U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 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.
Texas 76-0147579
----- ----------
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____.
---
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant dated Part IV
September 11, 1985, as supplemented
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
1997 FORM 10-K
TABLE OF CONTENTS
PART I Page
----
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-4
PART II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-6
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-6
PART III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owner
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-23
<PAGE>
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Partnership's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference are discussed in Item 7 in the section entitled
"Certain Factors Affecting Future Operating Results" beginning on page II-5 of
this Form 10-K.
PART I
Item 1. Business
PaineWebber Development Partners Four, Ltd. (the "Partnership") is a
limited partnership formed in June 1985 under the Uniform Limited Partnership
Act of the State of Texas to invest either directly or through the acquisition
of joint venture interests in a diversified portfolio of newly-constructed and
to-be-constructed income-producing properties. On September 9, 1986, the
Partnership elected to extend the offering period to the public through
September 10, 1987 and reduced the maximum offering amount to 42,000 Partnership
Units (at $1,000 per Unit) from 100,000 Units. At the conclusion of the offering
period 41,644 Units had been issued representing capital contributions of
$41,644,000. Limited Partners will not be required to make any additional
capital contributions.
As of March 31, 1997, the Partnership had investments, through joint
ventures and limited partnerships, in three residential apartment complexes
referred to below:
<TABLE>
<CAPTION>
Name of Joint Venture
or Limited Partnership Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- ---------------------------- ---- ----------- -------------
<S> <C> <C> <C>
The Lakes Joint Venture 770 units 11/1/85 Fee ownership of land and
The Lakes at South Coast Apartments improvements (through
Costa Mesa, California joint venture partnership)
Lincoln Garden Apartments 200 units 11/15/85 Fee ownership of land and
Joint Venture improvements (through
Lincoln Garden Apartments joint venture partnership)
Tucson, Arizona
71st Street Housing Partners, Ltd. 234 units 12/16/85 Fee ownership of land and
Harbour Pointe Apartments improvements (through
Bradenton, Florida limited partnership)
</TABLE>
(1) See Notes to the financial statements filed with this Annual Report for a
description of the long-term mortgage indebtedness secured by the
Partnership's operating property investments and for a description of the
agreements through which the Partnership has acquired these real estate
investments.
The Partnership originally had investments in six operating investment
properties. Through March 31, 1997, three of these properties had been forfeited
through foreclosure proceedings. During the fourth quarter of fiscal 1991, due
to a default by the Quinten's Crossing Joint Venture under the terms of its
first mortgage loan, the lender was granted, by Court order, the right to
foreclose on the venture's operating property. As a result, on April 1, 1991,
the Partnership's co-venturer filed an involuntary petition under Chapter 11 of
the United States Bankruptcy Code on behalf of the venture. The bankruptcy
petition prevented an immediate foreclosure action. However, the venture
partners and the lender were unable to reach an agreement on an acceptable
modification of the mortgage obligation. Accordingly, on August 27, 1992, the
Partnership and its co-venturer forfeited their interests in Quinten's Crossing
to the mortgage lender. The Parrot's Landing Joint Venture had stopped making
the required debt service payments to the mortgage lender on February 1, 1990.
Because of the defaults, the mortgage lender had the right to accelerate payment
on the entire balance of the mortgage note. The mortgage lender had given the
joint venture formal notice of default and had filed for foreclosure. On October
16, 1992, the Partnership and the co-venturer forfeited their interests in
Parrot's Landing to the mortgage holder in settlement of the foreclosure
proceedings, after protracted negotiations failed to produce an acceptable loan
modification agreement. The Partnership also originally had an investment,
through a limited partnership, in the Clipper Cove Apartments, located in
Boynton Beach, Florida. On March 5, 1990, the Clipper Cove Apartments, owned by
The Landing Apartments, Ltd., was foreclosed on by the mortgage lender. The
lender was entitled to foreclose on the property because of the inability of the
venture to make the required debt service payments due on the mortgage loan.
Negotiations to modify the loan terms and efforts by the Partnership to locate a
buyer for the property were unsuccessful. As a result of these transactions, the
Partnership no longer owns any interest in these three properties.
The Partnership's original investment objectives were:
(1) to preserve and protect the original capital invested in the Partnership;
(2) to achieve long-term capital appreciation through potential appreciation in
the values of Partnership properties;
(3) to obtain tax losses during the early years of operations from deductions
generated by investments;
(4) to provide annual distributions of cash flow from operations of the
Partnership;
(5) to achieve accumulation of equity through reduction of mortgage loans on
Partnership properties.
