UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to ______.
Commission File Number: 0-15036
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
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(Exact name of registrant as specified in its charter)
Delaware 04-2841746
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
BALANCE SHEETS
May 31, 1997 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
May 31 August 31
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Real estate investments:
Investment properties held for sale, net $12,100 $12,100
Land 1,115 1,115
Mortgage loans, receivable 7,285 7,285
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20,500 20,500
Cash and cash equivalents 2,023 2,060
Interest receivable 60 60
Accounts receivable 17 14
Deferred expenses, net 85 99
Other assets 50 68
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$22,735 $22,801
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LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 32 $ 32
Accounts payable and accrued expenses 78 201
Unearned rental income 3 26
Tenant security deposits 72 45
Partners' capital 22,550 22,497
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$22,735 $22,801
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STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended May 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1995 $ (18) $29,265
Net income 29 2,854
Cash distributions (13) (10,898)
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Balance at May 31, 1996 $ (2) $21,221
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Balance at August 31, 1996 $ 11 $22,486
Net income 10 1,013
Cash distributions (10) (960)
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Balance at May 31, 1997 $ 11 $22,539
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See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF INCOME
For the three and nine months ended May 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Interest from mortgage loans $ 179 $ 179 $ 537 $ 696
Land rent 39 31 93 175
Other interest income 27 26 75 182
------ ------- ----- -------
245 236 705 1,053
Expenses:
Management fees 35 35 106 123
General and administrative 96 44 267 288
Amortization of deferred
expenses 5 4 14 34
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136 83 387 445
------ ------- ----- -------
Operating income 109 153 318 608
Income from operations of investment
properties held for sale, net 333 377 705 897
Gain on sale of land - - - 1,378
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Net income $ 442 $ 530 $1,023 $ 2,883
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Net income per Limited
Partnership Unit $0.49 $0.58 $1.13 $ 3.18
===== ===== ===== ======
Cash distributions per Limited
Partnership Unit $0.36 $0.32 $1.07 $12.15
===== ===== ===== ======
The above net income and cash distributions per Limited Partnership Unit are
based upon the 896,993 Units ($50 per Unit) of Limited Partnership Interest
outstanding during each period.
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 1,023 $ 2,883
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain on sale of land - (1,378)
Amortization of deferred expenses 14 34
Changes in assets and liabilities:
Interest receivable - 59
Accounts receivable (3) 12
Other assets 18 27
Accounts payable - affiliates - (12)
Accounts payable and accrued expenses (123) (67)
Unearned rental income (23) -
Other liabilities - (50)
Tenant security deposits 27 -
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Total adjustments (90) (1,375)
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Net cash provided by operating activities 933 1,508
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Cash flows from investing activities:
Net proceeds from sale of land - 3,440
Proceeds received from repayment of mortgage loan - 6,188
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Net cash provided by investing activities - 9,628
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Cash flows from financing activities:
Distributions to partners (970) (10,911)
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Net (decrease) increase in cash and cash equivalents (37) 225
Cash and cash equivalents, beginning of period 2,060 1,851
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Cash and cash equivalents, end of period $ 2,023 $ 2,076
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in
the Partnership's Annual Report for the year ended August 31, 1996. In the
opinion of management, the accompanying financial statements, which have not
been audited, reflect all adjustments necessary to present fairly the results
for the interim period. All of the accounting adjustments reflected in the
accompanying interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual basis
of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of May 31, 1997 and August 31, 1996 and revenues
and expenses for the three and nine months ended May 31, 1997 and 1996.
Actual results could differ from the estimates and assumptions used.
2. Mortgage Loan and Land Investments
The following are the first mortgage loans outstanding and the cost of the
related land to the Partnership at May 31, 1997 and August 31, 1996 (in
thousands):
Amount of Mortgage Loan Cost of Land
----------------------- ------------
Property 5/31/97 8/31/96 5/31/97 8/31/96
-------- ------- ------- ------- -------
Willow Creek Apartments
Wichita, Kansas $ 3,055 $ 3,055 $ 345 $ 345
Park South Apartments
Charlotte, North Carolina 4,230 4,230 770 770
------- ------- ------- -------
$ 7,285 $ 7,285 $ 1,115 $ 1,115
======= ======= ======= =======
The loans are secured by first mortgages on the properties, the owner's
leasehold interest in the land and an assignment of all tenant leases.
