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
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: JULY 31, 1999
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.
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(Exact name of registrant as specified in its charter)
Delaware 04-3038480
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(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Depositary Receipts representing
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Units of Limited Partner Interests
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|
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|_|
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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The Prospectus of the registrant Part IV
dated April 23, 1987, as supplemented
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
1999 FORM 10-K
TABLE OF CONTENTS
Part I Page
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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-3
Part II
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Item 5 Market for the Registrant's Depositary Units of Limited
Partnership Interest and Related Security Holde
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 7A Market Risk Disclosures II-6
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
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Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
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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-14
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-5 of
this Form 10-K.
PART I
Item 1. Business
PaineWebber Insured Mortgage Partners 1-B, L.P. (the "Partnership") is a
Delaware limited partnership formed primarily for the purpose of investing in a
diversified portfolio of federally insured or coinsured mortgage loans
("Participating Insured Mortgage Loans") through the purchase of certain
mortgage-backed securities ("GNMA Securities") guaranteed as to their payment of
principal and interest by the Government National Mortgage Association ("GNMA").
On May 16, 1988, the Partnership commenced the sale of Limited Partner Interests
(the "Units"), which are evidenced by Depositary Receipts (at $100 per Unit).
Depositary Receipts were offered to the public by PaineWebber Incorporated
("PWI"), as sales agent, pursuant to a Registration Statement on Form S-11 filed
under the Securities Act of 1933 (Registration No. 33-11911). The Partnership
sold 551,604 Units of Depositary Receipts from May 16, 1988 to May 1, 1989,
representing capital contributions of approximately $55,160,000. Unitholders
will not be required to make any additional capital contributions.
The Units represent an interest assigned to persons who purchased Units
("Unitholders") from the initial limited partner of the Partnership pursuant to
the Partnership Agreement, which interest is the equivalent of a limited
partnership interest. Although Unitholders are not limited partners of the
Partnership, as Unitholders they are entitled to the same economic benefits,
including the same share of income, gains, losses, deductions, credits and cash
distributions, as if they were limited partners holding the number of limited
partnership interests represented by their Units.
The Partnership originally invested in three Participating Insured Mortgage
Loans, which were originated under or in connection with Federal Housing
Administration ("FHA") insurance programs to finance or refinance the
acquisition, construction or substantial rehabilitation of privately owned and
operating multi-family residential rental projects, (the "Projects"). The
Partnership purchased each of the GNMA Securities with proceeds raised through
its public offering from an FHA-approved mortgagee/coinsurer and GNMA
issuer/servicer. The Partnership was expected to make an investment in a fourth
Participating Insured Mortgage Loan and entered into a commitment to fund a $4.5
million loan on a to-be-built project in Orlando, Florida. During fiscal 1991,
the prospective borrower elected not to proceed with the Orlando development
and, as a result, the commitment to purchase the related GNMA securities
subsequently expired. The efforts of the General Partner to obtain a suitable
investment to replace the expired commitment were not successful, in large part
due to changes instituted by the Department of Housing and Urban Development
which made the type of insured financing that the Partnership can invest in very
difficult to obtain. As a result, the General Partner decided to return the
majority of the previously committed funds to the Unitholders. A distribution of
approximately $4 million was paid to the Unitholders in June of 1991. The
remainder of the previously committed funds was added to the Partnership's cash
reserves. As discussed further below, one of the Partnership's Insured Mortgage
Loans was repaid in full during fiscal 1992, and the proceeds were distributed
to the Unitholders in June of 1993.
Each Participating Insured Mortgage Loan has two components, a base
component consisting of the principal amount of the mortgage loan plus interest
at a stated rate thereon and a contingent component providing for the payment of
contingent interest ("Contingent Interest") from net cash flow from Project
operations and from capital appreciation, if any, realized as a result of a
Project sale or refinancing. The principal of and the stated interest on each
Participating Insured Mortgage Loan is coinsured by the FHA ("FHA Insurance")
and is represented by a GNMA Security, the interest rate on which (the "Base
Interest") is equal to the stated interest rate on the Participating Insured
Mortgage Loan minus certain fixed fees payable to GNMA and the FHA mortgagee.
Neither FHA Insurance nor any GNMA security will provide for or support the
payment of Contingent Interest.
The Partnership has also invested in 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 GNMA. Investments in
non-participating MBS were limited to no more than 30% of the original net
offering proceeds.
Until May 1992, the Partnership held a Participating Insured Mortgage loan
with respect to an apartment complex known as the Casablanca Apartments in
Boynton Beach, Florida. During fiscal 1992, the owner of the Casablanca
Apartments complex defaulted on the scheduled debt service payments to the GNMA
issuer. The default triggered the prepayment provisions of the Partnership's
GNMA mortgage-backed security. Consequently, on May 26, 1992, GNMA prepaid the
outstanding balance of the principal and accrued interest to the Partnership
pursuant to the terms of the mortgage-backed security agreement. The Partnership
distributed the proceeds received from the Casablanca prepayment, which
aggregated $12,521,000, to the Unitholders concurrent with the regular quarterly
distribution paid on June 15, 1993.
The objectives of the Partnership have been to protect and preserve the
Partnership's capital, to make quarterly distributions of cash attributable to
payments of principal and interest (including Contingent Interest) on
Participating Insured Mortgage Loans and MBS and to provide gains through the
appreciation of properties financed with Participating Insured Mortgage Loans.
Cumulative cash distributions to the Unitholders through July 31, 1999
have totalled approximately $54,673,000, or approximately $1,001 per original
$1,000 investment for the Partnership's earliest investors. Such distributions
include a return of capital totalling approximately $503 per $1,000 investment
resulting from the expired commitment and the prepayment discussed above, along
with the scheduled amortization of mortgage principal and principal prepayments
from the Partnership's mortgage-backed securities. The return of capital to date
includes special distributions of $47.13, $10.00 and $25.00 per original $1,000
investment paid on March 14, 1997, March 13, 1998 and March 15, 1999,
respectively, which resulted from excess Partnership reserves which had
accumulated from prepayment activity on the non-participating MBS. Quarterly
distributions had been paid at a rate of 8.25% per annum on Unitholders'
remaining invested capital from inception through the distribution made on March
14, 1997 for the quarter ended January 31, 1997. Beginning with the distribution
made on June 13, 1997 for the quarter ended April 30, 1997, the Partnership
reduced the regular distribution rate to 6.5% per annum due to a decline in the
rate of principal prepayments on the non-participating MBS. Unitholders'
remaining capital accounts as of July 31, 1999 totalled approximately $497 per
$1,000 investment. Through July 31, 1999, the Partnership had received $213,000
of Contingent Interest payments from its Participating Insured Mortgage Loans.
As of July 31, 1999, the Partnership holds Participating Insured Mortgage
Loans secured by GNMA securities as described below.
GNMA
Certificate Property Name, Date of Interest Maturity
Number and Location (1) Size Acquisition Rate Date
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279985 Quarter Mill Apartments 266 Units 08/02/89 8.50% 10/15/31
Richmond, VA
279119 Emerald Cove Apartments 276 Units 10/16/89 8.75% 08/15/31
Charlotte, NC
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the agreements through which the Partnership has acquired
these investments.
As discussed further in Item 7, the Partnership is currently analyzing
potential disposition strategies for its remaining investments. As part of these
efforts, the Partnership is evaluating the current economic benefits it would
receive if the owners of the Emerald Cove Apartments and the Quaker Mill
Apartments were to prepay their participating loans in the near term. In
addition, since the Partnership cannot require either of the owners to prepay
their loans in the near term, the Partnership continues to investigate the
benefits of selling one or both of the participating loans and some or all of
the non-participating mortgage backed securities on the secondary market. If the
Partnership decides to pursue secondary market sales of its debt securities, it
is possible that such sales, along with a liquidation of the Partnership, could
be completed by December 31, 1999. If the Partnership chooses to pursue
prepayments of the participating loans, it would appear unlikely that a
liquidation of the Partnership could be completed prior to the end of calendar
year 1999.
