UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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.
(Exact name of registrant as specified in its charter)
Texas 76-0147579
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and March 31, 1996 (Unaudited)
(In thousands)
ASSETS
December 31 March 31
----------- -------
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 77,566 76,995
--------- ---------
95,756 95,185
Less accumulated depreciation (27,769) (25,465)
--------- ---------
67,987 69,720
Cash and cash equivalents 2,419 1,390
Restricted cash 3,778 4,164
Accounts receivable - affiliates 20 16
Prepaid and other assets 78 68
Deferred expenses, net 686 769
--------- ---------
$ 74,968 $ 76,127
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt in default $ 86,370 $ 87,489
Accounts payable and accrued expenses 900 355
Accrued interest and fees 5,001 4,258
Tenant security deposits 479 477
Equity in losses of unconsolidated joint venture
in excess of investments and advances 2,315 2,223
Long-term debt 9,125 9,125
Co-venturers' share of net assets of
consolidated ventures 1,080 1,153
Partners' deficit (30,302) (28,953)
--------- ----------
$ 74,968 $ 76,127
========= =========
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1995 $(2,500) $(23,840)
Net loss (102) (1,946)
------- --------
Balance at December 31, 1995 $(2,602) $(25,786)
======= ========
Balance at March 31, 1996 $(2,631) $(26,322)
Net loss (66) (1,283)
-------- ---------
Balance at December 31, 1996 $(2,697) $(27,605)
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended December 31, 1996 and 1995 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Rental income $ 2,572 $ 2,445 $ 7,545 $ 7,289
Interest income 36 61 166 159
Other income 125 109 471 327
-------- ------- -------- -------
2,733 2,615 8,182 7,775
Expenses:
Property operating expenses 903 1,031 2,803 2,781
Real estate taxes 248 39 745 533
Interest expense 1,175 1,301 3,528 3,995
Depreciation 773 751 2,309 2,264
General and administrative 50 62 127 186
-------- ------- -------- -------
3,149 3,184 9,512 9,759
-------- ------- -------- -------
Operating loss (416) (569) (1,330) (1,984)
Partnership's share of
unconsolidated
venture's loss (31) (24) (92) (68)
Co-venturers' share of
consolidated
ventures' losses 31 2 73 4
-------- ------- -------- -------
Net loss $ (416) $ (591) $ (1,349) $(2,048)
======== ======= ======== =======
Net loss per Limited
Partnership Unit $ (9.53) $(13.50) $ (30.81) $(46.73)
======= ======= ======== =======
The above net loss per Limited Partnership Unit is based upon the 41,644 Limited
Partnership Units outstanding for each period.
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (1,349) $ (2,048)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 2,304 2,264
Amortization of deferred financing costs 83 83
Amortization of deferred gain on forgiveness of debt (257) (257)
Partnership's share of unconsolidated venture's loss 92 68
Co-venturers' share of consolidated ventures' losses (73) (4)
Changes in assets and liabilities:
Accounts receivable - affiliates (4) (4)
Prepaid and other assets (10) (7)
Accounts payable and accrued expenses 545 46
Accrued interest and fees 743 896
Tenant security deposits 2 (11)
--------- ---------
Total adjustments 3,425 3,074
--------- ---------
Net cash provided by operating activities 2,076 1,026
--------- ---------
Cash flows from investing activities:
Additions to buildings and improvements (571) (6)
--------- ---------
Net cash used in investing activities (571) (6)
--------- ---------
Cash flows from financing activities:
Net withdrawals from restricted cash 386 789
Repayment of principal on long-term debt (862) -
--------- ---------
Net cash (used in) provided by
financing activities (476) 789
--------- ---------
Net increase in cash and cash equivalents 1,029 1,809
Cash and cash equivalents, beginning of period 1,390 1,292
--------- ---------
Cash and cash equivalents, end of period $ 2,419 $ 3,101
========= =========
Cash paid during the period for interest $ 2,815 $ 3,273
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussions should
be read in conjunction with the financial statements and footnotes contained
in the Partnership's Annual Report for the year ended March 31, 1996. In the
opinion of management, the accompanying financial statements, which have not
been audited, reflect all adjustments necessary to present fairly the
results for the interim period. All of the accounting adjustments reflected
in the accompanying interim financial statements are of a normal recurring
nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which 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 December 31, 1996 and March 31, 1996
and revenues and expenses for each of the three- and nine-month periods
ended December 31, 1996 and 1995. Actual results could differ from the
estimates and assumptions used.
2. Related Party Transactions
Included in general and administrative expenses for the nine months
ended December 31, 1996 and 1995 is $55,000 and $61,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
Also included in general and administrative expenses for both the nine
months ended December 31, 1996 and 1995 is $3,000, representing fees earned
by an affiliate, Mitchell Hutchins Institutional Investors, Inc., for
managing the Partnership's cash assets.
