U. S. 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: MARCH 31, 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: 0-17150
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Texas 76-0147579
(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 on
Title of each class 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
September 11, 1985, as supplemented
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
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-6
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-6
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-22
<PAGE>
PART I
Item 1. Business
PaineWebber Development Partners Four, Ltd. (the "Partnership") is a limited
partnership formed in June 1985 under the Uniform Limited Partnership Act of the
State of Texas to invest either directly or through the acquisition of joint
venture interests in a diversified portfolio of newly-constructed and
to-be-constructed income-producing properties. On September 9, 1986, the
Partnership elected to extend the offering period to the public through
September 10, 1987 and reduced the maximum offering amount to 42,000 Partnership
Units (at $1,000 per Unit) from 100,000 Units. At the conclusion of the offering
period 41,644 Units had been issued representing capital contributions of
$41,644,000. Limited Partners will not be required to make any additional
capital contributions.
As of March 31, 1996, the Partnership had investments, through joint
ventures and limited partnerships, in three residential apartment complexes
referred to below:
Name of Joint Venture
or Limited Partnership Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- ---------------------------- ---- ----------- -------------
The Lakes Joint Venture 770 units 11/1/85 Fee ownership of land
The Lakes at South Coast and improvements (through
Apartments joint venture partnership)
Costa Mesa, California
Lincoln Garden Apartments 200 units 11/15/85 Fee ownership of land
Joint Venture and improvements (through
Lincoln Garden Apartments joint venture partnership)
Tucson, Arizona
71st Street Housing Partners, 234 units 12/16/85 Fee ownership of land and
Ltd. improvements (through
Harbour Pointe Apartments limited partnership)
Bradenton, Florida
(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 originally had investments in six operating investment
properties. Through March 31, 1996, three of these properties had been forfeited
through foreclosure proceedings. During the fourth quarter of fiscal 1991, due
to a default by the Quinten's Crossing Joint Venture under the terms of its
mortgage loan, the lender was granted, by Court order, the right to foreclose on
the venture's operating property. As a result, on April 1, 1991, the
Partnership's co-venturer filed an involuntary petition under Chapter 11 of the
United States Bankruptcy Code on behalf of the venture. The bankruptcy petition
prevented an immediate foreclosure action. However, the venture partners and the
lender were unable to reach an agreement on an acceptable modification of the
mortgage obligation. Accordingly, on August 27, 1992, the Partnership and its
co-venturer forfeited their interests in Quinten's Crossing to the mortgage
lender. The Parrot's Landing Joint Venture had stopped making the required debt
service payments to the mortgage lender on February 1, 1990. Because of the
defaults, the mortgage lender had the right to accelerate payment on the entire
balance of the mortgage note. The mortgage lender had given the joint venture
formal notice of default and had filed for foreclosure. On October 16, 1992, the
Partnership and the co-venturer forfeited their interests in Parrot's Landing to
the mortgage holder in settlement of the foreclosure proceedings, after
protracted negotiations failed to produce an acceptable loan modification
agreement. The Partnership also originally had an investment, through a limited
partnership, in the Clipper Cove Apartments, located in Boynton Beach, Florida.
On March 5, 1990, the Clipper Cove Apartments, owned by The Landing Apartments,
Ltd., was foreclosed on by the mortgage lender. The lender was entitled to
foreclose on the property because of the inability of the venture to make the
required debt service payments due on the mortgage loan. Negotiations to modify
the loan terms and efforts by the Partnership to locate a buyer for the property
were unsuccessful. As a result of these transactions, the Partnership no longer
owns any interest in these three properties.
The Partnership's original investment objectives were:
(1) to preserve and protect the original capital invested in the Partnership;
(2) to achieve long-term capital appreciation through potential appreciation
in the values of Partnership properties;
(3) to obtain tax losses during the early years of operations from deductions
generated by investments;
(4) to provide annual distributions of cash flow from operations of the
Partnership;
(5) to achieve accumulation of equity through reduction of mortgage loans on
Partnership properties.
The Partnership's operating investment properties have been adversely
affected by an oversupply of competing rental apartment properties in the
markets in which the properties are located. The effects of the resulting
competition, combined with high debt service costs and weakened local economies,
resulted in the inability of all of the joint ventures to meet their original
debt service obligations without contributions from the venture owners. This
situation has caused the Partnership to lose its investments in the Clipper Cove
Apartments, Quinten's Crossing Apartments and Parrot's Landing Apartments
through foreclosure proceedings, as discussed above. These three properties
comprised approximately 38% of the Partnership's original investment portfolio.
Furthermore, while the three remaining ventures have obtained more favorable
financing terms, additional relief from debt service obligations and continued
financial support from the venture partners may be required if the properties'
operations do not improve. The Managing General Partner, along with the
Partnership's co-venture partners, has pursued workout negotiations with the
mortgage holders on all of the operating investment properties in efforts to
obtain relief from debt service obligations in order to protect the
Partnership's invested capital. Despite such efforts, which have been partially
successful, the Partnership will be unable to achieve most of its original
objectives due to the foreclosure losses of a substantial portion of the
original investment portfolio.
The Managing General Partner's strategy has been, and continues to be, to
marshall the Partnership's resources for use in protecting the investment
properties with the best long-term financial prospects in order to return as
much of the invested capital as possible. The portion of the Partnership's
original invested capital which may be returned to the Limited Partners, if any,
will depend upon the ultimate selling prices obtained for the three remaining
investment properties, which cannot presently be determined. At the present
time, all three remaining properties have estimated market values which are
below the balances of their outstanding debt obligations. It remains to be seen
whether such market values will recover sufficiently over the Partnership's
remaining holding period to provide any meaningful cash return to the Limited
Partners. The Partnership has generated tax losses since inception. However, the
benefits of such losses to investors have been significantly reduced by changes
in the federal income tax laws subsequent to the organization of the
Partnership. Furthermore, the Partnership's investment properties have not
produced sufficient cash flow from operations to provide the Limited Partners
with cash distributions to date.
All of the Partnership's investment properties 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 and amenities. Apartment properties in all
markets 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 over the past few years. However,
the impact of the competition from the single-family home market has generally
been offset by the lack of significant new construction activity in the
multi-family apartment market over this period. As discussed further in Item 7,
the pace of new construction activity has picked up somewhat in the local
markets in which the Partnership's properties are located over the past year. In
addition, throughout fiscal 1996 the California real estate market, where The
Lakes at South Coast Apartments is located, continued to be adversely affected
by the state of the region's economy, the recovery of which has generally lagged
that of the rest of the country.
The Partnership has no real property 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
Development Fund Inc., and Property Associates 1985, L.P. Fourth Development
Fund Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber, is the managing general partner of the Partnership. The associate
general partner is Properties Associates 1985, L.P. (the "Associate General
Partner"), a Virginia limited partnership, certain limited partners of which are
also officers of the Adviser and the Managing General Partner.
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.
Item 2. Properties
As of March 31, 1996, the Partnership owned interests in three operating
properties through joint ventures and limited partnerships. These joint ventures
and limited 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
6/30/95 9/30/95 12/31/95 3/31/96 Average
------- ------- -------- ------- --------
The Lakes 92% 95% 97% 96% 95%
Lincoln Garden
Apartments 95% 92% 91% 91% 92%
Harbour Pointe
Apartments 94% 95% 94% 97% 95%
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 Development Fund Inc. and Properties
Associates 1985, L.P. ("PA1985"), 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 alleges
that, in connection with the sale of interests in PaineWebber Development
Partners Four, Ltd., PaineWebber, Fourth Development Fund Inc. and PA1985 (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
purport to be suing on behalf of all persons who invested in PaineWebber
Development Partners Four, Ltd., also allege that following the sale of the
partnership interests, PaineWebber, Fourth Development Fund Inc. and PA1985
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Fourth Development
Fund, Inc. and PA1985 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek
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
seek 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 which the parties expect
to submit to the court for its consideration and approval within the next
several months. Until a definitive settlement and plan of allocation is approved
by the court, there can be no assurance what, if any, payment or non-monetary
benefits will be made available to investors in PaineWebber Development Partners
Four, Ltd.
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 alleges, 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 seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
The eventual outcome of this litigation and the potential impact, if any, on the
Partnership's unitholders cannot be determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests, including those
offered by the Partnership. The complaint is substantially similar to the
complaint in the Abbate action described above, and seeks compensatory damages
of $3.4 million plus punitive damages.
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 this
litigation. At the present time, the Managing General Partner 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 March 31, 1996 there were 3,090 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for the resale of Units will develop. The
Managing General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Development Partners Four, Ltd.
For the years ended March 31, 1996, 1995, 1994, 1993 and 1992
(in thousands except for per Unit data)
Years ended March 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 10,644 $ 10,275 $ 10,481 $ 10,359 $10,542
Operating loss $ (2,557) $ (2,047)$ (1,503) $ (2,141) $(7,582)
Partnership's share of
unconsolidated
ventures' losses $ (124) $ (35) $ (101) $ (1,032) $(1,788)
Partnership's share of
gain on transfer of
assets at foreclosure - - - $ 821 -
Loss before
extraordinary items $ (2,613)$ (2,082)$ (1,604) $(2,350) $(5,535)
Extraordinary loss - - - - $ (1,338)
Partnership's share of
extraordinary gains on
settlement of debt
obligations - - - $ 6,968 -
Net income (loss) $ (2,613) $ (2,082)$ (1,604) $ 4,618 $ (6,873)
Per Limited Partnership Unit:
Loss before
extraordinary items $ (59.60) $ (47.48)$ (36.59)$ (54.64)$ (126.27)
Extraordinary loss - - - - $ (30.52)
Extraordinary gains - - - $ 150.23 -
Net income (loss) $ (59.60) $ (47.48) $ (36.59) $ 95.59 $(156.79)
Total assets $ 76,127 $ 77,924 $ 80,500 $ 83,600 $ 86,988
Mortgage loans payable $ 96,614 $ 96,957 $ 97,948 $ 99,856 $102,307
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the 41,644
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
September 11, 1985 to September 5, 1987 pursuant to a Registration Statement on
Form S-11 filed under the Securities Act of 1933. Gross proceeds of $41,644,000
were received by the Partnership and, after deducting selling expenses and
offering costs, approximately $32,751,000 was originally invested in joint
venture interests in six residential apartment properties. The performance of
the Partnership's investment properties has been adversely impacted by an
oversupply of competing apartment units throughout the country and in the six
local markets in which the properties are located. Through March 31, 1996, these
conditions have resulted in the loss of three of the properties to foreclosure:
Clipper Cove Apartments in March 1990, Quinten's Crossing Apartments in August
1992 and Parrot's Landing Apartments in October 1992. The foreclosures of these
three properties represent a loss of approximately 38% of the Partnership's
original investment portfolio.
