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: SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-10980
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-2738053
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
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
Prospectus of registrant dated Part IV
December 22, 1981, as supplemented
<PAGE>
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-4
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-5
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-37
<PAGE>
PART I
Item 1. Business
Paine Webber Income Properties Four Limited Partnership (the "Partnership")
is a limited partnership formed in July 1981 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of existing income-producing real properties including
shopping centers, office buildings and apartment complexes. The Partnership sold
$25,698,000 in Limited Partnership Units (the "Units"), representing 25,698
Units at $1,000 per Unit, during the offering period pursuant to a Registration
Statement on Form S-11 filed under the Securities Act of 1933 (Registration No.
2-73602). Limited Partners will not be required to make any additional
contributions.
The Partnership originally invested the net proceeds of the public offering,
through joint venture partnerships, in five operating properties. As discussed
further below, through September 30, 1996 two of the Partnership's original
investments had been sold and one had been lost through foreclosure proceedings.
As of September 30, 1996, the Partnership had two remaining operating property
investments which were owned through joint venture partnerships as set forth
below:
<TABLE>
Name of Joint Venture Date of
Name and Type of Property Acquisition
Location Size of Interest Type of Ownership (1)
- ------------------------------------- ---- ----------- ----------------------------------
<S> <C> <C> <C>
Charter Oak Associates 284 6/8/82 Fee ownership of land and
Charter Oak Apartments units improvements (through joint venture)
Creve Coeur, Missouri
Arlington Towne Oaks Associates 320 8/31/82 Fee ownership of land and
Arlington Towne Oaks Apartments units improvements (through joint venture)
Arlington, Texas
</TABLE>
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the long-term mortgage indebtedness secured by the
Partnership's operating property investments, and for a description of the
agreements through which the Partnership has acquired these real estate
investments.
The Partnership previously owned interests in Braesridge 305 Associates, the
Yorktown Office Center and the Glenwood Village Shopping Center. As discussed
further in Item 7, on December 29, 1995 the Partnership assigned its interest in
Braesridge 305 Associates, a joint venture which owned the Braesridge
Apartments, a 545-unit apartment complex in Houston, Texas, to an affiliate of
its co-venture partners for net cash proceeds of $1,000,000. The Partnership
distributed approximately $514,000 of the Braesridge proceeds, or $20 per
original $1,000 investment, in a special distribution to the Limited Partners on
February 15, 1996. The remaining proceeds were added to the Partnership's cash
reserves. In addition, the venture which owned the Glenwood Village Shopping
Center, a 41,000 square foot strip center in Raleigh, North Carolina, sold the
property to a third party on September 23, 1991. The property was sold for
$4,300,000 and, after repaying the outstanding mortgage loan and paying
transaction costs, the Partnership's share of the net proceeds was $1,650,000.
The Partnership distributed the majority of such proceeds to the Limited
Partners in the form of a special distribution of $58 per original $1,000
investment which was paid in November 1991. The Partnership agreed to transfer
title to the Yorktown Office Center to the mortgage lender in March of 1991. The
decision to forfeit the Partnership's interest in the Yorktown Office Center, a
99,000 square foot building located in a suburb of Chicago, Illinois, was based
on the property's inability to generate sufficient income to cover its debt
service obligations. The inability of the Yorktown joint venture to meet the
debt service requirements of the mortgage loan resulted from the significant
oversupply of competing office space in the local suburban real estate market
and its negative impact on occupancy and rental rates. As a result of the
transfer of title, the Partnership no longer has any ownership interest in this
property.
<PAGE>
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some
extent, will not constitute taxable income;
(ii) preserve and protect the Limited Partners' capital;
(iii) obtain long-term appreciation in the value of its properties; and
(iv) provide a build-up of equity through the reduction of mortgage loans
on its properties.
The Partnership suspended the payment of regular quarterly distributions of
excess cash flow in fiscal 1987. Through September 30, 1996, the Limited
Partners had received cumulative cash distributions totalling $10,006,000, or
approximately $407 per original $1,000 investment for the Partnership's earliest
investors. Of this amount, $5,011,000, or $195 per original $1,000 investment,
represents capital proceeds distributed from the refinancing of the Charter Oak
Apartments in fiscal 1986, the sale of the Glenwood Village Shopping Center in
fiscal 1992 and the sale of the Partnership's interest in the Braesridge joint
venture in fiscal 1996. The remaining distributions have been paid from
operating cash flow. A substantial portion of these distributions paid to date
has been sheltered from current taxable income. As of September 30, 1996, the
Partnership retained its ownership interest in two of its five original
investment properties. Due to the fiscal 1996 sale of the interest in the
Braesridge joint venture, which represented 31% of the Partnership's original
investment portfolio, for an amount which was substantially lower than the
Partnership's investment in the joint venture, combined with the fiscal 1991
foreclosure loss of the Yorktown investment, which represented 16% of the
Partnership's original investment portfolio, the Partnership will be unable to
return the full amount of the original capital contributed by the Limited
Partners. The amount of capital which will be returned will depend upon the
proceeds received from the final liquidation of the two remaining investments.
The amount of such proceeds will ultimately depend upon the value of the
underlying investment properties at the time of their final disposition, which
cannot presently be determined.
Both of the properties securing the Partnership's remaining investments are
located in real estate markets in which they face significant competition for
the revenues they generate. The apartment complexes compete with numerous
projects of similar type generally on the basis of price, location and
amenities. As in all markets, the apartment projects also compete with the local
single family home market for prospective tenants. The continued availability of
low interest rates on home mortgage loans has increased the level of this
competition in all parts of the country over the past several years. However,
the impact of the competition from the single-family home market has been offset
by the lack of significant new construction activity in the multi-family
apartment market over most of this period. In the past 12 months, development
activity for multi-family properties in many markets, including the greater
Dallas area in which the Towne Oaks property is located, has escalated
significantly.
The Partnership has no real estate investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment, therefore, presentation of information about industry segments is
not applicable.
The Partnership has no employees; it has, however, entered into an Advisory
Contract with PaineWebber Properties Incorporated (the "Adviser"), which is
responsible for the day-to-day operations of the Partnership. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Fourth
Income Properties Fund, Inc. and Properties Associates. Fourth Income Properties
Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General
Partner of the Partnership. The Associate General Partner of the Partnership is
Properties Associates, a Massachusetts general partnership, certain general
partners of which are also officers of the Adviser and the Managing General
Partner. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
<PAGE>
Item 2. Properties
As of September 30, 1996, the Partnership had interests in two operating
properties through joint venture partnerships. The joint venture partnerships
and the related properties are referred to under Item 1 above to which reference
is made for the name, location and description of each property.
Occupancy figures for each fiscal quarter during 1996, along with an average
for the year, are presented below for each property:
Percent Occupied At
-------------------------------------------------
Fiscal
1996
12/31/95 3/31/96 6/30/96 9/30/96 Average
-------- ------- ------- ------- -------
Charter Oak Apartments 93% 89% 94% 94% 93%
Arlington Towne Oaks
Apartments 94% 94% 91% 91% 93%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Fourth Income Properties Fund, Inc. and
Properties Associates ("PA"), which are the General Partners of the Partnership
and affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Income Properties
Four Limited Partnership, PaineWebber, Fourth Income Properties Fund, Inc. and
PA (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Income Properties Four Limited Partnership, also alleged that following the sale
of the partnership interests, PaineWebber, Fourth Income Properties Fund, Inc.
and PA misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Fourth Income
Properties Fund, Inc. and PA violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At September 30, 1996 there were 1,974 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for the Units will develop. The Managing General Partner
will not redeem or repurchase Units.
Reference is made to Item 6 below for the amount of cash distributions made
to the Limited Partners during fiscal 1996.
Item 6. Selected Financial Data
Paine Webber Income Properties Four Limited Partnership For the years
ended September 30, 1996, 1995, 1994, 1993 and 1992
(In thousands, except per Unit data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 1,816 $ 1,656 $ 1,496 $ 1,531 $ 1,577
Loss on impairment of
long-lived asset $ (1,000) - - - -
Operating loss $ (1,310) $ (427) $ (518) $ (322) $ (222)
Partnership's share of
unconsolidated
ventures' income (losses) $ 94 $ 174 $ 34 $ (353) $ (299)
Gain on sale of
joint venture interest $ 2,111 - - - -
Net income (loss) $ 895 $ (253) $ (484) $ (675) $ (521)
Per Limited Partnership Unit:
Net income (loss) $ 34.48 $ (9.75) $(18.65) $(26.01) $(20.09)
Cash distributions
from sale proceeds $ 20.00 - - - $ 58.00
Total assets $ 9,320 $ 9,962 $10,410 $ 8,849 $ 9,364
Long-term debt $ 4,852 $ 4,915 $ 4,973 $ 3,337 $ 3,486
The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the 25,698
Limited Partnership Units outstanding during each year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered Limited Partnership Interests to the public from
December 1981 to December 1982 pursuant to a Registration Statement filed under
the Securities Act of 1933. Gross proceeds of $25,698,000 were received by the
Partnership and, after deducting selling expenses and offering costs,
approximately $22,336,000 was originally invested, through joint venture
partnerships, in five operating investment properties, comprised of three
multi-family apartment complexes, one commercial office property and one retail
shopping center. As discussed further below, the sale of the Partnership's
interest in one of the apartment properties occurred in fiscal 1996. In
addition, in September 1991, the joint venture which owned the retail shopping
center sold the property and distributed the net proceeds to the venture
partners. Also in fiscal 1991, the Partnership agreed to transfer title to the
office property to the first mortgage lender in settlement of the outstanding
debt obligation, after a protracted period of negotiations failed to produce a
mutually acceptable restructuring agreement. The Partnership does not have any
commitments for additional investments but may be called upon to fund its
portion of operating deficits or capital improvements of the joint ventures in
accordance with the respective joint venture agreements.
On December 29, 1995, the Partnership assigned its interest in the
Braesridge Apartments joint venture to an affiliate of its co-venture partners
for net cash proceeds of $1,000,000. As previously reported, the Partnership and
its co-venture partner had been marketing Braesridge Apartments for sale and, as
part of a marketing effort coordinated by a national brokerage firm, had
received several offers from third party prospective purchasers. During the
first quarter, an agreement was reached to assign the Partnership's interest in
the Braesridge joint venture to an affiliate of the co-venture partners for the
amount of $1,000,000, which provided more net proceeds to the Partnership than
any of the third-party offers. This net sale price for the Partnership's equity
interest reflects the deduction of the outstanding first mortgage loan and
certain co-venture partner operating loans from an agreed upon effective sale
price of $11,750,000, which was supported by the most recent independent
appraisal of the property. The purchase contract was signed in October 1995 and
required the co-venture partner to make a $200,000 non-refundable escrow deposit
and to close the transaction by January 16, 1996. On December 29, 1995, the
transaction closed and the Partnership received the additional $800,000. The
Partnership distributed approximately $514,000 of the net sale proceeds, or $20
per original $1,000 investment, in a special distribution to the Limited
Partners on February 15, 1996. The remaining net sale proceeds of approximately
$486,000 were retained by the Partnership to increase cash reserves maintained
to fund working capital requirements and potential future capital needs of the
Charter Oak and Towne Oaks investments.
