UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 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
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(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
November 30, 1997 and August 31, 1997 (Unaudited)
(In thousands)
ASSETS
November 30 August 31
----------- ---------
Real estate investments:
Investment properties held for sale, net $12,100 $12,100
Land 770 770
Mortgage loans 4,230 4,230
------- -------
17,100 17,100
Cash and cash equivalents 1,774 1,711
Interest receivable 32 32
Accounts receivable 17 9
Deferred expenses, net 66 70
Other assets 17 19
------- -------
$19,006 $18,941
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 28 $ 32
Accounts payable and accrued expenses 193 190
Unearned rental income 1 3
Tenant security deposits 72 72
Partners' capital 18,712 18,644
------- -------
$19,006 $18,941
======= =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF INCOME
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit amounts)
1997 1996
---- ----
Revenues:
Interest from mortgage loans $ 95 $ 179
Land rent 36 27
Other interest income 24 25
------- -------
155 231
Expenses:
Management fees 30 35
General and administrative 85 94
Amortization of deferred expenses 4 5
------- -------
119 134
------- -------
Operating income 36 97
Income from operations of investment
properties held for sale, net 355 222
------- -------
Net income $ 391 $ 319
======= =======
Net income per Limited
Partnership Unit $0.43 $0.35
===== =====
Cash distributions per Limited
Partnership Unit $0.36 $0.36
===== =====
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 CHANGES IN PARTNERS' CAPITAL (DEFICIT
For the three months ended November 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at August 31, 1996 $ 11 $22,486
Net income 3 316
Cash distributions (3) (320)
----- -------
Balance at November 30, 1996 $ 11 $22,482
===== =======
Balance at August 31, 1997 $ 12 $18,632
Net income 4 387
Cash distributions (3) (320)
----- -------
Balance at November 30, 1997 $ 13 $18,699
===== =======
See accompanying notes.
<PAGE>
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1997 and 1996 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 391 $ 319
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization of deferred expenses 4 5
Changes in assets and liabilities:
Accounts receivable (8) (47)
Other assets 2 (36)
Accounts payable - affiliates (4) -
Accounts payable and accrued expenses 3 (15)
Unearned rental income (2) (26)
Tenant security deposits - 27
------- -------
Total adjustments (5) (92)
------- -------
Net cash provided by operating activities 386 227
Cash flows from financing activities:
Distributions to partners (323) (323)
------- -------
Net increase (decrease) in cash and cash equivalents 63 (96)
Cash and cash equivalents, beginning of period 1,711 2,060
------- --------
Cash and cash equivalents, end of period $ 1,774 $ 1,964
======= ========
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, 1997. 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 November 30, 1997 and August 31, 1997 and revenues and
expenses for the three months ended November 30, 1997 and 1996. Actual results
could differ from the estimates and assumptions used.
2. Mortgage Loan and Land Investments
----------------------------------
The outstanding first mortgage loan and the cost of the related land to
the Partnership at November 30, 1997 and August 31, 1997 are as follows (in
thousands):
Amount of
Property Mortgage Loan Cost of Land
-------- ------------- ------------
Park South Apartments
Charlotte, North Carolina $4,230 $ 770
The loan is secured by a first mortgage on the property, 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 on December 28, 2001.
The annual interest rate on the Park South mortgage loan is 9%. The land lease
has a term of 40 years. Among the provisions of the lease agreement, the
Partnership is entitled to additional rent based upon gross revenues of the
underlying property in excess of a base amount, as defined. During the three
months ended November 30, 1997, the Partnership received additional rent under
the terms of the Park South Apartments land lease totalling $19,000. The
Partnership received no additional rent for the three months ended November 30,
1996. The lessee has the option to purchase the land for a specified period of
time, beginning in December 1997, at a price based on fair market value, as
defined, but not less than the original cost to the Partnership. The
Partnership's investment is 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 50% share of the appreciation above a specified
base amount.
The fair value of the Park South loan, which became prepayable subsequent
to the end of the first quarter, in December 1997, has been estimated using
discounted cash flow analysis and approximated the loan's carrying value as of
November 30, 1997 and August 31, 1997.
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 November 30, 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 November 30, 1997 and
August 31, 1997.
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.
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 98% occupied as of November 30, 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
November 30, 1997 and August 31, 1997.
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 months ended November 30, 1997 and 1996 are as follows (in thousands):
1997 1996
---- ----
Revenues:
Rental income $ 400 $ 385
Other income 73 89
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473 474
Expenses:
Property operating expenses 64 212
Property taxes and insurance 54 40
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118 252
------- -------
Income from operations, net $ 355 $ 222
======= =======
Property operating expenses for the three months ended November 30, 1996
include capital improvement costs of $154,000.
4. Related Party Transactions
--------------------------
The Adviser earned basic management fees of $30,000 and $35,000 for the
three-month periods ended November 30, 1997 and 1996, respectively. Accounts
payable - affiliates at November 30, 1997 and August 31, 1997 consists of
management fees of $28,000 and $32,000, respectively, payable to the Adviser.