The operations of the three remaining assets, The Lakes at South Coast
Apartments, the Harbour Pointe Apartments and the Lincoln Garden Apartments,
have been stabilized as a result of successful debt restructurings, and the
properties do not currently require the use of the Partnership's cash reserves
to support operations. Nonetheless, the properties would not operate at or above
breakeven under conventional financing terms based on the current outstanding
principal amounts owed. All three of these properties have been financed with
tax-exempt revenue bonds issued by local housing authorities. The interest rates
on all three of these restructured debt obligations are now variable rates which
are based on comparable rates on similar tax-exempt obligations. Such rates have
remained 3 to 4 percent per annum below comparable conventional rates over the
past several years. As previously reported, the debt modification agreement for
The Lakes was structured with certain debt service reserves and accrual features
intended to help absorb interest rate fluctuations. Although such reserves were
drawn down during fiscal 1996 to cover required current debt service, The Lakes
Joint Venture still has over $1,200,000 of reserves in place to help cover
possible future debt service shortfalls. The Harbour Pointe and Lincoln Garden
joint ventures would require advances from the venture partners, principally the
Partnership in the case of Harbour Pointe, if future cash flows are insufficient
to cover any increases in debt service payments. The Letter of Credit which
collateralizes the Lincoln Garden mortgage loan expires on May 1, 1997.
Management is currently evaluating its options for renewing this letter of
credit. If this letter of credit is not renewed, the mortgage loan would become
immediately due and payable and would need to be repaid from the proceeds of a
sale or refinancing of the operating investment property. If a sale or
refinancing could not be accomplished, the property could be subject to
foreclosure by the lender. The outcome of this situation cannot presently be
determined.
Despite a general strengthening in the real estate market for multi-family
residential properties over the past four years, based on current cash flows
generated from operations, all three of the Partnership's remaining properties
have estimated current market values which are below the balances of their
outstanding debt obligations. It remains to be seen whether further improvement
in market conditions will occur as rapidly or to the extent necessary to enable
the Partnership to recover any meaningful portion of its original investment in
these three remaining properties. At the present time, the recovery of the local
markets in which the Partnership's remaining properties are located is being
slowed by, in all cases, new construction of competing apartment properties and,
in the case of The Lakes at South Coast Apartments, the state of California's
overall economy, the recovery of which has generally lagged that of the rest of
the country. The new construction activity in the Bradenton, Florida (Harbour
Pointe), Tucson, Arizona (Lincoln Garden) and Costa Mesa, California (The Lakes)
markets represents the first substantial additions to the market supply of
apartment units in these markets in several years and has forced the Partnership
to offer rental concessions at its investment properties in order to maintain
occupancy levels. The supply of new apartment units has also restrained rental
rate growth at the Partnership's properties over the past year.
As previously reported, the Reimbursement Agreement which governs the
secured debt obligations of The Lakes Joint Venture contains certain restrictive
covenants, including, among others, a requirement that the venture provide the
lender, in September 1994 and September 1996, with certified independent
appraisals of the operating property indicating the value of the property to be
equal to or greater than $92 million and $100 million, respectively. Failure to
provide such appraisals is defined as an event of default under the
Reimbursement Agreement. Based on current cash flow levels and the prevailing
market conditions, the value of the property could be expected to be
considerably less than $92 million as of March 31, 1996. The Managing General
Partner has had preliminary discussions with the lender regarding possible
changes to the 1994 appraisal requirement. Management expects to continue such
discussions in fiscal 1997, which will address the September 1996 appraisal
requirement as well. Preliminary indications have been that the lender might
consider waiving or modifying the minimum appraised value requirements in
exchange for a rearrangement of the timing and amounts of certain payment
priorities, as specified in the Reimbursement Agreement. However, to date the
venture has not provided the lender with an appraisal which meets the $92
million requirement, and the lender has not waived or modified the minimum
appraised value requirements. In February 1996, the lender issued a formal
notice of default to the Joint Venture pursuant to the Reimbursement Agreement.
At this time, management does not expect the lender to take any additional
actions as long as progress continues to be made in negotiations for
modification to the terms of the Reimbursement Agreement. However, there can be
no assurances that the lender will grant any relief in connection with these
appraisal covenants.
In the event that management is successful in negotiating a waiver or
modification of the minimum appraised value requirements described above for The
Lakes Joint Venture, which represents approximately 49% of the Partnership's
original investment portfolio, the Partnership will continue to direct the
management of the remaining operating properties in order to generate sufficient
cash flow to sustain operations in the near-term while attempting to maximize
their long-term values. As discussed above, even under these circumstances, it
remains to be seen whether such a strategy would result in the return of any
significant amount of invested capital to the Limited Partners. If management
cannot reach an agreement with The Lakes' mortgage lender regarding the
appraisal covenants, the lender could choose to initiate foreclosure
proceedings. While the Partnership is prepared to exercise all available legal
remedies in the event that the lender takes such actions, if the Partnership
were not successful with its legal defenses the result could be a foreclosure of
the operating property. If such a foreclosure were to occur within the next 2
years, the Partnership may be unable to recover the net carrying value of the
operating investment property, which exceeded its estimated market value by
approximately $7.2 million as of December 31, 1995. In the event that the
ownership of The Lakes was transferred to the lender as a result of foreclosure
actions, the Partnership would have to weigh the costs of continued operations
against the realistic hopes for any future recovery of capital from the other
two investments. Under such circumstances, the Managing General Partner might
determine that it would be in the best interests of the Limited Partners to
liquidate the remaining investments and terminate the Partnership. Management
will reassess its future operating strategy once the appraisal covenant
compliance issue on The Lakes is fully resolved.
Barring a significant increase in tax-exempt interest rates, excess cash
flow from Harbour Pointe should be sufficient to cover the Partnership's
operating expenses over the near term. Excess cash flow from the Lincoln Garden
joint venture has been minimal and is primarily payable to the co-venturer for
the repayment of prior advances. To the extent that the Partnership's operating
properties generate excess cash flow after current debt service, a substantial
portion of such amounts will be reinvested in the properties to make certain
repairs and improvements aimed at maximizing long-term values. At The Lakes,
planned capital improvements for calendar 1996 include a continuation of the
program to upgrade the hallways, elevator landings, lobbies, carpeting and
signage, as well as the painting of the building exteriors. Management has
reached an agreement with the mortgage lender regarding the release of certain
restricted cash amounts to pay for these planned improvements. Improvements
planned at Lincoln Garden for calendar 1996 include resurfacing the pool deck,
replacing the roofs on several buildings, repairing the sidewalks and upgrading
the unit interiors on a turnover basis. Future improvements at the Harbour
Pointe Apartments are expected to include new pool furniture, additional
exterior lighting and appliance replacement. During calendar 1995, the
installation of individual water meters in all units at Harbour Pointe was
completed, which transferred the water usage costs from the joint venture to the
tenants. The full twelve-month effect of this reduction in operating expenses
should improve the venture's cash flow in calendar 1996. The amount and timing
of the funds to be spent on future property improvements at both Lincoln Garden
and Harbour Pointe will depend upon the availability of cash flow from the
respective property's operations.
At March 31, 1996, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $1,390,000. Such cash and
cash equivalents will be used for the working capital requirements of the
Partnership and the consolidated ventures and, to the extent necessary and
economically justified, to fund the Partnership's share of any future operating
deficits of its remaining joint venture investments. The source of future
liquidity and distributions to the partners is expected to be from cash
generated from the operations of the remaining investment properties and from
proceeds received from the sale, refinancing or other disposition of such
properties.
<PAGE>
Results of Operations
1996 Compared to 1995
The Partnership's net loss increased by $531,000 during fiscal 1996, as
compared to the prior year. This unfavorable change in net loss resulted from
increases in the Partnership's operating loss and the Partnership's share of
unconsolidated venture's loss of $510,000 and $89,000, respectively. Operating
loss increased mainly due to an increase in interest expense of $950,000,
attributable to an increase in the variable interest rates on the mortgage loans
secured by The Lakes at South Coast Apartments and the Harbour Pointe
Apartments. This increase in interest expense was partially offset by an
increase in rental income from the consolidated joint ventures of $214,000, an
increase in interest income of $74,000, an increase in other income of $81,000
and a decrease in real estate taxes of $71,000. Rental income at Harbour Pointe
and The Lakes improved by 3.5% and 2%, respectively, for calendar 1995 as
compared to calendar 1994, in both cases mainly due to increases in average
rental rates. In addition, the two apartment properties experienced identical
improvement in their average occupancy levels from 94% for calendar 1994 to 95%
for calendar 1995. Interest income increased primarily due to an increase in the
average outstanding balances of the interest-earning restricted cash accounts
held by the mortgage lender of The Lakes Joint Venture. Other income increased
mainly due to a refund of prior year real estate taxes which was received by The
Lakes Joint Venture in the current year, and real estate taxes declined as a
result of a reduction in the assessed value of The Lakes.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Lincoln Garden joint venture, increased by $89,000
for fiscal 1996. This increase in the Partnership's share of the venture's net
loss is mainly due to an increase in interest expense, as a result of an
increase in the variable interest rate on the venture's mortgage loan. A decline
in other income at the Lincoln Garden joint venture for calendar 1995 was offset
by a 4% increase in rental income which resulted from an increase in rental
rates. The occupancy level at the Lincoln Garden Apartments averaged 95% for
both calendar 1995 and 1994.