The future performance of the Partnership will depend, in part, upon
future interest rate fluctuations, which cannot be predicted. In addition, the
Partnership's overall operating performance is subject to all of the risks
normally associated with real estate investments, including: reliance on the
owners' operating skills, including their ability to maintain occupancy levels,
meet operating expenses, maintain the property and maintain adequate insurance
coverage; adverse changes in general and/or local economic conditions; changes
in governmental regulations, real estate zoning laws, or tax laws; and other
circumstances over which the Partnership may have little or no control.
The Partnership is engaged solely in the business of investing in real
estate through Participating Insured Mortgage Loans and conventional MBS,
therefore, presentation of information about industry segments is not
applicable. The Partnership has no employees. Subject to the General Partner's
overall authority, the business of the Partnership is managed by PaineWebber
Properties Incorporated ("PWPI"), a wholly-owned subsidiary of PWI.
The General Partner of the Partnership (the "General Partner") is First
Insured Mortgage Partners, L.P., a Delaware limited partnership. First Insured
Mortgage Partners, Inc. (the "Managing General Partner"), a wholly-owned
subsidiary of PaineWebber Group, Inc. ("PaineWebber"), is the Managing General
Partner of the General Partner. PWI and Properties Associates 1988, L.P.
("PA1988"), a Virginia limited partnership, are the limited partners of the
General Partner. The officers and directors of the Managing General Partner and
certain limited partners of PA1988 are also officers and directors of PWI and
PWPI. The initial limited partner of the Partnership is PaineWebber Depositary
Corporation, a wholly-owned subsidiary of PaineWebber.
The terms of transactions between the Partnership and affiliates of the
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
The Partnership owns no real estate. The Partnership has acquired
Participating Insured Mortgage Loans secured by the properties referred to under
Item 1 above to which reference is made for the name, location and description
of each property.
Occupancy figures for the properties securing the Partnership's
Participating Insured Mortgage Loans for each fiscal quarter during 1999, along
with an average for the year, are presented below:
Percent Occupied At
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Fiscal
1999
10/31/98 1/31/99 4/30/99 7/31/99 Average
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Quarter Mill Apartments 98% 98% 97% 97% 97%
Emerald Cove Apartments 96% 96% 94% 90% 94%
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Depositary Units of Limited Partnership
Interest and Related Security Holder Matters
At July 31, 1999, there were 2,974 investors holding Depositary Receipts
in the Partnership. There is currently no public market for the resale of Units,
and it is not anticipated that a public market for Units will develop. Upon
request, the General Partner will endeavor to assist a Unitholder desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the Unitholder. The
General Partner will not redeem or repurchase Units.
Reference is made to Item 6 below for a discussion of cash distributions
made to the Unitholders during fiscal 1999.
Item 6. Selected Financial Data
PaineWebber Insured Mortgage Partners 1-B, L.P.
For the years ended July 31, 1999, 1998, 1997, 1996 and 1995
(In thousands, except per Unit data)
1999 1998 1997 1996 1995
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Revenues $ 1,856 $ 2,000 $ 2,193 $ 2,331 $ 2,410
Net income $ 1,286 $ 1,412 $ 1,709 $ 1,806 $ 1,898
Net income per Unit of
Depositary Receipt $ 2.31 $ 2.53 $ 3.07 $ 3.24 $ 3.41
Regular quarterly cash
distributions per Unit of
Depositary Receipt $ 3.38 $ 3.51 $ 4.61 $ 5.08 $ 5.22
Special cash distributions from
excess reserves and investment
prepayment transactions per
Unit of Depositary Receipt $ 2.50 $ 1.00 $ 4.71 - -
Total assets $22,387 $24,837 $25,971 $29,243 $30,315
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The regular quarterly cash distributions shown above include a return of
capital component resulting from the normal principal amortization on all debt
securities and principal prepayments on the non-participating MBS.
The above net income and cash distributions per Unit of Depositary Receipt
are based upon the 551,604 Units of Depositary Receipt of the Partnership
outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
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The Partnership offered depositary units (at $100 per Unit) representing
limited partnership interests to the public from May 16, 1988 to May 1, 1989
pursuant to a Registration Statement filed under the Securities Act of 1933.
Gross proceeds of approximately $55,160,000 were received by the Partnership
from the offering and, after deducting selling expenses and offering costs,
approximately $42,908,000 was invested in mortgage securities. Approximately $4
million of uninvested offering proceeds was returned to the Unitholders in June
of 1991 after a proposed investment, for which such funds had been committed,
could not be completed. The Partnership originally invested approximately
$30,697,000 in three Participating Insured Mortgage Loans originated in
connection with Federal Housing Administration ("FHA") insurance to finance the
construction of multi-family residential rental projects. The Partnership also
originally invested approximately $12,211,000 in non-participating
mortgage-backed securities ("MBS") collateralized by pools of single-family or
multi-family mortgage loans that are guaranteed by GNMA. In May 1992, one of the
Participating Insured Mortgage Loans was prepaid at par as a result of a default
by the underlying property owner. Proceeds from this prepayment were distributed
to the Unitholders in June 1993 after an examination of reinvestment
alternatives failed to identify any suitable replacement investments.
The Partnership is currently analyzing potential disposition strategies
for its remaining investments. As part of these efforts, the Partnership is
evaluating the current economic benefits it would receive if the owners of the
Emerald Cove Apartments and the Quarter Mill Apartments were to prepay their
participating loans in the near term. The current strength of the national real
estate market and the favorable interest rate environment for the sale or
refinancing of multi-family apartment properties make the prospect of a
prepayment transaction a potentially attractive option for the property owners.
During fiscal year 1999, the Partnership continued to have discussions with the
owners of the Emerald Cove Apartments and the Quarter Mill Apartments about the
possibility of a prepayment of their loans before the end of calendar year 1999.
While, to date, the discussions with the owners have not led to an agreement for
the prepayment of the participating loans, the Partnership continues to have
discussions with the owner of Emerald Cove. While the Partnership cannot require
either of the owners to prepay their loans in the near term, the Partnership
could possibly sell one or both of the participating loans and some or all of
the non-participating mortgage-backed security pools on the secondary market. In
this regard, a key consideration is the strength of the buying markets for these
types of investments. Also, as part of any sale of its two participating
mortgage loans, the Partnership would expect to receive fair value for its
entitlement to participate in potential cash flow increases and capital
appreciation from each property as well as for its entitlement to receive
prepayment penalties if either of the participating loans were prepaid by the
property owners. As discussed further below, as of the present date the amounts
of the prepayment penalties which could be received on the two remaining
participating loans range from 4% to 2% of the outstanding loan balances
depending on the date of the prepayment. The prepayment penalties would apply if
the participating loans were prepaid before June 2001 for its Quarter Mill
investment and May 2002 for its Emerald Cove investment. If the Partnership
decides to pursue secondary market sales of its debt securities, it is possible
that such sales, along with a liquidation of the Partnership, could be completed
by December 31, 1999. If the Partnership chooses to pursue prepayments of the
participating loans, it would appear unlikely that a liquidation of the
Partnership could be completed prior to the end of calendar year 1999. However,
the Partnership continues to pursue this goal.
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 is slightly above both the
aggregate face value and amortized cost, which includes any unamortized
discounts or premiums. As of July 31, 1999, the Partnership's two remaining
Participating Insured Mortgage Loans, which carry coupon interest rates of 8.5%
and 8.75%, also had estimated market values slightly above their face values due
to a variety of factors, including the participation features. Increases in
market interest rates reduced the fair market values of both the participating
loans and the non-participating MBS during fiscal 1999. Further 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 non-participating MBS
investments to fall below face value and/or amortized cost. In the event that
such circumstances were to occur, 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.
