UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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.
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(Exact name of registrant as specified in its charter)
Texas 76-0147579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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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
June 30, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
June 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 (28,730) (28,077)
--------- ---------
67,356 68,009
Cash and cash equivalents 2,298 1,562
Restricted cash 3,369 3,628
Accounts receivable - affiliates 22 21
Prepaid and other assets 179 64
Deferred expenses, net 643 658
--------- ---------
$ 73,867 $ 73,942
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt in default $ 85,397 $ 85,903
Accounts payable and accrued expenses 615 287
Accrued interest and fees 4,838 4,587
Tenant security deposits 502 526
Equity in losses of unconsolidated joint venture
in excess of investments and advances 2,422 2,375
Mortgage loan payable 9,125 9,125
Co-venturers' share of net assets of
consolidated ventures 1,132 1,140
Partners' deficit (30,164) (30,001)
--------- ---------
$ 73,867 $ 73,942
========= =========
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1996 $(2,631) $(26,322)
Net loss (19) (357)
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Balance at June 30, 1996 $(2,650) $(26,679)
======= ========
Balance at March 31, 1997 $(2,683) $(27,318)
Net loss (8) (155)
------- --------
Balance at June 30, 1997 $(2,691) $(27,473)
======= ========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
1997 1996
---- ----
Revenues:
Rental income $ 2,649 $ 2,518
Interest income 60 64
Other income 131 233
------- -------
2,840 2,815
Expenses:
Property operating expenses 871 906
Real estate taxes 234 248
Interest expense 1,143 1,188
Depreciation 653 768
General and administrative 63 45
------- -------
2,964 3,155
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Operating loss (124) (340)
Partnership's share of unconsolidated
venture's loss (47) (36)
Co-venturers' share of consolidated
ventures' losses 8 -
------- -------
Net loss $ (163) $ (376)
======= =======
Net loss per Limited Partnership Unit $(3.72) $(8.57)
====== ======
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 three months ended June 30, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (163) $ (376)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 653 768
Amortization of deferred financing costs 15 26
Amortization of deferred gain on forgiveness
of debt (85) (85)
Partnership's share of unconsolidated venture's
loss 47 36
Co-venturers' share of consolidated ventures'
losses (8) -
Changes in assets and liabilities:
Accounts receivable - affiliates (1) (71)
Prepaid and other assets (115) 6
Accounts payable and accrued expenses 328 177
Accrued interest and fees 251 339
Tenant security deposits (24) (35)
--------- ---------
Total adjustments 1,061 1,161
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Net cash provided by operating activities 898 785
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Cash flows from investing activities:
Additions to buildings and improvements - (273)
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Net cash used in investing activities - (273)
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Cash flows from financing activities:
Decrease in restricted cash 259 2,133
Repayment of principal on long-term debt (421) -
--------- ---------
Net cash (used in) provided by
financing activities (162) 2,133
--------- ---------
Net increase in cash and cash equivalents 736 2,645
Cash and cash equivalents, beginning of period 1,562 1,390
--------- ---------
Cash and cash equivalents, end of period $ 2,298 $ 4,035
========= =========
Cash paid during the period for interest $ 962 $ 908
========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
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 June 30, 1997 and March 31, 1997 and
revenues and expenses for each of the three-month periods ended June 30,
1997 and 1996. Actual results could differ from the estimates and
assumptions used.
2. 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.
Summarized operations of the unconsolidated joint venture, for the
periods indicated, are as follows:
Condensed Summary of Operations
For the three months ended March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Rental revenues $ 252 $ 275
Interest and other income 16 15
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268 290
Property operating expenses 158 160
Interest expense 115 123
Depreciation and amortization 66 62
------ ------
339 345
------ ------
Net loss $ (71) $ (55)
====== ======
Net loss:
Partnership's share of net loss $ (46) $ (35)
Co-venturer's share of net loss (25) (20)
------ ------
$ (71) $ (55)
====== ======
<PAGE>
Reconciliation of Partnership's Share of Operations
For the three months ended June 30, 1997 and 1996
(in thousands)
1997 1996
---- ----
Partnership's share of operations,
as shown above $ (46) $ (35)
Amortization of excess basis (1) (1)
------- -------
Partnership's share of unconsolidated
venture's loss $ (47) $ (36)
======= =======
3. 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 in the accompanying financial
statements.