1995 Compared to 1994
The Partnership's net loss increased by $478,000 during fiscal 1995 as
compared to the prior year. The primary reasons for this increase in net loss
were increases in property operating expenses, an increase in interest expense
and a decrease in other income. Property operating expenses increased by
$183,000 primarily due to an increase in repairs and maintenance expenses at The
Lakes at South Coast Apartments. Repairs and maintenance expenses increased as a
result of the start of a major capital improvement and deferred maintenance
program at the property, particularly to upgrade common areas, elevator landings
and lobbies. Interest expense increased by $87,000 primarily due to an increase
in the variable interest rates on the mortgage loans secured by the
Partnership's consolidated joint ventures, The Lakes at South Coast Apartments
and the Harbour Point Apartments. In addition, the interest cap on The Lakes
debt which fixed the interest rate on the mortgage loan at less than 4% per
annum expired at the end of calendar 1993. Other income decreased by $313,000
primarily due to the receipt of real estate tax refunds by The Lakes Joint
Venture during the prior year. Rental revenues at the two consolidated
investment properties for calendar 1994 were fairly flat compared to the prior
year, which reflected the competitive local market conditions facing The Lakes
and Harbour Pointe Apartments. At The Lakes, a combination of a still depressed
Southern California economy and some newly constructed competing projects forced
management to offer substantial concessions to maintain average occupancy levels
in the mid-90% range. At Harbour Pointe, rental rate increases implemented in
calendar 1993 had pushed rents at the property to the top of its local market.
Competition from some newly constructed projects during calendar 1994 made it
impossible to continue the pace of these rental rate increases.
The increases in property operating expenses and interest expense and the
decrease in other income were partially offset by an increase of $64,000 in
interest income earned on short-term investments and a decrease of $66,000 in
the Partnership's share of the unconsolidated venture's loss. The increase in
interest income earned on short term investments was a result of a steady
increase in interest rates earned on such investments throughout the year. The
decrease in the Partnership's share of the unconsolidated venture's loss, which
represented the operating results of the Lincoln Garden joint venture, was
mainly the result of an increase in rental rates at the Lincoln Garden
Apartments. Although average property occupancy levels fell slightly from the
high to low 90% range during the middle two quarters of calendar 1994, rental
rates increased by approximately 6% over the prior year.
1994 Compared to 1993
The Partnership had a net loss of approximately $1,604,000 for the year
ended March 31, 1994 as compared to net income of approximately $4,618,000 in
the prior year. The primary reason for this significant change in reported net
operating results was the impact of the foreclosures of the Quinten's Crossing
and Parrot's Landing properties during fiscal year 1993. The effects of the
foreclosures were partially offset by the continued improvement in the net
operating results of The Lakes Joint Venture, as discussed further below. During
fiscal 1993, the foreclosures of the Quinten's Crossing Apartments and Parrot's
Landing Apartments generated extraordinary gains on settlement of debt
obligations of approximately $9,322,000. The Partnership's share of such gains
was approximately $6,969,000. The transfers of Quinten Crossing's and Parrot's
Landing to the lenders through foreclosure proceedings were accounted for as
troubled debt restructurings in accordance with Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings." The extraordinary gains arose due to the fact that the
balance of the mortgage loans and related accrued interest exceeded the
estimated fair value of the respective joint ventures' investment properties and
certain other assets transferred to the lenders at the time of the foreclosure.
The Partnership also recognized a net gain during fiscal 1993 on the transfers
of assets at foreclosure in the amount of approximately $821,000. In accordance
with SFAS No. 15, a gain or loss on transfer of assets was calculated as the
difference between the net carrying value of the operating investment property
and its fair value at the time of foreclosure. Quinten's Crossing had a loss on
transfer of assets of approximately $4,897,000, of which approximately
$3,065,000 was allocated to the Partnership. Parrot's Landing had a gain on
transfer of assets of approximately $3,764,000 of which approximately $3,886,000
was allocated to the Partnership. The Partnership's share of the Parrot's
Landing ordinary gain was greater than the gain recognized by the joint venture
due to the method of allocating the gain as called for in the joint venture
agreement.
The Partnership's operating loss decreased by approximately $637,000 during
fiscal 1994 as compared to the prior year primarily as a result of the continued
reduction in the net operating loss of the consolidated Lakes Joint Venture. The
net loss of The Lakes Joint Venture decreased by approximately $652,000 mainly
as a result of a decrease in interest expense on the venture's variable rate
long-term debt of approximately $716,000. Interest expense decreased due to the
venture's purchase of a one-year interest rate cap, which fixed the interest
rate on the mortgage loan at less than 4% per annum for calendar 1993. In
addition, the variable interest rate on the venture's long-term debt fell below
the rate specified by the cap during portions of calendar 1993. The operating
results of the consolidated Harbour Pointe joint venture improved by
approximately $29,000 during calendar 1993. The operating results of Harbour
Pointe also improved as a result of a decrease in interest expense of
approximately $49,000 on the venture's variable rate debt. The decrease in
interest expense was a result of a lower average rate on the variable rate debt
during calendar 1993 as compared to the prior year.
The Partnership's share of unconsolidated ventures' losses decreased by
approximately $931,000 during fiscal 1994 as compared to the prior year. The
Partnership's share of unconsolidated ventures' losses for fiscal 1993 included
the operating losses of the Quinten's Crossing and Parrot's Landing properties
prior to their foreclosures during fiscal 1993. The operating loss of the
Partnership's remaining unconsolidated venture, the Lincoln Garden Apartments,
decreased by approximately $50,000 as a result of an increase in rental income
and a decrease in interest expense on the venture's variable rate mortgage.
Rental income at Lincoln Garden increased by approximately 9%, almost entirely
due to an increase in rental rates. Property occupancy remained stable, in the
low 90% range, throughout both calendar 1992 and 1993.
Inflation
The Partnership commenced operations in 1985 and completed its tenth full
year of operations in the current fiscal year. The effects of inflation and
changes in prices on the Partnership's operating results to date have not been
significant.
Inflation in future periods may increase 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 one year
or less in duration. Rental rates at these properties can be adjusted to keep
pace with inflation, to the extent 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.
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 Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The General Partners of the Partnership are Fourth Development Fund Inc.
(the "Managing General Partner"), a Texas corporation, which is a wholly-owned
subsidiary of PaineWebber, and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are officers and employees of the Managing General Partner.
(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
Lawrence Cohen President and Chief Executive Officer 42 5/1/91
Albert Pratt Director 85 6/24/85 *
J. Richard Sipes Director 49 6/9/94
Walter V. Arnold Senior Vice President and Chief Financial
Officer 48 10/29/85
James A. Snyder Senior Vice President 50 7/6/92
John B. Watts III Senior Vice President 43 6/6/88
David F. Brooks First Vice President and
Assistant Treasurer 53 6/24/85 *
Timothy J. Medlock Vice President and Treasurer 35 6/1/88
Thomas W. Boland Vice President 33 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 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 PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber.
They are also officers and employees of PaineWebber Properties Incorporated
("PWPI"), a wholly-owned subsidiary of PWI. The business experience of each of
the directors and principal executive officers of the Managing General Partner
is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing
General Partner and President and Chief Executive Officer of PWPI which he
joined in January 1989. He is also a member of the Board of Directors and the
Investment Committee of PWPI. From 1984 to 1988, Mr. Cohen was First Vice
President of VMS Realty Partners where he was responsible for origination and
structuring of real estate investment programs and for managing national
broker-dealer relationships. He is a member of the New York Bar and is a
Certified Public Accountant.
Albert Pratt is a Director of the Managing General Partner, a Consultant of
PWI and a general partner of the Associate General Partner. Mr. Pratt joined PWI
as Counsel in 1946 and since that time has held a number of positions including
Director of both the Investment Banking Division and the International Division,
Senior Vice President and Vice Chairman of PWI and Chairman of PaineWebber
International, Inc.
<PAGE>
J. Richard Sipes is a Director of the Managing General Partner and a
Director of the Adviser. Mr. Sipes is an Executive Vice President at
PaineWebber. He joined the firm in 1978 and has served in various capacities
within the Retail Sales and Marketing Division. Before assuming his current
position as Director of Retail Underwriting and Trading in 1990, he was a
Branch Manager, Regional Manager, Branch System and Marketing Manager for a
PaineWebber subsidiary, Manager of Branch Administration and Director of
Retail Products and Trading. Mr. Sipes holds a B.S. in Psychology from
Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing General Partner and Senior Vice President and Chief Financial
Officer of PWPI 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 PWPI.
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 and Member of the Investment Committee 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.
John B. Watts III is a Senior Vice President of the Managing General
Partner and a Senior Vice President of PWPI which he joined in June 1988. Mr.
Watts has had over 17 years of experience in acquisitions, dispositions and
finance of real estate. He received degrees of Bachelor of Architecture,
Bachelor of Arts and Master of Business Administration from the University of
Arkansas.
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 PWPI which he joined in March 1980. From 1972 to 1980, Mr. Brooks was an
Assistant Treasurer of Property Capital Advisors 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 PWPI 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 was 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 March 31, 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 renumeration from the Partnership.
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 never paid regular quarterly distributions of excess
cash flow. Furthermore, the Partnership's Limited Partnership Units 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 Development Fund Inc., is owned by PaineWebber.
Properties Associates 1985, L.P. the Associate General Partner, is a Virginia
limited partnership, certain limited partners of which are also officers of 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 nor officers of the Managing General Partner nor the
limited partners of the Associate General Partner, individually, own any Units
of limited partnership interest of the Partnership. No officer or director of
the Managing General Partner, nor any limited partner of the Associate General
Partner, possesses a right to acquire beneficial ownership of Units of limited
partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fourth Development Fund Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Managing General Partner and PaineWebber
Properties Incorporated ("PWPI"), a wholly-owned subsidiary of PaineWebber
Incorporated ("PWI"). PWI, a wholly-owned subsidiary of PaineWebber, acted as
the selling agent for the Limited Partnership Units. The General Partners, PWPI
and PWI will receive fees and compensation, determined on an agreed-upon basis,
in consideration of various services performed in connection with the sale of
the Units, the management of the Partnership and the acquisition, management,
financing and disposition of Partnership investments. The Managing General
Partner and its affiliates are reimbursed for their direct expenses relating to
the offering of Units, the administration of the Partnership and the acquisition
and operation of the Partnership's real property investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and 5% 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, net income or loss of
the Partnership, other than net gains resulting from Capital Transactions, as
defined, will generally be allocated 95% to the Limited Partners and 5% to the
General Partners.