Due to the fiscal 1996 sale of the Partnership's interest in the
Braesridge joint venture, which represented 31% of the original investment
portfolio, for an amount which is substantially lower than the Partnership's
investment in the joint venture, combined with the fiscal 1991 foreclosure loss
of the Yorktown investment, which represented 16% of the original investment
portfolio, the Partnership will be unable to return the full amount of the
original capital contributed by the Limited Partners. The amount of capital
which will be returned will depend upon the proceeds received from the final
liquidation of the two remaining investments. The amount of such proceeds will
ultimately depend upon the value of the underlying investment properties at the
time of their final disposition, which cannot presently be determined. The
Partnership's two remaining multi-family apartment properties both averaged 93%
occupancy levels for fiscal 1996. In fiscal 1995, the Charter Oak and Towne Oaks
apartment properties had average occupancy levels of 95% and 92%, respectively.
The occupancy decline at Charter Oak and the limited occupancy gain at Towne
Oaks can be partly attributed to competition from the single-family home market
prompted by the continued availability of low home mortgage interest rates. For
the past several years, the absence of significant new construction of
multi-family apartments more than offset the competition from the single-family
home market and allowed the oversupply of apartment units which existed in many
markets as a result of the overbuilding of the late 1980s to be absorbed. Over
the past 12 months, development activity for multi-family properties in many
markets, including the greater Dallas area in which the Towne Oaks Apartments is
located, has increased significantly. To date, Charter Oak has not experienced a
significant increase in the supply of apartment units in its sub-market, but
management continues to monitor this situation closely. The general increase in
development activity may be an indication that market values for multi-family
properties are nearing their peak for the current market cycle. Accordingly,
managment will likely explore the market for potential sales opportunities for
the Charter Oak and Towne Oaks properties in the near term. Depending on the
availability of favorable sales opportunities for the two remaining properties,
the Partnership could be positioned for a possible liquidation within the next
2-to-3 years. There are no assurances, however, that the Partnership will be
able to achieve the sale of its remaining assets within this time frame.
In light of the current strength of the real estate market for multi-family
apartment properties which may provide the Partnership with opportunities to
sell its remaining investment properties over the next 2-to-3 years, management
reviewed the carrying values of its consolidated operating investment property,
the Towne Oaks Apartments, for potential impairment as of September 30, 1996. In
conjunction with such review in fiscal 1996, the Partnership elected early
application of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (SFAS 121). In accordance with SFAS 121, an impairment loss with respect to
an operating investment property is recognized when the sum of the expected
future net cash flows (undiscounted and without interest charges) is less than
the carrying amount of the asset. An impairment loss is measured as the amount
by which the carrying amount of the asset exceeds its fair value, where fair
value is defined as the amount at which the asset could be bought or sold in a
current transaction between willing parties, that is other than a forced or
liquidation sale. The effect of such application was the recognition of an
impairment loss on the operating investment property owned by Arlington Towne
Oaks Associates. The impairment loss resulted because, in management's judgment,
the venture is unlikely to be able to recover the carrying value of the asset
within the Partnership's practicable remaining holding period. Arlington Towne
Oaks Associates recognized an impairment loss of $1,000,000 to write down the
operating investment property to its estimated fair value of $8.3 million as of
September 30, 1996. Fair value was estimated using an independent appraisal of
the operating property. Such appraisal makes use of a combination of certain
generally accepted valuation techniques, including direct capitalization,
discounted cash flows and comparable sales analysis.
Cash flow from the consolidated Towne Oaks joint venture continues to be
applied to the program begun in fiscal 1995 to upgrade the apartment interiors
on a turnover basis. This work is scheduled to continue over approximately the
next 2 years until all of the units have been upgraded. To date, more than half
of the unit interiors have been upgraded. The interior upgrades range from
repainting and carpet replacement, where needed, to the complete retrofit of the
fixtures, cabinets, heating and air conditioning equipment and the replacement
of all appliances in each unit. The upgraded units are generating additional
rental rates averaging 11% greater than unrenovated units.
During fiscal 1996, the Partnership received excess cash flow distributions
from the Charter Oak joint venture of $263,000. At Charter Oak, refinancing
reserves continue to be used as part of a program to upgrade individual units
and the property as a whole. As with Towne Oaks, the work to renovate the
individual apartment units is being done on a turnover basis and will continue
until all of the units have been upgraded. To date, approximately one-third of
the unit interiors have been upgraded. The upgraded units are generating
additional rental rates of $50 to $125 per month, depending on the type of unit.
At September 30, 1996, the Partnership and its consolidated joint venture
had available cash and cash equivalents of $654,000. Such cash and cash
equivalents will be utilized for the Partnership's working capital requirements
and, if necessary, to fund property operating deficits and capital improvements
of the two remaining joint ventures in accordance with the respective joint
venture agreements. The source of future liquidity and distributions to the
partners is expected to be through cash generated from operations of the
Partnership's investment properties and proceeds from the sale or refinancing of
such properties.
Results of Operations
1996 Compared to 1995
The Partnership reported net income of $895,000 for the year ended
September 30, 1996, as compared to a net loss of $253,000 fiscal 1995. This
favorable change in net operating results is a result of the fiscal 1996 gain on
the sale of the Braesridge joint venture interest discussed further above, which
was partially offset by an increase in the Partnership's operating loss and a
reduction in the Partnership's share of unconsolidated ventures' income. The
Partnership accounted for its investment in the Braesridge joint venture using
the equity method because the Partnership did not have voting control interest
in the venture. Under the equity method, the investment in a joint venture is
carried at cost adjusted for the Partnership's share of the venture's earnings
or losses and distributions. Despite recovering less than 15% of its original
cash investment in Braesridge, the Partnership recognized a gain of $2,111,000
in connection with the sale of its venture interest because the losses recorded
in prior years under the equity method had exceeded the Partnership's initial
investment amount.
Operating loss increased by $883,000 in fiscal 1996 primarily due to the
$1,000,000 impairment loss recognized in fiscal 1996 on the consolidated Towne
Oaks Apartments, as discussed further above. The impairment loss was partially
offset by increases in rental revenues from Towne Oaks and a decrease in general
and administrative expenses. Fiscal 1996 rental revenues at Towne Oaks increased
by $153,000, or 9%, over prior year amounts as a result of an increase in both
average occupancy and rental rates. General and administrative expenses
decreased by $40,000 mainly due to certain incremental costs incurred in the
prior year in connection with an independent valuation of the Partnership's
operating investment properties. An increase in property operating expenses also
contributed to the increase in the Partnership's operating loss in fiscal 1996.
Property operating expenses from the consolidated Towne Oaks joint venture
increased by $67,000 primarily due to increases in utilities and repairs and
maintenance expenses. Utilities at the property increased largely due to the
severe winter experienced in the Dallas area in 1996. The increase in repairs
and maintenance costs is consistent with the age of the property and
management's desire not to defer any needed maintenance items.
The decrease of $80,000 in the Partnership's share of unconsolidated
ventures' income in fiscal 1996 resulted primarily from the decline in income
associated with the sale of the Braesridge joint venture interest in the current
year. The prior year amount included $66,000 of net income from the Braesridge
joint venture which the Partnership sold on December 29, 1995. Accordingly, the
Partnership's share of unconsolidated ventures' income in the current year only
includes results from the Braesridge joint venture through the date of the sale,
or approximately three months. Net operating income from the Partnership's
remaining unconsolidated joint venture, Charter Oak Associates, declined in the
current year despite an improvement of 4% in the venture's rental revenue. The
increase in revenues was offset by higher non-cash depreciation charges in
fiscal 1996 resulting from capital improvements performed at the Charter Oak
Apartments over the past two years.
1995 Compared to 1994
The Partnership reported a net loss of $253,000 for the year ended
September 30, 1995, as compared to a net loss of $484,000 recognized in the
prior year. The decrease in net loss resulted from a decrease in the
Partnership's operating loss of $91,000 and an increase in the Partnership's
share of unconsolidated ventures' income of $140,000. The decrease in the
Partnership's operating loss, which includes the results of the consolidated
Towne Oaks joint venture, was primarily the result of an increase in rental
revenues from the Towne Oak Apartments. Rental revenues increased by $187,000
for fiscal 1995, when compared to fiscal 1994, due to the impact of the capital
improvements discussed above on occupancy and rental rates. The increase in
revenues at Towne Oaks was partially offset by increases in the consolidated
venture's interest expense, depreciation expense and real estate taxes. Interest
expense on the Towne Oaks debt increased by $42,000 as a result of the higher
principal balance and interest rate on the new mortgage loan subsequent to the
fiscal 1994 refinancing transaction. Depreciation expense increased by $25,000
due to the additional depreciation on the capital improvements at the Towne Oaks
Apartments. In addition, real estate tax expense on the Towne Oaks property
increased by $14,000 in fiscal 1995.
The improvement in the Partnership's share of unconsolidated ventures'
income during fiscal 1995 is primarily due to an increase in rental revenues at
both the Charter Oak and Braesridge joint ventures. Rental rates increased at
Charter Oak in conjunction with the capital improvement program and Braesridge
experienced increases in both average occupancy and rental rates during fiscal
1995. Average occupancy at the Braesridge Apartments was 96% for fiscal 1995, as
compared to 93% for fiscal 1994. The resulting increase in combined rental
revenues, of $243,000, was partially offset by increases in repairs and
maintenance expense at the Braesridge joint venture along with an increase in
depreciation and amortization expense at the Charter Oak joint venture as a
result of additional depreciation on the capital improvements.
1994 Compared to 1993
The Partnership reported a net loss of $484,000 for the year ended
September 30, 1994, which represented a decrease in net loss of $191,000 when
compared to fiscal 1993. This favorable change was primarily the result of an
improvement in the net operating results of the Partnership's unconsolidated
joint ventures (Braesridge and Charter Oak) during fiscal 1994. The Partnership
recognized income of $34,000 from its share of unconsolidated ventures'
operations in 1994, as compared to a loss of $353,000 in fiscal 1993. This
improvement was primarily the result of increased rental income from the
Braesridge Apartments and lower mortgage interest and operating expenses of the
Charter Oak joint venture. Rental revenues from Braesridge increased by $263,000
in fiscal 1994, which was partially offset by increases in salaries and repairs
and maintenance expenses. The Charter Oak joint venture refinanced its debt on
August 31, 1993, which resulted in a decrease in the venture's interest expense
of $242,000 during fiscal 1994. In addition, real estate taxes and maintenance
expenses of the Charter Oak joint venture decreased by $39,000.
The favorable change in the Partnership's share of unconsolidated ventures'
operations was partially offset by an increase in the Partnership's operating
loss. The increase in the Partnership's operating loss, of $196,000, was
primarily the result of an increase in interest expense, coupled with a slight
decline in rental revenues, from the Towne Oaks Apartments. The decrease in
rental revenues can be attributed to a decline in occupancy at the Towne Oaks
Apartments which occurred during the renovation period of the apartment complex.
Interest expense on the Towne Oaks debt increased by $110,000 as a result of the
higher principal balance and interest rate on the new mortgage loan. An increase
in Partnership general and administrative expenses of $63,000 also contributed
to the increase in operating loss for fiscal 1994. The increase in general and
administrative expenses resulted mainly from certain expenditures incurred in
connection with an independent valuation of the Partnership's operating
properties which was commissioned during fiscal 1994 in conjunction with
management's ongoing refinancing efforts and portfolio management
responsibilities.