The Partnership's operating investment properties have been adversely
affected by an oversupply of competing rental apartment properties in the
markets in which the properties are located. The effects of the resulting
competition, combined with high debt service costs and weakened local economies,
resulted in the inability of all of the joint ventures to meet their original
debt service obligations without contributions from the venture owners. This
situation has caused the Partnership to lose its investments in the Clipper Cove
Apartments, Quinten's Crossing Apartments and Parrot's Landing Apartments
through foreclosure proceedings, as discussed above. These three properties
comprised approximately 38% of the Partnership's original investment portfolio.
Furthermore, while the three remaining ventures have obtained more favorable
financing terms, additional relief from debt service obligations and continued
financial support from the venture partners may be required if the properties'
operations do not improve. The Managing General Partner, along with the
Partnership's co-venture partners, has pursued workout negotiations with the
mortgage holders on all of the operating investment properties in efforts to
obtain relief from debt service obligations in order to protect the
Partnership's invested capital. Despite such efforts, which have been partially
successful, the Partnership will be unable to achieve most of its original
objectives due to the foreclosure losses of a substantial portion of the
original investment portfolio and the declines in value which have been
experienced with respect to the remaining investment properties.
The Managing General Partner's strategy has been, and continues to be, to
marshall the Partnership's resources for use in protecting the investment
properties with the best long-term financial prospects in order to return as
much of the invested capital as possible. The portion of the Partnership's
original invested capital which may be returned to the Limited Partners, if any,
will depend upon the ultimate selling prices obtained for the three remaining
investment properties, which cannot presently be determined. At the present
time, all three remaining properties have estimated market values which are
below the balances of their outstanding debt obligations. It remains to be seen
whether such market values will recover sufficiently over the Partnership's
remaining holding period to provide any meaningful cash return to the Limited
Partners. The Partnership has generated tax losses since inception. However, the
benefits of such losses to investors have been significantly reduced by changes
in the federal income tax laws subsequent to the organization of the
Partnership. Furthermore, the Partnership's investment properties have not
produced sufficient cash flow from operations to provide the Limited Partners
with cash distributions to date.
All of the Partnership's investment properties are located in real estate
markets in which they face significant competition for the revenues they
generate. The apartment complexes compete with numerous projects of similar type
generally on the basis of price and amenities. Apartment properties in all
markets also compete with the local single family home market for prospective
tenants. The continued availability of low interest rates on home mortgage loans
has increased the level of this competition over the past several years.
However, the impact of the competition from the single-family home market has
generally been offset by the lack of significant new construction activity in
the multi-family apartment market over most of this period. The pace of new
construction activity picked up somewhat in the local markets in which the
Partnership's properties are located beginning in fiscal 1996.
The Partnership has no real property investments located outside the
United States. The Partnership is engaged solely in the business of real estate
investment, therefore presentation of information about industry segments is not
applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are
Fourth Development Fund Inc. and Property Associates 1985, L.P. Fourth
Development Fund Inc. (the "Managing General Partner"), a wholly-owned
subsidiary of PaineWebber, is the managing general partner of the Partnership.
The associate general partner is Properties Associates 1985, L.P. (the
"Associate General Partner"), a Virginia limited partnership, certain limited
partners of which are also officers of the Adviser and the Managing General
Partner.
The terms of transactions between the Partnership and affiliates of the
Managing General Partner of the Partnership are set forth in Items 11 and 13
below to which reference is hereby made for a description of such terms and
transactions.
Item 2. Properties
As of March 31, 1997, the Partnership owned interests in three operating
properties through joint ventures and limited partnerships. These joint ventures
and limited partnerships and the related properties are referred to under Item 1
above to which reference is made for the name, location and description of each
property.
Occupancy figures for each fiscal quarter during 1997, along with an
average for the year, are presented below for each property:
Percent Occupied at
------------------------------------------------------
Fiscal 1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ------- -------
The Lakes 95% 98% 98% 98% 97%
Lincoln Garden
Apartments 92% 90% 85% 90% 89%
Harbour Pointe
Apartments 93% 93% 95% 95% 94%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments and REIT Stocks,
including those offered by the Partnership. The lawsuits were brought against
PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"),
among others, by allegedly dissatisfied partnership investors. In March 1995,
after the actions were consolidated under the title In re PaineWebber Limited
Partnership Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Fourth Development Fund Inc.