Additionally, the Partnership Agreement provides for the allocation of net
gains resulting from Capital Transactions, as defined, first, to those partners
whose capital accounts reflect a deficit balance (after all distributions for
the year and all allocations of net income and losses from operations have been
made) in the ratio of such deficits and up to an amount equal to the sum of such
deficits; second, to the General and Limited Partners in such amounts as are
necessary to bring the General Partners' capital account balance in the ratio of
5 to 95 to the Limited Partners' capital account balances; then, 95% to the
Limited Partners and 5% to the General Partners.
Selling commissions incurred by the Partnership and paid to PWI for the
sale of Partnership interests were approximately $3,540,000 through the
completion of the offering period which expired in September of 1987.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 5% of the gross proceeds
from the sale of the Partnership units. Total acquisition fees incurred by the
Partnership and paid to PWPI aggregated $2,077,000.
The Partnership recorded as income a total of $5,000 of investor servicing
fees from certain of its joint ventures for the year ended March 31, 1996 in
accordance with the terms of the joint venture agreements.
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 March 31, 1996 is $82,000, representing reimbursements to this
affiliate of the Managing General Partner for providing such services to the
Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $3,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 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 the
Adviser.
<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 Schedule at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of this Report.
(b) No reports on Form 8-K were filed during the last
quarter of fiscal 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 Schedule 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.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
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: June 28, 1996
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 and
in the capacities and on
the dates indicated.
By:/s/ Albert Pratt Date: June 28, 1996
------------------- -------------
Albert Pratt
Director
By:/s/ J. Richard Sipes Date: June 28, 1996
-------------------- -------------
J. Richard Sipes
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ------------------------ -------------------------
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated September 11, 1985, as pursuant to Rule 424(c)
supplemented, with particular and incorporated
reference to the Restated herein by reference.
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or
statements and amendments thereto 15(d) of the Securities
of the registrant together with all Act of 1934 and
such contracts filed as exhibits of incorported herein
previously filed Forms 8-K and by reference.
Forms 10-K are hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the
fiscal year 1996 has been
sent to the Limited
Partners. An Annual Report
will be sent to the
Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of
Part I of this Report
Page I-1, to which
reference is hereby made.
(27) Financial Data Schedule Filed as the last page
of EDGAR submission
following the Financial
Statements and Financial
Statement Schedule required
by Item 14.
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference
PaineWebber Development Partners Four, Ltd.:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1996 and 1995 F-4
Consolidated statements of operations for the years ended
March 31, 1996, 1995 and 1994 F-5
Consolidated statements of changes in partners' deficit
for the years ended March 31, 1996, 1995 and 1994 F-6
Consolidated statements of cash flows for the years ended
March 31, 1996, 1995 and 1994 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-22
Other financial statement 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 consolidated financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Development Partners Four, Ltd.:
We have audited the accompanying consolidated balance sheets of PaineWebber
Development Partners Four, Ltd. as of March 31, 1996 and 1995, and the related
consolidated statements of operations, changes in partners' deficit, and cash
flows for each of the three years in the period ended March 31, 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 did not audit the
financial statements of 71st Street Housing Partners, Ltd., which statements
reflect 10% of the Partnership's consolidated total assets as of March 31, 1996
and 1995, and 0%, 1% and 1% of the Partnership's consolidated net loss for the
years ended March 31, 1996, 1995 and 1994, respectively. Those statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for 71st Street Housing
Partners, Ltd., is based solely on the reports of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of PaineWebber Development Partners Four,
Ltd. at March 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended March 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, based on our audits and the reports of other auditors, 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 Note 7 to the financial statements, the ability of The Lakes
Joint Venture (a consolidated joint venture investee) to continue as a going
concern is dependent upon future events, including the waiver or modification of
a restrictive covenant on its existing non-recourse debt requiring The Lakes to
provide, by September 1994, a certified independent appraisal of The Lakes'
operating investment property for an amount equal to or greater than
$92,000,000. The joint venture is in default under the loan agreement. These
conditions raise substantial doubt about the Partnership's ability to continue
as a going concern. Management's plans as to these matters are also described in
Note 7 and include negotiating with the lender regarding a possible waiver or
modification of this appraisal requirement. However, there are no assurances
that the lender will grant any relief. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young
ERNST & YOUNG LLP
Boston, Massachusetts
June 19, 1996
<PAGE>
Reznick Fedder & Silverman
Certified Public Accountants
217 East Redwood Street, Suite 1900
Baltimore, MD 21202
INDEPENDENT AUDITORS' REPORT
To the Partners
71st Street Housing Partners, Ltd.
We have audited the accompanying balance sheets of 71st Street Housing
Partners, Ltd. as of December 31, 1995 and 1994, and the related statements of
operations, changes in partners' deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 71st Street Housing
Partners, Ltd. as of December 31, 1995 and 1994, and the results of its
operations, changes in partners' deficit and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
Reznick Fedder & Silverman
Baltimore, Maryland
January 12, 1996
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and 1995
(In thousands, except for per Unit data)
ASSETS
1996 1995
---- ----
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 76,995 76,825
--------- ---------
95,185 95,015
Less accumulated depreciation (25,465) (22,386)
--------- ---------
69,720 72,629
Cash and cash equivalents 1,390 1,292
Restricted cash 4,164 3,045
Accounts receivable - affiliates 16 11
Prepaid and other assets 68 67
Deferred expenses, net of accumulated
amortization of $682 ($571 in 1995) 769 880
---------- ----------
$ 76,127 $ 77,924
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt in default $ 87,489 $ 87,832
Accounts payable and accrued expenses 355 390
Accrued interest and fees 4,258 3,156
Tenant security deposits 477 441
Equity in losses of unconsolidated joint venture
in excess of investments and advances 2,223 2,099
Long-term debt 9,125 9,125
---------- ----------
Total liabilities 103,927 103,043
Co-venturers' share of net assets of
consolidated ventures 1,153 1,221
Partners' deficit:
General Partners:
Capital contributions 1 1
Cumulative net loss (2,632) (2,501)
Limited Partners ($1,000 per unit;
41,644 Units issued):
Capital contributions, net of offering costs 36,641 36,641
Cumulative net loss (62,963) (60,481)
---------- ----------
Total partners' deficit (28,953) (26,340)
---------- -----------
$ 76,127 $ 77,924
========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March
31, 1996, 1995 and 1994
(In thousands, except for per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Rental income $ 10,108 $ 9,894 $ 9,851
Interest income 237 163 99
Other income 299 218 531
---------- ---------- ---------
10,644 10,275 10,481
Expenses:
Interest expense and related
financing fees 5,157 4,207 4,120
Property operating expenses 3,735 3,744 3,561
Depreciation and amortization 3,087 3,053 3,010
Real estate taxes 962 1,033 1,007
General and administrative 260 285 286
---------- ---------- ---------
13,201 12,322 11,984
---------- ---------- ---------
Operating loss (2,557) (2,047) (1,503)
Co-venturers' share of consolidated
ventures' losses 68 - -
Partnership's share of unconsolidated
venture's losses (124) (35) (101)
---------- ---------- ---------
Net loss $ (2,613) $ (2,082) $ (1,604)
========= ========= ==========
Net loss per Limited Partnership Unit $ (59.60) $ (47.48) $ (36.59)
========= ========= ==========
The above net loss per Limited Partnership Unit is based upon the 41,644 Limited
Partnership Units outstanding for each year.
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended March 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
Balance at March 31, 1993 $ (2,316) $ (20,338) $ (22,654)
Net loss (80) (1,524) (1,604)
---------- ---------- ----------
Balance at March 31, 1994 (2,396) (21,862) (24,258)
Net loss (104) (1,978) (2,082)
---------- ---------- ----------
Balance at March 31, 1995 (2,500) (23,840) (26,340)
Net loss (131) (2,482) (2,613)
---------- ---------- ----------
Balance at March 31, 1996 $ (2,631) $ (26,322) $ (28,953)
========= ========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net loss $ (2,613) $ (2,082) $ (1,604)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Co-venturers' share of consolidated
ventures' losses (68) - -
Partnership's share of unconsolidated
venture's losses 124 35 101
Depreciation and amortization 3,087 3,053 3,010
Amortization of deferred financing costs 103 105 294
Amortization of deferred gain on
forgiveness of debt (343) (343) (343)
Changes in assets and liabilities:
Accounts receivable - affiliates (5) 28 (30)
Prepaid and other assets (1) - -
Accounts payable and accrued expenses (35) 79 (133)
Accrued interest and fees 1,102 440 397
Tenant security deposits 36 43 41
Accounts payable - affiliates - - (14)
Advances from consolidated ventures - (100) 18
-------- ------ -------
Total adjustments 4,000 3,340 3,341
-------- ------ -------
Net cash provided by operating
activitie 1,387 1,258 1,737
Cash flows from investing activities:
Additions to buildings and improvements (170) (425) (155)
-------- ------ -------
Net cash used in investing
activities (170) (425) (155)
Cash flows from financing activities:
Decrease (increase) in restricted cash (1,119) (145) 14
Repayment of long-term debt - (648) (1,565)
-------- ------ -------
Net cash used in financing
activities (1,119) (793) (1,551)
-------- ------ -------
Net increase in cash and cash equivalents 98 40 31
Cash and cash equivalents, beginning of year 1,292 1,252 1,221
--------- --------- --------
Cash and cash equivalents, end of year $ 1,390 $ 1,292 $ 1,252
======== ======== =======
Cash paid for interest $ 4,239 $ 3,965 $ 3,786
======== ======== =======
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
PaineWebber Development Partners Four, Ltd. (the "Partnership") is a
limited partnership organized pursuant to the laws of the State of Texas on
June 24, 1985 for the purpose of investing in a diversified portfolio of
newly-constructed and to-be-constructed income-producing real properties. On
September 9, 1986 the Partnership elected to extend the offering period to
the public through September 10, 1987 (beyond its original termination date
of September 10, 1986) and reduce the maximum offering amount to 42,000
Partnership Units (at $1,000 per Unit) from 100,000 Units. Through the
conclusion of the offering period, 41,644 Units were issued representing
capital contributions of $41,644,000.