Interest is payable monthly and the principal is due at maturity. The annual
interest rates on the Willow Creek and Park South mortgage loans are 11% and
9%, respectively. The land leases have terms of 40 years. Among the
provisions of the lease agreements, the Partnership is entitled to additional
rent based upon gross revenues of the underlying properties in excess of a
base amount, as defined. During the nine months ended May 31, 1997 and 1996,
the Partnership received additional rent under the terms of the Park South
Apartments land lease totalling $13,000 and $40,000, respectively. The
lessees have the option to purchase the land for specified periods of time,
beginning in February of 1995 for the Willow Creek lease and December of 1997
for the Park South lease, at a price based on fair market value, as defined,
but not less than the original cost to the Partnership. The Partnership's
investments are structured to share in the appreciation in the value of the
underlying real estate. Accordingly, upon either sale, refinancing, maturity
of the mortgage loan or exercise of the option to repurchase the land, the
Partnership will receive a 40% to 50% share of the appreciation above a
specified base amount.
During the quarter ended May 31, 1997, the owner of the Willow Creek
Apartments informed the Partnership of its intent to prepay its first
leasehold mortgage loan which is scheduled to mature on October 31, 2000 and
purchase the underlying land from the Partnership. The transaction is
expected to close in the fourth quarter of fiscal 1997. Under the agreed upon
terms of the transaction, the Partnership will receive $3,055,000 from the
Willow Creek borrower, which represents the full repayment of the first
leasehold mortgage loan. Simultaneously, the Willow Creek owner will purchase
the Partnership's interest in the underlying land at a price equal to the
Partnership's cost basis of $345,000. In addition, the Partnership will
receive a mortgage loan prepayment penalty of 4% of the mortgage note
balance, or $122,200, and a land lease termination fee of $13,800 in
accordance with the terms of the agreements. Although the structure of the
Partnership's original investment in Willow Creek entitles the Partnership to
participate in the appreciated value of the property, the value of the
property has not increased to a level at which the Partnership could receive
a participation payment. If this transaction closes as expected, the proceeds
described above will be distributed to the Limited Partners.
The mortgage loan secured by The Corner at Seven Corners Shopping Center
became prepayable in February 1995. On December 16, 1994, the borrower
notified the Partnership of its intent to prepay the loan and exercise the
option to purchase the land during 1995. On November 22, 1995, the borrower
of The Corner at Seven Corners loan prepaid the Partnership's first leasehold
mortgage loan and purchased the Partnership's interest in the underlying land
for total consideration of $9,628,000. The principal balance of the mortgage
loan was $6,188,000 plus interest accrued through November 22, 1995 of
$43,000. The Partnership's cost basis in the land was $2,062,000. Pursuant to
the ground lease, the Partnership received $1,378,000 in excess of its land
investment as its share of the appreciation in value of the operating
investment property above a specified base amount. Such amount was recorded
as a gain in the Partnership's financial statements for the quarter ended
November 30, 1995. The net proceeds from this prepayment transaction were
distributed to the Limited Partners as part of a special distribution paid on
January 31, 1996 in the amount of approximately $9,598,000, or $214 per
original $1,000 investment.
As discussed further above, the Willow Creek mortgage loan is expected to be
prepaid in the fourth quarter of fiscal 1997. As a result of these
circumstances, based on an expected short-term maturity, the estimated fair
value of the Willow Creek mortgage loan approximated its carrying value as of
May 31, 1997 and August 31, 1996 since the estimated fair value of the
collateral property exceeded the principal balance of the loan. The fair
value of the Park South loan, which does not become prepayable until December
1997, has been estimated using discounted cash flow analysis and also
approximated the loan's carrying value as of May 31, 1997 and August 31,
1996.