and Properties Associates 1985, L.P. ("PA1985"), which are the Managing General
Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber Development
Partners Four, Ltd., PaineWebber, including Fourth Development Fund Inc. and
PA1985 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in PaineWebber
Development Partners Four, Ltd., also alleged that following the sale of the
partnership interests, PaineWebber, including Fourth Development Fund Inc. and
PA1985 misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, including Fourth
Development Fund Inc. and PA1985 violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement, PaineWebber also agreed
to provide class members with certain financial guarantees relating to some of
the partnerships and REITs. The details of the settlement are described in a
notice mailed directly to class members at the direction of the court. A final
hearing on the fairness of the proposed settlement was held in December 1996,
and in March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement by two of the plaintiff
class members. As part of the settlement agreement, PaineWebber has agreed not
to seek indemnification from the related partnerships and real estate investment
trusts at issue in the litigation (including the Partnership) for any amounts
that it is required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In June 1996, approximately 50 plaintiffs filed an action entitled Bandrowski v.
PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber
Incorporated and various affiliated entities concerning the plaintiffs'
purchases of various limited partnership interests, including those offered by
the Partnership. The complaint was very similar to the Abbate action described
above and sought compensatory damages of $3.4 million plus punitive damages
against PaineWebber. In September 1996, the court dismissed many of the
plaintiffs' claims in both the Abbate and Bandrowski actions as barred by
applicable securities arbitration regulations. Mediation with respect to the
Abbate and Bandrowski actions was held in December 1996. As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached which
provided for the complete resolution of both actions. Final releases and
dismissals with regard to these actions were received subsequent to March 31,
1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, and notwithstanding the appeal of the class
action settlement referred to above, management does not expect that the
resolution of these matters will have a material impact on the Partnership's
financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and Related
Security Holder Matters
At March 31, 1997 there were 3,045 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for the resale of Units will develop. The
Managing General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Development Partners Four, Ltd.
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands except for per Unit data)
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 11,142 $ 10,644 $ 10,275 $ 10,481 $ 10,359
Operating loss $ (909) $ (2,557) $ (2,047) $ (1,503) $ (2,141)
Partnership's share of
unconsolidated ventures' losses $ (152) $ (124) $ (35) $ (101) $ (1,032)
Partnership's share of gain on
transfer of assets at foreclosure - - - - $ 821
Loss before extraordinary items $ (1,048) $ (2,613) $ (2,082) $ (1,604) $ (2,350)
Partnership's share of
extraordinary gains on
settlement of debt obligations - - - - $ 6,968
Net income (loss) $ (1,048) $ (2,613) $ (2,082) $ (1,604) $ 4,618
Per Limited Partnership Unit:
Loss before
extraordinary items $ (23.90) $ (59.60) $ (47.48) $ (36.59) $ (54.64)
Extraordinary gains - - - - $ 150.23
Net income (loss) $ (23.90) $ (59.60) $ (47.48) $ (36.59) $ 95.59
Total assets $ 73,942 $ 76,127 $ 77,924 $ 80,500 $ 83,600
Mortgage loans payable $ 9,125 $ 9,125 $ 9,125 $ 97,948 $ 99,856
Long-term debt in default $ 85,903 $ 87,489 $ 87,832 - -
</TABLE>
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the
41,644 Limited Partnership Units outstanding during each year.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 below 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 offered limited partnership interests to the public from
September 11, 1985 to September 5, 1987 pursuant to a Registration Statement on
Form S-11 filed under the Securities Act of 1933. Gross proceeds of $41,644,000
were received by the Partnership and, after deducting selling expenses and
offering costs, approximately $32,751,000 was originally invested in joint
venture interests in six residential apartment properties. The performance of
the Partnership's investment properties has been adversely impacted by an
oversupply of competing apartment units throughout the country and in the six
local markets in which the properties are located. Through March 31, 1997, these
conditions had resulted in the loss of three of the properties to foreclosure:
Clipper Cove Apartments in March 1990, Quinten's Crossing Apartments in August
1992 and Parrot's Landing Apartments in October 1992. The foreclosures of these
three properties represent a loss of approximately 38% of the Partnership's
original investment portfolio.
The operations of the three remaining assets, The Lakes at South Coast
Apartments, the Harbour Pointe Apartments and the Lincoln Garden Apartments,
have been stabilized as a result of 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 March 31, 1997 of approximately $2.5 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 matured during May 1997. A tentative extension to the letter of
credit for Lincoln Garden has been negotiated with the existing issuer, and the
final documents to formalize the extension are in the process of being reviewed
and executed. The new letter of credit would have a two-year term and would
expire in May 1999. There are no assurances, however, that this agreement will
be finalized. Failure to finalize the extension agreement could result in the
initiation of foreclosure proceedings on the Lincoln Garden property. The
outcome of this situation cannot presently be determined. The Partnership has
also initiated discussions with the issuer of the letter of credit on the
Harbour Pointe Apartments, which is scheduled to expire on December 15, 1997.