The Partnership originally invested the net proceeds of the offering,
through joint venture partnerships, in six rental apartment properties. As
further discussed in Notes 4 and 5, the Partnership's operating properties
have encountered major adverse business developments which, to date, have
resulted in the loss of three of the original investments to foreclosure. As
of March 31, 1996, the remaining three joint ventures, which had obtained
more favorable financing terms, were generating net cash flow sufficient to
satisfy their current debt service requirements. However, as discussed
further in Note 7, one of these ventures is in default of the terms of its
debt agreement.
2. Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of March 31, 1996 and 1995 and revenues
and expenses for each of the three years in the period ended March 31, 1996.
Actual results could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in three joint venture partnerships which own operating
properties. The joint ventures in which the Partnership has invested are
required to maintain their accounting records on a calendar year basis for
income tax purposes. As a result, the Partnership records its share of
ventures' income or losses based on financial information of the ventures
which is three months in arrears to that of the Partnership.
The Partnership accounts for one of its three remaining investments in
joint venture partnerships using the equity method because the Partnership
does not have majority voting control. Under the equity method the
investment is carried at cost adjusted for the Partnership's share of the
ventures' earnings and losses and distributions. See Note 5 for a
description of the unconsolidated joint venture partnership. As further
discussed in Note 4, the Partnership acquired control of 71st Street Housing
Partners, Ltd., which owns the Harbour Pointe Apartments, in fiscal 1990. In
addition, the Partnership acquired control of The Lakes Joint Venture, which
owns The Lakes at South Coast Apartments, in fiscal 1992. As a result, the
accompanying financial statements present the financial position and results
of operations of these joint ventures on a consolidated basis. As discussed
above, the joint ventures have December 31 year-ends and operations of the
consolidated ventures continue to be reported on a three-month lag. All
material transactions between the Partnership and the joint ventures have
been eliminated in consolidation, except for lag-period cash transfers. Such
lag period cash transfers are accounted for as advances from consolidated
ventures.
The consolidated joint ventures' operating investment properties are
carried at the lower of cost, reduced by accumulated depreciation, or net
realizable value. The net realizable value of a property held for long-term
investment purposes is measured by the recoverability of the investment
through expected future cash flows on an undiscounted basis, which may
exceed the property's current market value. The net realizable value of a
property held for sale approximates its market value. Both of the
consolidated ventures' operating investment properties were considered to be
held for long-term investment purposes as of March 31, 1996 and 1995.
Depreciation expense is computed using the straight-line method over
estimated useful lives of five-to-thirty years. Interest and taxes incurred
during the construction period, along with acquisition fees paid to
PaineWebber Properties Incorporated and costs of identifiable improvements,
have been capitalized and are included in the cost of the operating
investment properties. Maintenance and repairs are charged to expense when
incurred.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" ("Statement 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. Statement 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. Statement 121 is effective for
financial statements for years beginning after December 15, 1995. The
Partnership will adopt Statement 121 in fiscal 1997 and, based on current
circumstances, does not believe the adoption will have a material effect on
results of operations or financial position. However, see Note 7 for a
discussion of the risks and uncertainties related to the Partnership's
investment in The Lakes Joint Venture.
The consolidated joint ventures lease apartment units under leases with
terms generally of one year or less. Rental income is recorded monthly as
earned.
For purposes of reporting cash flows, the Partnership considers all
highly liquid investments with original maturities of 90 days or less to be
cash equivalents.
Deferred expenses on the balance sheet at March 31, 1996 and 1995 consist
of joint venture modification expense and deferred loan costs. Joint venture
modification expense represents a payment by the Partnership to the
co-venturer in 71st Street Housing Partners, Ltd. during fiscal 1990, in
return for the relinquishment of the general partner's rights to control the
operations of the joint venture, and is being amortized on a straight-line
basis over the term of the joint venture's mortgage note payable. Deferred
loans costs are being amortized using the straight-line method over the term
of the related debt. Amortization of deferred loan costs is included in
interest expense on the accompanying statements of operations.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership. Upon the sale or
disposition of the Partnership's investments, the taxable gain or loss
incurred will be allocated among the partners. In the case where a taxable
gain would be incurred, gain would first be allocated to the General
Partners in an amount at least sufficient to eliminate their deficit capital
balance. Any remaining gain would then be allocated to the Limited Partners.
In certain cases, the Limited Partners could be allocated taxable income in
excess of any liquidation proceeds that they may receive. Additionally, in
cases where the disposition of an investment involves a foreclosure by, or
voluntary conveyance to, the mortgage lender, taxable income could occur
without distribution of cash. Income from the sale or disposition of the
Partnership's investments would represent passive income to the partners
which could be offset by each partner's existing passive losses, including
any carryovers from prior years.
The cash and cash equivalents, restricted cash, receivables, accounts
payable, accrued expenses, tenant security deposits and long-term debt
appearing on the accompanying consolidated balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
With the exception of long-term debt, the carrying amount of these assets
and liabilities approximates their fair value due to the short-term
maturities of these instruments. The fair value of the non-recourse
long-term debt is estimated using the estimated market values of the real
estate collateral because such values are below the principal balances of
the debt obligations.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Development Fund Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Managing General Partner
and PaineWebber Properties Incorporated ("PWPI"), a wholly-owned subsidiary
of PaineWebber Incorporated ("PWI"). PWI, a wholly-owned subsidiary of
PaineWebber, acted as the selling agent for the Limited Partnership Units.
The General Partners, PWPI and PWI will receive fees and compensation,
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition of
Partnership investments. The Managing General Partner and its affiliates are
reimbursed for their direct expenses relating to the offering of Units, the
administration of the Partnership and the acquisition and operation of the
Partnership's real property investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and 5% 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, net income or loss of
the Partnership, other than net gains resulting from Capital Transactions,
as defined, will generally be allocated 95% to the Limited Partners and 5%
to the General Partners.
Additionally, the Partnership Agreement provides for the allocation of
net gains resulting from Capital Transactions, as defined, first, to those
partners whose capital accounts reflect a deficit balance (after all
distributions for the year and all allocations of net income and losses from
operations have been made) in the ratio of such deficits and up to an amount
equal to the sum of such deficits; second, to the General and Limited
Partners in such amounts as are necessary to bring the General Partners'
capital account balance in the ratio of 5 to 95 to the Limited Partners'
capital account balances; then, 95% to the Limited Partners and 5% to the
General Partners.
Selling commissions incurred by the Partnership and paid to PWI for the
sale of Partnership interests were approximately $3,540,000 through the
completion of the offering period which expired in September of 1987.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 5% of the gross
proceeds from the sale of the Partnership units. Total acquisition fees
incurred by the Partnership and paid to PWPI aggregated $2,077,000.
The Partnership recorded investor servicing fee income of $5,000, $5,000
and $83,000 for the years ended March 31, 1996, 1995, 1994, respectively.
Included in general and administrative expenses for the years ended March
31, 1996, 1995 and 1994 is $82,000, $84,000 and $93,000, 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 fees of $3,000, $4,000 and $2,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996, 1995 and 1994, respectively.
4. Operating Investment Properties
As of March 31, 1996 and 1995, the Partnership owns majority and
controlling interests in two joint venture partnerships which own operating
investment properties as described below. As discussed in Note 2, the
Partnership's policy is to report the operations of the joint ventures on a
three-month lag.
71st Street Housing Partners, Ltd.
On December 16, 1985, the Partnership acquired an interest in 71st Street
Housing Partners, Ltd., a joint venture formed to develop, own and operate
the Harbour Pointe Apartments, a 234-unit two-story garden apartment complex
located in Bradenton, Florida. Construction of this complex was completed in
January, 1987. The Partnership's co-venture partners are affiliates of The
Lieberman Corporation. The Partnership made a capital investment of
$2,658,000 (including an acquisition fee of $150,000 paid to PWPI) for a 60%
interest in the Joint Venture. The property was acquired subject to a
nonrecourse mortgage note in the amount of $9,200,000. On May 1, 1990, the
joint venture refinanced its mortgage note under more favorable terms, as
further discussed in Note 7. Pursuant to an Amended and Restated Agreement
of the Limited Partnership dated August 4, 1989, the general partner
interests of the co-venturers were converted to limited partnership
interests. The co-venturers received a payment of $125,000 from the
Partnership in return for their agreement to relinquish their general
partner rights and the property management contract. As a result of the
amendment, the Partnership, as the sole general partner, assumed control of
the operations of the property and hired a third-party property manager to
manage the day-to-day operations of the apartment complex.
Per the terms of the amended joint venture agreement, income is allocated
to the Partnership until such time as the Partnership's capital account
balance equals 250% of all capital contributions theretofore made by the
Partnership. Thereafter, income is allocated 60% to the Partnership and 40%
to the co-venturers. Net losses are generally allocated 95% to the
Partnership and 5% to the co-venturers, except that if one partner has a
deficit balance and the other a credit balance in their capital accounts,
net losses are allocated to the partner with the credit balance.
Allocations of gains and losses from capital transactions will be
allocated according to the formulas provided in the joint venture agreement.
Distributions of cash from a sale or operations of the operating property
will be made in the following order of priority: first, to repay accrued
interest and principal on optional loans (none outstanding as of March 31,
1996 and 1995); second, to the Partnership until the Partnership has
received an amount equal to 250% of all capital contributions theretofore
made by the Partnership; and third, any remainder, will be distributed 60%
to the Partnership and 40% to the co-venturers. Distributions of cash from a
refinancing of the operating property shall be distributed 60% to the
Partnership and 40% to the co-venturers.
