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 SEPTEMBER 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from________ to ______.
Commission File Number: 0-17150
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
September 30, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ --------
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 77,896 77,896
--------- ---------
96,086 96,086
Less accumulated depreciation (29,383) (28,077)
--------- ---------
66,703 68,009
Cash and cash equivalents 2,444 1,562
Restricted cash 3,255 3,628
Accounts receivable - affiliates 23 21
Prepaid and other assets - 64
Deferred expenses, net 639 658
--------- ---------
$ 73,064 $ 73,942
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 160 $ 287
Accrued interest and fees 5,087 4,587
Tenant security deposits 387 526
Equity in losses of unconsolidated joint
venture in excess of investments and
advances 2,504 2,375
Mortgage loans payable 94,333 95,028
Co-venturers' share of net assets of
consolidated ventures 1,108 1,140
Partners' deficit (30,515) (30,001)
--------- ---------
$ 73,064 $ 73,942
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rental income $2,633 $2,455 $5,282 $ 4,973
Interest income 61 66 121 130
Other income 136 113 267 346
------ ------ ------ -------
2,830 2,634 5,670 5,449
Expenses:
Property operating expenses 1,010 994 1,881 1,900
Real estate taxes 234 249 468 497
Interest expense 1,187 1,165 2,330 2,353
Depreciation 653 771 1,306 1,536
General and administrative 57 29 120 77
------ ------ ------ -------
3,141 3,208 6,105 6,363
------ ------ ------ -------
Operating loss (311) (574) (435) (914)
Partnership's share of
unconsolidated venture's
loss (64) (25) (111) (61)
Co-venturers' share of
consolidated ventures'
losses 24 42 32 42
------ ------ ------ -------
Net loss $ (351) $ (557) $ (514) $ (933)
====== ====== ====== =======
Net loss per Limited
Partnership Unit $(8.01) $(12.71) $(11.73) $(21.28)
====== ======= ======= =======
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 CHANGES IN PARTNERS' DEFICIT
For the six months ended September 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $(2,631) $(26,322)
Net loss (47) (886)
------- --------
Balance at September 30, 1996 $(2,678) $(27,208)
======= ========
Balance at March 31, 1997 $(2,683) $(27,318)
Net loss (26) (488)
------- --------
Balance at September 30, 1997 $(2,709) $(27,806)
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (514) $ (933)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 1,306 1,536
Amortization of deferred financing costs 30 55
Amortization of deferred gain on forgiveness
of debt (172) (172)
Partnership's share of unconsolidated
venture's loss 111 61
Co-venturers' share of consolidated ventures'
losses (32) (42)
Changes in assets and liabilities:
Accounts receivable - affiliates (2) (73)
Prepaid and other assets 64 12
Deferred expenses (11) -
Accounts payable and accrued expenses (127) 48
Accrued interest and fees 500 601
Tenant security deposits (139) (24)
------ -------
Total adjustments 1,528 2,002
------ -------
Net cash provided by operating activities 1,014 1,069
------ -------
Cash flows from investing activities:
Additions to buildings and improvements - (518)
Distribution from unconsolidated joint venture 18 -
------ -------
Net cash provided by (used in)
investing activities 18 (518)
------ -------
Cash flows from financing activities:
Decrease (increase) in restricted cash 373 (618)
Repayment of principal on long-term debt (523) -
------ -------
Net cash used in financing activities (150) (618)
------ -------
Net increase (decrease) in cash and cash equivalents 882 (67)
Cash and cash equivalents, beginning of period 1,562 1,390
------ -------
Cash and cash equivalents, end of period $2,444 $ 1,323
====== =======
Cash paid during the period for interest $1,972 $ 1,869
====== =======
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, 1997. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which 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 September 30, 1997 and March 31, 1997 and revenues and
expenses for each of the three-and six-month periods ended September 30, 1997
and 1996. Actual results could differ from the estimates and assumptions used.