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 months ended March 31, 1997 and 1996 (in thousands):
1997 1996
---- ----
Property operating expenses:
Repairs and maintenance $ 185 $ 212
Utilities 124 152
Management fees 99 94
Other operating and administrative 463 448
------- -------
$ 871 $ 906
======= =======
4. Related Party Transactions
Accounts receivable - affiliates as of June 30, 1997 and March 31, 1997
consist of investor servicing fees due from the unconsolidated joint
venture.
Included in general and administrative expenses for both of the three-month
periods ended June 30, 1997 and 1996 is $20,000, 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 of the
three-month periods ended June 30, 1997 and 1996 is $2,000, representing
fees earned by an affiliate, Mitchell Hutchins Institutional Investors,
Inc., for managing the Partnership's cash assets.
<PAGE>
5. Long-term Debt
Long-term debt on the Partnership's balance sheet at June 30, 1997 and
March 31, 1997 consists of the following (in thousands):
June 30 March 31
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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. 3,070 3,491
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 $1,962 and
$1,877 at March 31, 1997 and
December 31, 1996,
respectively). 3,316 3,401
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94,522 95,028
Less: Long-term debt in
default (see discussion below) (85,397) (85,903)
-------- ---------
$ 9,125 $ 9,125
======== =========
<PAGE>
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 March 31, 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. Subsequent to
the end of the first quarter of fiscal 1998, on July 22, 1997, 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 of 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 75% or less loan-to-value ratio, as
defined, 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.
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 (1% prior to December 15, 1996), payable 73% (60% prior
to December 15, 1996) monthly with the remaining 27% (40% prior to December
15, 1996) deferred and paid in accordance with the Reimbursement Agreement
(Unpaid Accrued Letter of Credit Fees). Unpaid Accrued Letter of Credit
Fees were $2,600,000 and $2,533,000 at March 31, 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
March 31, 1997, leaving an outstanding principal balance of $3,411,000 as
of March 31, 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 $3,057,000 through March
31, 1997, leaving an outstanding principal balance of $3,070,000 as of
March 31, 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 March 31, 1997 and December 31, 1996, $3,316,000 and
$3,401,000, respectively of such forgiven debt (net of accumulated
amortization) has been reflected on the accompanying balance sheets and
$85,000 has been amortized as a reduction of interest expense in the
accompanying statements of operations for each of the three-month periods
ended March 31, 1997 and 1996.
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 March 31, 1997 and December 31, 1996, the balance in
the deficit reserve account totalled $1,158,000 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 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 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 1997, the Partnership engaged in
discussions with the lender regarding possible changes in the appraisal
requirements and such discussions continued during the quarter ended June
30, 1997. However, no agreement has been reached to date. Management
expects to continue such discussions 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 June 30, 1997 and March 31, 1997. The fair value of
the aggregate indebtedness secured by The Lakes at South Coast Apartments
cannot presently be determined due to the current default status of the
obligations.
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. 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 Partnership would recognize a net gain for
financial reporting purposes upon either the sale or foreclosure of The
Lakes at South Coast Apartments because the balance of the mortgage loan
payable exceeds the net carrying value of the operating investment
properties.
<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 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. 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 $1.1
million of lender-controlled reserves in place to help cover possible future
debt service shortfalls. The additional restricted cash on the accompanying
consolidated balance sheet as of June 30, 1997 of approximately $2.2 million
relates to operating cash accounts of The Lakes Joint Venture in which
disbursements are restricted by the lender. 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 primary letter of credit which collateralizes the Lincoln Garden
mortgage loan expired during May 1997. This letter of credit for Lincoln Garden
was formally extended on July 7, 1997 for a two-year term. The new letter of
credit will expire on May 3, 1999. Despite this extension of the Lincoln Garden
letter of credit, management does not believe that the Partnership's interest in
the Lincoln Garden joint venture has any current or expected future value based
on the estimated market value of the operating investment property, the amount
of the outstanding debt obligation and the co-venture partner's priority return
for the repayment of prior advances. Accordingly, the Partnership has initiated
discussions with the co-venturer regarding the possible sale of the
Partnership's interest for a nominal amount. No agreement has been finalized to
date, and there are no assurances that such a sale will be completed.
As previously reported, the Partnership had also initiated discussions with
the issuer of the letter of credit on the Harbour Pointe Apartments, which was
scheduled to expire on December 15, 1997. Subsequent to the end of the first
quarter, on July 22, 1997, 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 to 1.25% per annum of 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 75% or less loan-to-value ratio, as
defined, 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 less than 75%. 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
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 is defined as an event of 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. During the most
recent discussions between the Partnership and the lender, which took place
during the first quarter of fiscal 1998, the lender indicated a potential
willingness to waive the minimum appraised value requirements in exchange for a
principal paydown to be funded from existing cash reserves of The Lakes Joint
Venture and an increase in the currently payable portion of the letter of credit
fee. However, no definitive agreement has been reached 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. 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. The outcome of this situation cannot
presently be determined.