The Lakes Joint Venture
The Lakes Joint Venture ("Venture") was formed May 30, 1985 (inception)
in accordance with the provisions of the laws of the State of California for
the purpose of developing, owning and operating a 770-unit apartment complex
(operating investment property) in Costa Mesa, California. On November 1,
1985 the Partnership acquired a 65% general partnership interest in the
joint venture. The Partnership's original co-venture partner was The Lakes
Development Company ("Developer"), a California general partnership and an
affiliate of Regis Homes Corporation. Construction of the operating
investment property was completed in December 1987. The initial aggregate
cash investment made by the Partnership for its interest was approximately
$16,226,000 (including an acquisition fee of $1,130,000 paid to PWPI).
Construction of the property was financed from the proceeds of a nonrecourse
$76,000,000 mortgage loan. On September 26, 1991, in conjunction with a
refinancing and modification of the Venture's long-term indebtedness, the
Developer transferred its interest in the Venture to Development Partners,
Inc. ("DPI"), a Delaware corporation and a wholly-owned subsidiary of Paine
Webber Group, Inc., and withdrew from the Venture. As a result of the
original co-venturer's withdrawal, the Partnership assumed control over the
operations of the Venture. The debt secured by the The Lakes at South Coast
Apartments is in default as of March 31, 1996 due to the failure of the
Venture to satisfy a covenant of the loan agreement. See Note 7 for a
further discussion.
Concurrent with the Developer's withdrawal from the Venture and the
admission of DPI as a Venturer, the Venture Agreement was amended and
restated effective September 26, 1991. The Venture Agreement between the
Partnership and DPI provides that, if the Venture's operating revenues are
insufficient to pay its operating expenses, the Venturers shall have the
right, but not the obligation, to arrange third-party loans to the Venture.
Alternatively, the Venturers may choose to make Optional Loans to the
Venture. If both Venturers desire to make such loans, the loans shall be
made in the ratio of 99.98% from the Partnership and .02% from DPI.
Distributable Funds and Net Proceeds of the Venture are to be allocated
first to the Partnership until the Partnership shall have received
cumulative distributions equal to any Additional Capital Contributions, as
defined. Thereafter, any remaining Distributable Funds or Net Proceeds are
to be distributed next to repay accrued interest and principal on any
Optional Loans and then to the Partnership until the Partnership shall have
received cumulative distributions equal to $17,250,000. Any remainder is to
be distributed 99.98% to the Partnership and .02% to DPI.
Net losses are to be allocated 99.98% to the Partnership and .02% to DPI.
Net income shall be allocated to Venturers to the extent of and in the ratio
of the distribution of Distributable Funds, with any remainder allocated
99.98% to the Partnership and .02% to DPI. In the event that there are no
Distributable Funds, net income would be allocated 99.98% to the Partnership
and .02% to DPI. Allocations of gain or losses from sales or other
dispositions of the operating investment property are set forth in the
Venture Agreement.
The following is a summary of combined property operating expenses for
Harbour Pointe Apartments and for The Lakes at South Coast Apartments for
the years ended December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 886 $ 915 $ 768
Salaries and related expenses 625 672 635
Utilities 522 504 547
Administrative and other 1,090 1,062 1,032
Management fees 365 349 354
Leasing commissions and fees 132 124 112
Insurance 115 118 113
------- ------- -------
$ 3,735 $ 3,744 $ 3,561
======= ======= =======
<PAGE>
5. Investments in Unconsolidated Joint Ventures
The Partnership has an investment in one unconsolidated joint venture at
March 31, 1996 and 1995. The unconsolidated joint venture is accounted for
on the equity method in the Partnership's financial statements. As discussed
in Note 2, this joint venture reports its operations on a calendar year
basis.
Condensed financial statements of the unconsolidated joint venture, for the
periods indicated, follow.
Condensed Balance Sheets
December 31, 1995 and 1994
(in thousands)
Assets
1995 1994
---- ----
Current assets $ 108 $ 126
Operating investment property, net 4,888 4,996
Other assets 292 375
--------- ---------
$ 5,288 $ 5,497
========= =========
Liabilities and Partners' Deficit
Current liabilities $ 502 $ 427
Loans payable to affiliates 537 537
Long-term debt 6,800 6,900
Partnership's share of combined deficit (2,359) (2,239)
Co-venturer's share of combined deficit (192) (128)
--------- ---------
$ 5,288 $ 5,497
========= =========
Condensed Summary of Operations
For the years ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
---- ---- ----
Rental revenues $ 1,148 $ 1,102 $ 1,038
Interest and other income 71 109 51
--------- --------- --------
1,219 1,211 1,089
Property operating expenses 685 636 656
Depreciation and amortization 236 212 282
Interest expense 482 411 301
---------- ---------- --------
1,403 1,259 1,239
---------- --------- ---------
Net loss $ (184) $ (48) $ (150)
========== ========== =========
Net loss:
Partnership's share of
loss $ (120) $ (31) $ (97)
Co-venturer's share of
loss (64) (17) (53)
------------ ----------- ---------
$ (184) $ (48) $ (150)
========== ========== =========
Reconciliation of Partnership's Investment
March 31, 1996 and 1995
(in thousands)
1996 1995
---- ----
Partnership's share of deficit
as shown above at December 31 $ (2,359) $ (2,239)
Partnership's share of current liabilities 60 60
Excess basis due to investment in joint
venture, net (1) 76 80
---------- ----------
Equity in losses of unconsolidated joint
venture in excess of investments
and advances at March 31 (2) $ (2,223) $ (2,099)
========= =========
(1)At March 31, 1996 and 1995 the Partnership's investment exceeds its share
of the combined joint venture's deficit account by approximately $76,000
and $80,000, respectively. These amounts, which relate to certain
expenses incurred by the Partnership in connection with acquiring its
remaining unconsolidated joint venture investment, are being amortized
using the straight-line method over the estimated useful life of the
related operating investment property.
(2)Equity in losses of unconsolidated joint venture in excess of investments
and advances at March 31, 1996 and 1995 represents the Partnership's net
investment in the Lincoln Garden joint venture partnership. This joint
venture is subject to a partnership agreement which determines 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. As a result, substantially
all of the Partnership's investment in this joint venture is restricted
as to distributions.
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Partnership's share of
operations, as shown above $ (120) $ (31) $ (97)
Amortization of excess basis (4) (4) (4)
------ ------- --------
Partnership's share of
unconsolidated venture's losses $ (124) $ (35) $ (101)
====== ======= =======
A description of the property owned by the remaining unconsolidated joint
venture and certain other matters are summarized below:
Lincoln Garden Apartments Joint Venture
On November 15, 1985, the Partnership acquired an interest in a joint
venture which developed, owns and operates Lincoln Garden Apartments, a
200-unit complex located on an 8.1-acre tract of land in Tucson, Arizona.
Construction of this complex was completed in June, 1986. The Partnership's
co-venture partner is an affiliate of Lincoln Property Company. The
Partnership made a cash investment of approximately $1,762,000 (including an
acquisition fee of $103,125 paid to PWPI) for a 65% interest in the Joint
Venture. The property was acquired subject to a nonrecourse mortgage note in
the amount of $7,700,000.
During fiscal 1989, the joint venture ceased to meet the debt service
requirements of its mortgage financing and, technically, was in default of
the loan agreements. In March 1989, the Partnership refinanced its loan
through the refunding of certain tax-exempt revenue bonds issued by a local
housing authority and obtained a lower interest rate, which reduced the
venture's debt service requirements. Interest rates on the previous
financing arrangement ranged from 7.2% to 8.8% per annum. Interest on the
new bonds is paid at a variable rate which fluctuates weekly and is tied to
the market rates on other similar tax-exempt debt instruments. The new
financing arrangement bore interest at varying rates ranging from 3.76% to
4.19% and 2.26% to 3.77% during calendar 1995 and 1994, respectively. The
venture has remained current on its debt service payments since the date of
the refinancing. The mortgage note had a remaining principal balance of
$6,800,000 as of December 31, 1995 and is secured by the venture's operating
investment property and a primary letter of credit in the amount of
$7,188,000, which requires annual fees equal to 0.8% of the letter of credit
amount and expires on May 1, 1997. To improve the credit rating of the
outstanding bonds and provide a more favorable variable interest rate, in
1993 the lender provided to the joint venture a confirming letter of credit
for $7,109,500. The confirming letter of credit required annual fees equal
to 0.3% of the letter of credit amount. This confirming letter of credit
expired subsequent to year-end, on June 4, 1996. Management of the venture
is currently evaluating its options for renewing the primary letter of
credit which expires in May 1997. If this primary letter of credit is not
renewed, the mortgage loan would become immediately due and payable and
would need to be repaid from the proceeds of a sale or refinancing of the
operating investment property. If a sale or refinancing could not be
accomplished, the property could be subject to foreclosure by the lender.
The outcome of this situation cannot presently be determined.
The co-venturer guaranteed to fund negative cash flow, as defined, of the
Joint Venture during the guarantee period, which ended September 30, 1988.
Operating expenses and debt service, if any, in excess of the amounts
available for expenditure were to be funded by the co-venturer during the
guarantee period. The co-venturer's obligation to fund cash pursuant to
these guarantees was in the form of nonreturnable capital contributions
through September 30, 1987, and mandatory additional capital contributions,
as defined, through September 30, 1988. From October 1, 1988 until July 2,
1990, the co-venturer was required to make mandatory loans, as defined, to
the Joint Venture to the extent operating revenues were insufficient to pay
the operating expenses. Thereafter, if operating revenues are insufficient
to pay operating expenses, either the co-venturer or the Partnership may
make optional loans, as defined, to the Joint Venture, but there is no
assurance that any will be made. All mandatory and optional loans bear
interest at prime (8.5% at December 31, 1995) plus 1% per annum and are to
be repaid from distributable funds, as defined. At December 31, 1995,
mandatory and optional loans payable to the co-venturer amounted to
$522,000. Unpaid interest on mandatory and optional loans at December 31,
1995, amounted to $335,000. Loans payable to the Partnership at December 31,
1995, amounted to $14,000 and are being accounted for as optional loans
similar to those made by the co-venturer.