2. Related Party Transactions
--------------------------
Accounts receivable - affiliates as of September 30, 1997 and March 31,
1997 consist of investor servicing fees due from the unconsolidated joint
venture.
Included in general and administrative expenses for the six-month periods
ended September 30, 1997 and 1996 is $40,000 and $34,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner for
providing certain financial, accounting and investor communication services to
the Partnership.
Also included in general and administrative expenses for the six-month
periods ended September 30, 1997 and 1996 is $3,000 and $2,000, respectively,
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.
On September 18, 1997, the Partnership sold 75% of its position in Lincoln
Garden Apartments for $18,845 to its co-venture partner. The remaining 25% will
be acquired by the co-venture partner for $6,155 on or after September 19, 1998.
Upon completion of this sale, the total net proceeds to the Partnership will be
$25,000. Management does not believe that the value of the Lincoln Garden
property has reached the point where it exceeds the outstanding first mortgage
loan balance. Because management does not foresee a potential for appreciation
in the value of the property over the near term, the Partnership negotiated a
sale of its position to the co-venture partner for a nominal payment. During
recent years, the operating performance of the Lincoln Garden Apartments has
deteriorated, as evidenced by declining occupancy levels, lower rental income
and an inability to generate positive cash flow. Since its inception, the
Partnership has not received cash flow from this investment, and no cash flow
from this asset is projected for the future. The property is located in Tucson,
Arizona, which has experienced an abundance of new apartment construction during
recent years. These new apartment developments have placed negative competitive
pressures on Lincoln Garden which is an older property removed from Tucson's
growing residential areas. The Partnership will recognize a gain for financial
reporting purposes on the sale of its interest in Lincoln Garden because the
equity method carrying value of the investment is negative, as prior year losses
have exceeded the amount of the Partnership's initial investment. The gain
related to the sale of the 75% portion of the Partnership's investment will be
reflected in the financial statements for the third quarter of fiscal 1998 due
to the Partnership's three-month reporting lag.
<PAGE>
Summarized operations of the unconsolidated joint venture, for the periods
indicated, are as follows:
Condensed Summary of Operations
For the three and six months ended June 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Rental revenues $ 249 $ 284 $ 501 $ 559
Interest and other income 15 16 31 31
----- ----- ----- -----
264 300 532 590
Property operating expenses 164 154 322 314
Interest expense 132 119 247 242
Depreciation and amortization 65 63 131 125
----- ----- ----- -----
361 336 700 681
----- ----- ----- -----
Net loss $ (97) $ (36) $(168) $ (91)
===== ===== ===== =====
Net loss:
Partnership's share of
net loss $ (63) $ (24) $(109) $ (59)
Co-venturer's share of
net loss (34) (12) (59) (32)
----- ----- ----- -----
$ (97) $ (36) $(168) $ (91)
====== ===== ===== =====
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Partnership's share of
operations, as shown
above $ (63) $ (24) $ (109) $ (59)
Amortization of excess
basis (1) (1) (2) (2)
----- ----- ------ ------
Partnership's share of
unconsolidated
venture's loss $ (64) $ (25) $ (111) $ (61)
====== ====== ====== ======
<PAGE>
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.
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.
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 six months ended June 30, 1997 and 1996 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 272 $ 288 $ 457 $ 500
Utilities 145 148 269 300
Management fees 101 93 200 187
Other operating and
administrative 492 465 955 913
------ ------ ------ ------
$1,010 $ 994 $1,881 $1,900
====== ====== ====== ======
5. Long-term Debt
--------------
Long-term debt on the Partnership's balance sheet at September 30, 1997
and March 31, 1997 consists of the following (in thousands):
September 30 March 31
------------ --------
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. 2,968 3,491
<PAGE>
Prior indebtedness principal
payable to bank. This
obligation is nonrecourse to
the joint venture. 3,411 3,411
Deferred gain on
forgiveness of debt (net of
accumulated amortization of
$2,049 and $1,877 at June
30, 1997 and December 31,
1996, respectively). 3,229 3,401
-------- --------
$ 94,333 $ 95,028
======== ========
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. The fair market value of
this debt obligation approximated $8.8 million as of June 30, 1997 and December
31, 1996.