3. Investment in Unconsolidated Joint Venture Partnership
The Partnership has an investment in one unconsolidated joint venture
which owns an operating investment property (Lincoln Garden Apartments), as
discussed further in the Annual Report. The unconsolidated joint venture is
accounted for by using the equity method because the Partnership does not
have a voting control interest in the venture. Under the equity method, the
investment is carried at cost adjusted for the Partnership's share of the
unconsolidated venture's earnings, losses and distributions. The
Partnership's policy is to recognize its share of unconsolidated venture's
operations three months in arrears.
<PAGE>
Summarized operations of the unconsolidated joint venture, for the periods
indicated, are as follows:
Condensed Summary of Operations
For the three and nine months ended September 30, 1996 and 1995
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Rental revenues $ 277 $ 279 $ 836 $ 876
Interest and other income 14 18 45 41
------ ------ ------ -------
291 297 881 917
Property operating expenses 157 154 471 464
Interest expense 115 119 357 379
Depreciation and amortization 64 59 189 174
------ ------ ------ -------
336 332 1,017 1,017
------ ------ ------ -------
Net loss $ (45) $ (35) $ (136) $ (100)
====== ====== ====== =======
Net loss:
Partnership's share
of net loss $ (30) $ (23) $ (89) $ (65)
Co-venturer's share
of net loss (15) (12) (47) (35)
------ ------ ------ -------
$ (45) $ (35) $ (136) $ (100)
====== ====== ====== =======
Reconciliation of Partnership's Share of Operations
For the three and nine months ended September 30, 1996 and 1995
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Partnership's share of
operations, as shown above $ (30) $ (23) $ (89) $ (65)
Amortization of excess basis (1) (1) (3) (3)
------ ------ ------ ------
Partnership's share of
unconsolidated venture's loss $ (31) $ (24) $ (92) $ (68)
====== ====== ====== ======
4. Operating Investment Properties
The Partnership consolidates the results of two majority-owned and
controlled joint ventures in its financial statements. The Partnership's
policy is to report the operations of the consolidated joint ventures on a
three month lag.
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. 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. As a result of the amendment, the Partnership, as the sole
general partner, assumed control of the operations of the property and,
accordingly, presents the financial position and the operating results of
the joint venture on a consolidated basis. The Lakes Joint Venture
("Venture") was formed on May 30, 1985 in accordance with the provisions of
the laws of the State of California for the purpose of developing, owning
and operating The Lakes at South Coast Apartments, a 770-unit apartment
complex located in Costa Mesa, California. As discussed further in the
Annual Report, on September 26, 1991, in conjunction with a refinancing and
modification of the Venture's long-term indebtedness, the original
co-venture partner 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. Accordingly, the financial position and
results of operations of the Venture are presented on a consolidated basis.
<PAGE>
The following is a combined summary of property operating expenses for
the Harbour Pointe Apartments and The Lakes at South Coast Apartments for
the three and nine months ended September 30, 1996 and 1995 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 213 $ 210 $ 713 $ 644
Utilities 147 166 447 463
Management fees 96 91 283 272
Other operating and
administrative 447 564 1,360 1,402
------ ------ ------- -------
$ 903 $1,031 $ 2,803 $ 2,781
====== ====== ======= =======
5. Long-term Debt
Long-term debt on the Partnership's balance sheet at December 31, 1996 and
March 31, 1996 consists of the following (in thousands):
December 31 March 31
----------- --------
Nonrecourse mortgage note payable by
71st Street Housing Partners, Ltd.
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 by The Lakes
Joint Venture 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 by The
Lakes Joint Venture to a bank
secured by a third deed of trust
plus all future rents and income
generated by The Lakes at South
Coast Apartments. 3,872 4,584
Prior indebtedness principal payable
by The Lakes Joint Venture to a
bank. This obligation is nonrecourse
to the joint venture. 3,411 3,561
Deferred gain on forgiveness of debt
of The Lakes Joint Venture (net of
accumulated amortization of $1,792
and $1,535 at September 30, 1996 and
December 31, 1995, respectively) 3,487 3,744
------- -------
95,495 96,614
Less: Long-term debt in default (see
discussion below) (86,370) (87,489)
-------- --------
$ 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. The Bonds are secured by the Harbour
Pointe Apartments.
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 Harbour Pointe joint venture
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. The letter of credit is scheduled to expire on December 15, 1997.
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 beginning in December 1989 for failure to make full and timely payments
on the loan. 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 on
December 1, 2006. Interest on the bonds is variable with the rate determined
weekly by a remarketing agent and is payable in arrears on the first of each
month.