The joint venture agreement provides that distributable funds, as
defined, and net proceeds arising from the sale, refinancing, or other
disposition of the Operating Investment Property of the Joint Venture, as
defined, will be distributed as follows: 1) for repayment of accrued
interest and principal on optional loans, 2) for repayment of accrued
interest and principal on mandatory loans, 3) to the Partnership until the
Partnership has received cumulative distributions equal to $1,897,500, 4) to
the co-venturer until the co-venturer has received a cumulative distribution
equal to, first, a preferred return on mandatory additional capital
contributions of prime plus 1% per annum and, second, any mandatory
additional capital contributions, and 5) the balance, 65% to the Partnership
and 35% to the co-venturer. The obligation to distribute distributable funds
is cumulative.
Losses of the joint venture, other than losses resulting from the sale of
the Operating Investment Property, were allocated 100% to the Partnership
through December 31, 1990, and thereafter, are allocated 65% to the
Partnership and 35% to the co-venturer unless the allocation of additional
losses to the Partnership would result in the Partnership's capital account
having a deficit balance while the co-venturer's capital account has a
credit balance. In such cases, the co-venturer will be allocated losses
until the capital account of the co-venturer is reduced to zero. Income of
the Joint Venture, other than gains resulting from the sale or other
disposition of the Operating Investment Property, will be allocated 65% to
the Partnership and 35% to the co-venturer if there are no distributable
funds. If there are distributable funds, income will be allocated as
follows: 1) to the Partnership to the extent of its preferred distributions,
2) to the co-venturer to the extent of its preferred distributions, and 3)
the balance, 65% to the Partnership and 35% to the co-venturer.
Gains arising from the sale, refinancing, or other disposition of the
Operating Investment Property are to be allocated in accordance with
specific formulas set forth in the joint venture agreement.
6. Restricted Cash
In September 1991, The Lakes Joint Venture entered into an agreement with
its mortgage lender whereby restricted cash accounts were established for
the purpose of making specific disbursements for debt service, property
taxes and insurance, security deposit refunds, and funding operating
deficits. These accounts are controlled by the bank in which all
disbursements and transfers are dictated by the related Reimbursement
Agreement (see Note 7). These cash accounts are included in Restricted Cash
on the accompanying balance sheet.
7. Long-term debt
Long-term debt on the Partnership's balance sheet at March 31, 1996 and 1995
consists of the following (in thousands):
1996 1995
---- ----
Nonrecourse mortgage note
payable which secures Manatee
County Housing Finance
Authority Revenue Refunding
Bonds. The mortgage loan is
secured by a deed to secure
debt and a security agreement
covering the real and personal
property of the Harbour Pointe
Apartments. $ 9,125 $ 9,125
Developer loan payable which
secures County of Orange,
California Tax-Exempt Apartment
Development Revenue Bonds. The
mortgage loan is nonrecourse
and is secured by a first deed
of trust plus all future rents
and income generated by The
Lakes at South Coast
Apartments. 75,600 75,600
Nonrecourse loan payable to bank
secured by a third deed of trust
plus all future rents and income
generated by The Lakes at South
Coast Apartments. 4,584 4,584
<PAGE>
1996 1995
---- ----
Prior indebtedness principal
payable to bank. This
obligation is related to The
Lakes Joint Venture and is
nonrecourse. 3,561 3,561
Deferred gain on forgiveness of
debt (net of accumulated
amortization of $1,534 and
$1,191 in 1996 and 1995,
respectively) 3,744 4,087
------- -------
96,614 96,957
Less: Long-term debt in
default (see discussion below) (87,489) (87,832)
--------- ---------
$ 9,125 $ 9,125
========= =========
Mortgage loan secured by the Harbour Pointe Apartments
Original financing for construction of the Harbour Pointe Apartments was
provided through $9,200,000 of Multi-Family Housing Mortgage Revenue Bonds,
Series 1985 E due December 1, 2007 (the original Bonds) issued by the
Manatee County Housing Finance Authority which bore interest at 8.25% plus a
1.25% letter of credit fee. An amount of $75,000 was paid on the original
bonds prior to the refinancing. The original bond issue was refinanced on
May 1, 1990 with $9,125,000 Weekly Adjustable/Fixed Rate Multi-Family
Housing Revenue Refunding Bonds, Series 1990A, due December 1, 2007 (the
Bonds).
The interest rate on the Bonds is adjusted weekly to a minimum rate that
would be necessary to remarket the Bonds in a secondary market as determined
by a bank remarketing agent. During calendar 1995, the interest rate
averaged 4.38% (3.36% in 1994). The Bonds are secured by the Harbour Pointe
Apartments. As of December 31, 1995, the fair value of this debt obligation
approximated $8.5 million.
Interest on the underlying bonds is intended to be exempt from federal
income tax pursuant to Section 103 of the Internal Revenue Code. In
connection with obtaining the mortgage, the partnership executed a Land Use
Restriction Agreement with the Manatee County Housing Finance Authority
which provides, among other things, that substantially all of the proceeds
of the Bonds issued be utilized to finance multi-family housing of which 20%
or more of the units are to be leased to low and moderate income families as
established by the United States Department of Housing and Urban
Development. In the event that the underlying Bonds do not maintain their
tax-exempt status, whether by a change in law or by noncompliance with the
rules and regulations related thereto, repayment of the note may be
accelerated.
Pursuant to the financing agreement, a bank has issued an irrevocable
letter of credit to the Bond trustee in the joint venture's name for
$9,247,500. An annual fee equal to 1% of the letter of credit balance is
payable monthly to the extent of net cash operating income available to pay
such fees. In addition, the joint venture pays annual remarketing,
administrative and trustee fees pertaining to the bonds which totalled
$35,000 during 1995.
Debt secured by The Lakes at South Coast Apartments
Original financing for construction of The Lakes at South Coast
Apartments was provided from a developer loan in the amount of $76,000,000
funded by the proceeds of a public offering of tax-exempt apartment
development revenue bonds. The Venture had been in default of the developer
loan since December 1989 for failure to make full and timely payments on the
loan. As a result of the Venture's default, the required semi-annual
interest and principal payments due to the bond holders through June of 1991
were made by the bank which had issued an irrevocable letter of credit
securing the bonds. Under the terms of the loan agreement, the Venture was
responsible for reimbursing the letter of credit issuer for any draws made
against the letter of credit which totalled $7,748,000.
The original bond issue was refinanced during 1991 and the original
developer loan was extinguished. The new developer loan (1991 Developer
Loan), in the amount of $75,600,000, is payable to the County of Orange and
was funded by the proceeds of a public offering of tax-exempt apartment
development revenues bonds issued, at par, by the County of Orange,
California in September 1991. Principal is payable upon maturity, December
1, 2006. Interest on the bonds is variable, with the rate determined weekly
by a remarketing agent (ranging from 2.7% to 6.8% during calendar 1995), and
is payable in arrears on the first of each month. In November 1992, the
Venture entered into an interest rate cap agreement for an amount which
covered the $75,600,000 Developer's loan. The cap agreement, which cost the
Venture $208,000, provided an interest rate ceiling of 3.49% and was
effective from November 30, 1992 to December 15, 1993. The cost of the
interest rate cap was amortized on a straight-line basis over the 13-month
period covered by the agreement.
The loan is secured by a first deed of trust plus all future rents and
income generated by the operating investment property. Bond principal and
interest payments are secured by and payable from an irrevocable letter of
credit issued by a bank in the amount of $76,569,000, expiring December 15,
1998. The Venture pays an annual letter of credit fee equal to 1.0% of the
outstanding amount, payable 60% monthly with the remaining 40% (Unpaid
Accrued Letter of Credit Fees) deferred and paid in accordance with the
Reimbursement Agreement (see below). Such Unpaid Accrued Letter of Credit
Fees were $1,306,000 and $999,000 at December 31, 1995 and 1994,
respectively. The bank letter of credit is secured by a second deed of trust
on the operating investment property and future rents and income from the
operating investment property.
In conjunction with the 1991 Developer Loan, the Venture entered into a
Reimbursement Agreement with the letter of credit issuer regarding the
unreimbursed letter of credit draws referred to above. The letter of credit
issuer agreed to forgive all outstanding accrued interest through September
26, 1991, aggregating $1,132,000, along with a portion of the outstanding
principal in the amount of $300,000. In return, the Venture made a principal
payment of $926,000, leaving an unpaid balance of $6,523,000 (Prior
Indebtedness). The outstanding principal balance of the Prior Indebtedness
bears interest payable to the letter of credit issuer at the rate of 11% per
annum. Interest accrued on the Prior Indebtedness from the date of closing
through June 1992 was forgiven by the letter of credit issuer. Principal
payments from available net cash flow and the release of certain restricted
escrow funds described below totalled $2,962,000 through December 31, 1994,
leaving an outstanding principal balance of $3,561,000 as of December 31,
1995 and 1994. At the time of the refinancing the Venture also owed the
letter of credit issuer fees totalling $2,184,000. The letter of credit
issuer agreed to forgive $1,259,000 of such unpaid fees, leaving an unpaid
balance of $925,000 (Deferred Prior Letter of Credit Fees). The Venture has
a limited right to defer payment of interest and principal on the Prior
Indebtedness and the Unpaid Accrued Letter of Credit Fees to the extent that
the net cash flow from operations is not sufficient after the payment of
debt service on the 1991 Developer Loan and the funding of certain required
reserves. In addition, upon a sale or other disposition of the operating
property, the Reimbursement Agreement allows for the payment to the Venture
of an amount of $5,500,000, plus accrued interest at the rate of 8% per
annum, prior to the repayment to the letter of credit issuer of the accrued
interest on the Prior Indebtedness and the Deferred Prior Letter of Credit
Fees.
