UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 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: 0-18076
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
(Exact name of registrant as specified in its charter)
Delaware 04-3038480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
BALANCE SHEETS
April 30, 1996 and July 31, 1995 (Unaudited)
(In thousands)
ASSETS
April 30 July 31
Investments in Debt Securities (at market value):
Mortgage-Backed Securities available for sale $ 6,596 $ 7,521
Participating Insured Mortgage Loans
available for sale 18,566 18,639
25,162 26,160
Cash and cash equivalents 3,508 3,274
Interest receivable 174 182
Deferred expenses, net 636 699
-------- ---------
$ 29,480 $ 30,315
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LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 30 $ 34
Accounts payable and accrued expenses 36 36
Partners' capital 29,414 30,245
-------- ---------
$29,480 $ 30,315
======= ========
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the nine months ended April 30, 1996 and 1995 (Unaudited)
(In thousands)
Corporate
Limited
General Partner and
Partner Unitholders
Balance at July 31, 1994 $ 1 $ 30,817
Net unrealized holding gains on debt securities - 56
Cash distributions (15) (2,164)
Net income 15 1,430
----- --------
Balance at April 30, 1995 $ 1 $ 30,139
===== ========
Balance at July 31, 1995 $ 1 $ 30,244
Net unrealized holding losses on debt securities - (48)
Cash distributions (14) (2,110)
Net income 14 1,327
----- --------
Balance at April 30, 1996 $ 1 $ 29,413
===== ========
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF INCOME
For the three and nine months ended April 30, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
April 30, April 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Interest income - Investments $ 521 $ 562 $ 1,580 $ 1,693
Interest income - Money Market 45 47 144 129
------ ------ ------- -------
566 609 1,724 1,822
Expenses:
Management fees 55 58 168 176
General and administrative 52 56 152 138
Amortization expense 21 21 63 63
------ ------ ------- -------
128 135 383 377
------- ------ ------- -------
Net income $ 438 $ 474 $1,341 $ 1,445
====== ====== ====== =======
Net income per Unit of
Depositary Receipt $0.79 $0.85 $2.41 $2.59
===== ===== ===== =====
Cash distributions per Unit
of Depositary Receipt $1.26 $ 1.29 $3.82 $3.92
===== ====== ===== =====
The above net income and cash distributions per Unit of Depositary Receipt are
based upon the 551,604 Units outstanding for each period.
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF CASH FLOWS
For the nine months ended April 30, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 1,341 $ 1,445
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization expense 63 63
Amortization of discount/premium on debt securities 13 13
Changes in assets and liabilities:
Interest receivable 8 5
Accounts payable - affiliates (4) (1)
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Total adjustments 80 80
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Net cash provided by operating activities 1,421 1,525
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Cash flows from investing activities:
Principal collections on Mortgage-Backed Securities 885 698
Principal collections on Participating Insured
Mortgage Loans 52 48
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Net cash provided by investing activities 937 746
-------- ---------
Cash flows from financing activities:
Distributions to Unitholders and partners (2,124) (2,179)
--------- --------
Net increase in cash and cash equivalents 234 92
Cash and cash equivalents, beginning of period 3,274 3,050
--------- --------
Cash and cash equivalents, end of period $ 3,508 $ 3,142
======== =======
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
Notes to Financial Statements
(Unaudited)
1. Organization
The accompanying financial statements, footnotes and discussions should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended July 31, 1995.
In the opinion of management, the accompanying financial statements, which
have not been audited, reflect all adjustments necessary to present fairly
the results for the interim period. The accounting adjustments included in
the accompanying interim financial statements are of a normal recurring
nature.
2. Mortgage-Backed Securities
At April 30, 1996 and July 31, 1995, the Partnership held
non-participating mortgage-backed securities ("MBS") backed by single-family
or multi-family mortgage loans issued or originated in connection with the
housing programs of the Government National Mortgage Association ("GNMA"),
and guaranteed by GNMA, as follows (in thousands):
April 30, 1996 July 31, 1995
--------------------- -------------------
Estimated Estimated
Market Amortized Market Amortized
Description Value Cost Value Cost
---------- ----- ---- ----- -----
9.5% GNMA Pool $2,310 $2,136 $2,575 $2,407
9.0% GNMA Pool 403 390 533 513
8.0% GNMA Pool 3,537 3,638 4,050 4,124
7.5% GNMA Pool 346 348 363 360
------ ------ ------- -------
$6,596 $6,512 $ 7,521 $ 7,404
====== ====== ======= =======
The amortized cost amount of the MBS represents the face value of the
securities net of unamortized premium or discount. The 9.5% MBS, which were
purchased at a discount on December 14, 1988, had a face value of $2,153,000
and $2,427,000 as of April 30, 1996 and July 31, 1995, respectively, carry a
coupon interest rate of 9.5% per annum and include loans with scheduled
maturities between June 2009 and December 2009. The 9.0% MBS, which were
purchased at a premium on November 16, 1989, had a face value of $379,000 and
$501,000 as of April 30, 1996 and July 31, 1995, respectively, carry a coupon
interest rate of 9.0% per annum and include loans with scheduled maturities
between June 2001 and September 2002. The 8.0% MBS, which were purchased at a
premium on July 30, 1992, had a face value of $3,492,000 and $3,968,000 as of
April 30, 1996 and July 31, 1995, respectively, carry a coupon interest rate
of 8.0% per annum and include loans with scheduled maturities in June 2022.