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 paid 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, through December 15, 1996. Commencing on December
16, 1996, the annual letter of credit fee increases to 1.375%, payable 73%
monthly with 27% deferred. See the Partnership's Annual Report for a further
discussion of the Reimbursement Agreement. Unpaid Accrued Letter of Credit
Fees were $1,536,000 and $1,306,000 at September 30, 1996 and December 31,
1995, 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.
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 amounts 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 either the
$92,000,000 or $100,000,000 requirement, and the lender has not waived or
modified the minimum appraised value requirements. Accordingly, the Venture
is technically 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 and 1997, the
Partnership has engaged in discussions with the lender regarding possible
changes in the appraisal requirements, however, no agreement has been
reached to date. 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 accompanying balance sheets
as of December 31, 1996 and March 31, 1996.
If management cannot reach an agreement with The Lakes' mortgage lender
regarding the appraisal covenants, the lender could choose to initiate
foreclosure proceedings. 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. The Partnership would, however, recognize
a net gain upon a foreclosure of The Lakes at South Coast Apartments because
the carrying value of the related non-recourse debt significantly exceeds
the net carrying value of the operating investment property. 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 any circumstances, it appears
unlikely at the present time that the Partnership will be able to return any
significant amount of invested capital to the Limited Partners.
Consequently, 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 in the near term. Management is
currently evaluating the potential for disposing of the Partnership's
remaining investments and completing a liquidation. The results of such
analysis will be communicated to the Limited Partners in future reports.
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 restructuring of the Prior Indebtedness, the Deferred Letter of
Credit Fees and the line of credit borrowings in 1991 was 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
September 30, 1996 and December 31, 1995, $3,487,000 and $3,744,000,
respectively, of such forgiven debt (net of accumulated amortization) is
reflected in the accompanying balance sheets.
7. Contingencies
As discussed in more detail in the Annual Report for the year ended March
31, 1996, the Partnership is involved in certain legal actions. At the
present time, the Managing General Partner is unable to determine what
impact, if any, the resolution of these matters might have on the
Partnership's financial statements, taken as a whole.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
As previously reported, 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. The debt
modification agreement for The Lakes was structured with certain debt service
reserves and accrual features intended to help absorb interest rate
fluctuations. The Lakes Joint Venture currently has over $1,200,000 of
lender-controlled 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 letters of credit which collateralize the Lincoln Garden and Harbour
Pointe mortgage loans are scheduled to expire on May 1, 1997 and December 15,
1997, respectively. Management is currently evaluating its options for renewing
these letters of credit. The estimated market values of both properties are
likely to be insufficient to meet the loan-to-value ratio requirements for the
issuance of new letters of credit. If the letters of credit are not renewed, the
mortgage loans would become immediately due and payable upon these expiration
dates and would need to be repaid from the proceeds of a sale or refinancing of
the operating investment properties. If a sale or refinancing could not be
accomplished, the properties could be subject to foreclosure by the lenders. The
outcome of this situation cannot presently be determined.
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 December 31, 1996. During fiscal 1996
and 1997, the Managing General Partner has had discussions with the lender
regarding possible changes to the appraisal requirements. 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 appraisals which meet either of the minimum thresholds, 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 ultimately
grant any relief in connection with these appraisal covenants.
If management cannot reach an agreement with The Lakes' mortgage lender
regarding the appraisal covenants, the lender could choose to initiate
foreclosure proceedings. 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
Lakes' operating investment property. The Partnership would, however, recognize
a net gain upon a foreclosure of The Lakes at South Coast Apartments, which
represented 49% of the Partnership's original investment portfolio, because the
carrying value of the related non-recourse debt significantly exceeds the net
carrying value of the operating investment property. 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 any circumstances, it appears unlikely at the present
time that the Partnership will be able to return any significant amount of
invested capital to the Limited Partners. Consequently, 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 in
the near term. Management is currently evaluating the potential for disposing of
the Partnership's remaining investments and completing a liquidation. The
results of such analysis will be communicated to the Limited Partners in future
reports.
Barring a significant increase in tax-exempt interest rates, excess cash
flow from Harbour Pointe should continue to 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, capital improvements for calendar 1996 included
a continuation of the program to upgrade the hallways, elevator landings,
lobbies, carpeting and signage. As of December 31, 1996, the hallway and lobby
renovations were completed, except for the addition of furniture and accessories
which is in process. As previously reported, management reached an agreement
with the mortgage lender regarding the release of certain restricted cash
amounts to pay for these improvements. Improvements at Lincoln Garden for
calendar 1996 included renovations to the clubhouse, additional exterior
lighting and appliance replacement on an as-needed basis. Improvements at the
Harbour Pointe Apartments during calendar 1996 included new pool furniture,
repairs to the surface area around the swimming pool, the installation of
additional sidewalks and upgrading the unit interiors on a turnover basis.