Included in general and administrative expenses for the three months ended
November 30, 1997 and 1996 is $44,000 and $47,000, 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 three months
ended November 30, 1997 and 1996 is $1,000 and $3,000, 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
- -------------------------------
The Partnership has three remaining real estate investments, only one of
which, Park South Apartments, is still in its original structure of a first
leasehold mortgage loan and land investment. The Partnership assumed direct
ownership of the Martin Sunnyvale Research and Development Center and Bell Forge
Square Shopping Center properties following foreclosure proceedings resulting
from defaults under the terms of the Partnership's first leasehold mortgage
loans. As discussed further below, the Partnership has determined that it may be
the appropriate time to sell both of these wholly-owned assets. Furthermore, as
discussed further below, the borrower of the mortgage loan secured by Park South
has indicated an intent to prepay the loan and repurchase the underlying land in
early calendar year 1998. As a result of these circumstances, it is possible
that the disposition of the remaining real estate assets and a liquidation of
the Partnership will be accomplished in fiscal 1998. There are no assurances,
however, that the disposition of the remaining investments and the liquidation
of the Partnership will be completed within this time frame. The net proceeds
from any future sales and financing transactions will be distributed to the
Limited Partners along with the remaining Partnership cash reserves after the
payment of all liquidation-related expenses.
Occupancy at the Park South Apartments in Charlotte, North Carolina,
averaged 95% for the quarter ended November 30, 1997, an increase from 92% for
the quarter ended August 31, 1997. The property management team attributes the
increase in occupancy to the continued selective use of rental concessions on
new leases and conservative rental rate increases on renewals. 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.
The first mortgage loan secured by Park South matures on December 28,
2001; however, it opened to prepayment without penalty subsequent to the
quarter-end, on December 29, 1997. The owner of the Park South Apartments has
recently indicated that it may prepay the first leasehold mortgage loan and
repurchase the underlying land in early 1998 in conjunction with a sale of the
property to an unrelated third party. However, there are no assurances that this
sale transaction and the resulting prepayments of the Partnership's investments
will occur within this time frame. The Partnership's Park South land investment
contains a participation feature which entitles the Partnership to share in the
appreciation of the property upon a sale or refinancing. Based on recent
third-party valuations, this property has an estimated value that is higher than
the Partnership's combined original investments. As a result, it is anticipated
that the Partnership will realize its original net investments plus some portion
of the appreciated value of the property when it is sold or refinanced.
The Partnership's wholly-owned, 39,000 square foot Martin Sunnyvale
Research and Development Center remained 100% leased as of November 30, 1997. No
leases expire at the property until April 30, 1999. 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 two years. Accordingly, management believes that
this would be the appropriate time to sell the property. As previously reported,
the Partnership 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. The property was marketed extensively during fiscal year
1997, and the Partnership received several offers from qualified third-party
buyers to acquire the property. After reviewing the offers, the Partnership
accepted an offer from one of these potential buyers and negotiated and executed
a purchase and sale agreement during the first quarter of fiscal 1998. The sale
remained subject to the satisfactory completion of the buyer's due diligence
which was scheduled to be completed in December 1997. At the conclusion of the
buyer's due diligence period, the offer to purchase the property was withdrawn.
Management now intends to re-market the property during the second quarter of
fiscal 1998.
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.
At the Partnership's other wholly-owned investment property, Bell Forge
Square Shopping Center in Nashville, Tennessee, the occupancy level improved to
98% as of November 30, 1997, up from 92% as of August 31, 1997. A 6,000 square
foot sports grill opened for business during the quarter ended November 30,
1997. In addition, renewal negotiations are ongoing with a 3,300 square foot
furniture store, whose lease expires in August 1998, and with a 3,165 square
foot hot tub dealership, whose lease expires in September 1998. 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.
As discussed further in the Annual Report, the Partnership decided to
explore potential opportunities to sell the Bell Forge Square property during
fiscal 1997 and hired a Nashville-based real estate firm specializing in the
sale of retail properties to market the property for sale. As part of this
firm's marketing efforts, the Partnership received offers from two prospective
third-party buyers. After reviewing the offers, the Partnership accepted an
offer from one of these potential buyers and negotiated a purchase and sale
agreement which was executed subsequent to the quarter-end. However, since any
sale transaction remains subject to certain due diligence contingencies, there
are no assurances that a near-term sale will be completed.
At November 30, 1997, the Partnership had available cash and cash
equivalents of $1,774,000. 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 loan 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 November 30, 1997
- ------------------------------------
The Partnership reported net income of $391,000 for the three months ended
November 30, 1997, as compared to net income of $319,000 for the same period in
the prior year. This $72,000 increase in net income is attributable to a
$133,000 increase in net income from the operations of investment properties
held for sale (Martin Sunnyvale and Bell Forge Square). Net income from the
operations of investment properties held for sale increased primarily due to a
decrease in property operating expenses. Property operating expenses decreased
due to a reduction in capital improvement expenditures of $154,000 at the Bell
Forge property. 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 income from operating properties held for sale was
partially offset by a decrease in the Partnership's operating income of $61,000.
The Partnership's operating income decreased primarily due to a decrease in
interest from mortgage loans of $84,000. Interest from mortgage loans decreased
as a result of the repayment of the Willow Creek first leasehold mortgage loan
on July 16, 1997 and the sale of the related land. The decrease in interest from
mortgage loans was partially offset by an increase in land rent revenue despite
the termination of the ground lease on Willow Creek. Land rent revenue increased
due to the $19,000 in additional rent received from the Park South Apartments
during the quarter ended November 30, 1997. No additional land rent was received
during the first quarter of the prior fiscal year.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
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: January 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended November 30,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 1,774
<SECURITIES> 0
<RECEIVABLES> 4,279
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,823
<PP&E> 12,870
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,006
<CURRENT-LIABILITIES> 294
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,712
<TOTAL-LIABILITY-AND-EQUITY> 19,006
<SALES> 0
<TOTAL-REVENUES> 510
<CGS> 0
<TOTAL-COSTS> 119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 391
<INCOME-TAX> 0
<INCOME-CONTINUING> 391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 391
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