Inflation
The Partnership completed its fourteenth full year of operations in fiscal
1996 and the effects of inflation and changes in prices on revenues and expenses
to date have not been significant.
Inflation in future periods may cause an increase in revenues, as well as
operating expenses, at the Partnership's operating investment properties.
Tenants at the Partnership's apartment properties have short-term leases,
generally of six-to-twelve months in duration. Rental rates at these properties
can be adjusted to keep pace with inflation, as market conditions allow, as the
leases are renewed or turned over. Such increases in rental income would be
expected to at least partially offset the corresponding increases in Partnership
and property operating expenses caused by future inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Fourth Income Properties
Fund, Inc. a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates, a Massachusetts general partnership, certain general partners of
which are officers of the Adviser and the Managing General Partner. The Managing
General Partner has overall authority and responsibility for the Partnership's
operations, however, the day-to-day business of the Partnership is managed by
the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date
elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and
Assistant Treasurer 54 6/12/81*
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors or
executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and executive officers have been elected to serve until
the 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, and for which PaineWebber Properties Incorporated serves as the Adviser.
The business experience of each of the directors and principal executive
officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General
Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI
in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking
in November 1995 as a Senior Vice President. Prior to joining PaineWebber,
Mr. Rubin was employed by Kidder, Peabody and served as President for KP
Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a
Senior Vice President and Director of Direct Investments at Smith Barney
Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real
estate workout specialist at Shearson Lehman Brothers. Prior to joining
Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford
University and Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher
previously worked for a major law firm in New York City. He has a J.D. from
Harvard Law School, an M.B.A. from Harvard Graduate School of Business
Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and a Senior Vice President and Chief Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice
President and Controller since 1978, and where he continued until joining the
Adviser. Mr. Arnold is a Certified Public Accountant licensed in the State of
Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and
also, from March 1974 to February 1980, the Assistant Treasurer of Capital for
Real Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and Vice President and Treasurer of the Adviser which he joined
in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of
the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and
a Vice President and Manager of Financial Reporting of the Adviser which he
joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended September 30, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
<PAGE>
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership. The
Partnership is required to pay certain fees to the Adviser, and the General
Partners are entitled to receive a share of Partnership cash distributions and a
share of profits and losses. These items are described in Item 13.
The Partnership has not paid cash distributions to the Unitholders from
operations over the past five years. Furthermore, the Partnership's Units of
Limited Partnership Interest are not actively traded on any organized exchange,
and no efficient secondary market exists. Accordingly, no accurate price
information is available for these Units. Therefore, a presentation of
historical Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited
Partnership Interest, not voting securities. All the outstanding stock of the
Managing General Partner, Fourth Income Properties Fund, Inc., is owned by
PaineWebber. Properties Associates, the Associate General Partner, is a
Massachusetts general partnership, certain general partners of which are
officers of the Adviser and the Managing General Partner. No limited partner is
known by the Partnership to own beneficially more than 5% of the outstanding
interests of the Partnership.
(b) Neither directors and officers of the Managing General Partner nor the
general partners of the Associate General Partner, individually, own any Units
of limited partnership interest of the Partnership. No director or officer of
the Managing General Partner, nor any general partner of the Associate General
Partner, possesses a right to acquire beneficial ownership of Units of Limited
Partnership Interest of the Partnership. As of September 30, 1996, PaineWebber
and its affiliates owned 72 Units of limited partnership interests of the
Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fourth Income Properties Fund,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group, Inc. ("PaineWebber"), and Properties Associates (the "Associate General
Partner"), a Massachusetts general partnership, certain general partners of
which are also officers of the Managing General Partner and PaineWebber
Properties Incorporated. Subject to the Managing General Partner's overall
authority, the business of the Partnership is managed by PaineWebber Properties
Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management and disposition of Partnership
investments. In connection with investing Partnership capital, the Adviser
received acquisition fees paid by the joint ventures and sellers.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
losses of the Partnership will be allocated 99% to the Limited Partners and 1%
to the General Partners. Taxable income or tax losses arising from a sale or
refinancing of investment properties will be allocated to the Limited Partners
and the General Partners in proportion to the amounts of sale or refinancing
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or refinancing. If
there are no sale or refinancing proceeds, taxable income and tax losses from a
sale or refinancing will be allocated 99% to the Limited Partners and 1% to the
General Partners. Allocations of the Partnership's operations between the
General Partners and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer day-to-day operations of the Partnership, and to
report periodically the performance of the Partnership to the Managing General
Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow,
as defined) and an incentive management fee (5% of adjusted cash flow
subordinated to a noncumulative annual return to the limited partners equal to
6% based upon their adjusted capital contribution) for services rendered. The
Adviser did not earn any management fees during the year ended September 30,
1996 due to the lack of distributable cash flow.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended September 30, 1996 is $82,000, representing reimbursements to
this affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $2,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended September 30, 1996. Fees charged
by Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at Page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
Page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of
fiscal 1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at Page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES FOUR
LIMITED PARTNERSHIP
By: Fourth Income Properties Fund, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
-------------------
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
---------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
----------------------
Thomas W. Boland
Vice President
Dated: January 10, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership in
the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 10, 1997
---------------------- ----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: January 10, 1997
---------------------- ----------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
INDEX TO EXHIBITS
<TABLE>
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ---------- ------------------------- -------------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated December 22, 1981, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated hereinby
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with th Commission
exhibits to registration statements and pursuant to Section 13 or 15(d)
amendments thereto of the registrant of the Securities Exchange Act
together with all such contracts filed of 1934 and incorporated
as exhibits of previously filed Forms herein by reference.
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year
ended September 30, 1996 has
been sent to the Limited Partners.
An Annual Report will be sent to
the Limited Partnes subsequent to
this filing.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial
StatementSchedul erequired by
Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
---------
Paine Webber Income Properties Four Limited Partnership:
Report of independent auditors F-3
Consolidated balance sheets as of September 30, 1996 and 1995 F-4
Consolidated statements of operations for the years ended
September 30, 1996, 1995 and 1994 F-5
Consolidated statements of changes in partners' capital (deficit)
for the years ended September 30, 1996, 1995 and 1994 F-6
Consolidated statements of cash flows for the years ended
September 30, 1996, 1995 and 1994 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-18
Charter Oak Associates:
Report of independent auditors F-19
Balance sheets as of September 30, 1996 and 1995 F-20
Statements of income for the years ended September 30, 1996,
1995 and 1994 F-21
Statements of changes in venturers' capital (deficit) for
the years ended September 30, 1996, 1995 and 1994 F-22
Statements of cash flows for the years ended September 30, 1996,
1995 and 1994 F-23
Notes to financial statements F-24
Schedule III- Real Estate and Accumulated Depreciation F-27
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
(continued)
-----------
Braesridge 305 Associates:
Report of independent auditors F-28
Balance sheets as of December 29, 1995 and September 30, 1995 F-29
Statements of income for the period October 1, 1995 to December 29,
1995 and the years ended September 30, 1995 and 1994 F-30
Statements of changes in venturers' capital (deficit) for the period
October 1, 1995 to December 29, 1995 and the years ended
September 30, 1995 and 1994 F-31
Statements of cash flows for the period October 1, 1995 to
December 29, 1995 and the years ended September 30, 1995 and 1994 F-32
Notes to financial statements F-33
Schedule III- Real Estate and Accumulated Depreciation F-37
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.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Income Properties Four Limited Partnership:
We have audited the accompanying consolidated balance sheets of PaineWebber
Income Properties Four Limited Partnership as of September 30, 1996 and 1995,
and the related consolidated statements of operations, changes in partners'
capital (deficit), and cash flows for each of the three years in the period
ended September 30, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Income Properties Four Limited Partnership at September 30, 1996 and
1995, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles. 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.
As discussed in Notes 2 and 4 to the consolidated financial statements, in
fiscal 1996 the Partnership adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
January 8, 1997
<PAGE>
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(In thousands, except per Unit amounts)
ASSETS
1996 1995
---- ----
Operating investment property:
Land $ 1,300 $ 1,400
Buildings, improvements and equipment 11,842 12,468
-------- --------
13,142 13,868
Accumulated depreciation (4,877) (4,436)
-------- --------
8,265 9,432
Cash and cash equivalents 654 129
Tax escrow deposit 121 110
Repair escrow 53 59
Prepaid and other assets 59 57
Deferred financing costs, net of accumulated
amortization of $20 ($13 in 1995) 168 175
-------- --------
$ 9,320 $ 9,962
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other liabilities $ 105 $ 144
Accrued real estate taxes 115 101
Mortgage interest payable 37 37
Tenant security deposits 65 58
Equity in losses of unconsolidated joint ventures
in excess of investments and advances 32 974
Long-term debt 4,852 4,915
-------- --------
Total liabilities 5,206 6,229
Partners' capital:
General Partners:
Capital contributions 1 l
Cumulative net loss (91) (100)
Cumulative cash distributions (51) (51)
Limited Partners ($1,000 per unit; 25,698 Units issued):
Capital contributions, net of offering costs 23,194 23,194
Cumulative net loss (8,933) (9,819)
Cumulative cash distributions (10,006) (9,492)
-------- --------
Total partners' capital 4,114 3,733
-------- --------
$ 9,320 $ 9,962
======== ========
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 1996, 1995 and 1994
(In thousands, except per Unit amounts)
1996 1995 1994
---- ---- ----
Revenues:
Rental revenue $ 1,766 $ 1,613 $ 1,426
Interest income 24 8 8
Other income 26 35 62
-------- ------- -------
1,816 1,656 1,496
Expenses:
Loss on impairment of long-lived asset 1,000 - -
Property operating expenses 887 820 811
Mortgage interest 451 458 416
Depreciation expense 441 420 391
Real estate taxes 136 134 120
General and administrative 211 251 272
Amortization expense - - 4
-------- ------- -------
3,126 2,083 2,014
-------- ------- -------
Operating loss (1,310) (427) (518)
Partnership's share of unconsolidated
ventures' income 94 174 34
Gain on sale of joint venture investment 2,111 - -
-------- -------- -------
Net income (loss) $ 895 $ (253) $ (484)
======== ======== ========
Net income (loss) per Limited
Partnership Unit $ 34.48 $ (9.75) $(18.65)
======= ======== =======
Cash distributions per Limited
Partnership Unit $ 20.00 $ - $ -
====== ======== =======
The above net income (loss) and cash distributions per Limited Partnership
Unit is based upon the 25,698 Limited Partnership Units outstanding during each
year.