As previously reported, generally low market interest rates have prompted
a high level of refinancing activity over the past several years, resulting in
significant prepayments on the Partnership's non-participating mortgage-backed
securities. Such prepayments had the effect of reducing the Partnership's
investment income and cash flows from operating activities and increasing the
outstanding balance of the Partnership's cash reserves. Regular quarterly
distributions are comprised of investment income and return of capital which
results from the scheduled amortization of mortgage principal on all of the debt
securities as well as principal prepayments from the non-participating GNMA
mortgage-backed securities. Such principal prepayments are unpredictable and, as
noted above, had been high during recent years but declined during fiscal 1997,
resulting in a reduction in cash flows from investing activities. Based on this
decline in the rate of principal prepayments and the expectation that this
decline would continue in the future, the Partnership had reduced the regular
quarterly distribution rate effective for the payment made on June 13, 1997 for
the third quarter of fiscal 1997. The distribution rate declined from 8.25% per
annum to 6.5%. During fiscal 1998 and fiscal 1999, however, actual principal
prepayment levels were higher than projected resulting in an increase in cash
flows from investing activities. As a result, the Partnership made a special
capital distribution of excess cash totaling approximately $552,000, or $10.00
per original $1,000 investment, to the Limited Partners on March 13, 1998
concurrent with the regular quarterly distribution for the period ended January
31, 1998. During fiscal 1999 a special distribution of $25.00 per original
$1,000 investment was paid to unit holders of record as of January 31, 1999.
This special capital distribution, which was made on March 15, 1999 and totalled
approximately $1,379,000, represented Partnership reserves that exceeded future
requirements. Distributions are expected to continue to be made at a rate of
6.5% per annum on remaining invested capital for the balance of calendar year
1999. Since the Partnership expects to be liquidated in the near term,
management does not currently plan to make any further special capital
distributions of excess cash reserves until the Partnership's investments have
been sold or prepaid.
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 94% for the year ended July 31, 1999 compared to
96% for fiscal 1998. This average occupancy level still compares favorably to
the slightly lower average for the properties which compete with Emerald Cove in
the local market. When necessary, the property's leasing team is matching the
rental concessions offered by competing apartment communities. These rental
concessions range from $600 to $800, depending on the apartment unit type, for
those tenants signing a one year lease. There are four new apartment communities
with a total of 1,246 units under construction in Emerald Cove's overall market.
While these properties are not expected to compete directly, the property's
leasing team continues to monitor their leasing progress. Prepayment of the
Partnership's Emerald Cove Participating Insured Mortgage Loan was restricted
through March 1998 and then requires a prepayment penalty which declines
ratably, from 5% to 2%, from April 1998 through April 2002. During the quarter
ended April 30, 1998, the Emerald Cove owner informed the Partnership that the
property was being actively marketed for sale and asked that the Partnership
specify the terms upon which it would accept prepayment of the participating
loan. During the quarter ended July 31, 1998, the owner of the Emerald Cove
Apartments approached the Partnership regarding a prepayment of the
participating mortgage loan as part of a potential sale of the Emerald Cove
property. However, during the first quarter of fiscal 1999, the Partnership was
informed that the potential buyer and the owner were not able to agree on final
terms and that a sale would not occur. As previously reported, the owner of the
Emerald Cove Apartments has initiated discussions of prepayment on several
occasions over the past five years, but none of those discussions have resulted
in a prepayment transaction. As a result, as noted above, the Partnership is
presently reviewing other potential disposition options for its Participating
Insured Mortgage Loan investments.
The Quarter Mill Apartments continued its strong operating performance
during fiscal 1999, with an average occupancy level of 97%, which compared with
98% for fiscal 1997. Because Quarter Mill Apartments participates in the Low
Income Housing Tax Credit Program, its rental rates are based on the
metropolitan area's median family income, rather than on market rent levels. As
of July 31, 1999, average rental rates on new leases being signed were up 3%
from one year earlier. A strong local rental market, combined with below market
rental rates at Quarter Mill, has resulted in consistently high occupancy levels
at the property. 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 1999, 1998 and 1997, the Partnership received
approximately $27,000, $54,000 and $49,000, respectively, representing its 30%
share of the surplus cash, as defined. Construction of 484 new apartment units
were completed in the property's local market area during the past year and 236
new apartment units are under construction. While these property are not
expected to compete directly, the property's leasing teams is closely monitoring
their leasing progress. The Quarter Mill Participating Insured Mortgage Loan
became open to prepayment in May 1996 with a specified prepayment penalty which
declines ratably, from 10% to 2%, from May 1996 through May 2001. During fiscal
1998 and 1999, the Partnership and the owner of Quarter Mill engaged in very
preliminary discussions concerning a potential prepayment of the Participating
Insured Mortgage Loan. However, to date no formal proposals to prepay the loan
have been received from the owner of Quarter Mill.
At July 31, 1999, the Partnership had cash and cash equivalents of
approximately $1,420,000. Such amounts will be utilized for distributions to the
Unitholders 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. As noted above, it is
possible that the Partnership could be liquidated prior to the end of calendar
year 1999. Notwithstanding this, the Partnership believes that it has made all
necessary modifications to its existing systems to make them year 2000 compliant
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Partnership's results of operations or financial
position.
Results of Operations
1999 Compared to 1998
- ---------------------
For the year ended July 31, 1999, the Partnership reported net income of
$1,286,000 as compared to net income of $1,412,000 for fiscal 1998. This
$126,000 decrease in net income resulted from a $144,000 decline in total
revenues, which was partially offset by an $18,000 reduction in total expenses.
The decline in total revenues can be attributed to a $154,000 decrease in
interest income from Participating Insured Mortgage Loans and non-participating
MBS, which was partially offset by a $10,000 increase in money market interest
income. The decline in interest income from Participating Insured Mortgage Loans
and non-participating MBS resulted from a reduction 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. In addition,
Contingent Interest received from the Quarter Mill investment decreased from
$54,000 in fiscal 1998 to $27,000 in fiscal 1999. The increase in money market
interest income is attributable to an increase in the average outstanding
balance of the Partnership's invested cash reserves compared to the prior year.
The decrease in total expenses is attributable to a decline in management fee
expense of $13,000 and a reduction in general and administrative expenses of
$5,000. Management fee expense declined due to a reduction in the outstanding
balances of debt securities upon which such fees are based. General and
administrative expenses decreased primarily due to a reduction in certain
required professional services for the year ended July 31, 1999.
1998 Compared to 1997
- ---------------------
For the year ended July 31 1998, the Partnership reported net income of
$1,412,000, compared to net income of $1,709,000 for fiscal 1997. This $297,000
decrease in net income resulted from a $193,000 decline in total revenues and a
$104,000 increase in operating expenses. The decline in total revenues can be
attributed to a $126,000 decrease in interest income from Participating Insured
Mortgage Loans and non-participating MBS and a $67,000 reduction in money market
interest income. The decline in interest income from Participating Insured
Mortgage Loans and non-participating MBS resulted mainly from a reduction 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.
In addition, the amortization of the net premium on the Partnership's mortgage
securities increased by $43,000 in fiscal 1998 as a result of an acceleration in
the amortization rate due to a reassessment of the expected remaining holding
period of the investments. These unfavorable changes in interest income were
offset slightly by an increase in Contingent Interest. Contingent Interest
received from the Quarter Mill investment increased from $49,000 in fiscal 1997
to $54,000 in fiscal 1998. The decrease in money market interest income was
mainly the result of a decrease in the average outstanding balance of the
Partnership's invested cash reserves subsequent to the special distributions of
excess cash reserves made on March 14, 1997 and March 13, 1998. The increase in
operating expenses was attributable to a $23,000 increase in general and
administrative expenses and a $93,000 increase in amortization expense. General
and administrative expenses were higher primarily due to increases in the costs
of certain required professional services for the year ended July 31, 1998.