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 was scheduled to expire on December 15, 1997. During the second
quarter of fiscal 1998, the letter of credit issuer approved the joint venture's
application for an extension of the letter of credit through December 15, 2000.
The new terms of the letter of credit agreement require the commencement of
regular principal amortization payments on the underlying first mortgage loan of
$60,000 per quarter beginning on February 15, 1998. The terms of the extension
also increase the letter of credit fee to 1.25% per annum on the outstanding
amount of $9,247,500, payable on a quarterly basis beginning February 15, 1998.
The joint venture will also be required to make annual deposits to a
lender-controlled escrow account equal to 75% of Harbour Pointe's annual net
cash flow, as defined, for each fiscal year, beginning with fiscal 1998. All
funds deposited to the escrow account will be returned to the joint venture upon
the earlier of the termination and surrendering of the letter of credit to the
lender or the achievement of a loan-to-value ratio equal to or less than 75%, as
determined solely by the lender.
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 and is
payable in arrears on the first of each month.
<PAGE>
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 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 1.3% of the outstanding amount, payable
73% monthly with the remaining 27% deferred and paid in accordance with the
Reimbursement Agreement (Unpaid Accrued Letter of Credit Fees). Unpaid Accrued
Letter of Credit Fees were $2,667,000 and $2,533,000 at June 30, 1997 and
December 31, 1996, 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
$3,112,000 through June 30, 1997, leaving an outstanding principal balance of
$3,411,000 as of June 30, 1997. 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.
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
$3,159,000 through June 30, 1997, leaving an outstanding principal balance of
$2,968,000 as of June 30, 1997.
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 $5,278,000, 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 June 30, 1997 and December 31, 1996,
$3,229,000 and $3,401,000, respectively, of such forgiven debt (net of
accumulated amortization) has been reflected on the accompanying balance sheets
and $172,000 has been amortized as a reduction of interest expense in the
accompanying statements of operations for each of the six-month periods ended
June 30, 1997 and 1996.
<PAGE>
The 1991 Developer Loan required the establishment of a $2,000,000 deficit
reserve account, funded from the Venturers' 1991 contributions. The loan also
required 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 totalled
$1,000,000. During fiscal 1997, the requirement for the additional reserve
account was eliminated and the balance in the account was applied against the
Venture's outstanding debt obligations. The $2,000,000 deficit reserve may be
used under certain circumstances to fund the Venture's debt service obligations
to the extent that net operating income is insufficient. As of June 30, 1997 and
December 31, 1996, the balance in the deficit reserve account totalled
$1,171,000 and $1,146,000, respectively. Such amounts 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 was defined as an event of default under the
Reimbursement Agreement. Through the first quarter of fiscal 1998, the Lakes
Joint Venture had not provided the lender with an appraisal which met either the
$92,000,000 or $100,000,000 requirement and, accordingly, was 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. For the
past several years, the Managing General Partner has had discussions with the
lender regarding possible changes to the appraisal requirements which were fully
resolved during the second quarter of fiscal 1998. On September 18, 1997, the
Partnership signed amendment documents with the lender to remove the appraisal
requirements. As a result, the Venture is no longer in technical default.