The 1991 Developer Loan required the establishment of a $2,000,000
deficit reserve account, funded from the Venturers' 1991 contributions. The
loan also requires the funding of an additional reserve account on a monthly
basis from available cash flow (as defined) to the extent that the interest
rate on the bonds is below 6%, until the balance in this reserve account
totals $1,000,000. The requirement for this additional reserve account may
be eliminated if the operating property generates a certain minimum level of
net operating income. The $2,000,000 deficit reserve account and the
additional reserve account funded by operations may be used under certain
circumstances to fund the Venture's debt service obligations to the extent
that net operating income is insufficient. In the event that such reserves
no longer become necessary under the terms of the Reimbursement Agreement,
any remaining balances in the reserve accounts are to be paid to the letter
of credit issuer to be applied against certain of the Venture's outstanding
obligations. In November 1992, the bank and the Venture agreed to release
$1,764,000 from the deficit reserve account to pay down the Prior
Indebtedness. As of December 31, 1995, the balances in the deficit reserve
account and the additional reserve account totalled $151,000 and $1,101,000,
respectively, ($150,000 and $1,051,000 in 1994, respectively), and are
included in restricted cash on the accompanying balance sheets. The
remaining balance in restricted cash relates to operating cash accounts of
the Venture in which disbursements are restricted by the bank.
The 1991 Developer Loan contains several restrictive covenants,
including, among others, a requirement that the Venture furnish the letter
of credit issuer in September 1994 and September 1996 with certified
independent appraisals of the fair market value of the operating investment
property for an amount equal to or greater than $92,000,000 and
$100,000,000, respectively. Failure to provide such appraisals constitute
events of default under the Reimbursement Agreement. To date, the Lakes
Joint Venture has not provided the lender with an appraisal which meets the
$92,000,000 requirement, and the lender has not waived or modified the
minimum appraised value requirement. Accordingly, the Venture is in default
under the Reimbursement Agreement. In February 1996, the lender issued a
formal notice of default to the Joint Venture pursuant to the Reimbursement
Agreement. During fiscal 1996, the Partnership engaged in discussions with
the lender regarding possible changes in the 1994 appraisal requirement,
however, no agreement has been reached to date. Management expects to
continue such discussions in fiscal 1997, which will address the September
1996 appraisal requirement as well, but there can be no assurances that the
lender will grant any relief in connection with these appraisal covenants.
Accordingly, the carrying amount of the debt related to The Lakes Joint
Venture has been classified as long-term debt in default on the balance
sheets as of March 31, 1996 and 1995.
In the event that management is successful in negotiating a waiver or
modification of the minimum appraised value requirements described above for
The Lakes Joint Venture, the Partnership will continue to direct the
management of the remaining operating properties in order to generate
sufficient cash flow to sustain operations in the near-term while attempting
to maximize their long-term values. Even under these circumstances, it
remains to be seen whether such a strategy would result in the return of any
significant amount of invested capital to the Limited Partners. If
management cannot reach an agreement with The Lakes' mortgage lender
regarding the appraisal covenants, the lender could choose to initiate
foreclosure proceedings. While the Partnership is prepared to exercise all
available legal remedies in the event that the lender takes such actions, if
the Partnership were not successful with its legal defenses the result could
be a foreclosure of the operating property. If such a foreclosure were to
occur within the next 2 years, the Partnership may be unable to recover the
net carrying value of the operating investment property, which exceeded its
estimated market value by approximately $7.2 million as of December 31,
1995. In the event that the ownership of The Lakes was transferred to the
lender as a result of foreclosure actions, the Partnership would have to
weigh the costs of continued operations against the realistic hopes for any
future recovery of capital from the other two investments. Under such
circumstances, the Managing General Partner might determine that it would be
in the best interests of the Limited Partners to liquidate the remaining
investments and terminate the Partnership. Management will reassess its
future operating strategy once the appraisal covenant compliance issue on
The Lakes is fully resolved. These conditions raise substantial doubt about
the Venture's and the Partnership's ability to continue as going concerns.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty. The total assets, total liabilities, gross
revenues and total expenses of The Lakes Joint Venture included in the 1995
consolidated financial statements total $66,212,000, $92,348,000, $9,009,000
and $11,259,000, respectively.
In November 1988, a borrowing arrangement with a bank was entered into to
provide funds for The Lakes. The Venture obtained a line of credit secured
by a third trust deed on the subleasehold interest, buildings and
improvements, and rents and income in the amount of $6,300,000. Interest on
the line of credit was originally payable monthly at 1-1/2% over the
Citibank, N.A. prime rate. However, because of the default status of this
obligation during 1990, interest had accrued at a rate of prime plus 4%
through September 26, 1991. Accrued interest on the line of credit, which is
payable to the same bank which issued the letter of credit in connection
with the bonds, totalled $1,841,000 at September 26, 1991. The outstanding
principal balance of the line of credit was $6,127,000 as of September 26,
1991. In conjunction with the refinancing of the developer loan described
above, the lender agreed to forgive all of the outstanding accrued interest
at the date of the refinancing. Interest accrues on the outstanding
principal balance at the rate of 11% per annum beginning September 27, 1991.
Payment of interest and principal on the line of credit borrowings, prior to
a sale or other disposition of the operating property, is limited to the
extent of available cash flow after the payment of debt service on the
developer loan and the funding of certain required reserves. In addition, as
with the Prior Indebtedness principal and interest described above, upon a
sale or other disposition of the operating property, the payment of accrued
interest on the line of credit borrowings is subordinated to the receipt by
the Venture of $5,500,000 plus a simple return thereon of 8% per annum.
Principal payments on the line of credit borrowings from available net cash
flow totalled $1,543,000 through December 31, 1994, leaving an outstanding
principal balance of $4,584,000 as of December 31, 1995 and 1994.
The restructuring of the Prior Indebtedness, the Deferred Letter of
Credit Fees and the line of credit borrowings, as described above, have been
accounted for in accordance with Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". Accordingly, the forgiveness of debt, aggregating
$5,279,000, has been deferred and is being amortized as a reduction of
interest expense prospectively using a method approximating the effective
interest method over the estimated remaining term of the Venture's
indebtedness. At December 31, 1995 and 1994, $3,744,000 and $4,087,000,
respectively of such forgiven debt (net of accumulated amortization) has
been reflected in the accompanying balance sheet and $343,000 has been
amortized as a reduction of interest expense in the accompanying statements
of operations for each of the years ended December 31, 1995, 1994 and 1993,
respectively. As of December 31, 1995, the fair value of the aggregate
indebtedness secured by The Lakes at South Coast Apartments approximated
$54.1 million.
8. 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 Development Fund Inc. and Properties Associates
1985, L.P. ("PA1985"), 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 alleges
that, in connection with the sale of interests in PaineWebber Development
Partners Four, Ltd., PaineWebber, Fourth Development Fund Inc. and PA1985
(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 purport to be suing on behalf of all persons who invested in PaineWebber
Development Partners Four, Ltd., also allege that following the sale of the
partnership interests, PaineWebber, Fourth Development Fund Inc. and PA1985
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleges that PaineWebber, Fourth
Development Fund Inc. and PA1985 violated the Racketeer Influenced and
Corrupt Organizations Act ("RICO") and the federal securities laws. The
plaintiffs seek 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 seek 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 which the parties expect to submit to the court for its
consideration and approval within the next several months. Until a
definitive settlement and plan of allocation is approved by the court, there
can be no assurance what, if any, payment or non-monetary benefits will be
made available to investors in PaineWebber Development Partners Four, Ltd.
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 alleges, 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 seeks compensatory damages of $15 million plus punitive
damages against PaineWebber. The eventual outcome of this litigation and the
potential impact, if any, on the Partnership's unitholders cannot be
determined at the present time.
In June 1996, approximately 50 plaintiffs filed an action entitled
Bandrowski v. PaineWebber Inc. in Sacramento, California Superior Court
against PaineWebber Incorporated and various affiliated entities concerning
the plaintiff's purchases of various limited partnership interests,
including those offered by the Partnership. The complaint is substantially
similar to the complaint in the Abbate action described above, and seeks
compensatory damages of $3.4 million plus punitive damages.
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
this litigation. At the present time, the Managing General Partner 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.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR LTD.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1996
(In thousands)
<CAPTION>
Cost
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Consolidated Subsequent to Gross Amount at Which Carried at in Latest
Joint Venture Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Complex
Bradenton,
FL $ 9,125 $ 1,543 $ 8,309 $ 361 $ 1,543 $ 8,670 $10,213 $ 2,646 1987 12/16/85 5 - 30 yrs.
Apartment
Complex
Costa Mesa,
CA 83,745 16,647 64,350 3,975 16,647 68,325 84,972 22,819 1987 11/1/85 5 - 30 yrs.
-------- ------- -------- -------- -------- ------ ------- --------
$92,870 $ 18,190 $ 72,659 $ 4,336 $ 18,190 $76,995 $95,185 $25,465
======= ======== ======== ======== ========= ======= ======= ========
Notes
(A) The aggregate cost of real estate owned at December 31, 1995 for Federal
income tax purposes is approximately $84,423,000. (B) See Note 7 to the
financial statements for a description of the terms of the debt encumbering the
property. (C) Reconciliation of real estate owned:
1995 1994 1993
---- ---- ----
Balance at beginning of period $ 95,015 $ 94,590 $ 94,435
Increase due to additions 170 425 155
--------- --------- --------
Balance at end of period $ 95,185 $ 95,015 $ 94,590
========= ========= ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 22,386 $ 19,339 $ 16,337
Depreciation expense 3,079 3,047 3,002
--------- -------- --------
Balance at end of period $ 25,465 $ 22,386 $ 19,339
========= ========= ========
</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 March 31, 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> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,390
<SECURITIES> 0
<RECEIVABLES> 16
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,638
<PP&E> 95,185
<DEPRECIATION> 25,465
<TOTAL-ASSETS> 76,127
<CURRENT-LIABILITIES> 92,579
<BONDS> 9,125
0
0
<COMMON> 0
<OTHER-SE> (28,953)
<TOTAL-LIABILITY-AND-EQUITY> 76,127
<SALES> 0
<TOTAL-REVENUES> 10,712
<CGS> 0
<TOTAL-COSTS> 8,044
<OTHER-EXPENSES> 124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,157
<INCOME-PRETAX> (2,613)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,613)
<EPS-PRIMARY> (59.60)
<EPS-DILUTED> (59.60)