Amortization expense increased by $93,000 as a result of an acceleration in the
amortization rate of the Partnership's deferred expenses. Beginning in fiscal
1998, the Partnership reduced the expected holding period of its remaining
investments, which resulted in higher non-cash amortization charges for the year
ended July 31, 1998.
1997 Compared to 1996
- ---------------------
For the year ended July 31 1997, the Partnership reported net income of
$1,709,000, compared to net income of $1,806,000 for fiscal 1996. This $97,000
decrease in net income resulted from a $138,000 decline in total revenues which
was partially offset by a $41,000 reduction in operating expenses. The decline
in total revenues was attributable to a $97,000 decline in interest income from
Participating Insured Mortgage Loans and non-participating MBS and a $44,000
decline in money market interest income. The decline in interest income from
Participating Insured Mortgage Loans and non-participating MBS resulted from a
reduction 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. This was offset slightly by an increase in Contingent
Interest. Contingent Interest received from the Quarter Mill investment
increased from $46,000 in fiscal 1996 to $49,000 in fiscal 1997. The decrease in
money market interest income was mainly the result of a decline in the average
outstanding balance of the Partnership's invested cash reserves subsequent to
the $2.6 million special distribution of excess cash reserves made on March 14,
1997. The decrease in operating expenses resulted from a $32,000 reduction in
general and administrative expenses and a $9,000 decline in management fees.
General and administrative expenses decreased due to a reduction in certain
required professional services. The decrease in management fees reflected the
declining principal balances of the Partnership's outstanding mortgage
securities, upon which such fees are primarily based.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Interest Rate Risk. The Partnership's investments are structured to
provide maximum 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 interest
rate 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 the real estate
investment and competitive risks outlined below. 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.
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Competition. The financial performance of the real estate investments
securing the Partnership's debt securities will be significantly impacted by the
competition from comparable properties in their local market areas. The
occupancy levels and rental rates achievable at the properties are largely a
function of supply and demand in the markets. In many markets across the
country, development of new multi-family properties has increased significantly
over the past 2 to 3 years. Existing apartment properties in such markets could
be expected to experience increased vacancy levels, declines in effective rental
rates and, in some cases, declines in estimated market values as a result of the
increased competition. There are no assurances that these competitive pressures
will not adversely affect the operations and/or market values of the properties
securing the Partnership's investments in the future.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such investments at the time of their final dispositions. Demand by
buyers of multi-family apartment properties is affected by many factors,
including the size, quality, age, condition and location of the subject
property, potential environmental liability concerns, the liquidity in the debt
and equity markets for asset acquisitions, the general level of market interest
rates and the general and local economic climates. Demand by buyers of
mortgage-backed securities is largely a function of the current interest rate
environment, although general real estate market factors are considered as well.
Inflation
- ---------
The Partnership completed its tenth full year of operations in fiscal
1999. The effects of inflation and changes in prices on the Partnership's
operating results to date have not been significant.
Inflation in future periods is likely to cause increases in Partnership
operating expenses without a corresponding increase in revenues, which are
principally derived from fixed interest rates on debt securities.
Item 7A. Market Risk Disclosures
- ---------------------------------
As discussed further in the Notes to the accompanying financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents and debt securities. The cash equivalents are invested exclusively
in short-term money-market instruments and, therefore, are not subject to any
material exposure to market risk factors. The Partnership's debt securities,
which include non-participating mortgage-backed securities pools and
single-asset participating mortgage loans, are all fixed rate instruments. As a
result, the contractual cash flows from those instruments are not subject to any
material exposure to market risk factors. In addition, the principal balances of
all of the Partnership's debt securities are guaranteed by the Government
National Mortgage Association ("GNMA"). The cash flows from the Partnership's
debt securities are subject to prepayment risk. The loans included in the
non-participating GNMA pool programs may be prepaid, without penalty, at any
time. The Partnership's two participating mortgage loans, which are fully
amortizing loans with 40-year maturities, may be prepaid with penalties which
phase-out over the next 2- to- 3 years. The Partnership is also exposed to the
impact of interest rates on the fair market value of its debt securities. The
Partnership does not invest in derivative financial instruments or engage in
hedging transactions.
The Partnership's debt securities are not held for trading purposes. They
are considered to be held for sale, but to date they have been held primarily
for the purpose of realizing participation in the appreciation in the value of
the operating properties underlying the Participating Insured Mortgage Loans
based on an original expected holding period set forth in the Partnership's
original offering prospectus. The Partnership is now approaching the end of this
expected holding period and, based on the current health of the national real
estate market, is considering liquidating its debt securities in the near term.
The table below provides information about the Partnership's debt
securities that are sensitive to changes in interest rates (dollar amounts in
thousands):
July 31, 1999
Interest Face Amortized Estimated Maturity
Debt Security Rate Value Cost Market Value Dates
------------- ---- ----- ---- ------------ -----
9.5% GNMA Pool 9.5% $ 986 $ 982 $ 1,056 June 2009 to
December 2009
9.0% GNMA Pool 9.0% 76 79 78 June 2001 to
September 2002
8.0% GNMA Pool 8.0% 1,437 1,480 1,469 June 2022
7.5% GNMA Pool 7.5% 112 111 112 March 2022
Quarter Mill
Participating Loan 8.5% 7,094 7,094 7,236 October 2031
Emerald Cove
Participating Loan 8.75% 10,485 10,504 10,694 August 2031
------- ------- -------
$20,190 $20,250 $20,645
======= ======= ========
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data for the Partnership are
included under Item 14 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
Under the Partnership Agreement, exclusive management responsibility for
and control over the affairs of the Partnership rests with the General Partner,
First Insured Mortgage Partners, L.P., a Delaware limited partnership formed in
February 1987. The day-to-day operating responsibility for the Partnership is
delegated to PWPI by the General Partner. However, the General Partner retains
general responsibility for partnership business and oversees partnership
activities. The General Partner also supervises the registration and marketing
of the Units, approves all budgets for the Partnership prepared by PWPI and
makes all final decisions with respect to the Partnership's investments and
their acquisition and disposition.
Certain of the officers and directors of the Managing General Partner of
the General Partner, First Insured Mortgage Partners, Inc., a Delaware
corporation and a wholly-owned subsidiary of PaineWebber, are also officers
and/or directors of PWI and PWPI. Such officers and directors will devote only
so much of their time to the business of the Partnership as in their judgment is
reasonably required.
(a) and (b) The names and ages of the directors and executive officers of
the Managing General Partner of the General Partner are as follows:
Date
elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President, Chief Executive Officer
and Director 40 8/22/96
Terrence E. Fancher Director 46 9/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 52 2/23/87*
David F. Brooks First Vice President and Assistant
Treasurer 57 2/23/87*
Thomas W. Boland Vice President and Controller 37 7/31/97
Dorothy F. Haughey Secretary 73 2/23/87*
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees of First Insured Mortgage
Partners, Inc. in addition to the directors and officers mentioned above.
(d) There is no family relationship among any of the foregoing directors and
officers of the Managing General Partner of the General Partner. All of the
foregoing directors and officers have been elected to serve until the next
annual meeting of the Managing General Partner.
(e) All of the directors and 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. The business experience of each of the directors and officers of the
Managing General Partner is as follows:
Bruce J. Rubin is President, Chief Executive Officer 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.