The Lakes at South Coast Apartments had an average occupancy level of 96%
for the quarter ended June 30, 1997, which was below the 98% average for the
prior quarter. This change was anticipated and is the outcome of steps taken by
the property's leasing team to test the market's sensitivity to rental rate
increases. The leasing staff implemented rent increases of 5% on lease renewals
signed during the quarter ended June 30, 1997. According to surveys taken from
tenants who moved from the property during the quarter, the most common reasons
given were job transfers, purchase of homes and, to a much lesser extent, to
reduce their rental payments. The property's leasing team plans to continue with
this rent increase program in the second quarter. The Lakes' local market of
7,560 rental units in 25 apartment communities has recently benefited from the
economic recovery in California and has an average occupancy level of 96%. As
previously reported, the market's healthy conditions of high occupancy levels
and escalating rental rates has resulted in the development of new units in
Orange County. Recently, approximately 1,220 units in four apartment properties
were completed, and two additional projects are in the process of being approved
for development. Of the four completed properties, two are substantially leased,
one is still in lease-up, and the other is a family-oriented apartment project
that does not compete with The Lakes. Despite the new competition, The Lakes is
expected to continue to experience improved operating performance as a result of
the property's strong position in the marketplace and the area's strong job and
population growth. 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. Subsequent to the quarter ended June 30, 1997, the Partnership
has received certain 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 in the process of completing a market analysis in order to conclude
whether such expressions of interest are truly reflective of the property's
current market value, to assess the near term potential for additional
appreciation and to determine the appropriate timing for a possible sale of the
property. The major expenditures being scheduled at The Lakes for fiscal 1998
include exterior painting, roof repairs and renovations to the property's
clubhouse. These improvement projects are expected to cost a total of
approximately $1.1 million. As part of the ongoing negotiations with the lender
on The Lakes, as discussed further above, management of the Partnership and the
lender continue to discuss the possible release of certain restricted cash
amounts to pay for these improvements. Completion of the improvements is
dependent upon the outcome of these negotiations.
At June 30, 1997, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $3,432,000. 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. In addition, The Lakes
Joint Venture had a restricted cash balance of $3.3 million, which represents
amounts available at the discretion of the lender for future debt service
shortfalls, principal paydowns or operating expenditures of the venture. 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
Three Months Ended June 30, 1997
- --------------------------------
The Partnership's net loss decreased by $213,000 for the three-month period
ended June 30, 1997, 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 $224,000 (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 $11,000. Operating loss, which
includes the consolidated results of The Lakes and Harbour Pointe, decreased
mainly due to an increase in rental income and decreases in interest,
depreciation and property operating expenses. Rental income increased by
$131,000 primarily due to an increase in rental rates and occupancy at The Lakes
at South Coast Apartments. Interest expense decreased by $45,000 due largely to
a decline 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. Depreciation decreased
by $115,000 as a result of having various five-year assets become fully
depreciated at The Lakes Joint Venture during fiscal 1997. Property operating
expenses declined mainly as a result of lower repairs and maintenance costs and
utilities expense at The Lakes Joint Venture. The favorable changes in operating
loss were partially offset by a $102,000 decrease in other income from The Lakes
Joint Venture, due to a refund of real estate taxes received during the prior
year.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Lincoln Garden Joint Venture increased by $11,000
in the current period due to a decrease in rental income of $24,000. Rental
income decreased as a result of a decline in average occupancy when compared to
the same period in the prior year.
<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: August 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended June 30,
1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 2,298
<SECURITIES> 0
<RECEIVABLES> 22
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,868
<PP&E> 96,086
<DEPRECIATION> 28,730
<TOTAL-ASSETS> 73,867
<CURRENT-LIABILITIES> 91,352
<BONDS> 9,125
0
0
<COMMON> 0
<OTHER-SE> (30,164)
<TOTAL-LIABILITY-AND-EQUITY> 73,867
<SALES> 0
<TOTAL-REVENUES> 2,840
<CGS> 0
<TOTAL-COSTS> 1,821
<OTHER-EXPENSES> 39
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,143
<INCOME-PRETAX> (163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (163)
<EPS-PRIMARY> (3.72)
<EPS-DILUTED> (3.72)
</TABLE>