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at September 30, 1993 $ (142) $ 4,612 $ 4,470
Net loss (5) (479) (484)
------ ------- -------
Balance at September 30, 1994 (147) 4,133 3,986
Net loss (3) (250) (253)
------- ------- -------
Balance at September 30, 1995 (150) 3,883 3,733
Net income 9 886 895
Cash distributions - (514) (514)
------- ------- -------
Balance at September 30, 1996 $ (141) $ 4,255 $ 4,114
======= ======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 895 $ (253) $ (484)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on impairment of long-lived assets 1,000 - -
Gain on sale of joint venture investment (2,111) - -
Depreciation and amortization 441 420 395
Amortization of deferred financing costs 7 9 18
Partnership's share of unconsolidated
ventures' income (94) (174) (34)
Changes in assets and liabilities:
Tax escrow deposit (11) 46 (18)
Accrued interest and other receivables - - 1
Prepaid and other assets (2) (18) 5
Accounts payable and other liabilities (39) (3) 5
Accounts payable - affiliate - - (25)
Accrued real estate taxes 14 8 (8)
Mortgage interest payable - (1) 13
Tenant security deposits 7 2 (4)
------ -------- ------
Total adjustments (788) 289 348
------ -------- ------
Net cash provided by (used in)
operating activities 107 36 (136)
------ -------- ------
Cash flows from investing activities:
Proceeds from the sale of joint venture
investment 1,000 - -
Distributions from unconsolidated joint ventures 263 409 125
Additional investments in unconsolidated
joint ventures - (41) -
Additions to operating investment property (274) (976) (795)
Decrease in (deposits to) repair escrow 6 735 (794)
----- ------- ------
Net cash provided by (used in)
investing activities 995 127 (1,464)
----- ------- ------
Cash flows from financing activities:
Distributions to limited partners (514) - -
Principal repayments on long-term debt (63) (58) (3,364)
Payment of deferred financing costs - - (188)
Proceeds from issuance of long-term debt - - 5,000
---- ------ -----
Net cash (used in) provided by
financing activities (577) (58) 1,448
---- ------ -----
Net increase (decrease) in cash and cash equivalents 525 105 (152)
Cash and cash equivalents, beginning of year 129 24 176
----- ------ -----
Cash and cash equivalents, end of year $ 654 $ 129 $ 24
====== ===== =====
Cash paid during the year for interest $ 444 $ 450 $ 370
====== ======= ======
</TABLE>
See accompanying notes.
<PAGE>
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
Notes To Consolidated Financial Statements
1. Organization and Nature of Operations
Paine Webber Income Properties Four Limited Partnership (the
"Partnership") is a limited partnership organized pursuant to the laws of the
State of Delaware in July 1981 for the purpose of investing in a diversified
portfolio of income-producing properties. The Partnership authorized the sale of
units (the "Units") of partnership interest (at $1,000 per Unit) of which 25,698
were subscribed and issued between December 1981 and December 1982.
The Partnership originally invested the net proceeds of the public
offering, through joint venture partnerships, in five operating properties,
comprised of three multi-family apartment complexes, one commercial office
property and one retail shopping center. As discussed further in Note 5, the
sale of the Partnership's interest in one of the apartment properties occurred
in fiscal 1996. In addition, in September 1991 the joint venture which owned the
retail shopping center sold the property and distributed the net proceeds to the
venture partners. Also in fiscal 1991, the Partnership agreed to transfer title
to the office property to the first mortgage lender in settlement of the
outstanding debt obligation after a protracted period of negotiations failed to
produce a mutually acceptable restructuring agreement. The Partnership's two
remaining investments are described in Notes 4 and 5.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1996 and 1995 and revenues and expenses for
each of the three years in the period ended September 30, 1996. Actual results
could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in certain joint venture partnerships which own operating
properties. Except as described below, the Partnership accounts for its
investments in joint venture partnerships using the equity method because the
Partnership does not have a voting control interest in the ventures. Under the
equity method the investment in a joint venture is carried at cost adjusted for
the Partnership's share of the venture's earnings or losses and distributions.
See Note 5 for a description of the unconsolidated joint venture partnerships.
As further discussed in Note 4, effective December 31, 1990, the
co-venture partner of Arlington Towne Oaks Associates assigned its general
partnership interest to Fourth Income Properties Fund, Inc., the Managing
General Partner of the Partnership (see Note 3). The assignment gave the
Partnership control over the affairs of the joint venture. Accordingly, the
accompanying financial statements present the financial position, results of
operations and cash flows of this joint venture on a consolidated basis. All
transactions between the Partnership and the joint venture have been eliminated
in consolidation.
Effective for fiscal 1996, the Partnership adopted Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to account for
its operating investment properties. In accordance with SFAS 121, an impairment
loss with respect to an operating investment property is recognized when the sum
of the expected future net cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds its
fair value, where fair value is defined as the amount at which the asset could
be bought or sold in a current transaction between willing parties, that is
other than a forced or liquidation sale. In conjunction with the application of
SFAS 121, an impairment loss on the operating investment property owned by the
consolidated joint venture was recognized in fiscal 1996. Such loss is described
in more detail in Note 4.
<PAGE>
Depreciation on the operating investment property is computed using the
straight-line method over an estimated useful life of forty years for the
buildings and improvements and five years for the equipment. Acquisition fees
paid to an affiliate in connection with the investment in the Towne Oaks joint
venture have been capitalized and are included in the cost of the operating
investment property.
Deferred financing costs represent loan financing fees and other long-term
debt acquisition costs which have been capitalized and are being amortized, on a
straight-line basis, over the term of the consolidated joint venture's mortgage
loan. Amortization of deferred financing costs is included in mortgage interest
expense and related financing costs on the accompanying statements of
operations.
The consolidated joint venture leases apartment units under leases with
terms usually of one year or less. Rental income is recorded on the accrual
basis as earned. Security deposits typically are required of all tenants.
For purposes of reporting cash flows, the Partnerships considers all
highly liquid investments with original maturities of 90 days or less to be cash
equivalents.
The cash and cash equivalents, escrow deposits, and accounts payable and
accrued expenses appearing on the accompanying balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The
carrying amount of these assets and liabilities approximates their fair value as
of September 30, 1996 due to the short-term maturities of these instruments. The
long-term debt is also a financial instrument for purposes of FAS 107. The fair
value of the long-term debt is estimated using discounted cash flow analysis
based on the current market rate for a similar type of borrowing arrangement
(see Note 6).
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership. Upon sale or
disposition of the Partnership's investments, the taxable gain or the taxable
loss incurred will be allocated among the partners. In cases where the
disposition of the investment involves the lender foreclosing on the investment,
taxable income could occur without distribution of cash. This income would
represent passive income to the partners which could be offset by each partners'
existing passive losses, including any passive loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Income Properties Fund,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group, Inc. ("PaineWebber"), and Properties Associates (the "Associate General
Partner"), a Massachusetts general partnership, certain general partners of
which are also officers of the Managing General Partner and PaineWebber
Properties Incorporated. Subject to the Managing General Partner's overall
authority, the business of the Partnership is managed by PaineWebber Properties
Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned
subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive
fees and compensation, determined on an agreed-upon basis, in consideration of
various services performed in connection with the sale of the Units, the
management of the Partnership and the acquisition, management, financing and
disposition of Partnership investments.
All distributable cash, as defined, for each fiscal year shall be
distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the
General Partners. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
<PAGE>
Pursuant to the terms of the Partnership Agreement, taxable income or tax
losses of the Partnership will be allocated 99% to the Limited Partners and 1%
to the General Partners. Taxable income or tax losses arising from a sale or
refinancing of investment properties will be allocated to the Limited Partners
and the General Partners in proportion to the amounts of sale or refinancing
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or refinancing. If
there are no sale or refinancing proceeds, taxable income and tax losses from a
sale or refinancing will be allocated 99% to the Limited Partners and 1% to the
General Partners. Allocations of the Partnership's operations between the
General Partners and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities: to administer day-to-day operations of the Partnership, and to
report periodically the performance of the Partnership to the Managing General
Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow,
as defined) and an incentive management fee (5% of adjusted cash flow
subordinated to a noncumulative annual return to the limited partners equal to
6% based upon their adjusted capital contribution) for services rendered. The
Adviser did not earn any basic management fees during the three-year period
ended September 30, 1996 due to the lack of distributable cash flow. No
incentive management fees have been paid to date.
In connection with the sale of each property, the Adviser may receive a
disposition fee in an amount equal to 3/4% based on the selling price of the
property, subordinated to the payment of certain amounts to the Limited
Partners. No such fees have been earned to date.
Included in general and administrative expenses for the years ended
September 30, 1996, 1995 and 1994 is $82,000, $86,000 and $98,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") 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
$2,000, $1,000 and $1,000, respectively, (included in general and administrative
expenses) for the years ended September 30, 1996, 1995 and 1994 for managing the
Partnership's cash assets.
4. Operating Investment Property
Operating investment property at September 30, 1996 and 1995 represents
the land, buildings and equipment of Arlington Towne Oaks Associates, a joint
venture in which the Partnership has a controlling interest, as described below.
On August 31, 1982 the Partnership acquired an interest in Arlington Towne
Oaks Associates, a Texas general partnership organized to purchase and operate
Towne Oaks Apartments, a 320-unit apartment complex in Arlington, Texas. The
aggregate cash investment by the Partnership for its interest was approximately
$5,258,000 (including an acquisition fee of $550,000 paid to the Adviser). The
Partnership's original co-venture partner was an affiliate of the Trammell Crow
organization. Effective December 31, 1990, the co-venture partner of Arlington
Towne Oaks Associates withdrew from the venture and assigned its interest to the
Managing General Partner of the Partnership in return for a release of any
further obligations. As a result of the assignment, the Partnership assumed
control over the affairs of the joint venture.
As discussed in Note 2, the Partnership elected early application of SFAS
121 effective for fiscal 1996. The effect of such application was the
recognition of an impairment loss on the operating investment property owned by
Arlington Towne Oaks Associates. The impairment loss resulted because, in
management's judgment, the venture is unlikely to be able to recover the
carrying value of the asset within the Partnership's practicable remaining
holding period. The Partnership expects to have possible opportunities to sell
its remaining investments over the next 2-to-3 years. Arlington Towne Oaks
Associates recognized an impairment loss of $1,000,000 to write down the
operating investment property to its estimated fair value of approximately $8.3
million as of September 30, 1996. Fair value was estimated using an independent
appraisal of the operating property. Such appraisal makes use of a combination
of certain generally accepted valuation techniques, including direct
capitalization, discounted cash flows and comparable sales analysis.
The joint venture agreement provides that the Partnership will receive
from cash flow, to the extent available, a non-cumulative preferred return,
payable monthly, of $483,000 for each year. After the Partnership's preferred
return requirements are met, the co-venturer is then entitled to receive
quarterly, non-cumulative subordinated returns of $14,000 for each quarter
thereafter. The next $300,000 of available annual cash flow in any year is to be
distributed 90% to the Partnership and 10% to the co-venturer. The next $200,000
of cash flow in any year is to be distributed 80% to the Partnership and 20% to
the co-venturer. Any remaining cash flow is to be used to liquidate any unpaid
principal and accrued interest on any notes made by the joint venture to any
partners, and any remaining cash flow is to be distributed 70% to the
Partnership and 30% to the co-venturer.