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 improved the venture's cash flow in calendar 1996.
At December 31, 1996, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $2,419,000. 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, if any, received from the sale, refinancing or other disposition of
such properties.
Results of Operations
Three Months Ended December 31, 1996
- ------------------------------------
The Partnership's net loss decreased by $175,000 for the three-month period
ended December 31, 1996, as compared to the same period in the prior year. This
favorable change in net loss resulted largely from a decrease in the
Partnership's operating loss of $153,000. Operating loss decreased mainly due to
an increase in rental income and decreases in interest and property operating
expenses attributable to the consolidated joint ventures. Rental income from the
consolidated joint ventures increased by $127,000 primarily due to an increase
in rental rates at The Lakes at South Coast Apartments in the current period.
Interest expense decreased by $126,000 mainly due to a decrease in the variable
interest rate on the first mortgage loan secured by The Lakes at South Coast
Apartments as well as a reduction in the outstanding principal balance of the
other debt secured by The Lakes. Property operating expenses decreased by
$128,000 primarily due to reductions in salaries, utilities and various other
operating expenses at The Lakes at South Coast Apartments. The increase in
rental income and the decreases in interest and property operating expenses were
partially offset by an increase in real estate taxes at the Lakes Joint Venture
for the current three-month period.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Lincoln Garden Joint Venture increased by $7,000
for the current three-month period, compared to the same period last year,
primarily due to a slight increase in depreciation charges. Rental income at
Lincoln Garden was flat compared to the same period in the prior year.
<PAGE>
Nine Months Ended December 31, 1996
- -----------------------------------
The Partnership's net loss decreased by $699,000 for the nine-month period
ended December 31, 1996, as compared to the same period in the prior year. This
favorable change in net loss resulted from a decrease in the Partnership's
operating loss of $654,000. Operating loss decreased mainly due to increases in
rental and other income and a decrease in interest expense from the consolidated
joint ventures. Rental income increased by $256,000 for the current nine-month
period primarily due to an increase in rental rates at The Lakes at South Coast
Apartments. Other income increased by $144,000 largely due to the receipt of a
real estate tax refund by The Lakes Joint Venture during the current year.
Interest expense decreased by $467,000 mainly due to a decrease in the variable
interest rate on the first mortgage loan secured by The Lakes at South Coast
Apartments as well as a reduction in the outstanding principal balance of the
other debt secured by The Lakes. The increases in rental and other income and
the decrease in interest expense were partially offset by an increase in real
estate taxes at The Lakes Joint Venture for the current nine-month period.
The decrease in the Partnership's operating loss was partially offset by an
increase in the Partnership's share of unconsolidated venture's loss. The
Partnership's share of unconsolidated venture's loss, which represents the
operating results of the Lincoln Garden Joint Venture, increased by
approximately $24,000 for the current nine-month period primarily due to a
decrease in the venture's rental income resulting from a decline in average
occupancy at the Lincoln Garden Apartments.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
As discussed in prior quarterly and annual reports, 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 70 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.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships at issue in the
case. As part of the settlement, PaineWebber also agreed to provide class
members with certain financial guarantees relating to some of the partnerships.
The details of the settlement are described in a notice mailed directly to class
members at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and a ruling by the court as a
result of this final hearing is currently pending.
With regard to the Abbate and Bandrowski actions described in the Annual
Report on Form 10-K for the year ended March 31, 1996, in September 1996 the
court dismissed many of the plaintiffs' claims as barred by applicable
securities arbitration regulations. Mediation with respect to both actions was
held in December 1996. As a result of such mediation, a tentative settlement
between PaineWebber and the plaintiffs was reached which would provide for
complete resolution of such actions. PaineWebber anticipates that releases and
dismissals with regard to these actions will be received by February 1997.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
discussed above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the 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.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
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/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: February 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the nine months ended December
31, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 2,419
<SECURITIES> 0
<RECEIVABLES> 20
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,295
<PP&E> 95,756
<DEPRECIATION> 27,769
<TOTAL-ASSETS> 74,968
<CURRENT-LIABILITIES> 92,750
<BONDS> 9,125
0
0
<COMMON> 0
<OTHER-SE> (30,302)
<TOTAL-LIABILITY-AND-EQUITY> 74,968
<SALES> 0
<TOTAL-REVENUES> 8,182
<CGS> 0
<TOTAL-COSTS> 5,984
<OTHER-EXPENSES> 92
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,528
<INCOME-PRETAX> (1,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,349)
<EPS-PRIMARY> (30.81)
<EPS-DILUTED> (30.81)
</TABLE>
