UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997
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
January 31, 1997 and July 31, 1996 (Unaudited)
(In thousands)
ASSETS
January 31 July 31
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Investments in Debt Securities:
Mortgage-Backed Securities available for sale $ 5,937 $ 6,280
Participating Insured Mortgage Loans
available for sale 18,717 18,539
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24,654 24,819
Cash and cash equivalents 3,617 3,637
Interest and other receivables 169 172
Deferred expenses, net 574 615
-------- --------
$ 29,014 $ 29,243
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LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 33 $ 30
Accounts payable and accrued expenses 36 51
Partners' capital 28,945 29,162
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$ 29,014 $ 29,243
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended January 31, 1997 and 1996 (Unaudited)
(In thousands)
Corporate
Limited
General Partner and
Partner Unitholders
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Balance at July 31, 1995 $ 1 $ 30,244
Net unrealized holding gains on debt securities - 283
Cash distributions (9) (1,412)
Net income 9 894
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Balance at January 31, 1996 $ 1 $ 30,009
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Balance at July 31, 1996 $ 1 $ 29,161
Net unrealized holding gains on debt securities - 292
Cash distributions (10) (1,373)
Net income 9 865
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Balance at January 31, 1997 $ - $ 28,945
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See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF INCOME
For the three and six months ended January 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
January 31, January 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Interest income - Investments $ 502 $ 527 $1,009 $1,060
Interest income - Money Market 50 49 100 98
------ ----- ------ ------
552 576 1,109 1,158
Expenses:
Management fees 53 56 108 113
General and administrative 40 56 85 100
Amortization expense 21 21 42 42
------ ----- ------ ------
114 133 235 255
------ ----- ------ ------
Net income $ 438 $ 443 $ 874 $ 903
====== ====== ====== ======
Net income per Unit of
Depositary Receipt $ 0.78 $0.79 $1.57 $ 1.62
====== ===== ===== ======
Cash distributions per Unit
of Depositary Receipt $ 1.24 $1.28 $2.49 $ 2.56
====== ===== ===== ======
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 six months ended January 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 874 $ 903
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization expense 41 42
Amortization of discount/premium on debt securities 9 9
Changes in assets and liabilities:
Interest receivable 3 6
Accounts payable - affiliates 3 -
Accounts payable and accrued expenses (15) (10)
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Total adjustments 41 47
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Net cash provided by operating activities 915 950
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Cash flows from investing activities:
Principal collections on Mortgage-Backed Securities 411 582
Principal collections on Participating Insured
Mortgage Loans 37 34
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Net cash provided by investing activities 448 616
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Cash flows from financing activities:
Distributions to Unitholders and partners (1,383) (1,421)
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Net (decrease) increase in cash and cash equivalents (20) 145
Cash and cash equivalents, beginning of period 3,637 3,274
-------- --------
Cash and cash equivalents, end of period $ 3,617 $ 3,419
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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, 1996. 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.
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 January 31, 1997 and July 31, 1996
and revenues and expenses for the three and six months ended January 31, 1997
and 1996. Actual results could differ from the estimates and assumptions
used.
2. Mortgage-Backed Securities
At January 31, 1997 and July 31, 1996, 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):
January 31, 1997 July 31, 1996
----------------------------- --------------------------
Estimated Estimated
Market Face Amortized Market Face Amortized
Description Value Value Cost Value Value Cost
----------- ----- ----- ---- ----- ----- ----
9.5% GNMA Pool $ 2,104 $ 1,937 $ 1,923 $ 2,228 $ 2,071 $ 2,055
9.0% GNMA Pool 318 303 314 362 347 358
8.0% GNMA Pool 3,194 3,104 3,240 3,363 3,326 3,468
7.5% GNMA Pool 321 319 316 327 330 328
------- ------- ------- ------- ------- -------
$ 5,937 $ 5,663 $ 5,793 $ 6,280 $ 6,074 $ 6,209
======= ======= ======= ======= ======= =======
As discussed further in the Annual Report, the Partnership's investments
in MBS are carried at fair value as of January 31, 1997 and July 31, 1996.
Investments in MBS are valued based on quoted market prices. The amortized
cost of the MBS represents the face value of the securities net of
unamortized premium or discount. Investments in non-participating MBS were
limited to no more than 30% of the original net offering proceeds per the
terms of the Partnership's offering prospectus.
The 9.5% MBS, which were purchased at a discount on December 14, 1988,
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, 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, 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 October 30, 1992, carry a coupon
interest rate of 7.50% 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.