Distributions of sale and/or refinancing proceeds will be as follows,
after the payment of mortgage debts and to the extent not previously returned to
each partner: 1) payment of notes and accrued interest payable to partners, 2)
to the Partnership in an amount equal to the Partnership's gross investment, 3)
to the manager for any unpaid subordinated management fees, 4) the next
$3,000,000 to the Partnership and co-venturer allocated 90% and 10%,
respectively, 5) the next $2,000,000 to the Partnership and co-venturer
allocated 80% and 20%, respectively, 6) the next $2,000,000 to the Partnership
and co-venturer allocated 70% and 30%, respectively (increased by $200,000 for
each year or partial year succeeding the fifth year of ownership by the
Partnership), 7) remaining balance to the Partnership and co-venturer allocated
60% and 40%, respectively.
Tax profits, as defined, will be allocated to the Partnership and the
co-venturer in amounts equal to cash distributions, with the balance of the
taxable income allocated 70% to the Partnership and 30% to the co-venturer. Tax
losses, as defined, are allocated 80% to the Partnership and 20% to the
co-venturer. Profits resulting from the sale or refinancing of the Operating
Investment Property will be allocated as follows: 1) to the Partnership and the
co-venturer on a proportionate basis to restore any negative capital accounts to
zero, 2) any remaining gain equal to the excess of the capital proceeds, as
defined, over the aggregate capital balances of all partners, to the Partnership
and the co-venturer on a proportionate basis, and 3) to the Partnership and the
co-venturer in a manner similar to cash distributions described in the preceding
paragraph. Losses from the sale or refinancing of the Operating Investment
Property will be allocated as follows: 1) losses equal to the excess of the
aggregate positive capital accounts of all partners who have positive capital
balances over the capital proceeds, as defined, to the Partnership and the
co-venturer on a proportionate basis and 2) remaining losses 70% to the
Partnership and 30% to the co-venturer. Internal Revenue Service regulations
require partnership allocations of income and loss to the respective partners to
have "substantial economic effect". This requirement resulted in the joint
venture's net loss for the years ended September 30, 1996, 1995 and 1994 being
allocated in a manner different from that provided in the joint venture
agreement, as set forth above. Allocations of the venture's operations between
the Partnership and the co-venturer for financial accounting purposes have been
made in conformity with the actual allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the
venture, the Partnership and the co-venturer shall loan the required funds to
the venture in the proportions of 70% and 30%, respectively. In the event a
partner defaults in its obligations to make a loan, the other partner may make
all or any part of the loan required by the defaulting partner. Cumulative loans
advanced to the joint venture by the Partnership totalled $1,551,000 as of
September 30, 1996. Such loans bear interest at the lesser of 12% per annum or
the prime rate and are repayable only from the venture's net cash flow or sale
or refinancing proceeds. Such loans and the related accrued interest have been
eliminated in consolidation.
<PAGE>
The following is a summary of property operating expenses for the years
ended September 30, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Property operating expenses:
Salaries $ 262 $ 263 $ 241
Repairs and maintenance 255 241 175
Utilities 136 105 150
Insurance 23 10 26
Management fees 83 78 69
Administrative and other 128 123 150
------ ----- -----
$ 887 $ 820 $ 811
====== ===== =====
5. Investments in Unconsolidated Joint Ventures
At September 30, 1996, the Partnership had an investment in one
unconsolidated joint venture, Charter Oak Associates, which owned an operating
investment property. At September 30, 1995, the Partnership's unconsolidated
joint venture investments included Braesridge 305 Associates which also owned an
operating investment property. On December 29, 1995, the Partnership assigned
its investment interest in Braesridge 305 Associates to an affiliate of its
co-venture partners for net cash proceeds of $1,000,000 (see below for a further
discussion). The unconsolidated joint ventures are accounted for on the equity
method in the Partnership's financial statements. Under the equity method, the
assets, liabilities, revenues and expenses of the joint ventures do not appear
in the Partnership's financial statements. Instead, the investments are carried
at cost adjusted for the Partnership's share of the ventures' earnings, losses
and distributions. Condensed combined financial statements of the unconsolidated
joint ventures follow. The condensed combined summary of operations for fiscal
1996 includes the results of the Braesridge joint venture through the date of
the sale of the Partnership's interest.
Condensed Combined Balance Sheets
September 30, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 721 $ 1,221
Operating investment property, net 8,908 18,216
Other assets, net 210 292
------- --------
$ 9,839 $ 19,729
======= ========
Liabilities and Venturers' Deficit
Current liabilities (including current portion of
mortgage notes payable) $ 718 $ 2,052
Long-term mortgage debt, less current portion 9,971 19,854
Partnership's share of combined deficit (376) (1,575)
Co-venturers' share of combined deficit (474) (602)
------- --------
$ 9,839 $ 19,729
======= ========
<PAGE>
Reconciliation of Partnership's Investment
September 30, 1996 and 1995
1996 1995
---- ----
Partnership's share of combined deficit,
as shown above $ (376) $ (1,575)
Partnership's share of current liabilities
and long-term debt 313 511
Excess basis due to investment in joint
ventures, net (1) 31 90
-------- --------
Equity in losses of unconsolidated joint
ventures in excess of investments and advances $ (32) $ (974)
======== ========
(1) At September 30, 1996 and 1995, the Partnership's investment exceeds its
share of the combined joint venture capital and liabilities by
approximately $31,000 and $90,000, respectively. This amount, which relates
to certain expenses incurred by the Partnership in connection with
acquiring its joint venture investments, is being amortized on a
straight-line basis over the estimated useful life of the properties.
Condensed Combined Summary of Operations
For the years ended September 30, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Rental income $ 3,200 $ 5,168 $ 4,925
Interest and other income 101 129 132
------- ------- -------
3,301 5,297 5,057
Interest expense and related
financing fees 977 1,779 1,790
Property operating expenses 1,686 2,663 2,646
Depreciation expense 512 640 565
------- ------- --------
3,175 5,082 5,001
------- ------- --------
Net income $ 126 $ 215 $ 56
======= ======= ========
Net income:
Partnership's share of combined
operations $ 98 $ 179 $ 39
Co-venturers' share of combined
operations 28 36 17
------- ------- --------
$ 126 $ 215 $ 56
======= ======= ========
Reconciliation of Partnership's Share of Operations
1996 1995 1994
---- ---- ----
Partnership's share of combined
operations, as shown above $ 98 $ 179 $ 39
Amortization of excess basis (4) (5) (5)
------- ------ --------
Partnership's share of unconsolidated
ventures' income $ 94 $ 174 $ 34
======= ======= ========
<PAGE>
Equity in losses of unconsolidated joint ventures in excess of investments
and advances on the balance sheet is comprised of the following equity method
carrying values:
1996 1995
---- ----
Charter Oak Associates $ (32) $ 32
Braesridge 305 Associates - (1,006)
------ --------
$ (32) $ (974)
====== ========
These joint ventures are subject to partnership agreements which determine
the distribution of available funds, the disposition of the venture's assets and
the rights of the partners, regardless of the Partnership's percentage ownership
interest in the venture. Substantially all of the Partnership's investments in
these joint ventures are restricted as to distributions.
The Partnership received cash distributions from the joint ventures as set
forth below (in thousands):
1996 1995 1994
---- ---- ----
Charter Oak Associates $ 263 $ 409 $ 125
Braesridge 305 Associates - - -
------ ------- ------
$ 263 $ 409 $ 125
====== ======= ======
A description of the unconsolidated ventures' properties and the terms of
the joint venture agreements are summarized below:
a) Charter Oak Associates
----------------------
On June 8, 1982, the Partnership acquired an interest in Charter Oak
Associates, a Missouri general partnership organized to purchase and operate
Charter Oak Apartments, a 284-unit apartment complex in Creve Coeur, Missouri.
The Partnership is a general partner in the joint venture. The Partnership's
co-venture partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest was
approximately $5,289,000 (including an acquisition fee of $530,000 paid to the
Adviser). The apartment complex was acquired subject to an institutional
nonrecourse first mortgage with a balance of $5,036,000 at the time of closing.
At September 30, 1985, Charter Oak Associates refinanced the first mortgage loan
on the Charter Oak apartment complex. A new non-recourse first mortgage in the
amount of $8,600,000 was obtained at that time. The mortgage loan had a term of
seven years and bore interest at the rate of 11.3% per year. The proceeds from
the refinancing were used to repay the remaining balance on the existing first
mortgage loan of $4,670,000, to pay expenses of closing the new loan and for
distributions to the joint venture partners. Refinancing proceeds of $3,000,000
and $600,000 were distributed to the Partnership and the co-venturer,
respectively, on September 30, 1985. During fiscal 1993, the property's existing
debt was refinanced again through the receipt of a loan issued in conjunction
with an insured loan program of the U.S. Department of Housing and Urban
Development (HUD). The new loan, which had an initial principal balance of
$10,262,000, is a nonrecourse obligation secured by the operating investment
property and an assignment of rents and leases. The loan, which is fully
assumable, has a 35-year maturity and bears interest at a fixed rate of 7.35% .
As part of the HUD insured loan program, the operating investment property was
required to establish an escrow account for a replacement reserve and other
required repairs. The excess loan proceeds, after repayment of the outstanding
indebtedness, were used to pay transaction costs and to fund certain of the
aforementioned reserve requirements.
The joint venture agreement and an amendment thereto (the "Agreement")
dated September 30, 1985 provides that the first distribution of cash flow for
any year shall be used collectively to reduce the other partner's deficit. The
other partner's deficit is defined to be an amount equal to 10% of the excess
aggregate amount required to be loaned to Charter Oak over the aggregate amount
actually so loaned to Charter Oak by such partner. During fiscal 1993, the
Partnership advanced 100% of the funds required to close the refinancing
transaction referred to above, which totalled approximately $25,000. The joint
venture agreement provides that the next $220,000 of net cash flow be
distributed to the Partnership, on a noncumulative annual basis, payable monthly
(preference return of the Partnership) and that the next $19,000 of cash flow be
distributed to the co-venturer on a noncumulative annual basis, payable
quarterly (preference return of the co-venturer); the next $213,000 of annual
cash flow will be distributed 85% to the Partnership and 15% to the co-venturer,
and any remaining annual cash flow will be distributed 70% to the Partnership
and 30% to the co-venturer. The amount and timing of actual cash distributions
are restricted by the Computation of Surplus Cash, Distributions and Residual
Receipts as defined under the HUD financing agreement.
Depreciation and an amount of gross taxable income equal to the amount
paid to amortize the indebtedness of Charter Oak Associates shall be allocated
94% to the Partnership and 6% to the co-venturer. Any remaining taxable income
or tax loss shall be allocated in the same proportions as cash is distributed.
Allocations of the venture's operations between the Partnership and co-venturer
for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
Any proceeds arising from a refinancing, sale, exchange or other
disposition of property will be distributed first to the payment of unpaid
principal and accrued interest on any outstanding mortgage loans. Any remaining
proceeds will be distributed according to the September 30, 1985 Amendment to
the Agreement in the following order: repayment of unpaid principal and accrued
interest on all outstanding operating notes; $2,230,000 to the Partnership;
$200,000 to the co-venturer; $4,000,000 to the Partnership and the co-venturer
in the proportions of 85% and 15%, respectively; with the remaining balance to
the Partnership and the co-venturer in the proportions of 70% and 30%,
respectively, unless distributions of net cash flow and certain proceeds have
reached specified levels, in which case the remaining balance is distributed
equally.