Management is currently evaluating its options for renewing this letter of
credit. In response to a request from the issuer, the Partnership has filed an
application to extend the letter of credit for a three-year period. If the
application is approved as submitted, the extended letter of credit would mature
in December 2000. The new terms of the letter of credit agreement would require
the commencement of regular principal amortization payments on the underlying
first mortgage loan and would restrict the Partnership's access to excess net
cash flow from property operations. If the letter of credit is not renewed, the
mortgage loan would become immediately due and payable upon the December 1997
expiration date and would need to be repaid from the proceeds of a sale or
refinancing of the operating investment property. If a sale or refinancing could
not be accomplished, the property could be subject to foreclosure by the lender.
The outcome of this situation cannot presently be determined.
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. While the estimated market value of the property
improved significantly during fiscal 1997, based on current cash flow levels and
the prevailing market conditions the value of the property is still estimated to
be considerably less than $92 million as of March 31, 1997. During fiscal 1996
and 1997, the Managing General Partner 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 subsequent
to year-end, 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. In February 1996,
the lender issued a formal notice of default to the Joint Venture pursuant to
the Reimbursement Agreement. At this time, management does not expect the lender
to take any additional actions as long as progress continues to be made in
negotiations for modification to the terms of the Reimbursement Agreement.
However, there can be no assurances that the lender will ultimately grant any
relief in connection with these appraisal covenants. If management cannot reach
an agreement with The Lakes' mortgage lender regarding the appraisal covenants,
the lender could choose to initiate foreclosure proceedings. The outcome of this
situation cannot presently be determined.
While the national market for multi-family apartment properties is
several years into a recovery cycle, the current estimated market values of all
three of the Partnership remaining investment properties are still below the
amounts of the related debt obligations. Accordingly, under any circumstances,
it appears unlikely at the present time that the Partnership will be able to
return any significant amount of invested capital to the Limited Partners.
Consequently, the Managing General Partner is reviewing potential disposition
strategies for the remaining investments. While no assurances can be given, it
is currently expected that the Partnership will complete the disposition of its
remaining investment properties within the next 2-to-3 years. The disposition of
the last of the Partnership's investment properties would be followed by a
liquidation of the Partnership. The amount of the net proceeds, if any, received
from the final asset dispositions, along with any remaining cash reserves after
the payment of all liquidation-related expenses, would be distributed to the
Limited Partners prior to the liquidation of the Partnership.
Barring a significant increase in tax-exempt interest rates, the
Partnership's cash reserves, along with excess cash flow from the Harbour Pointe
joint venture, should continue to be sufficient to cover the Partnership's
operating expenses over the near term. Excess cash flow from the Lincoln Garden
joint venture has been minimal and is primarily payable to the co-venturer for
the repayment of prior advances. To the extent that the Partnership's operating
properties generate excess cash flow after current debt service, a substantial
portion of such amounts will continue to be reinvested in the properties to make
certain repairs and improvements aimed at maximizing long-term values. At The
Lakes, capital improvements for fiscal 1997 included the completion of the
program to upgrade the hallways, elevator landings, lobbies, carpeting and
signage. The major expenditures being scheduled for fiscal 1998 include exterior
painting, roof repairs and renovations to the property's clubhouse. 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. Improvements at Lincoln Garden for fiscal 1997 included
renovations to the clubhouse, additional exterior lighting and appliance
replacements on an as-needed basis. Physical improvements planned for fiscal
1998 are limited to the replacement of carpeting, vinyl flooring, window blinds
and appliances as units are leased to new tenants. Improvements at the Harbour
Pointe Apartments during fiscal 1997 included new pool furniture, repairs to the
surface area around the swimming pool, the installation of additional sidewalks
and upgrading the unit interiors on a turnover basis. Budgeted improvements for
fiscal 1998 include exterior touch-up painting, renovations to the exercise
facility, new gutters to prevent water damage, parking lot repairs, additional
outdoor lighting and ongoing appliance, carpeting and vinyl flooring
replacements.
At March 31, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $1,562,000. 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 $3.6 million, which represents
amounts available at the discretion of the lender for future debt service
shortfalls, principal paydowns or operating expenses 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.