Terrence E. Fancher was appointed a Director of the Managing General
Partner in September 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 a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of PWPI which he joined in 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 PWPI. Mr. Arnold is
a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and Assistant Treasurer of
PWPI. Mr. Brooks joined PWPI 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.
Thomas W. Boland is a Vice President and Controller of the Managing General
Partner and a Vice President and Controller of PWPI 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.
Dorothy F. Haughey is Secretary of the Managing General Partner, Assistant
Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined PaineWebber in
1962.
(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 July 31, 1999 all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Managing General Partner receive no
current or proposed remuneration from the Partnership.
The General Partner is entitled to receive a share of the Partnership's
cash distributions and a share of profits and losses. These items are described
under Item 13.
The Partnership paid cash distributions to the Unitholders on a quarterly
basis at a rate of 8.25% per annum on remaining invested capital from November
15, 1988 to March 14, 1997. Effective for the distribution payment made on June
13, 1997 for the quarter ended April 30, 1997, the distribution rate was lowered
to 6.5% per annum on remaining invested capital. However, the Partnership's
Units of Depositary Receipts are not actively traded on any organized exchange,
and, accordingly, no accurate price information exists 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 Depositary Units
which represent units of assigned limited partnership interest, not voting
securities. All the outstanding stock of the Managing General Partner of the
General Partner, First Insured Mortgage Partners, Inc., is owned by PaineWebber.
PA1988 is a Virginia limited partnership, certain limited partners of which are
also officers of PWPI. PaineWebber Depositary Corporation (the "Corporate
Limited Partner"), a Delaware corporation and an affiliate of the General
Partner, is the Initial Limited Partner. No Unitholder is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(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 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 Partner of the Partnership is First Insured Mortgage Partners,
L.P. (the "General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber"). The Managing General Partner of the General Partner is
First Insured Mortgage Partners, Inc., (the "Managing General Partner") a
wholly-owned subsidiary of PaineWebber. The officers and directors of the
Managing General Partner are also officers and/or directors of PaineWebber
Properties Incorporated ("PWPI"). Properties Associates 1988, L.P. ("PA1988")
and PaineWebber Incorporated ("PWI") are the limited partners of the General
Partner. PA1988 is a Virginia limited partnership in which certain officers of
PWPI are the individual limited partners. Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by PWPI,
which is a wholly-owned subsidiary of PWI. The General Partner and other
PaineWebber affiliates will 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.
The Partnership entered into a Sales Agreement with PWI under which PWI
acted as sales agent for the offering of Units. In connection with the sale of
Units, PWI was to be paid sales commissions of up to 6% of the offering
proceeds. Sales commissions paid to PWI aggregated $3,278,000 through the end of
the offering period.
Origination fees were payable directly to the General Partner and its
affiliates by project owners in recognition of the participation feature of
their Participating Insured Mortgage Loans in an amount equal to 2% of the
principal balance of each Participating Insured Mortgage Loan.
In connection with the acquisition of mortgage securities, the General
Partner and its affiliates were to receive acquisition fees in an amount not to
exceed 1.5% of the gross offering proceeds for services rendered in connection
with the investment by the Partnership in mortgage securities. Acquisition fees
of $827,000 were paid by the Partnership to the General Partner and its
affiliates. The General Partner and its affiliates also received a
non-accountable acquisition expense allowance of 1.5% of the Gross Offering
Proceeds. Acquisition expenses in excess of 1.5% of the Gross Offering Proceeds
were to be paid by the General Partner. Acquisition expenses aggregating
$827,000 were paid to the General Partner and its affiliates.
For services rendered in managing the business of the Partnership, the
Partnership shall pay the General Partner and its affiliates an Asset Management
Fee equal to 0.75% per annum of the outstanding principal balance of the
mortgage securities of the Partnership. Asset management fees of $157,000 were
earned by the General Partner and its affiliates for the year ended July 31,
1999. PWPI also furnishes additional asset management and advisory services to
the Partnership and receives additional asset management fees as compensation
for such services. The additional management fees paid by the Partnership
totalled $31,000 for the year ended July 31, 1999.
Generally, all distributable cash, as defined, for each fiscal year shall
be distributed quarterly in the ratio of 97% to the Unitholders, 1% to the
General Partner and 2% to PWPI as the additional asset management fee referred
to above. Capital distributions (including distributions of principal
repayments) will be distributed 100% to the Unitholders until they have received
the return of their capital contributions and then to the General Partner until
it has received a return of its capital contribution. Thereafter, capital
distributions shall be distributed in varying proportions to the Unitholders and
General Partner, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or loss
of the Partnership will be allocated 98.98% to the Unitholders and 1.02% to the
General Partner. Income or loss arising from a sale or refinancing of investment
properties will be allocated to the Unitholders and the General Partner
generally as residual proceeds are distributed.
An affiliate of the 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
July 31, 1999 is $98,000, representing reimbursements to this affiliate of the
General Partner for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") 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 $4,000 (included in general and administrative expenses) for managing the
Partnership's cash assets for the year ended July 31, 1999. 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.
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 reports on Form 8-K were filed during the last quarter of fiscal 1999.
(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.
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
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 and Controller
Dated: October 27, 1999
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: October 27, 1999
----------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: October 27, 1999
----------------------- ----------------
Terrence E. Fancher
Director
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
INDEX TO EXHIBITS
Page Number in the
Exhibit No. Description of Document Report or Other Reference
- ---------------- ------------------------------- --------------------------
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated April 23, 1987, as pursuant to Rule 424(c)
supplemented. and incorporated herein
by reference.
(10) Material contracts previously Filed with the Commission
filed as exhibits to pursuant to Section 13
registration statements and or 15(d) of the Securities
amendments thereto of the Exchange Act of 1934 and
registrant together with all incorporated herein by
such contracts filed as reference.
exhibits of previously filed
Forms 8-K and Forms 10-K are
hereby incorporated herein by
reference.
(13) Annual Reports to Unitholders No Annual Report for the
year ended July 31, 1999
has been sent to the
Unitholders. An Annual
Report will be sent to
the Unitholders subsequent
to this filing.
(27) Financial data schedule Filed as the last page
of EDGAR submission
following the Financial
Statements and Financial
Statement Schedule
required by Item 14.