If additional cash is required in connection with Charter Oak Associates,
it may be provided by the Partnership and the co-venturer as loans to Charter
Oak Associates. The agreement calls for such loans to be provided 70% by the
Partnership and 30% by the co-venturer.
The joint venture entered into a property management contract with an
affiliate of the co-venturer, cancelable at the option of the Partnership upon
the occurrence of certain events. The management fee is 5% of gross rental
revenues.
b) Braesridge 305 Associates
-------------------------
On September 30, 1982, the Partnership acquired an interest in Braesridge
305 Associates (Braesridge), a Texas general partnership organized to purchase
and operate Braesridge Apartments, a 545-unit apartment complex. The apartment
complex is located in Houston, Texas. The aggregate cash investment by the
Partnership for its interest was approximately $6,879,000 (including an
acquisition fee of $725,000 paid to the Adviser of the Partnership). The
Partnership was a general partner in the joint venture. The Partnership's
co-venture partners were Stanford Capital Corporation and certain individuals.
On December 29, 1995, the Partnership assigned its interest in Braesridge
to an affiliate of the co-venture partners for net cash proceeds of $1 million.
Management had been actively marketing the Braesridge Apartments for sale during
fiscal 1995 and received several offers from prospective purchasers. The
purchase contract signed with the co-venture partners was at a price which
exceeded all third party offers. The net sale price for the Partnership's equity
interest is based on an agreed upon fair value of the property of approximately
$11.7 million. The agreed upon fair market value is supported by management's
most recent independent appraisal of the Braesridge Apartments and by the
marketing efforts to third-parties which were conducted during fiscal 1995.
Under the terms of the Braesridge joint venture agreement, the co-venture
partner had the right to match any third-party offer to purchase the property.
Accordingly, a negotiated sale to the co-venturer at the appropriate market
price represented the most expeditious and advantageous way for the Partnership
to sell this investment. The Partnership's investment in the Braesridge
Apartments represented 31% of the original investment portfolio. Despite
recovering less than 15% of its original cash investment in Braesridge, the
Partnership recognized a gain of $2,126,000 in fiscal 1996 in connection with
the sale of this venture interest because the cumulative losses and
distributions recorded in prior years under the equity method exceeded the
Partnership's investment in the joint venture. The Partnership distributed
approximately $514,000 of the net sale proceeds, or approximately $20 per
original $1,000 investment, in a Special Distribution to the Limited Partners on
February 15, 1996. The remaining net sale proceeds of approximately $486,000
were retained by the Partnership as additional working capital reserves.
Taxable income or tax loss of the joint venture through the date of the
sale of the Partnership's interest was allocated in the same proportion as cash
is distributed and if no cash was distributed, 100% to the Partnership.
Allocations of the venture's operations among the Partnership and co-venturers
for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.
The joint venture had entered into a property management contract with an
affiliate of the co-venturers for fees equal to 4% of the gross receipts from
operations of the apartment complex.
<PAGE>
6. Long-term Debt
Long-term debt at September 30, 1996 and 1995 relates to the consolidated
joint venture, Arlington Towne Oaks Associates, and is summarized as follows (in
thousands):
1996 1995
---- ----
9.08% mortgage note due March
1, 2019, payable in monthly
installments of $42, including
interest, collateralized by the
operating investment property.
The fair value of this note
payable approximated its
carrying value as of September
30, 1996. $ 4,852 $4,915
======== ======
Scheduled maturities of long-term debt are summarized as follows (in
thousands):
1997 $ 69
1998 75
1999 83
2000 91
2001 99
Thereafter 4,435
-------
$ 4,852
=======
7. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Fourth Income Properties Fund, Inc. and
Properties Associates ("PA"), which are the General Partners of the Partnership
and affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in Paine Webber Income Properties
Four Limited Partnership, PaineWebber, Fourth Income Properties Fund, Inc. and
PA (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Income Properties Four Limited Partnership, also alleged that following the sale
of the partnership interests, PaineWebber, Fourth Income Properties Fund, Inc.
and PA misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Fourth Income
Properties Fund, Inc. and PA violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
<PAGE>
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements.
<TABLE>
Schedule III- Real Estate and Accumulated Depreciation
Paine Webber Income Properties Four Limited Partnership
Schedule of Real Estate and Accumulated Depreciation
September 30, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- -------- ----------- ---- --------- ---- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Complex
Arlington, TX $4,852 $1,400 $9,763 $1,979 $1,300 $11,842 $13,142 $4,877 1975 8/31/82 5-40 yrs.
Notes:
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $13,669.
(B) See Notes 4 and 6 of Notes to Financial Statements.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $13,868 $13,229 $12,097
Increase due to capitalized improvements 274 639 1,132
Loss on impairment of long-lived asset (1) (1,000) - -
------- ------ -------
Balance at end of period $13,142 $13,868 $13,229
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 4,436 $ 4,016 $ 3,625
Depreciation expense 441 420 391
-------- ------- ------
Balance at end of period $ 4,877 $ 4,436 $ 4,016
======== ======= =======
(1) See Note 4 of Notes to Financial Statements for a discussion of the impairment write-down recorded in fiscal 1996.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Charter Oak Associates
We have audited the accompanying balance sheets of Charter Oak Associates
(Partnership) as of September 30, 1996 and 1995, and the related statements of
income, changes in partners' capital (deficit), and cash flows for the each of
the three years in the period ended September 30, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Charter Oak Associates at
September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles. 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
November 15, 1996
<PAGE>
CHARTER OAK ASSOCIATES
Balance Sheets
September 30, 1996 and 1995
(In thousands)
Assets
1996 1995
----- ----
Current assets:
Cash $ 175 $ 221
Tenant security deposits, funded 61 53
Restricted escrow deposits 461 665
Prepaid expenses 24 26
------- --------
Total current assets 721 965
Operating investment property:
Land 1,420 1,420
Buildings, improvements and equipment 11,625 11,077
-------- --------
13,045 12,497
Less accumulated depreciation (4,137) (3,706)
-------- --------
8,908 8,791
Deferred expenses (net of accumulated
amortization of $21 in 1996 and
$12 in 1995) 210 219
-------- --------
$ 9,839 $ 9,975
======== ========
Liabilities and Partners' Deficit
Current liabilities:
Current portion of long-term debt $ 81 $ 75
Accounts payable and accrued expenses 27 49
Real estate taxes payable 118 109
Accrued interest 61 62
Tenant security deposits 61 42
Payable to property manager 3 11
Distributions payable to limited partnership 42 42
Distributions payable to PWIP4 325 263
-------- --------
Total current liabilities 718 653
Long-term debt 9,971 10,052
Partners' deficit (850) (730)
-------- --------
$ 9,839 $ 9,975
======== ========
See accompanying notes.
<PAGE>
CHARTER OAK ASSOCIATES
Statements of Income
For the years ended September 30, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenue:
Rental income $2,499 $2,401 $2,288
Interest income 19 31 39
Other 58 61 40
------ ------ ------
2,576 2,493 2,367
Expenses:
Depreciation 431 315 257
Interest expense 751 756 756
Repairs and maintenance 267 279 272
Salaries and related costs 276 283 267
Real estate taxes 157 144 158
Management fees 128 123 117
Utilities 126 123 113
General and administrative 90 80 50
Mortgage insurance 50 59 103
General insurance 33 24 32
Professional fees 22 17 18
Bad debts 3 6 1
------ ------ ------
2,334 2,209 2,144
------ ------ ------
Net income $ 242 $ 284 $ 223
====== ====== ======
See accompanying notes.
<PAGE>
CHARTER OAK ASSOCIATES
Statements of Changes in Partners'
Deficit For the years ended September 30, 1996, 1995 and 1994
(In thousands)
PaineWebber
Income Paragon/
Properties Charter Oak
Four Limited Associates,
Partnership Ltd. Total
----------- ---------- -----
Balance at September 30, 1993 $ 74 $ (473) $ (398)
Distributions (413) (35) (448)
Net income 192 31 223
------- -------- ------
Balance at September 30, 1994 $ (147) $ (478) $ (625)
Distributions (348) (41) (389)
Net income 242 42 284
------- ------- ------
Balance at September 30, 1995 $ (253) $ (477) $ (730)
Distributions (325) (37) (362)
Net income 202 40 242
------- ------- -------
Balance at September 30, 1996 $ (376) $ (474) $ (850)
====== ======= =======
See accompanying notes.
<PAGE>
CHARTER OAK ASSOCIATES
Statements of Cash Flows
For the years ended September 30, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 242 $ 284 $ 223
Adjustments to reconcile net income
to net cash flows provided by
operating activities:
Depreciation 431 315 257
Amortization of deferred loan costs 9 6 4
Changes in operating assets and liabilities:
Tenant security deposits, funded (8) (13) 4
Restricted escrow deposits 204 724 396
Prepaid expenses 2 (6) 104
Accounts payable and accrued expenses (22) (10) (102)
Real estate taxes payable 9 (1) 2
Accrued interest (1) - (1)
Tenant security deposits 19 3 3
Payable to property manager (8) (1) (9)
------- -------- ---------
Total adjustments 635 1,017 658
------- -------- ---------
Net cash flows provided by
operating activities 877 1,301 881
------ -------- ---------
Cash flows from investing activities:
Capital expenditures (548) (781) (620)
Cash flows from financing activities:
Cash distributions to partners (300) (420) (125)
Payment of principal on long-term debt (75) (70) (9)
Payment of operating note - (25) (65)
------- -------- ---------
Net cash flows used in
financing activities (375) (515) (199)
-------- -------- ---------
Net (decrease) increase in cash (46) 5 62
Cash at beginning of year 221 216 154
------- --------- ---------
Cash at end of year $ 175 $ 221 $ 216
======= ========= =========
Cash paid during the year for interest $ 742 $ 749 $ 752
======= ========= =========
See accompanying notes.
<PAGE>
CHARTER OAK ASSOCIATES
Notes to Financial Statements
1. Organization and Nature of Operations
Charter Oak Associates (Partnership) was organized on June 8, 1982 in
accordance with a Partnership Agreement between PaineWebber Income Properties
Four Limited Partnership (PWIP4), the general partner, and Paragon/Charter Oak
Associates, Ltd. (Limited Partnership). The Partnership was organized to
purchase and operate an apartment complex in St. Louis County, Missouri. The
complex consists of 284 units.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of September 30, 1996 and 1995 and revenues and expenses for each
of the three years in the period ended September 30, 1996. Actual results could
differ from the estimates and assumptions used.
Tenant Security Deposits
- ------------------------
Tenant security deposits are held in a separate bank account in the name of
the Partnership. Use of these funds is restricted, and funds can be withdrawn
only at the termination of the lease. Funds are returned to the lessee in
accordance with the property's lease settlement policy.
Restricted Deposits and Funded Reserves
- ---------------------------------------
The agreement with the U.S. Department of Housing and Urban Development (HUD)
to insure the long-term debt requires the Partnership to maintain separate
escrow accounts for property taxes and property and mortgage insurance premiums
and a reserve for replacement of investment property. The funds are held and
controlled by a federally insured depository. Use of these funds must be
approved by HUD.