Additionally, the amendment allows the release of funds from certain reserve
accounts that have been required by the lender. The property's improved
operations and increasing rental rates, combined with the low interest rate on
the tax-exempt bonds, make the reserves no longer necessary. The money from
these accounts was used to pay down approximately $1,900,000 of debt owed by the
Venture to the lender. Such principal paydown will be reflected in the third
quarter financial statements due to the three-month reporting lag described in
Note 4. In addition, approximately $800,000 has been earmarked for the necessary
painting of the property, and another $300,000 has been allocated for future
capital needs. The fair value of the aggregate indebtedness secured by The Lakes
at South Coast Apartments cannot presently be determined due to its unique terms
and conditions.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended March 31, 1997 under the heading "Certain Factors Affecting Future
Operating Results", which could cause actual results to differ materially from
historical results or those anticipated. The words "believe", "expect",
"anticipate," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which were made based on facts and conditions as they existed as of
the date of this report. The Partnership undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Liquidity and Capital Resources
- -------------------------------
The Partnership is focusing on potential disposition strategies for the
remaining investments in its portfolio. Management believes that due to
improving market conditions, the values of The Lakes at South Coast Apartments
and Harbour Pointe Apartments have increased during recent months and are
approaching or have exceeded the outstanding balances of the properties' debt
encumbrances. However, it remains to be seen whether continued improvement in
market conditions will be sufficient for the Partnership to recover significant
portions of its original investments in the remaining properties. The
Partnership's ability to recover any significant portion of its original capital
will depend principally on the future success of The Lakes at South Coast
Apartments, which represents the majority of the Partnership's remaining
portfolio. Although no assurances can be given, it is currently contemplated
that sales of the Partnership's assets could be accomplished within the next 2
to 3 years.
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 debt restructurings, and the properties do
not currently require the use of the Partnership's cash reserves to support
operations. Without these restrictions, the properties would most likely have
been lost through foreclosure actions by the respective lenders. All three of
these properties were 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 which has
allowed the properties, for the most part, to generate excess cash flow after
the payment of operating expenses and debt service obligations. This cash flow
has been used to maintain these properties in competitive condition. If interest
rates were to rise dramatically, The Lakes at South Coast Apartments and Harbour
Pointe Apartments would require advances from the Partnership in order to
continue paying their operating expenses and debt service obligations.
On September 18, 1997, the Partnership sold 75% of its position in Lincoln
Garden Apartments for $18,845 to its co-venture partner. The remaining 25% will
be acquired by the co-venture partner for $6,155 on or after September 19, 1998.
Upon completion of this sale, the total net proceeds to the Partnership will be
$25,000. Unlike the Lakes and Harbour Pointe investments, management does not
believe that the value of the Lincoln Garden property has reached the point
where it exceeds the outstanding first mortgage loan balance. Because management
does not foresee a potential for appreciation in the value of the property over
the near term, the Partnership negotiated a sale of its position to the
co-venture partner for a nominal payment. During recent years, the operating
performance of the Lincoln Garden Apartments has deteriorated, as evidenced by
declining occupancy levels, lower rental income and an inability to generate
positive cash flow. Since its inception, the Partnership has not received cash
flow from this investment, and no cash flow from this asset is projected for the
future. The property is located in Tucson, Arizona, where a significant number
of new apartment units have been constructed during recent years. These new
apartment developments have placed negative competitive pressures on Lincoln
Garden which is an older property located outside of Tucson's growing
residential areas. The Partnership will recognize a gain for financial reporting
purposes on the sale of its interest in Lincoln Garden because the equity method
carrying value of the investment is negative, as prior year losses have exceeded
the amount of the Partnership's initial investment. The gain related to the sale
of the 75% portion of the Partnership's investment will be reflected in the
financial statements for the third quarter of fiscal 1998 due to the
Partnership's three-month reporting lag.