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Reference
---------
PaineWebber Insured Mortgage Partners 1-B, L.P.:
Report of independent auditors F-2
Balance sheets as of July 31, 1999 and 1998 F-3
Statements of income and comprehensive income for the years
ended July 31, 1999, 1998 and 1997 F-4
Statements of changes in partners' capital (deficit) for the
years ended July 31, 1999, 1998 and 1997 F-5
Statements of cash flows for the years ended July 31, 1999,
1998 and 1997 F-6
Notes to financial statements F-7
Schedule IV - Investments in Mortgage Loans on Real Estate F-14
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 financial
statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Insured Mortgage Partners 1-B, L.P.:
We have audited the accompanying balance sheets of PaineWebber Insured
Mortgage Partners 1-B, L.P. as of July 31, 1999 and 1998, and the related
statements of income and comprehensive income, changes in partners' capital
(deficit), and cash flows for each of the three years in the period ended July
31, 1999. 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 financial statements referred to above present fairly,
in all material respects, the financial position of PaineWebber Insured Mortgage
Partners 1-B, L.P. at July 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended July 31,
1999, 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
October 20, 1999
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
BALANCE SHEETS
July 31, 1999 and 1998
(In thousands, except for per Unit data)
ASSETS
1999 1998
---- ----
Investments in Debt Securities:
Mortgage-Backed Securities available for sale $ 2,715 $ 4,178
Participating Insured Mortgage Loans available
for sale 17,930 18,447
--------- ---------
20,645 22,625
Cash and cash equivalents 1,420 1,702
Interest and other receivables 145 156
Deferred expenses, net of accumulated
amortization of $973 ($796 in 1998) 177 354
--------- ---------
$ 22,387 $ 24,837
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 25 $ 27
Accounts payable and accrued expenses 39 50
--------- ---------
Total liabilities 64 77
Partners' capital:
General Partner:
Capital contributions 1 1
Cumulative net income 265 252
Cumulative cash distributions (272) (257)
Corporate Limited Partner and
Unitholder Interests ($100 per Unit,
551,604 Units issued):
Capital contributions, net of offering costs 50,779 50,779
Cumulative net income 25,829 24,556
Accumulated unrealized holding gains on
debt securities 394 858
Cumulative cash distributions (54,673) (51,429)
--------- ---------
Total partners' capital 22,323 24,760
--------- ---------
$ 22,387 $ 24,837
========= =========
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the years ended July 31, 1999, 1998 and 1997
(In thousands, except per Unit data)
1999 1998 1997
---- ---- ----
Revenues:
Interest income - Debt Securities $ 1,765 $ 1,919 $ 2,045
Interest income - Money Market 91 81 148
------- ------- -------
1,856 2,000 2,193
Expenses:
General and administrative 205 210 187
Management fees 188 201 213
Amortization expense 177 177 84
------- ------- -------
570 588 484
------- ------- -------
Net income $ 1,286 $ 1,412 $ 1,709
Other comprehensive income:
Unrealized holding gains
(losses) on debt securities (464) (50) 193
------- ------- -------
Comprehensive income $ 822 $ 1,362 $ 1,902
======= ======= =======
Net income per Unit of Depositary
Receipt $ 2.31 $ 2.53 $ 3.07
======= ======= =======
Cash distributions per Unit of
Depositary Receipt $ 5.88 $ 4.51 $ 9.32
======= ======= =======
The above net income and cash distributions per Unit of Depositary Receipt
are based upon the 551,604 Units outstanding during each year.
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended July 31, 1999, 1998 and 1997
(In thousands)
Corporate
Limited
General Partner and
Partner Unitholders Total
------- ----------- -----
Balance at July 31, 1996 $ 1 $ 29,161 $ 29,162
Comprehensive income:
Net income 17 1,692 1,709
Net unrealized holding gains
on debt securities - 193 193
------ --------- ---------
17 1,885 1,902
Cash distributions (20) (5,141) (5,161)
------ --------- ---------
Balance at July 31, 1997 (2) 25,905 25,903
Comprehensive income:
Net income 14 1,398 1,412
Net unrealized holding losses
on debt securities - (50) (50)
------ --------- ---------
14 1,348 1,362
Cash distributions (16) (2,489) (2,505)
------ --------- ---------
Balance at July 31, 1998 (4) 24,764 24,760
Comprehensive income:
Net income 13 1,273 1,286
Net unrealized holding losses
on debt securities - (464) (464)
------ --------- ---------
13 809 822
Cash distributions (15) (3,244) (3,259)
------ --------- ---------
Balance at July 31, 1999 $ (6) $ 22,329 $ 22,323
====== ========= =========
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
STATEMENTS OF CASH FLOWS
For the years ended July 31, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 1,286 $ 1,412 $ 1,709
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization expense 177 177 84
Amortization of discount/premium on
mortgage securities 61 60 17
Changes in assets and liabilities:
Interest and other receivables 11 9 7
Accounts payable - affiliates (2) (2) (1)
Accounts payable and accrued expenses (11) 11 (12)
-------- -------- -------
Total adjustments 236 255 95
-------- -------- -------
Net cash provided by operating activities 1,522 1,667 1,804
-------- -------- -------
Cash flows from investing activities:
Principal collections on Mortgage-Backed Securities 1,364 1,146 953
Principal collections on Participating Insured
Mortgage Loans 91 84 77
-------- -------- -------
Net cash provided by investing activities 1,455 1,230 1,030
-------- -------- -------
Cash flows from financing activities:
Distributions to Unitholders and partners (3,259) (2,505) (5,161)
-------- -------- -------
Net cash used in financing activities (3,259) (2,505) (5,161)
-------- -------- -------
Net (decrease) increase in cash and cash equivalents (282) 392 (2,327)
Cash and cash equivalents, beginning of year 1,702 1,310 3,637
-------- -------- -------
Cash and cash equivalents, end of year $ 1,420 $ 1,702 $ 1,310
======== ======== ========
See accompanying notes.
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
Notes to Financial Statements
1. Organization and Nature of Operations
--------------------------------------
PaineWebber Insured Mortgage Partners 1-B, L.P., a Delaware limited
partnership, was organized for the purpose of investing in a diversified
portfolio of federally insured or coinsured mortgage loans ("Participating
Insured Mortgage Loans") through the purchase of certain mortgage-backed
securities ("GNMA securities"). The Partnership has also invested in
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"). Investments
in non-participating MBS were limited to no more than 30% of the original net
offering proceeds. On May 16, 1988, the Partnership commenced the sale of
Limited Partnership Interests (the "Units"), which are evidenced by Depositary
Receipts (at $100 per Unit). The Partnership's initial capital was $3,000,
representing capital contributions of $1,000 by the General Partner and $2,000
by the Corporate Limited Partner (PaineWebber Depositary Corporation). The
Partnership issued 551,604 Units from May 16, 1988 to May 1, 1989, representing
capital contributions of $55,160,425. The Units represent an interest assigned
to persons who purchased Units ("Unitholders") from the initial limited partner
of the Partnership pursuant to the Partnership Agreement, which interest is the
equivalent of a limited partnership interest. Although Unitholders are not
limited partners of the Partnership, as Unitholders they are entitled to the
same economic benefits, including the same share of income, gains, losses,
deductions, credits and cash distributions, as if they were limited partners
holding the number of limited partnership interests represented by their Units.
The Partnership originally invested in three Participating Insured
Mortgage Loans, which were originated under or in connection with Federal
Housing Administration ("FHA") insurance programs to finance or refinance the
acquisition, construction or substantial rehabilitation of privately owned and
operating multi-family residential rental projects, (the "Projects"). The
Partnership purchased each of the GNMA Securities with proceeds raised through
its public offering from an FHA-approved mortgagee/coinsurer and GNMA
issuer/servicer. The Partnership was expected to make an investment in a fourth
Participating Insured Mortgage Loan and entered into a commitment to fund a $4.5
million loan on a to-be-built project in Orlando, Florida. During fiscal 1991,
the prospective borrower elected not to proceed with the Orlando development
and, as a result, the commitment to purchase the related GNMA securities
subsequently expired. The efforts of the General Partner to obtain a suitable
investment to replace the expired commitment were not successful, in large part
due to changes instituted by the Department of Housing and Urban Development
which made the type of insured financing that the Partnership can invest in very
difficult to obtain. As a result, the General Partner decided to return the
majority of the previously committed funds to the Unitholders. A distribution of
approximately $4 million was paid to the Unitholders in June of 1991. The
remainder of the previously committed funds was added to the Partnership's cash
reserves. Until May 1992, the Partnership held a Participating Insured Mortgage
loan with respect to an apartment complex known as the Casablanca Apartments in
Boynton Beach, Florida. During fiscal 1992, the owner of the Casablanca
Apartments complex defaulted on the scheduled debt service payments to the GNMA
issuer. The default triggered the prepayment provisions of the Partnership's
GNMA mortgage-backed security. Consequently, on May 26, 1992, GNMA prepaid the
outstanding balance of the principal and accrued interest to the Partnership
pursuant to the terms of the mortgage-backed security agreement. The Partnership
distributed the proceeds received from the Casablanca prepayment, which
aggregated $12,521,000, to the Unitholders concurrent with the regular quarterly
distribution paid on June 15, 1993.