Operating Investment Property
- -----------------------------
The operating investment property is recorded at cost. Professional fees and
other costs relating to the formation of the Partnership have been capitalized
and are included in the cost of the property. Depreciation is computed on a
straight-line basis based on useful lives of 40 years for the buildings and
improvements and 5 years for furniture and fixtures. Minor maintenance and
repair expenses are charged to expense when incurred, while major renewals and
betterments are capitalized.
In March 1995, the FASB issued statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
(FAS 121) which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. FAS 121 also addressed the accounting for
long-lived assets that are expected to be disposed of. FAS 121 is effective for
fiscal years beginning after December 15, 1995 and therefore the Partnership
will address FAS 121 in fiscal year 1997. Based on current circumstances
management does not believe the effect of adoption will be material.
Deferred Expenses
- -----------------
Deferred expenses consist of financing costs, which are being amortized using
the straight-line method over the life of the long-term debt. The amortization
of deferred financing costs is included in interest expense on the accompanying
income statements.
<PAGE>
Income Tax Matters
- ------------------
The Partnership is not a taxable entity, and the results of its operations
are included in the tax returns of the partners. Accordingly, no income tax
provision is reflected in the accompanying financial statements.
Rental Activities
- -----------------
The Partnership leases apartment units under leases with terms usually of one
year or less. Rental income is recorded as earned. Security deposits are
typically required of all tenants.
Reclassification
- ----------------
Certain reclassifications have been made to the prior year's financial
statements to conform with current year presentation.
Fair Value Estimates
- --------------------
The fair value of the Partnership's long-term debt is estimated using
discounted cash flow analysis, based on the Partnership's current incremental
borrowing rate for a similar borrowing agreement.
3. Partnership Agreement
The Partnership Agreement and an amendment thereto dated September 30, 1985
(collectively, the Agreement) provide that the cash flow, as defined in the
Agreement, for any year shall first be distributed to a partner in the amount of
the other partner's deficit. The other partner's deficit is defined to be an
amount equal to 10 percent of the excess aggregate amount required to be loaned
to the Partnership, if any, over the aggregate amount actually loaned to the
Partnership by such partner. In 1993, the Partnership received partner loan
proceeds as part of refinancing its long-term debt. PWIP4 funded 100 percent of
the loan, instead of 70 percent as required by the Agreement. This loan was paid
in full during 1995. The allocation of cash available for distribution for 1994
included a distribution in the amount of the other partner's deficit.
Cash flow for any year shall next be distributed to PWIP4 in the amount of
$220,000 on a noncumulative annual basis, payable monthly (preference return of
PWIP4). The next $19,000 will be distributed to the Limited Partnership on a
noncumulative annual basis, payable quarterly (preference return of the Limited
Partnership); the next $213,000 of annual cash flow will be distributed 85
percent to PWIP4 and 15 percent to the Limited Partnership, and any remaining
annual cash flow will be distributed 70 percent to PWIP4 and 30 percent to the
Limited Partnership. Actual cash distributions are restricted by the Computation
of Surplus Cash, Distributions, and Residual Receipts as defined by the U.S.
Department of Housing and Urban Development.
Depreciation and an amount of gross income equal to the amount paid to
amortize the indebtedness of the Partnership shall be allocated 94 percent to
PWIP4 and 6 percent to the Limited Partnership. Any remaining taxable income or
taxable losses shall be allocated in the same proportion as cash distributions.
Any proceeds arising from a refinancing, sale, exchange, or other disposition
of property will be distributed first to the payment of unpaid principal and
accrued interest on any outstanding mortgage notes. Any remaining proceeds will
be distributed in the following order: repayment of unpaid principal and accrued
interest on all outstanding operating notes; $2,230,000 to PWIP4; $200,000 to
the Limited Partnership; $4,000,000 to PWIP4 and the Limited Partnership in the
proportions of 85 percent and 15 percent, respectively; with any remaining
balance to PWIP4 and the Limited Partnership in the proportions of 70 percent
and 30 percent, respectively, unless distributions of net cash flow and certain
proceeds have reached specified levels, in which case the remaining balance is
distributed equally.
If additional cash is required in connection with the Partnership, it may be
provided by PWIP4 and the Limited Partnership as loans (evidenced by operating
notes) to the Partnership. Such loans would be provided 70 percent by PWIP4 and
30 percent by the Limited Partnership.
4. Related-Party Transactions
The Partnership has a property management contract with an affiliate
(property manager) of the Limited Partnership. The management fee to the
property manager is 5 percent of gross revenues.
The payables to the property manager of $3,412 and $11,375 at September 30,
1996 and 1995, respectively, represent the balances in an intercompany account
maintained between the property manager and the Partnership.
<PAGE>
5. Long-Term Debt
Long-term debt consists of a 7.35 percent nonrecourse mortgage secured by the
operating investment property and assignment of rents and leases. The mortgage
is payable in monthly installments, including principal and interest of $68,094
through August l, 2028, with the final installment due and payable on September
l, 2028. In addition, the property submits monthly escrow deposits of $19,000
for tax and insurance escrows and the replacement reserve. The loan is insured
by the U.S. Department of Housing and Urban Development.
Scheduled maturities of the long-term debt are as follows (in thousands):
1997 $ 81
1998 87
1999 94
2000 101
2001 109
Thereafter 9,580
--------
$ 10,052
========
The carrying amount and fair value of the Partnership's long-term debt at
September 30, 1996 were $10,052,000 and $9,031,000, respectively.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
CHARTER OAK ASSOCIATES
Schedule of Real Estate and Accumulated Depreciation
September 30, 1996
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- -------- ----------- ---- -------- ----- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Complex
Creve Coeur, MO $10,051 $1,420 $ 9,106 $2,519 $1,420 $11,625 $13,045 $4,137 1971 6/8/82 5-40 yrs
Notes:
(A) The aggregate cost of real estate owned at September 30, 1996 for Federal income tax purposes is approximately $12,886.
(B) See Note 5 of Notes to Financial Statements.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $12,497 $11,716 $11,096
Increase due to capitalized improvements 548 781 620
------- ------- -------
Balance at end of period $13,045 $12,497 $11,716
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 3,706 $ 3,391 $ 3,134
Depreciation expense 431 315 257
-------- -------- -------
Balance at end of period $ 4,137 $ 3,706 $ 3,391
======== ======== =======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Braesridge 305 Associates:
We have audited the accompanying balance sheet of Braesridge 305 Associates
(the Partnership) as of September 30, 1995, and the related statements of
operations, changes in partners' deficit, and cash flows for the years ended
September 30, 1995 and 1994. 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 Braesridge 305 Associates at
September 30, 1995, and the results of its operations and its cash flows for the
years ended September 30, 1995 and 1994, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basis financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements as of December 29, 1995 and for the
period October 1, 1995 through December 29, 1995 were not audited by us and,
accordingly, we do not express an opinion on them.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
November 1, 1995
<PAGE>
BRAESRIDGE 305 ASSOCIATES
BALANCE SHEETS
December 29, 1995 and September 30, 1995
(In thousands)
ASSETS
December 29, 1995 September 30, 1995
----------------- ------------------
(Unaudited)
Cash and cash equivalents $ - $ 40
Real estate tax and insurance
escrow deposits 246 164
Property maintenance escrow 36 19
Prepaid insurance 20 33
Other receivables 10 -
-------- ----------
Total current assets 312 256
Operating investment property, at cost:
Land 1,699 1,699
Buildings, improvements and equipment 11,647 11,629
-------- ----------
13,346 13,328
Less accumulated depreciation (3,984) (3,902)
--------- ----------
Net operating investment property 9,362 9,426
Deferred expenses, net of
accumulated amortization
of $16 ($13 in 1995) 69 72
-------- ----------
Total assets $ 9,743 $ 9,754
======== ==========
LIABILITIES AND PARTNERS' DEFICIT
Cash overdraft $ 165 $ -
Accounts payable 50 31
Accrued real estate taxes payable 246 185
Accrued interest 357 432
Other accrued expenses - 34
Tenant security deposits 75 77
Operating loans from partners 516 516
Long-term debt 9,897 9,926
-------- ----------
Total liabilities 11,306 11,201
Partners' deficit (1,563) (1,447)
-------- ----------
Total liabilities and partners' deficit $ 9,743 $ 9,754
======== ==========
See accompanying notes.
<PAGE>
BRAESRIDGE 305 ASSOCIATES
STATEMENTS OF OPERATIONS
For the period October 1, 1995 to December 29, 1995 and
the years ended September 30, 1995 and 1994
(In thousands)
December 29, September 30, September 30,
1995 1995 1994
------------ ------------ -----------
(Unaudited)
Revenues:
Rental revenue $ 702 $ 2,767 $ 2,637
Interest income 1 1 2
Other income 23 36 51
------ ------- -------
Total revenues 726 2,804 2,690
Expenses:
Interest 226 972 932
Depreciation 82 324 307
Salaries and related costs 77 436 471
Repairs and maintenance 246 349 285
Real estate taxes 62 241 231
Utilities 57 236 273
General and administrative 27 ` 95 145
Management fees 29 113 106
Insurance 13 49 48
Professional fees 23 18 23
Other - 39 35
------ ------- -------
Total expenses 842 2,872 2,856
------ ------- -------
Net loss $ (116) $ (68) $ (166)
====== ======= =======
See accompanying notes.
<PAGE>
BRAESRIDGE 305 ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the period October 1, 1995 to December 29, 1995 and the years ended
September 30, 1995 and 1994
(In thousands)
Co-Venture Braesridge
PWIP 4 Partners 1995 Equity Total
------ --------- ----------- -----
Balance at September 30, 1993 $(1,108) $ (105) $ - $ (1,213)
Net loss (152) (14) - (166)
------- ------- ------- ---------
Balance at September 30, 1994 (1,260) (119) - (1,379)
Net loss (62) (6) - (68)
------- ------- -------- ---------
Balance at September 30, 1995 (1,322) (125) - (1,447)
Net loss (Unaudited) (104) (12) - (116)
Assignment of partnership
interest (Unaudited) 1,426 - (1,426) -
------- ------- -------- --------
Balance at
December 29, 1995 (Unaudited) $ - $ (137) $(1,426) $ (1,563)
======= ======= ======== ========
See accompanying notes.
<PAGE>
BRAESRIDGE 305 ASSOCIATES
STATEMENTS OF CASH FLOWS
For the period October 1, 1995 to December 29, 1995 and the years ended
September 30, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
December 29, September 30, September 30,
1995 1995 1994
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (116) $ (68) $ (166)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 82 324 307
Amortization of deferred loan costs 3 13 36
Accrued original issue discount interest - - (144)
Changes in assets and liabilities:
Real estate tax and insurance escrow deposits (82) (12) (2)
Property maintenance escrow (17) 18 32
Prepaid insurance 13 (33) 31
Other receivables (10) - -
Accounts payable 19 7 (82)
Accrued real estate taxes payable 61 (5) (9)
Accrued insurance payable - (16) 16
Accrued interest (75) (18) 117
Other accrued expenses (34) - 22
Tenant security deposits (2) - 4
------ ------
Total adjustments (42) 278 328
------ ------ -----
Net cash (used in) provided by
operating activities (158) 210 162
Cash flows from investing activities:
Capital expenditures (18) (132) (80)
Cash flows from financing activities:
Payment of loan brokerage fees - (36) (50)
Proceeds from operating loans from partners - 82 -
Borrowings resulting from cash overdraft 165 - -
Repayment of long-term debt (29) (132) -
------- ------ ----
Net cash used in financing activities 136 (86) (50)
------- ------ -----
Net (decrease) increase in cash and
cash equivalents (40) (8) 32
Cash and cash equivalents, beginning of year 40 48 16
------- ------ -----
Cash and cash equivalents, end of year $ - $ 40 $ 48
====== ====== ======
Cash paid during the period for interest $ 297 $ 977 $ 923
====== ====== ======
</TABLE>
See accompanying notes.