As previously reported, the Partnership had initiated discussions with the
issuer of the letter of credit on the Harbour Pointe Apartments, which was
scheduled to expire on December 15, 1997. During the second quarter of fiscal
1998, the letter of credit issuer approved the joint venture's application for
an extension of the letter of credit through December 2000. The new terms of the
letter of credit agreement require the commencement of regular bond sinking fund
contributions of $240,000 per annum to be paid in quarterly installments of
$60,000 beginning February 15, 1998. The terms of the extension also increase
the letter of credit fee from 1% to 1.25% per annum on the outstanding amount of
$9,247,500, payable on a quarterly basis beginning February 15, 1998. The joint
venture will also be required to make annual deposits to a lender-controlled
escrow account equal to 75% of Harbour Pointe's annual net cash flow, as
defined, for each fiscal year, beginning with fiscal 1998. All funds deposited
to the escrow account will be returned to the joint venture upon the earlier of
the termination and surrendering of the letter of credit to the lender or the
achievement of a loan-to-value ratio equal to or less than 75%, as determined
solely by the lender. Recent improvements in market conditions and in the
operating performance of the Harbour Pointe Apartments have increased the
estimated market value of the property to a level which slightly exceeds the
outstanding first mortgage loan balance. Nonetheless, significant additional
appreciation would have to occur in order to achieve a loan-to-value ratio of
75% or less. As a result, the effect of the new terms of the Harbour Pointe
letter of credit will be that the cash flow from the property's operations will
no longer be available to cover the Partnership's future operating expenses.
However, the Partnership has sufficient cash reserves to cover operating
expenses for the next several years. With the Partnership focusing on potential
disposition strategies for its remaining investment properties and targeting a
liquidation within the next 2-to-3 years, such reserves should be adequate to
meet the Partnership's liquidity needs during this period.
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 was defined as an event of default under the
Reimbursement Agreement. Through the first quarter of fiscal 1998, the Lakes
Joint Venture had not provided the lender with an appraisal which met either the
$92,000,000 or $100,000,000 requirement and, accordingly, was 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. For the
past several years, the Managing General Partner has had discussions with the
lender regarding possible changes to the appraisal requirements which were fully
resolved during the second quarter of fiscal 1998. On September 18, 1997, the
Partnership signed amendment documents with the lender to remove the appraisal
requirements. As a result, the Venture is no longer in technical default.
Additionally, the amendment allows the release of funds from certain reserve
accounts that have been required by the lender. The property's improved
operations and increasing rental rates, combined with the low interest rate on
the tax-exempt bonds, make the reserves no longer necessary. The money from
these accounts was used to pay down approximately $1,900,000 of debt owed by the
Venture to the lender. In addition, approximately $800,000 has been earmarked
for the necessary painting of the property, and another $300,000 has been
allocated for future capital needs.
The Lakes at South Coast Apartments had an average occupancy level of 95%
for the quarter ended September 30, 1997, which was down 1% from the prior
quarter. This change was anticipated and is the result of aggressive rental rate
increases that began in December 1996. At the same time that the rental rates
have been increased, the property's leasing team has eliminated concessions to
all new tenants and significantly reduced the discounts to existing tenants on
leases that are being renewed. These actions have been possible because The
Lakes is located in an extremely strong apartment market that continues to gain
momentum. Projecting an average occupancy level of 95% for the year, the local
market contains 7,560 rental units and reports rental rate increases of 10% to
15% since the beginning of 1997. Although there are several apartment
communities being constructed in Orange County, none of this new competition has
adversely impacted the performance of The Lakes. A new toll road opened earlier
this year to provide quicker access between Orange County and outlying areas
which have appealing apartment rental rates and affordable new home prices. To
date, the new highway has not had a major impact on apartment communities in
Costa Mesa. The Lakes is somewhat insulated from the effects of these changes
because it has a highly desirable location close to numerous employers and
within walking distance of South Coast Plaza, one of the largest retail malls in
the United States. The proximity to work, shopping and entertainment is an
attractive benefit for tenants at the property. The rapidly improving market
conditions in the Orange County area have resulted in an increase in the
estimated market value of The Lakes in recent months. During the quarter ended
September 30, 1997, the Partnership received several unsolicited expressions of
interest from potential purchasers of The Lakes which suggest that a sale price
in excess of the outstanding balance of the secured indebtedness might be
achievable. Management is currently completing a market analysis in order to
evaluate the property's current value, to assess the near term potential for
additional appreciation and to determine the appropriate timing for a possible
sale of the property.