The 7.5% MBS, which were purchased at a discount on January 30, 1992, had a
face value of $350,000 and $363,000 as of April 30, 1996 and July 31, 1995,
respectively, carry a coupon interest rate of 7.5% per annum and include
loans with scheduled maturities in March 2022. The loans included in these
GNMA pool programs may be prepaid, without penalty, at any time.
As of July 31, 1994, the Partnership applied of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115) to account for its investments in debt
securities. Under the provisions of SFAS No. 115, investments in debt and
equity securities are classified as either trading securities,
held-to-maturity, or available for sale based on management's intentions as
to their ultimate disposition. The Partnership's debt securities have been
classified as available for sale as of April 30, 1996 and July 31, 1995 and
are stated at estimated market value on the accompanying balance sheets.
Unrealized holding gains or losses on securities classified as available for
sale are reported as a net amount in a separate component of partners'
capital until realized. In accordance with SFAS No. 115, the net unrealized
holding gain or loss as of the date that the statement was first applied was
recorded as an adjustment of the balance of the separate component of equity.
Unrealized holding losses recognized for the nine months ended April 30, 1996
(including unrealized losses on Participating Insured Mortgage Loans - see
Note 3) totalled $48,000. Cumulative net unrealized holding gains for the
Partnership's debt securities (including Participating Insured Mortgage
Loans) totalled $735,000 and $783,000 at April 30, 1996 and July 31, 1995,
respectively. Investments in MBS are valued based on quoted market prices.
3. Investments in Participating Insured Mortgage Loans
Participating Insured Mortgage Loans secured by GNMA securities
outstanding at April 30, 1996 and July 31, 1995 are comprised of the
following invested amounts at amortized cost (in thousands):
GNMA
Certificate Interest Maturity
Number Property Rate Date April 30 July 31
------ -------- ---- ---- -------- -------
279985 Quarter Mill Apts. 8.50% 10/15/31 $ 7,206 $ 7,228
279119 Emerald Cove Apts. 8.75% 08/15/31 10,709 10,745
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$17,915 $ 17,973
======= ========
As of April 30, 1996 and July 31, 1995, the aggregate market value of
the Partnership's Participating Insured Mortgage Loans was approximately
$18,566,000 and $18,639,000, respectively. As discussed further in Note 2,
the Partnership's investments in debt securities are carried at estimated
market value as of April 30, 1996 and July 31, 1995. Investments in
Participating Insured Mortgage Loans, for which quoted market prices are not
available, are valued by an independent pricing service which determines the
valuations based on the reported financial results of the underlying
properties and a comparison of recent market trades of securities with
similar characteristics.
Descriptions of the properties financed by the Partnership's loans and
of the loan investments themselves are summarized below:
Quarter Mill Apartments
The Partnership acquired a Participating Insured Mortgage Loan with
respect to a 266-unit apartment complex known as Quarter Mill Apartments
located in Richmond, Virginia (the "Virginia Project"). Construction of the
Virginia Project was completed in November of 1990. Initial closing of this
Participating Insured Mortgage loan took place on August 2, 1989. The
Project Owner is Amurcon Corporation. The Base Component of this
Participating Insured Mortgage Loan is coinsured by FHA and represented by
GNMA Securities with an initial face value of $7,316,600, which GNMA
Securities bore interest at the rate of 10.25% during construction of the
Virginia Project and 8.50% thereafter. Effective May 1, 1991, the
construction loan was converted to a permanent loan with a principal balance
of $6,525,000. On June 21, 1991 an additional $791,600 was funded,
completing the Partnership's investment of $7,316,600. Scheduled principal
repayments of $111,000 have been received through April 30, 1996.