3. Investments in Participating Insured Mortgage Loans
Participating Insured Mortgage Loans secured by GNMA securities
outstanding at January 31, 1997 and July 31, 1996 are comprised of the
following (in thousands):
January 31, 1997 July 31, 1996
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GNMA Estimated Estimated
Certificate Interest Market Amortized Market Amortized
Number Property Rate Value Cost Value Cost
------ -------- ---- ----- ---- ----- ----
279985 Quarter Mill 8.50% $ 7,519 $ 7,183 $ 7,441 $ 7,198
279119 Emerald Cove 8.75% 11,198 10,671 11,098 10,697
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$18,717 $17,854 $18,539 $17,895
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As discussed further in the Annual Report, the Partnership's investments
in Participating Insured Mortgage Loans are carried at fair value as of
January 31, 1997 and July 31, 1996. 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
the loan agreements 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 $133,982 have been received through January 31, 1997.
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
$173,438 have been received through January 31, 1997.
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
$108,000 and $113,000 for the six months ended January 31, 1997 and 1996,
respectively. Such management fees include an Asset Management Fee equal to
0.75% per annum of the outstanding principal balance of the Partnership's
mortgage securities and additional asset management fees equal to 2% of the
Partnership's distributable cash, as defined. Of the total management fees
incurred for the six months ended January 31, 1997 and 1996, $19,000 in each
period represents additional asset management fees paid to PWPI. Accounts
payable - affiliates at January 31, 1997 and July 31, 1996 consists of
$33,000 and $30,000, respectively, of management fees payable to the General
Partner and its affiliates.
Included in general and administrative expenses for the six months ended
January 31, 1997 and 1996 is $48,000 and $47,000, 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 the six-month
periods ended January 31, 1997 and 1996 is $3,500 and $7,300, respectively,
representing fees earned by an affiliate, Mitchell Hutchins Institutional
Investors, Inc., for managing the Partnership's cash assets.
5. Subsequent Event
On February 28, 1997, the General Partner authorized the payment of a
special distribution to Unitholders in the amount of approximately
$2,600,000, or $47.13 per original $1,000 investment, in addition to the
regular quarterly distribution of $12.31 per original $1,000 investment for
the quarter ended January 31, 1997. Both distributions will be paid on March
14, 1997 to Unitholders of record as of January 31, 1997. The special
distribution consists of Partnership cash reserves which exceed expected
future requirements.
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 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, as expected,
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. The market value of the Partnership's Participating Insured
Mortgage Loans is also affected by the value, if any, that is attributed to the
participation features of such loans. Such value is impacted by overall real
estate market conditions and by the specific performance of the properties
securing the Partnership's participation interests. The Partnership's
non-participating MBS have coupon interest rates ranging from 7.5% to 9.5%.
Based on current market interest rate levels, the aggregate market value of
these securities at the present time would be expected to be slightly above both
their face value and amortized cost, which includes any unamortized discounts or
premiums. As of January 31, 1997, the Partnership's Participating Insured
Mortgage Loans, which carry coupon interest rates of 8.5% and 8.75%, had
estimated market values slightly above their face values due to a variety of
factors, including the participation features. Increases in market interest
rates and/or deterioration in general real estate market conditions in the near
term could cause the aggregate market value of the Participating Insured
Mortgage Loans and the portfolio of MBS investments to fall below face value
and/or amortized cost. However, fluctuating market conditions will not result in
realized gains or losses unless the Partnership's investments are prepaid or
sold prior to maturity. Secondary market sales of the Partnership's investments
would likely only occur as part of a formal plan of liquidation for the
Partnership.
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.
Current rates of return do not warrant the reinvestment of these principal
prepayments in additional non-participating mortgage backed securities. Since is
unlikely that there will be a default on either of the Partnership's two
remaining multi-family participating loans, management has concluded that it
would be in the best interests of the Unitholders to return the portion of the
Partnership's cash reserves which exceeds expected future requirements.
Consequently, the Partnership will distribute approximately $2,600,000 of its
excess reserves, or $47.13 per original $1,000 investment, in a special capital
distribution to be made on March 14, 1997, which is in addition to the regular
quarterly distribution of $12.31 per original $1,000 investment to be paid on
the same date for the quarter ended January 31, 1997.
Regular quarterly distributions are comprised of investment income and
return of capital which results from amortization of mortgage principal as well
as principal prepayments from the non-participating GNMA mortgage-backed
securities. Such principal prepayments are unpredictable and have been high
during recent years, but have declined during the past two quarters. Based on
this decline in the rate of principal prepayments and the expectation that this
decline will continue in the future, the Partnership will reduce the regular
quarterly distribution rate effective for the third quarter of fiscal 1997 from
8.25% per annum to 6.5%, of which approximately 5.5% is expected to represent
net investment income and 1% is expected to be a return of capital. If the
actual payment levels exceed anticipated levels during the next twelve months,
the Partnership is expected to make a Special Distribution of these excess
amounts in March 1998 and each subsequent March, if warranted by future
principal repayment levels.