3. Investment Properties Held for Sale
Martin Sunnyvale Research and Development Center
------------------------------------------------
The Partnership foreclosed under the terms of the mortgage loan secured by
the Martin Sunnyvale Research and Development Center on July 12, 1991. The
borrower had defaulted on the payment terms of the loan due to significant
lease turnover during 1991. The property contains 39,000 rentable square
feet, is located in Sunnyvale, California and was 100% leased as of May 31,
1997. The combined carrying value of the original land and loan investments,
of $5,100,000, was adjusted to management's estimate of the fair value of the
property as of the date of the foreclosure, of $3,400,000, and reclassified
to investment properties held for sale. Subsequent to the date of the
foreclosure and through August 31, 1994, the Partnership had recorded
provisions for possible investment loss totalling $900,000 to write down the
carrying value of the Martin Sunnyvale investment property to $2,500,000 to
reflect additional declines in its estimated fair value, net of selling
expenses. During fiscal 1996, real estate values for R&D office properties in
Northern California recovered somewhat as a result of the resurgence in the
growth of the high technology industries. As a result of lower market vacancy
levels and increasing rental rates, the estimated fair value of the Martin
Sunnyvale property improved significantly during fiscal 1996 to an amount
which exceeded the cost basis established for the property in fiscal 1991 of
$3,400,000. Accordingly, the Partnership adjusted the valuation account with
respect to the Martin Sunnyvale property and recognized a recovery of
possible investment loss of $900,000 effective in the fourth quarter of
fiscal 1996. The carrying value of the investment, of $3,400,000, is included
in the balance of investment properties held for sale on the accompanying
balance sheets as of May 31, 1997 and August 31, 1996.
During fiscal 1994, the Partnership was notified by a California state water
agency of a potential environmental problem at Martin Sunnyvale. As a result
of governmental required testing, management learned that there has been a
contamination of the underground soil and water at the site. The
environmental testing was paid for by one of the parties identified as a
potential contaminator. Management believes that this contamination occurred
prior to the Partnership's initial mortgage loan and ground lease investments
in the property, which were made in 1985. The California state water agency
has issued a site cleanup order identifying two companies which had occupied
the Martin Sunnyvale property prior to the Partnership's investment.
Management has engaged local counsel to monitor all legal actions to insure
that the Partnership's rights are fully protected. This matter is not
expected to have any long-term impact on the market value of the operating
investment property.
Bell Forge Square Shopping Center
---------------------------------
On October 4, 1991, the Partnership received a deed in lieu of foreclosure on
the mortgage loan secured by the Bell Forge Square Shopping Center. The
property, which was 90% occupied as of May 31, 1997, is comprised of 130,470
leasable square feet and is located in Nashville, Tennessee. The Managing
General Partner estimated that the fair value of the investment property, net
of selling expenses, at the date title to the mortgaged property was
transferred was approximately equal to the combined cost of the land and the
face amount of the Partnership's mortgage loan. Accordingly, the combined
value of the land and the face amount of the mortgage loan, of $9,000,000,
was reclassified to investment properties held for sale. During fiscal 1992,
the Partnership had recorded a provision for possible investment loss of
$600,000 to write down the carrying value of the Bell Forge Square investment
property to reflect a decline in its estimated fair value, net of selling
expenses, as of August 31, 1992. During fiscal 1993, the Partnership recorded
an adjustment to reduce the valuation allowance by $300,000 to reflect an
increase in the estimated fair value of the Bell Forge Square property as of
August 31, 1993. The resulting net carrying value of $8,700,000 is included
in the balance of investment properties held for sale on the accompanying
balance sheets at May 31, 1997 and August 31, 1996.
The Partnership recognizes income from the investment properties held for
sale equal to its share of the excess of the properties' gross revenues over
property operating expenses (including capital improvement costs), taxes and
insurance. Combined summarized operating results of the Martin Sunnyvale
Research and Development Center and Bell Forge Square Shopping Center for the
three and nine months ended May 31, 1997 and 1996 are as follows (in
thousands):
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income $ 393 $ 366 $1,136 $1,087
Other income 54 63 220 213
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447 429 1,356 1,300
Expenses:
Property operating expenses 65 47 513 231
Property taxes and insurance 49 5 138 172
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114 52 651 403
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Income from operations, net $ 333 $ 377 $ 705 $ 897
====== ======== ======= ======
4. Related Party Transactions
The Adviser earned basic management fees of $106,000 and $123,000 for the
nine-month periods ended May 31, 1997 and 1996, respectively. Accounts
payable - affiliates at both May 31, 1997 and August 31, 1996 consists of
management fees of $32,000 payable to the Adviser.