Emerald Cove Apartments
The Partnership acquired a Participating Insured Mortgage Loan with
respect to a 276-unit apartment complex known as Emerald Cove Apartments in
Charlotte, North Carolina (the "North Carolina Project"). Initial closing of
this Participating Insured Mortgage Loan took place on October 16, 1989. The
Project Owners are Ronald Curry and Ralph Abercia. The Base Component of
this Participating Insured Mortgage Loan is coinsured by FHA and represented
by GNMA Securities with an initial face value of $10,783,900 at closing,
which GNMA Securities bore interest at the rate of 10.25% during
construction of the North Carolina Project and 8.75% thereafter. During
fiscal 1992, the Partnership funded its remaining commitment on the
investment of approximately $1,184,000 and, effective May 1, 1992, the
investment was converted to a permanent loan with a principal balance of
$10,776,500. The Partnership paid a premium of $108,000 to the GNMA issuer
to obtain the original loan commitment due to the fact that the permanent
loan interest rate was higher than comparable market rates at the time of
the initial closing. The premium is included in the balance of the
Participating Insured Mortgage Loan on the accompanying balance sheet and is
being amortized on the straight-line method, which approximates the
effective interest method, over 15 years. Scheduled principal repayments of
$141,000 have been received through April 30, 1996.
4. Related Party Transactions
Management fees earned by the General Partner and its affiliates for
services rendered in managing the business of the Partnership aggregated
$168,000 and $176,000 for the nine months ended April 30, 1996 and 1995,
respectively. Of these amounts, $29,000 and $30,000, respectively, represent
additional asset management fees paid to PWPI. Accounts payable - affiliates
at April 30, 1996 and July 31, 1995 includes $30,000 and $31,000,
respectively, of management fees payable to the General Partner and its
affiliates. Accounts payable - affiliates at July 31, 1995 also includes
$3,000 of distributions payable to the General Partner.
Included in general and administrative expenses for the nine months
ended April 30, 1996 and 1995 is $71,000 and $73,000, respectively,
representing reimbursements to an affiliate of the General Partner for
providing certain financial, accounting and investor communication services
to the Partnership.
Also included in general and administrative expenses for each of the
nine-month periods ended April 30, 1996 and 1995 is $9,000 representing fees
earned by Mitchell Hutchins Institutional Investors, Inc. for managing the
Partnership's cash assets.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership's investments are structured to provide current income and
safety of principal. The Partnership's principal investments in both
Participating Insured Mortgage Loans and conventional mortgage-backed securities
are 100% guaranteed by GNMA in the event of defaults by the underlying property
owners. Obligations of GNMA are backed by the full faith and credit of the
Federal government. The Partnership does face potential market risk in the event
that the Partnership liquidates its investments in Participating Insured
Mortgage Loans and non-participating mortgage-backed securities prior to the
scheduled maturity dates of such investments. Depending on the general level of
market interest rates at the time of the sale of any of the Partnership's
mortgage security investments, the market value of the investments may be higher
or lower than the outstanding principal balances. Nonetheless, since the
Partnership is not required to be liquidated prior to the scheduled maturity
dates, management can limit the exposure to market risk by attempting to time
the liquidation of the Partnership's investments to coincide with a period of
favorable interest rates. However, management is not prohibited from selling any
security at a loss and may do so if it is believed that such a sale would be in
the best interests of the Partnership. In addition, the Partnership is also
subject to possible reinvestment risk to the extent that its principal
investments are prepaid prior to the Partnership's expected liquidation period.
Depending on the general level of market interest rates at the time of such a
prepayment, the Partnership or an individual Unitholder might be unable to earn
a comparable yield on a similar low-risk investment upon the reinvestment of
such funds. Over the past several years, generally low market interest rates
have prompted a high level of refinancing activity, resulting in significant
prepayments on the Partnership's non-participating mortgage-backed securities.
Such prepayments have reduced the Partnership's investment income and increased
the outstanding balance of the Partnership's cash reserves over this period.
The Partnership's two Participating Insured Mortgage Loans are secured by
the Emerald Cove and Quarter Mill apartment complexes. The occupancy level at
Emerald Cove was 96% for the current fiscal quarter, up from 94% for the prior
quarter. Occupancy at the Quarter Mill Apartments during the current fiscal
quarter was 96%, up from 95% for the prior quarter. As discussed further in the
Annual Report, during fiscal 1995 the Project Owner of the Emerald Cove
Apartments received an offer to purchase the property. A similar offer to
purchase the property had been proposed in fiscal 1994 but could not be
completed. Prepayment of the Partnership's Participating Insured Mortgage Loan
is restricted through March 1997 and then requires a prepayment penalty for the
next four years. Based on this sale offer, the Emerald Cove Project Owner made a
proposal to the Partnership to accept prepayment on its Participating Insured
Mortgage Loan at a premium in return for the Partnership's waiver of the
prepayment restrictions. Management had evaluated such proposal and, during the
quarter ended October 31, 1995, had agreed to allow the transaction. However,
subsequent to the end of the first quarter, the Partnership was notified that
the potential buyer and the owner were not able to agree on final terms for a
sale and the offer to purchase the property was withdrawn.