The Partnership's two remaining Participating Insured Mortgage Loans are
secured by the Emerald Cove and Quarter Mill apartment complexes. The occupancy
level at Emerald Cove averaged 90% for the current fiscal quarter, compared to
96% for the prior quarter and 94% for the same quarter a year ago. The decrease
in occupancy is primarily attributable to the competition from the four newly
developed properties which opened in this submarket during the past six months.
These competing properties offered rental concessions in order to accelerate
their leasing progress. Prepayment of the Partnership's Emerald Cove
Participating Insured Mortgage Loan is restricted through March 1997 and then
requires a prepayment penalty which declines ratably, from 5% to 2%, over the
next four years. There are no ongoing prepayment discussions with the Emerald
Cove owner at the present time.
Occupancy at the Quarter Mill Apartments during the current fiscal quarter
averaged 98%, unchanged from the prior quarter. Property operations continue to
generate small amounts of excess cash flow, a portion of which is payable to the
Partnership as Contingent Interest. During fiscal 1996, the Partnership received
approximately $46,000, representing its 30% share of the surplus cash, as
defined, generated by the Quarter Mill property for calendar year 1995.
Effective in fiscal 1996, the Quarter Mill Participating Insured Mortgage Loan
became open to prepayment with a specified prepayment penalty which declines
ratably, from 10% to 2%, over the next five years. To date, the Quarter Mill
owner has given no indication of an intent to prepay the outstanding loan in the
near term.
At January 31, 1997, the Partnership had cash and cash equivalents of
approximately $3,617,000. Such amounts will be utilized for distributions to the
Unitholders, as discussed further above, and for the working capital
requirements of the Partnership. 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 mortgage securities,
money-market interest income from invested cash reserves, and to a lesser extent
from 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 January 31, 1997
- -----------------------------------
Net income decreased by $5,000 for the three months ended January 31, 1997,
when compared to the same period in the prior year, due to a $24,000 decline in
total revenues which was partially offset by a $19,000 reduction in operating
expenses. The decrease in revenues can be attributed primarily to the $25,000
decline in interest income from Participating Insured Mortgage Loans and
non-participating MBS. This decline in interest income resulted from a reduction
in the average outstanding principal balances of such investments due to
scheduled principal amortization and prepayments on the MBS. An increase of
$1,000 in money market interest income in the current three-month period
partially offset the decline in revenues generated from the investments in debt
securities. The increase in money market interest income was mainly the result
of an increase in the average outstanding balance of the Partnership's invested
cash reserves. Future money market interest income is expected to decline
subsequent to the $2.6 million special distribution of excess cash reserves to
be made on March 14, 1997, as discussed further above. The decrease in operating
expenses resulted from a $16,000 decrease in general and administrative expenses
and a $3,000 decrease in management fees. General and administrative expenses
decreased primarily due to a reduction in certain required professional
services, while the decrease in management fees reflects the declining principal
balances of the Partnership's outstanding mortgage securities, upon which such
fees are primarily based.
Six Months Ended January 31, 1997
- ---------------------------------
Net income decreased by $29,000 for the six months ended January 31, 1997,
when compared to the same period in the prior year, due to a $49,000 decline in
total revenues which was partially offset by a $20,000 reduction in operating
expenses. The decrease in revenues can be attributed to a $51,000 decline in
interest income from Participating Insured Mortgage Loans and non-participating
MBS. This decline in interest income resulted from a reduction in the average
outstanding principal balances of such investments due to scheduled principal
amortization and prepayments on the MBS. An increase of $2,000 in money market
interest income in the current six-month period partially offset the decline in
revenues generated from the investments in debt securities. The increase in
money market interest income was mainly the result of an increase in the average
outstanding balance of the Partnership's invested cash reserves. Future money
market interest income is expected to decline subsequent to the $2.6 million
special distribution of excess cash reserves to be made on March 14, 1997, as
discussed further above. The decrease in operating expenses resulted from a
$15,000 reduction in general and administrative expenses and a $5,000 decline in
management fees. General and administrative expenses decreased primarily due to
reduction in certain required professional services, while the decrease in
management fees reflects the declining principal balances of the Partnership's
outstanding mortgage securities, upon which such fees are primarily based.
PART II
Other Information
Item 1. Legal Proceedings
With regard to the proposed settlement of the New York Limited Partnership
Actions described in the Partnership's Annual Report on Form 10-K for the year
ended July 31, 1996, 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.
Mediation with respect to the Abbate and Barstad actions described in the
Partnership's Annual Report 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 March 1997.
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: March 13, 1997 By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Vice President and
Chief Financial Officer