<PAGE>
BRAESRIDGE 305 ASSOCIATES
Notes to Financial Statements
1. Organization and Nature of Operations
Braesridge 305 Associates (the Partnership) was formed as a general
partnership with a cash contribution by Paine Webber Income Properties Four
Limited Partnership (PWIP4) of $6,775,000 on September 30, 1982. PWIP4's
co-venture partners were Stanford Capital Corporation, a Texas corporation, and
Braesridge Apartments, a Texas general partnership. The Partnership was formed
for the purpose of acquiring and operating an apartment complex consisting of
two phases, Braesridge I and Braesridge II. On the same date, the Partnership
acquired from a partner the assets, subject to certain liabilities, of
Braesridge I and the adjacent site for Braesridge II. Braesridge II was
completed in August 1983. On a combined basis, Phase I and II consist of 545
units.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of December 29, 1995 and September 30, 1995 and revenues and
expenses for the period October 1, 1995 to December 29, 1995 and the years ended
September 30, 1995 and 1994. Actual results could differ from the estimates and
assumptions used.
Cash Equivalents
- ----------------
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Operating Investment Property
- -----------------------------
The operating investment property is recorded at cost. Professional fees and
other costs relating to the formation of the Partnership have been capitalized
and are included in the cost of the property. Depreciation is computed on a
straight-line basis based on useful lives of 40 years for the buildings and
improvements and 5 years for furniture and fixtures. Minor maintenance and
repair expenses are charged to expense when incurred, while major renewals and
betterments are capitalized.
In March 1995, the FASB issued statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
(FAS 121) which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. FAS 121 also addressed the accounting for
long-lived assets that are expected to be disposed of. FAS 121 is effective for
fiscal years beginning after December 15, 1995 and therefore the Partnership
will address FAS 121 in fiscal year 1997. Based on current circumstances
management does not believe the effect of adoption will be material.
Deferred Expenses
-----------------
Deferred expenses represent loan brokerage fees which are paid in conjunction
with the purchase or refinancing of the real property, and are being amortized
over the expected life of the mortgage loan (see Note 4). The amortization of
deferred financing costs is included in interest expense on the accompanying
statements of operations.
Rental Activities
- -----------------
The Partnership leases apartment units under leases with terms usually of one
year or less. Rental income is recorded as earned. Security deposits are
typically required of all tenants.
<PAGE>
Federal Income Taxes
- --------------------
No provision is made for federal income taxes, as the income or loss of the
Partnership is reportable in the tax returns of the partners.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with current
period presentation.
3. Related Party Transactions
In prior years, the Partnership charged Stanford Capital Corporation
(Stanford) and Braesridge Apartments for cash deficiency funds under the terms
of a guarantee of payment of expenses and a cash flow preferences agreement
which were in effect through September 30, 1986. An allowance for
uncollectibility was established at September 30, 1986 for unpaid amounts of
$588,590. Of this total, $300,000 relates to cash flow preferences which the
Partners have agreed are to be repaid by distribution as a preferred item upon
dissolution of the Partnership.
Affiliates of Stanford provided property repair and maintenance services
totaling $65,206 and $153,796 during the years ended September 30, 1995 and
1994, respectively. Additionally, management fees and fees for accounting
services rendered totaling $135,738 and $137,758 were paid by the Partnership to
Stanford and affiliates of Stanford for fiscal year 1995 and 1994, respectively.
Management fees are paid by the Partnership to Stanford and affiliates of
Stanford at .50% and 3.5%, respectively, of certain gross revenues.
As provided for in the Partnership agreement, the first $100,000 of deficit
funding is to be treated as a special operating loan. The special operating
loans from partners accrue interest on principal only at 16%. Any deficit
funding thereafter is to be treated as an operating loan which shall accrue
interest on principal only at the greater of Bank of Boston prime plus 1% or
12%. The prime rate at September 30, 1995 was 8.75% and at September 30, 1994
was 7.75%. During 1995, the partners loaned an additional $81,500 to the
Partnership under the same terms stated previously. Of the total special
operating and operating loans at September 30, 1995, $223,955, $178,250, and
$66,795 is payable to Braesridge Apartments, PWIP4, and Stanford, respectively.
Interest incurred on the special operating loans and operating loans totaled
$57,427 and $50,500 during 1995 and 1994, respectively. Interest payable to the
partners on the special operating and operating loans was $357,393 and $299,965
at September 30, 1995 and 1994, respectively. See Notes 6 and 8 for additional
information regarding obligations to partners.
4. Long-Term Debt
Effective August 1, 1994, the Partnership modified its mortgage obligation.
The new note is secured by the operating investment property and requires
principal and interest payments of $84,413 on the first day of each month
beginning September 1994. The interest rate on the new obligation is 9% with
provisions to adjust the rate after the first 7 years of the note. The life of
the mortgage obligation is not to exceed 25 years. The agreement contains a call
option that, with six months advance written notice on either the 7th, 14th, or
21st anniversary date of the note, would require the payment of the unpaid
principal and accrued interest. Given 30 days advance written notice, the
Partnership is allowed to make prepayments of up to 10% of the original
principal on any interest paying date during the first 7 years of the note
without prepayment consideration. The entire balance may be prepaid during the
six full calendar months immediately preceding the 7th, 14th, and 21st
anniversary date of the note or immediately preceding the maturity date of
August 1, 2019, given 30 days advance written notice.
<PAGE>
The note payments due in each of the next five fiscal years and thereafter
are as follows (in thousands):
1996 $ 125
1997 136
1998 149
1999 163
2000 178
Thereafter 9,177
------
$9,928
======
Additionally, the partnership is required to make property maintenance escrow
payments of $16,667 each month that the escrow does not maintain a balance of
$300,000. Amounts in the property maintenance escrow are to be used, subject to
approval by the lender, for major repairs, replacements, and renovations to the
property or to offset operating deficits incurred in connection with the
property. The partnership is also required to make real estate taxes escrow
payments.
5. Capital Expenditure Reserve
Under the Partnership agreement, the Partnership shall establish and maintain
a separate reserve to be used for capital repairs and replacements to the
property. Additionally, amounts in the reserve may be temporarily used for
working capital purposes. At September 30, 1995 and 1994, there were no funds
reserved for capital repairs and replacements to the property under the
provisions of the Partnership agreement.
6. Partners' Deficit
The Partnership agreement provides that the net cash flow (as defined), after
certain adjustments, shall be distributed monthly as a preferred return to PWIP4
from the date of the agreement as follows: September30, 1983 - $510,000;
September30, 1984 - $555,000; September 30, 1985 and thereafter - $600,000. Any
such amounts not distributed prior to sale of the property will be distributed
as a preference item to PWIP4 upon dissolution of the Partnership. Unpaid
amounts at September 30, 1995 total $6,300,000. If any net cash flow remains
after the payment to PWIP4 and payment of interest on the special operating
loans for years subsequent to September 30, 1995, a noncumulative annual
preferred return of up to $200,000 will be paid to Stanford Capital Corporation
and Braesridge Apartments (the "remaining partners") on a quarterly basis. Any
net cash flow remaining after payment of the preferred returns subsequent to
September 30, 1995 will be distributed annually as follows: the first 100,000
distributed 75% to PWIP4 and 25% to the remaining partners and any remainder
distributed 50% to PWIP4 and 50% to the remaining partners (see Note 8).
If there is a sale, exchange, or refinancing of encumbered operating
investment property, the first payment (after certain adjustments) will be to
PWIP4 to the extent of its gross investment (presently $6,775,000), the next
will be to pay the principal and any accrued interest thereon of any outstanding
special operating loans, the next $2,250,000 will be to the remaining partners,
the next $1,000,000 will be to PWIP4, and the next $500,000 will be to the
remaining partners. Any excess will be distributed 50% to PWIP4 and 50% to the
remaining partners (see Note 8).
Taxable income or loss in each year shall be allocated in accordance with the
partners' tax basis interests in the partnership. Additional working capital
required in connection with operating the property prior to September 30, 1986
was to be provided by the remaining partners. Working capital required
subsequent to September 30, 1986 is to be provided by the partners as loans to
the Partnership.
<PAGE>
7. Uncertainty
The Partnership has incurred recurring operating losses and, as a result, has
a working capital deficiency and deficit capital accounts. The continued
operations of the Partnership are dependent upon additional financial support
from the partners. These conditions raise substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the Partnership to
continue as a going concern.
8. Assignment of Partnership Interest
On December 29, 1995, PWIP4 assigned its entire partnership interest to
Braesridge 1995 Equity (Braesridge), an affiliate of the co-venture partners,
for net cash proceeds of $1,000,000. Under the terms of the assignment, PWIP4
relinquished all rights and obligations associated with its interest in the
Partnership, including any loans outstanding and interest related thereto.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
BRAESRIDGE 305 ASSOCIATES
Schedule of Real Estate and Accumulated Depreciation
September 30,1995
(In thousands)
<CAPTION>
Initial Cost to Gross Amount at Which Carried at Life on Which
Partnership Costs Close of period Depreciation
Buildings Capitalized Buildings, in Latest
Improvements (Removed) Improvements Income
& Personal Subsequent to & Personal Accumulated Date of Date Statement
Description Encumbrances Land Property Acquisition Land Property Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- -------- ----------- ---- -------- ----- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Complex
Houston, TX $9,927 $2,000 $ 7,590 $3,738 $1,699 $11,629 $13,328 $3,902 1981 9/30/82 5-40 yrs
Notes:
(A) The aggregate cost of real estate owned at September 30, 1995 for Federal income tax purposes is approximately $15,387.
(B) See Note 4 of Notes to Financial Statements.
C) Reconciliation of real estate owned:
September 30, September 30,
1995 1994
---- ----
Balance at beginning of period $13,196 $13,116
Increase due to capitalized improvements 132 80
------- -------
Balance at end of period $13,328 $13,196
======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 3,578 $ 3,271
Depreciation expense 324 307
-------- -------
Balance at end of period $ 3,902 $ 3,578
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended September 30, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 654
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 887
<PP&E> 13,142
<DEPRECIATION> 4,877
<TOTAL-ASSETS> 9,320
<CURRENT-LIABILITIES> 322
<BONDS> 4,852
0
0
<COMMON> 0
<OTHER-SE> 4,114
<TOTAL-LIABILITY-AND-EQUITY> 9,320
<SALES> 0
<TOTAL-REVENUES> 4,021
<CGS> 0
<TOTAL-COSTS> 1,675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> 451
<INCOME-PRETAX> 895
<INCOME-TAX> 0
<INCOME-CONTINUING> 895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 895
<EPS-PRIMARY> 34.48
<EPS-DILUTED> 34.48
</TABLE>