The Partnership is currently analyzing potential disposition strategies
for its remaining investments. As part of these efforts, the Partnership is now
evaluating the current economic benefits it would receive if the owners of the
Emerald Cove Apartments and Quarter Mill Apartments were to prepay their
participating loans in the near term. In addition, since the Partnership cannot
require either of the owners to prepay their loans in the near term, the
Partnership continues to investigate the benefits of selling one or both of the
participating loans and some or all of the non-participating mortgage backed
securities pools on the secondary market. In this regard, a key consideration is
the strength of the buying markets for these types of investments. Also, as part
of any sale of its two participating mortgage loans, the Partnership would
expect to receive fair value for its entitlement to participate in potential
cash flow increases and capital appreciation from each property, as well as for
its entitlement to receive prepayment penalties if either of the participating
loans were prepaid by the property owners. The prepayment penalties would apply
if the participating loans were prepaid before June 2001 for its Quarter Mill
investment and May 2002 for its Emerald Cove investment. During fiscal year
1999, the Partnership continued to have discussions with the owners of Emerald
Cove Apartments and Quarter Mill Apartments about the possibility of a
prepayment of their loans before the end of calendar year 1999. While, to date,
the discussions with the owners have not led to an agreement for the prepayment
of the participating loans, the Partnership continues to have discussions with
the owner of Emerald Cove. If the Partnership decides to pursue secondary market
sales of its debt securities, it is possible that such sales, along with a
liquidation of the Partnership, could be completed by December 31, 1999. If the
Partnership chooses to pursue prepayments of the participating loans, it would
appear unlikely that a liquidation of the Partnership could be completed prior
to the end of calendar year 1999. However, the Partnership continues to pursue
this goal.
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 July 31, 1999 and 1998 and revenues and expenses for each
of the three years in the period ended July 31, 1999. Actual results could
differ from the estimates and assumptions used.
The Partnership accounts for investments in debt securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115). 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
July 31, 1999 and 1998 and are stated at fair value on the accompanying balance
sheets at those dates. 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 a separate component of equity.
Future unrealized holding gains or losses on securities classified as available
for sale are reported as a net amount in the separate component of equity until
realized. Unrealized holding gains or losses on debt securities are also
recognized as a component of other comprehensive income in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which the Partnership adopted in fiscal 1998. Information regarding the
fair value of the Partnership's debt securities is disclosed in Notes 4 and 5.
Beginning in fiscal 1998, the related discounts or premiums for these GNMA
securities are being amortized using the effective interest method over the
expected remaining holding period of the investments of three years. Prior to
fiscal 1998, the premium and discounts were being amortized over the original
estimated holding period of fifteen years. The effect of this change in
accounting estimate was to decrease interest income by $31,000 in fiscal 1998
and 1999.
In addition to the debt securities which are carried at fair value on the
Partnership's balance sheets, the cash and cash equivalents 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 amounts of cash and cash
equivalents approximate fair value as of July 31, 1999 and 1998 due to the
short-term maturities of these instruments.
Deferred expenses consist of legal fees incurred in connection with the
organization of the Partnership and acquisition fees and acquisition expenses
paid to the General Partner and its affiliates as compensation for analyzing,
structuring and negotiating the Partnership's investments. Beginning in fiscal
1998, acquisition fees and expenses are being amortized using the straight-line
method over the expected remaining holding periods of the investments of three
years. Prior to fiscal 1998, the acquisition fees and expenses were being
amortized over the original estimated holding period of fifteen years. The
effect of this change in accounting estimate was to increase amortization
expense by $93,000 in fiscal 1998 and 1999.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents. The Partnership's cash reserves and excess cash flow are generally
invested in money market instruments, principally overnight investment-grade
commercial paper.
No provision for income taxes has been made as the liability for such
taxes is that of the partners and Unitholders rather than the Partnership. The
principal differences between the Partnership's accounting on a federal income
tax basis and the accompanying financial statements prepared in accordance with
generally accepted accounting principles relate to the recognition of unrealized
gains and losses on debt securities and the calculation of amortization on the
premiums and discounts on debt securities.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partner of the Partnership is First Insured Mortgage Partners,
L.P. (the "General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber"). The Managing General Partner of the General Partner is
First Insured Mortgage Partners, Inc., (the "Managing General Partner") a
wholly-owned subsidiary of PaineWebber. The officers and directors of the
Managing General Partner are also officers and/or directors of PaineWebber
Properties Incorporated ("PWPI"). Properties Associates 1988, L.P. ("PA1988")
and PaineWebber Incorporated ("PWI") are the limited partners of the General
Partner. PA1988 is a Virginia limited partnership in which certain officers of
PWPI are the individual limited partners. Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by PWPI,
which is a wholly-owned subsidiary of PWI. The General Partner and other
PaineWebber affiliates will 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.
The Partnership entered into a Sales Agreement with PWI under which PWI
acted as sales agent for the offering of Units. In connection with the sale of
Units, PWI was to be paid sales commissions of up to 6% of the offering
proceeds. Sales commissions paid to PWI aggregated $3,278,000 through the end of
the offering period.
Origination fees were payable directly to the General Partner and its
affiliates by project owners in recognition of the participation feature of
their Participating Insured Mortgage Loans in an amount equal to 2% of the
principal balance of each Participating Insured Mortgage Loan.
In connection with the acquisition of mortgage securities, the General
Partner and its affiliates were to receive acquisition fees in an amount not to
exceed 1.5% of the gross offering proceeds for services rendered in connection
with the investment by the Partnership in mortgage securities. Acquisition fees
of $827,000 were paid by the Partnership to the General Partner and its
affiliates. The General Partner and its affiliates also received a
non-accountable acquisition expense allowance of 1.5% of the Gross Offering
Proceeds. Acquisition expenses in excess of 1.5% of the Gross Offering Proceeds
were to be paid by the General Partner. Non-accountable acquisition expenses
aggregating $827,000 were paid to the General Partner and its affiliates.
For services rendered in managing the business of the Partnership, the
Partnership shall pay the General Partner and its affiliates an Asset Management
Fee equal to 0.75% per annum of the outstanding principal balance of the
mortgage securities of the Partnership. Asset management fees of $157,000,
$168,000 and $175,000 were earned by the General Partner and its affiliates for
the years ended July 31, 1999, 1998 and 1997, respectively. PWPI also furnishes
additional asset management and advisory services to the Partnership and
receives additional asset management fees as compensation for such services. The
additional management fees paid by the Partnership totalled $31,000, $33,000 and
$38,000 for the years ended July 31, 1999, 1998 and 1997, respectively. Accounts
payable affiliates at July 31, 1999 and 1998 consists of $25,000 and $27,000,
respectively, of management fees payable to the General Partner and its
affiliates.
Generally, all distributable cash, as defined, for each fiscal year shall
be distributed quarterly in the ratio of 97% to the Unitholders, 1% to the
General Partner and 2% to PWPI as the additional asset management fee referred
to above. Capital distributions (including distributions of principal
repayments) will be distributed 100% to the Unitholders until they have received
the return of their capital contributions and then to the General Partner until
it has received a return of its capital contribution. Thereafter, capital
distributions shall be distributed in varying proportions to the Unitholders and
General Partner, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss of the Partnership will be allocated 98.98% to the Unitholders and 1.02% to
the General Partner. Income or loss arising from a sale or refinancing of
investment properties will be allocated to the Unitholders and the General
Partner generally as residual proceeds are distributed. Allocations of income or
loss for financial reporting purposes have been made in conformity with
allocations of taxable income or tax loss set forth in the Partnership
Agreement.
Included in general and administrative expenses for the years ended July
31, 1999, 1998 and 1997 is $98,000, $94,000 and $95,000, respectively,
representing reimbursements to an affiliate of the 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") 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 $4,000, $6,000 and $8,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1999, 1998 and 1997,
respectively.