Included in general and administrative expenses for the nine months ended May
31, 1997 and 1996 is $141,000 and $139,000, respectively, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the nine months
ended May 31, 1997 and 1996 is $4,000 and $5,000, respectively, representing
fees earned by an affiliate, Mitchell Hutchins Institutional Investors, Inc.,
for managing the Partnership's cash assets.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
During the quarter ended May 31, 1997, the owner of the Willow Creek
Apartments informed the Partnership of its intent to prepay its first leasehold
mortgage loan which is scheduled to mature on October 31, 2000 and purchase the
underlying land from the Partnership. The transaction is expected to close in
the fourth quarter of fiscal 1997. Under the agreed upon terms of the
transaction, the Partnership will receive $3,055,000 from the Willow Creek
borrower, which represents the full repayment of the first leasehold mortgage
loan. Simultaneously, the Willow Creek owner will purchase the Partnership's
interest in the underlying land at a price equal to the Partnership's cost basis
of $345,000. In addition, the Partnership will receive a mortgage loan
prepayment penalty of 4% of the mortgage note balance, or $122,200, and a land
lease termination fee of $13,800 in accordance with the terms of the agreements.
Although the structure of the Partnership's original investment in Willow Creek
entitles the Partnership to participate in the appreciated value of the
property, the value of the property has not increased to a level at which the
Partnership could receive a participation payment. If this transaction closes as
expected, the proceeds described above will be distributed to the Limited
Partners.
The Partnership's wholly-owned, 39,000 square foot Martin Sunnyvale
Research and Development Center remained 100% leased as of May 31, 1997. During
the first quarter of fiscal 1997, the largest tenant at Martin Sunnyvale vacated
17,784 square feet when its lease expired at the beginning of November 1996.
However, a replacement tenant executed a five-year lease through November 2001
for the entire 17,784 square foot space at an average rental rate which is 40%
higher than the previous tenant had been paying. This transaction completed the
successful re-leasing of the three tenant spaces at the property. The other two
spaces were re-leased during fiscal 1996 at rental rates 40% and 60% higher than
the previous leases. As a result of the significant increase in rental income,
the market value of the Martin Sunnyvale property has increased substantially
over the past year. Accordingly, management believed that it would be
appropriate to pursue a possible sale of the property and, during the current
quarter, contracted with a national real estate firm with a strong background in
selling R&D buildings in the Silicon Valley area to market the property for
sale. Subsequent to the end of the quarter, the Partnership received two offers
to acquire the property. After a review of the two offers, the Partnership has
determined that a better price may be attainable and has instructed the national
real estate firm to continue its sales efforts. There are no assurances,
however, that a sale transaction will be completed in the near term.
As previously reported, the Partnership was notified by a California state
water agency in fiscal 1994 of a potential environmental problem at the Martin
Sunnyvale property. As a result of governmental required testing, management
learned that there has been a contamination of the underground soil and water at
the site. The state water agency has issued a final report identifying two
tenants which had occupied the property prior to 1985 and may have caused the
environmental problem. Both prior tenants are Fortune 500 companies and both
have been ordered at their own expense to perform the necessary testing, cleanup
and documentation as required by the California state water agency. The
Partnership will be required to monitor the efforts of these two firms. The
environmental testing was paid for by one of the parties identified as a
potential contaminator. Management has engaged local counsel to monitor all
legal actions to insure that the Partnership's rights are fully protected. This
matter is not expected to have any long-term impact on the market value of the
Partnership's operating property.
At the Partnership's other wholly-owned investment property, Bell Forge
Square Shopping Center in Nashville, Tennessee, occupancy remained at 90% for
the third consecutive quarter. During the first quarter of fiscal 1997, two
tenants, a furniture store and a pet store, occupying 10% of the center's
rentable area, vacated their spaces prior to the termination of their leases.
During the current quarter, the Partnership negotiated and received a
termination fee from the furniture store in exchange for a space reduction under
its lease. The space taken back by the Partnership, totalling 2,400 square feet,
was then leased to a dental operation for a seven-year term. The furniture store
continues to pay its rent obligation under the terms of the lease on the
remaining 4,000 square feet, which expires in October 2000. The dental center's
average annual rent per square foot is approximately 50% higher than the rate
under the lease with the furniture store. The termination fee was used to pay
for tenant improvements for the dental center. The former pet store tenant which
ceased operations and stopped paying rent during the first quarter of fiscal
1997 has been issued a court order to pay its rental obligation. Although the
Partnership is pursuing its rights under this court judgment to recover the rent
due under the lease agreement, management is not optimistic about the likelihood
of collection given the poor financial condition of the former pet store tenant.