At September 30, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $2,444,000. 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 capital
improvements or operating deficits of its remaining joint venture investments.
As noted above, approximately $1.1 million of capital improvements planned at
The Lakes will be paid from the balances in the restricted escrow accounts
formerly required by the lender. 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.
Results of Operations
Three Months Ended September 30, 1997
- -------------------------------------
The Partnership's net loss decreased by $206,000 for the three-month period
ended September 30, 1997, when 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 $245,000 (including the co-venturers' share of consolidated
ventures' losses) which was partially offset by an increase in the Partnership's
share of unconsolidated venture's loss of $39,000. Operating loss, which
includes the consolidated results of The Lakes and Harbour Pointe, decreased
mainly due to an increase in rental revenue of $178,000 and a decrease in
depreciation expense of $118,000. Rental revenue increased primarily due to a
$158,000 increase in rental revenue at The Lakes as a result of increases in
rental rates. Depreciation expense decreased as a result of various five-year
assets having become fully depreciated at The Lakes during fiscal 1997. The
increase in rental revenue and decrease in depreciation expense were partially
offset by a $28,000 increase in general and administrative expenses. The
increase in general and administrative expense was largely attributable to an
increase in certain required professional services.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Lincoln Garden Joint Venture, increased by $39,000
in the current three-month period due to a $35,000 decline in rental income.
Rental income decreased mainly as a result of a decline in average occupancy
when compared to the same period in the prior year due to the competitive
conditions referred to above.
Six Months Ended September 30, 1997
- -----------------------------------
The Partnership's net loss decreased by $419,000 for the six-month period
ended September 30, 1997, when 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 $469,000 (including the co-venturers' share of consolidated
ventures' losses) which was partially offset by an increase in the Partnership's
share of unconsolidated venture's loss of $50,000. Operating loss, which
includes the consolidated results of The Lakes and Harbour Pointe, decreased
mainly due to an increase in rental revenue of $309,000 and a decrease in
depreciation expense of $230,000. Rental revenue increased primarily due to a
$304,000 increase in rental revenue at The Lakes as a result of increases in
rental rates. Depreciation expense declined as a result of various five-year
assets having become fully depreciated at The Lakes during fiscal 1997. The
increase in rental revenue and decrease in depreciation expense were partially
offset by a $79,000 decrease in other income and a $43,000 increase in general
and administrative expenses. Other income decreased mainly due to real estate
tax refunds received by The Lakes Joint Venture during the prior year. The
increase in general and administrative expense was largely attributable to an
increase in certain required professional services.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Lincoln Garden Joint Venture, increased by $50,000
in the current six-month period due to a $58,000 decrease in rental income.
Rental income decreased mainly as a result of a decline in average occupancy
when compared to the same period in the prior year due to the competitive
conditions referred to above.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
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: November 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Partnership's audited financial statements for the six months ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 2,444
<SECURITIES> 0
<RECEIVABLES> 23
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,722
<PP&E> 96,086
<DEPRECIATION> 29,383
<TOTAL-ASSETS> 73,064
<CURRENT-LIABILITIES> 5,634
<BONDS> 94,333
0
0
<COMMON> 0
<OTHER-SE> (30,515)
<TOTAL-LIABILITY-AND-EQUITY> 73,064
<SALES> 0
<TOTAL-REVENUES> 5,670
<CGS> 0
<TOTAL-COSTS> 3,775
<OTHER-EXPENSES> 79
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,330
<INCOME-PRETAX> (514)
<INCOME-TAX> 0
<INCOME-CONTINUING> (514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (514)
<EPS-PRIMARY> (11.73)
<EPS-DILUTED> (11.73)
</TABLE>