4. Mortgage-Backed Securities
--------------------------
At July 31, 1999 and 1998 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):
July 31, 1999 July 31, 1998
------------------------------- --------------------------------
Estimated Estimated
Market Face Amortized Market Face Amortized
Description Value Value Cost Value Value Cost
------------ ------ ----- ---- ----- ----- ----
9.5% GNMA Pool $ 1,056 $ 986 $ 982 $ 1,394 $ 1,294 $ 1,286
9.0% GNMA Pool 78 76 79 178 174 181
8.0% GNMA Pool 1,469 1,437 1,480 2,382 2,289 2,376
7.5% GNMA Pool 112 112 111 224 218 216
------- ------- ------- ------- ------- -------
$ 2,715 $ 2,611 $ 2,652 $ 4,178 $ 3,975 $ 4,059
======= ======= ======= ======= ======= =======
As discussed further in Note 2, the Partnership's investments in MBS are
carried at fair value as of July 31, 1999 and 1998. 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.
5. Investments in Participating Insured Mortgage Loans
---------------------------------------------------
Participating Insured Mortgage Loans secured by GNMA securities
outstanding at July 31, 1999 and 1998 are comprised of the following (in
thousands):
July 31, 1999 July 31, 1998
----------------------- ------------------------
GNMA Estimated Estimated
Certificate Interest Market Amortized Market Amortized
Number Property Rate Value Cost Value Cost
------ -------- ---- ----- ---- ----- ----
279985 Quarter Mill 8.50% $ 7,236 $ 7,094 $ 7,403 $ 7,132
279119 Emerald Cove 8.75% 10,694 10,504 11,044 10,576
-------- -------- -------- --------
$ 17,930 $ 17,598 $ 18,447 $ 17,708
======== ======== ======== ========
As discussed further in Note 2, the Partnership's investments in
Participating Insured Mortgage Loans are carried at fair value as of July 31,
1999 and 1998. Investments in Participating Insured Mortgage Loans, for which
quoted market prices are not available, are valued by a pricing service which
determines the valuations based on a comparison of recent market trades of
securities with similar characteristics. Because of the inherent uncertainty of
valuations, estimated values, as reflected herein, may differ from the values
that would have been used had a ready market for the securities existed.
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. Monthly payments of
principal and interest totalling approximately $53,547 are due through maturity,
on October 15, 2031. Scheduled principal repayments of $222,824 have been
received through July 31, 1999.
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
$107,840 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. Beginning in fiscal 1998, the premium
is being amortized using the effective interest method over the expected
remaining holding period of the investment of three years. Prior to fiscal 1998,
the premium was being amortized over the original estimated holding period of
fifteen years. The effect of this change in accounting estimate was to decrease
interest income by $12,000 in fiscal 1998. Monthly payments of principal and
interest totalling approximately $81,133 are due through maturity, on August 15,
2031. Scheduled principal repayments of $299,093 have been received through July
31, 1999.
PROVISIONS APPLICABLE TO BOTH OF THE PARTICIPATING INSURED MORTGAGE LOANS OF THE
PARTNERSHIP:
The closing of the Participating Insured Mortgage Loans was subject to
conditions with respect to satisfactory completion of construction. The
Partnership purchased the GNMA Securities representing each of the above
Participating Insured Mortgage Loans with proceeds raised through its public
offering from an FHA-approved mortgagee/coinsurer and GNMA issuer/servicer.
As required by the Partnership's investment criteria, the Participating
Insured Mortgage Loans could not be repaid by the applicable project owner, in
whole or in part, for a period of five years from the date of initial
endorsement of each such Loan for FHA Insurance (unless required or permitted by
HUD or as a result of the partial or total destruction or condemnation of the
Project). The Participating Insured Mortgage Loans may thereafter be prepaid at
various premiums which decline over the next four-to-five-year period. After
nine or ten years from the date of initial endorsement of a Participating
Insured Mortgage Loan for FHA Insurance, such loan may be prepaid without
premium. Although the permanent phase of each such Participating Insured
Mortgage Loan has a term of approximately 40 years, payable in substantially
equal installments consisting of principal and interest over such term, each
loan provides the Partnership with the option to require such loan be repaid in
full beginning not later than the twelfth anniversary of its date of initial
endorsement for FHA Insurance.
The Contingent Component of the Participating Insured Mortgage Loans
provides for the payment of Contingent Interest equal to 25% of the Net Project
Cash Flow, if any, (30% for the Virginia Project) and 25% of the Net Project
Residuals, if any, derived from the applicable Project; provided, however, that
to the extent the applicable Project fails to generate certain minimum amounts
of Net Project Cash Flow, the share of Net Project Residuals to which the
Partnership is entitled may be increased to up to 50%. In addition to the
deduction for the outstanding principal balance of the first mortgage relating
to each Participating Insured Mortgage Loan, Net Project Residuals shall also be
reduced by certain FHA-approved development costs and by certain amounts
advanced by the applicable project owner from its own funds to fund operating
deficits or provide working capital for the applicable Project. The obligation
of a project owner to pay Contingent Interest is evidenced by a Subordinated
Promissory Note of such project owner which in turn is secured by a second
mortgage on the applicable Project. The obligations of each project owner to pay
Contingent Interest is secured by a lien on all of the interests in such project
owner. Neither FHA Insurance nor any GNMA Security will provide for the payment
of Contingent Interest with respect to any Participating Insured Mortgage Loan.
No Contingent Interest has been earned with respect to the Emerald Cove
Participating Insured Mortgage Loan to date. During fiscal 1999, 1998 and 1997,
the Partnership received approximately $27,000, $54,000, and $49,000,
respectively, representing its 30% share of the surplus cash generated by the
Quarter Mill property. Such amounts are included in interest income on the
accompanying statements of income. Cumulative Contingent Interest received from
the Quarter Mill property totalled approximately $213,000 as of July 31, 1999.
The future performance of the Partnership will depend, in part, upon
future interest rate fluctuations, which cannot be predicted. In addition, the
Partnership's overall operating performance is subject to all of the risks
normally associated with real estate investments, including: reliance on the
owners' operating skills, including their ability to maintain occupancy levels,
meet operating expenses, maintain the property and maintain adequate insurance
coverage; adverse changes in general and/or local economic conditions; changes
in governmental regulations, real estate zoning laws, or tax laws; and other
circumstances over which the Partnership may have little or no control.
6. Subsequent Event
----------------
On September 15, 1999, the Partnership distributed $445,000 to the
Unitholders, $4,000 to the General Partner and $7,000 to PWPI as an asset
management fee for the quarter ended July 31, 1999.
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
July 31, 1999
(In thousands)
Carrying Amount of loans
Coupon Final maturity Periodic Face amount amount of subject to delinquent
Description Interest rate date payment terms of mortgages mortgages principal or interest
- ----------- ------------- ---- ------------- ------------ --------- ---------------------
GNMA Single Loan Pool:
Quarter Mill Apts. 8.50% 10/15/2031 Interest and $ 7,094 $ 7,236 N/A
Apartment Complex principal payable
Richmond, VA monthly ($53,547)
Pool #279985 through maturity.
Emerald Cove Apts. 8.75% 8/15/2031 Interest and 10,485 10,694 N/A
Apartment Complex principal payable
Charlotte, NC monthly ($81,133)
Pool #279119 through maturity.
-------- -------
TOTALS $ 17,579 $17,930
======== =======
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 18,447 $ 18,586 $ 18,539
Collections of principal (91) (84) (77)
Amortization of premium (19) (19) (7)
Net unrealized holding gains (losses) (407) (36) 131
-------- -------- --------
Balance at close of year $ 17,930 $ 18,447 $ 18,586
======== ======== ========