During the current quarter, the property's leasing team executed a new five-year
lease with a restaurant tenant for the vacant space formerly occupied by the pet
store at a rental rate 19% higher than the previous tenant's. The restaurant
will fund all of its own tenant improvements and working capital requirements.
Also during the current quarter, a 3,160 square foot sporting goods store
renewed its lease for an additional five years at a rate which is 17% more than
its original lease rate. Two additional leases at Bell Forge Square are due to
expire through the end of calendar 1997. The property management team expects
both of these tenants to renew their leases. As previously reported, although
Discovery Zone, which occupies 9% of the center's net rentable area, has filed
for protection under Chapter 11 of the U.S. Bankruptcy Code, it continues to pay
its post-petition rent and operate its store at Bell Forge Square. While there
are likely to be some store closings as part of the company's bankruptcy
reorganization plan, it is uncertain at this time whether the Bell Forge Square
location would be affected by such actions. During the second quarter of fiscal
1997, management decided to explore potential opportunities to sell the Bell
Forge Square property and contracted with a regional real estate broker to
market the property for sale. Subsequent to the end of the third quarter, the
Partnership received an offer from a prospective buyer to purchase Bell Forge
Square. The offer is currently being reviewed, and a decision on whether to
pursue this offer or to continue the marketing efforts will be made in the
fourth quarter. Regardless of the outcome of this decision, there are no
assurances that a sale of Bell Forge Square will be completed in the near term.
Occupancy at the Park South Apartments in Charlotte, North Carolina,
averaged 91% for the quarter ended May 31, 1997, compared to 90% for the
previous quarter. Operations of the property continue to fully support the debt
service and ground lease payments owed to the Partnership despite a weakening in
market conditions for existing properties in the greater Charlotte area over the
past year. A significant number of new apartment units have been added to the
overall Charlotte market during this time period, including several hundred new
units which are in Park South's sub-market, and a substantial amount of
additional units are either currently under construction or in the planning
stages. In order to remain competitive with these new units, Park South
currently offers reduced rental rates and/or discounted move-in rates to
prospective tenants. As an incentive to renew leases, current tenants are
offered minimal increases at the expiration of their leases. The use of rental
concessions and renewal incentives is expected to continue for the near term.
Notwithstanding the current market conditions, management believes that the
long-term prospects for the Park South property remain positive due to the
property's strong position within the marketplace and the region's outlook for
job and population growth over the next several years.
At May 31, 1997, the Partnership had available cash and cash equivalents
of $2,023,000. Such cash and cash equivalents will be used for the working
capital needs of the Partnership, distributions to the partners and, if
necessary, for tenant improvement expenses and other leasing costs of the
Partnership's wholly-owned investment properties. The source of future liquidity
and distributions to the partners is expected to be through cash generated from
the Partnership's real estate and mortgage loan investments, the repayment of
the mortgage loans receivable and the future sales or refinancings of the
underlying land and the investment properties. Such sources of liquidity are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis.
Results of Operations
Three Months Ended May 31, 1997
- -------------------------------
The Partnership reported net income of $442,000 for the three months ended
May 31, 1997, as compared to net income of $530,000 for the same period in the
prior year. This $88,000 decrease in net income is attributable to a $44,000
reduction in income from the operations of investment properties held for sale
(Martin Sunnyvale and Bell Forge Square) and a $44,000 decline in the
Partnership's operating income. Income from operations of investment properties
held for sale declined primarily due to an increase in property taxes and
insurance expense and an increase in property operating expenses which were
partially offset by an increase in rental revenues. Rental revenues increased by
$27,000 mainly due to the increase in rental rates at the Martin Sunnyvale
Research and Development Center, as discussed further above. Property operating
expenses increased by $18,000 primarily due to the capital improvement
expenditures and leasing commissions related to the new lease signed in the
first quarter of fiscal 1997 at the Martin Sunnyvale property, as discussed
further above. Under the Partnership's accounting policy with respect to assets
held for sale, capital and tenant improvement costs and leasing commissions are
expensed as incurred. Real estate taxes and insurance increased by $44,000 due
to an adjustment recorded during the third quarter of fiscal 1996 at Bell Forge
Shopping Center to correct an over-accrual of real estate tax expense related to
the first two quarters of fiscal 1996.