During the quarter ended January 31, 1996, the owner of Emerald Cove
Apartments received two new offers to purchase the property and, in connection
with these offers, again requested permission to prepay the Partnership's
participating loan. During the current quarter ended April 30, 1996, based on an
analysis of the economic benefits to the Partnership, the Partnership responded
with terms on which it would accept prepayment of the Participating Insured
Mortgage Loan. As with previously reported offers, there can be no assurance
that the proposed sale and prepayment transactions will be completed.
The Partnership's non-participating MBS have coupon interest rates ranging
from 7.5% to 9.5%. Interest rates on the two Participating Insured Mortgage
Loans are at 8.5% and 8.75%. Based on current market interest rate levels, the
aggregate market value of these securities would be expected to be above par as
of April 30, 1996. As discussed further above, fluctuations in market interest
rate levels will not result in realized gains or losses unless the Partnership
chooses to sell its investments prior to maturity in secondary market
transactions. Such sales would only be likely as part of a formal plan of
liquidation for the Partnership. A prepayment of the Emerald Cove investment, if
completed, could initiate such a plan of liquidation prior to the end of
calendar 1996. However, as noted above, the Emerald Cove borrower has failed to
close on two previously proposed prepayment transactions and there are no
assurances that the currently proposed transaction will be completed.
At April 30, 1996, the Partnership had cash and cash equivalents of
approximately $3,508,000. Such amounts will be utilized for the working capital
requirements of the Partnership and for distributions to the Unitholders. The
source of future liquidity and distributions to the Unitholders is expected to
be primarily through interest income and principal repayments from the
Partnership's debt securities, interest income from temporary investments, and
to a lesser extent from reserves, contingent interest from Participating Insured
Mortgage Loans and net project residuals from the sale or refinancing of the
properties securing such investments.
Results of Operations
Three Months Ended April 30, 1996
Net income decreased by $36,000 for the three months ended April 30, 1996,
when compared to the same period in the prior year, primarily due to a decrease
in total revenues of $43,000. The decrease in revenues can be attributed mainly
to the decrease in interest income from Participating Insured Mortgage Loans and
non-participating MBS which aggregated $41,000. This decrease resulted primarily
from a decline in the average outstanding principal balances of such investments
due to scheduled principal amortization on all of the debt securities and
prepayments on the MBS. Also partially contributing to this decrease in interest
income was an amount of contingent interest totalling $15,000 which was received
by the Partnership from the Quarter Mill investment during the quarter ended
April 30, 1995. No contingent interest payments were received in the current
three-month period.
Nine Months Ended April 30, 1996
Net income decreased by $104,000 for the nine months ended April 30, 1996,
when compared to the same period in the prior year, primarily due to a decrease
in total revenues of $98,000. The decrease in total revenues can be attributed
to the decrease in interest income from Participating Insured Mortgage Loans and
non-participating MBS which aggregated $113,000. This decrease resulted
primarily from a decline in the average outstanding principal balances of such
investments due to scheduled principal amortization on all of the debt
securities and prepayments on the MBS. Also partially contributing to this
decrease in interest income was an amount of contingent interest totalling
$37,000 which was received by the Partnership from the Quarter Mill investment
during the nine months ended April 30, 1995. No contingent interest payments
were received in the current nine-month period. An increase of $15,000 in money
market interest income for the nine months ended April 30, 1996 partially offset
the decline in revenues generated from the investments in debt securities. The
increase in money market interest was mainly due to an increase in the average
outstanding balance of the Partnership's cash reserves resulting from the MBS
prepayment activity. The decrease in net income for the nine months ended April
30, 1996 was also partly due to an increase in general and administrative
expenses of $14,000 which resulted mainly from an increase in certain required
professional services in the current fiscal year.
PART II
Other Information
Item 1. Legal Proceedings
As previously disclosed, First Insured Mortgage Partners, Inc. and
Properties Associates 1988, L.P., the General Partners of the Partnership, were
named as defendants in a class action lawsuit against PaineWebber Incorporated
("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of
70 direct investment offerings, including the offering of interests in the
Partnership. In January 1996, PaineWebber signed a memorandum of understanding
with the plaintiffs in the class action outlining the terms under which the
parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and a plan of allocation which the parties
expect to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to unitholders in PaineWebber Insured Mortgage
Partners 1-B, L.P. Under certain limited circumstances, pursuant to the
Partnership Agreement and other contractual obligations, PaineWebber affiliates
could be entitled to indemnification for expenses and liabilities in connection
with this litigation. At the present time, the General Partners cannot estimate
the impact, if any, of this matter on the Partnership's financial statements,
taken as a whole.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages. The eventual outcome
of this litigation and the potential impact, if any, on the Partnership's
unitholders cannot be determined at the present time.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Partnership has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
By: FIRST INSURED MORTGAGE PARTNERS, INC.
Managing General Partner
Date: June 6, 1996 By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Vice President and
Chief Financial Officer