnership
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
combined with expense savings from the conversion, helped boost net
property revenue for the first quarter 1994 by 12% compared to the first
quarter of 1993 and 16% compared to the fourth quarter of 1993. Net
property revenue for the second quarter 1994 was down from the first
quarter but up 8% from the second quarter of 1993. The property had
average occupancy for the quarter of 86% and ended the quarter at 93%.
At the Partnership's other conventionally run apartment properties,
Arbor Park, Amberway and Pacifica Club, operations for the three and six
months ended June 30, 1994, as compared to the same periods of 1993 have
posted mixed results. Net property revenues for 1993 include one-time
laundry contract fee income of $30,000, $38,000, and $40,000 for Arbor
Park, Amberway, and Pacifica Club, respectively. Excluding the laundry
contract fee, Arbor Park's results for the three and six months compared
with the previous year were down 14% and 6%, respectively. The decrease is
attributable to a steady experience of maintenance and repair expenses
incurred in the first half of 1994 compared to very little in the first
half of 1993. Arbor Park had proportionately higher level of maintenance
expenses in the latter half of 1993. Amberway's net revenue, exclusive of
1993 laundry contract revenue, dropped 20% and 2% for the three and six
months, respectively, compared to the previous year. The drop is directly
related to weak occupancies. Physical occupancy was negatively impacted by
relocations, job loss and home purchases. Offsetting a portion of the six
month drop in revenue was a large drop in maintenance and repairs expenses.
Pacifica Club's net property revenue increased, exclusive of laundry
contract revenue, by 26% and 20% for the three and six months ended June
30, 1994, respectively, compared with the same periods of the previous
year. The increases are attributable to strong occupancies, lower taxes,
and savings in repair and maintenance expenses in second quarter.
The Partnership currently has one remaining property operating as an
OAKWOOD. During the first quarter of 1994, the West Los Angeles OAKWOOD
posted a 42% increase in net property revenue compared to the first quarter
of 1993 and a 17% increase compared to the fourth quarter of 1993. For the
second quarter 1994, net property revenues are down from the first quarter
but are up 6% compared with the second quarter of 1993 and 23% for the six
month period ended June 30, 1994 compared with the first six months of
1993. Increases are attributable to increased average occupancy
percentages, less discounting on corporate rental rates and lower expenses,
including a drop in repairs and maintenance and worker compensation
insurance.
Average occupancy at West Los Angeles for the three and six months ended
June 30, 1994 was up slightly, as compared with the same periods of 1993.
The increase in average occupancy coupled with less corporate rate
discounting increased rental income approximately $23,000 and $87,000 for
the three and six month periods, respectively. At Mission Bay East,
leftover corporate business from the first quarter contributed
approximately $5,000 to the increase in rental income for the six months.
Mission Bay East posted a $35,000 decrease for the three month period as
conventional rates are lower than corporate rates and average occupancy
dropped. Rental income at Pacifica Club increased approximately $116,000
for the six months and $76,000 for the three months as the result of higher
average occupancy. At Arbor Park, a slight increase in rates led to a
$16,000 and $22,000 increase in the three and six month periods,
respectively. These increases were offset by $46,000 and $56,000 decreases
for the three and six month periods, respectively, at Amberway because of
weak occupancy.
Other income decreased for the three and six months ended June 30, 1994,
as compared with the same periods in 1993, due to one-time redecorating
fees received from a new laundry contract in 1993 of $38,000, $40,000, and
$30,000 at Amberway, Pacifica Club, and Arbor Park, respectively. The fee
for Amberway was received and recorded in the first quarter of 1993 and the
fees for Pacifica Club and Arbor Park were received and recorded in the
second quarter of 1993.
California Seven Associates Limited Partnership,
a California Limited Partnership
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Overall, property operating expenses increased for the three and six
months ended June 30, 1994, as compared to the same periods of the previous
year. Amberway and West Los Angeles posted declines in maintenance and
repair expenses due to costs in the first quarter of 1993 resulting from
damages caused by heavy rains. Offsetting the decreases was an increase in
utilities at Mission Bay East as a result of lower reimbursements for
various utilities from corporate tenants. As the property converts to
conventional operations from OAKWOOD, utilities will increase as the
Partnership is not allowed to charge back certain utilities to its non-
corporate tenants. Additionally, Mission Bay East and Arbor Park had
increased non-routine maintenance for carpet replacements, faucets, and
vinyl.
Property taxes are down for the three and six months ended June 30,
1994, as compared with 1993, due to decreased assessments at Mission Bay
East and Pacifica Club.
The decrease in property administrative expense for the three and six
months ended June 30, 1994, as compared with the same periods in 1993, was
the result of a reduction of OAKWOOD related costs at Mission Bay East as
the result of the conversion from OAKWOOD operations to conventional
operations. The property saved $43,000 and $83,000 for the three and six
month periods, respectively, in payroll related direct and indirect costs.
Although conventional type advertising increased with the conversion,
OAKWOOD related advertising dropped for the three and six month periods,
for a net decrease of $32,000 and $23,000, respectively. West Los Angeles
experienced significant savings in payroll related costs; $41,000 for the
six month period and $9,000 for the three month period. West Los Angeles
saved approximately $22,000 of the $41,000 on workers compensation
insurance.
The decrease in interest income for the three and six months ended June
30, 1994, as compared with the same periods in 1993, was due to the
decrease in the average cash balance invested as a result of cash flow
deficits.
Amortization decreased for the three and six months ended June 30, 1994,
as compared with 1993, due to deferred loan costs becoming fully amortized
during 1993. Offsetting the decrease partially was an increase in
depreciation from major additions in 1992 and 1993.
California Seven Associates Limited Partnership,
a California Limited Partnership
Management's Discussion and Analysis of Financial
Occupancy
The following is a listing of approximate occupancy levels by quarter
for the Partnership's investment properties during 1994 and 1993:
1993 1994
At 3/31 At 6/30 At 9/30At 12/31 At 3/31 At 6/30
The Anaheim Property 91% 96% 94% 91% 83% 81%
The Huntington Beach Property 91% 86% 94% 96% 95% 98%
The West Los Angeles Property 85% 93% 92% 83% 87% 92%
The San Diego Property 86% 92% 86% 97% 84% 93%
The Sherman Oaks Property (a) 87% 88% 88% 84% N/A N/A
The Upland Property 92% 90% 91% 91% 91% 90%
(a) The property was severely damaged by the January 17, 1994 Southern
California earthquake. The property was evacuated and considered
unsafe for use. Therefore, occupancy is not applicable for 1994.
Part II - Other Information
Item 1. Legal Proceedings
The information included in the "Notes to Financial Statements, Note 4.
Litigation" on page 6 of the Partnership's June 30, 1994 Financial
Statements, is incorporated by reference.
Item 3. Defaults by the Partnership on its Senior Securities
The information included in the "Notes to Financial Statements, Note 2.
Property and Improvements and Note and Mortgages Payable" on page 5 of the
Partnership's June 30, 1994 Financial Statements is incorporated by
reference.
Item 6. Exhibits and Reports on Form 8-K
(b) No Form 8-Ks were filed during the three months ended June 30,
1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
California Seven Associates Limited Partnership,
a California Limited Partnership
By: CIGNA Realty Resources, Inc. - Seventh,
General Partner
Date: August 15, 1994 By: /s/ John D. Carey
John D. Carey, President and Controller
(Principal Executive Officer)
(Principal Accounting Officer)