The Partnership's operating income decreased due to a $53,000 increase in
expenses which was partially offset by a $9,000 increase in revenues. The
Partnership's operating expenses increased for the current three-month period
mainly due to the timing of the performance of the annual independent appraisal
work on the Partnership's investments while revenues increased primarily due to
the timing of the receipt of additional land rent from the Park South
Apartments.
<PAGE>
Nine Months Ended May 31, 1997
- ------------------------------
The Partnership reported net income of $1,023,000 for the nine months
ended May 31, 1997, as compared to net income of $2,883,000 for the same period
in the prior year. The decrease in net income is primarily attributable to the
gain recognized in the prior period on the sale of The Corner at Seven Corners
land, of $1,378,000. In addition, the Partnership's net income declined due to a
decrease in operating income of $290,000. Operating income declined primarily
due to a decrease in revenues of $348,000. Revenues decreased due to declines in
interest earned on mortgage loans of $159,000, land rent revenue of $82,000 and
other interest income of $107,000. Interest earned on mortgage loans and land
rent revenue decreased as a result of The Corner at Seven Corners mortgage
repayment and related land sale which occurred during the prior year. Other
income decreased due to the inclusion of The Corner at Seven Corners' prepayment
proceeds in the invested cash balances in the prior period pending the special
distribution to the Limited Partners which was made on January 31, 1996. The
decrease in revenues was partially offset by a reduction in management fees of
$17,000 and a decline in amortization of deferred expenses of $20,000.
Management fees decreased due to a reduction in adjusted capital contributions,
upon which such fees are based, as a result of the capital distribution which
followed the prepayment transaction involving of The Corner at Seven Corners
investments. Amortization of deferred expenses decreased due to the write-off of
the remaining deferred acquisition expenses associated with The Corner at Seven
Corners investments at the time of the November 1995 sale.
Also contributing to the decline in net income for the current nine-month
period is a $192,000 decrease in income from the operations of investment
properties held for sale. Income from operations of investment properties held
for sale declined due to a $282,000 increase in property operating expenses
which was partially offset by a $49,000 increase in rental revenues and a
$34,000 decrease in property taxes and insurance expense. Property operating
expenses increased primarily due to additional capital improvement expenditures
and leasing commissions associated with the three new tenants at the Martin
Sunnyvale Research and Development Center, as well as the tenant improvement
costs related to new leases at Bell Forge Square Shopping Center. As noted
above, under the Partnership's accounting policy with respect to assets held for
sale, capital and tenant improvement costs and leasing commissions are expensed
as incurred. The increase in rental revenues is primarily attributable to the
increase in the rental rates on the three new leases at Martin Sunnyvale, as
discussed further above.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As previously reported, the Partnership's General Partners were named as
defendants in a class action lawsuit against PaineWebber Incorporated
("PaineWebber") and a number of its affiliates relating to PaineWebber's sale of
70 direct investment offerings of interests in various limited partnership
investments and REIT stocks, including those offered by the Partnership. In
January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and
the class plaintiffs submitted a definitive settlement agreement which 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 settlement was held in December 1996, and in March 1997 the
court issued a final approval of the settlement. The release of the $125 million
of settlement proceeds has not occurred to date pending the resolution of an
appeal of the settlement agreement by two of the plaintiff class members. As
part of the settlement agreement, PaineWebber has agreed not to seek
indemnification from the related partnerships and real estate investment trusts
at issue in the litigation (including the Partnership) for any amounts that it
is required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation with respect to the
Abbate action was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which provided for
the complete resolution of such action. Final releases and dismissals with
regard to this action were received during the quarter ended May 31, 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
Items 2 through 5: NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
By: FOURTH QUALIFIED PROPERTIES, INC.
--------------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and Chief
Financial Officer
Dated: July 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended May 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 2,023
<SECURITIES> 0
<RECEIVABLES> 7,362
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,100
<PP&E> 13,215
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,735
<CURRENT-LIABILITIES> 185
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 22,550
<TOTAL-LIABILITY-AND-EQUITY> 22,735
<SALES> 0
<TOTAL-REVENUES> 1,410
<CGS> 0
<TOTAL-COSTS> 387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,023
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,023
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
</TABLE>