Results of Operations
1997 Compared to 1996
- ---------------------
The Partnership's net loss for fiscal 1997 decreased by $1,565,000 when
compared to the prior year. This favorable change in net loss resulted from a
decrease in the Partnership's operating loss of $1,648,000. Operating loss
decreased mainly due to an increase in rental income and decreases in interest
and depreciation and amortization expenses attributable to the consolidated
Lakes and Harbour Pointe joint ventures. Rental income from the consolidated
joint ventures increased by $446,000 primarily due to an increase in rental
rates and occupancy at The Lakes at South Coast Apartments during fiscal 1997.
Rental income from The Lakes was up almost 5% compared to the prior year. Rental
revenues were up slightly at Harbour Pointe in the current year as well.
Interest expense decreased by $564,000 mainly due to a decrease in the variable
interest rate on the first mortgage loan secured by The Lakes at South Coast
Apartments as well as a reduction in the outstanding principal balance of the
other debt secured by The Lakes. As discussed further above, despite the
decrease in the outstanding debt balance and the improved operating results, the
remaining debt obligation secured by The Lakes continues to exceed the
property's fair market value. Depreciation and amortization decreased by
$468,000 primarily due to various five-year assets becoming fully depreciated at
The Lakes at South Coast Apartments. A decline in Partnership general and
administrative expenses of $76,000 also contributed to the improvement in the
Partnership's net loss for fiscal 1997. The reduction in general and
administrative expenses can be attributed mainly to a decline in certain
required professional fees.
The Partnership's share of unconsolidated venture's loss, which
represents the operating results of the Lincoln Garden Joint Venture increased
by $28,000 during fiscal 1997, as compared to the prior year, primarily due to a
decrease in rental income. Rental income decreased by $64,000 mainly due to a
decline in the average occupancy level at the property. The decrease in rental
income was partially offset by a decline in interest expense of $22,000 as a
result of a decrease in the variable interest rate on the venture's mortgage
loan and by a reduction in administrative expenses of $24,000.
1996 Compared to 1995
- ---------------------
The Partnership's net loss increased by $531,000 during fiscal 1996, as
compared to the prior year. This unfavorable change in net loss resulted from
increases in the Partnership's operating loss and the Partnership's share of
unconsolidated venture's loss of $510,000 and $89,000, respectively. Operating
loss increased mainly due to an increase in interest expense of $950,000,
attributable to an increase in the variable interest rates on the mortgage loans
secured by The Lakes at South Coast Apartments and the Harbour Pointe
Apartments. This increase in interest expense was partially offset by an
increase in rental income from the consolidated joint ventures of $214,000, an
increase in interest income of $74,000, an increase in other income of $81,000
and a decrease in real estate taxes of $71,000. Rental income at Harbour Pointe
and The Lakes improved by 3.5% and 2%, respectively, for calendar 1995 as
compared to calendar 1994, in both cases mainly due to increases in average
rental rates. In addition, the two apartment properties experienced identical
improvement in their average occupancy levels from 94% for calendar 1994 to 95%
for calendar 1995. Interest income increased primarily due to an increase in the
average outstanding balances of the interest-earning restricted cash accounts
held by the mortgage lender of The Lakes Joint Venture. Other income increased
mainly due to a refund of prior year real estate taxes which was received by The
Lakes Joint Venture during fiscal 1996, and real estate taxes declined as a
result of a reduction in the assessed value of The Lakes.
The Partnership's share of unconsolidated venture's loss, which
represents the operating results of the Lincoln Garden joint venture, increased
by $89,000 for fiscal 1996. This increase in the Partnership's share of the
venture's net loss was mainly due to an increase in interest expense, as a
result of an increase in the variable interest rate on the venture's mortgage
loan. A decline in other income at the Lincoln Garden joint venture for calendar
1995 was offset by a 4% increase in rental income which resulted from an
increase in rental rates. The occupancy level at the Lincoln Garden Apartments
averaged 95% for both calendar 1995 and 1994.
1995 Compared to 1994
- ---------------------
The Partnership's net loss increased by $478,000 during fiscal 1995 as
compared to the prior year. The primary reasons for this increase in net loss
were increases in property operating expenses, an increase in interest expense
and a decrease in other income. Property operating expenses increased by
$183,000 primarily due to an increase in repairs and maintenance expenses at The
Lakes at South Coast Apartments. Repairs and maintenance expenses increased as a
result of the start of a major capital improvement and deferred maintenance
program at the property, particularly to upgrade common areas, elevator landings
and lobbies. Interest expense increased by $87,000 primarily due to an increase
in the variable interest rates on the mortgage loans secured by the
Partnership's consolidated joint ventures, The Lakes at South Coast Apartments
and the Harbour Point Apartments. In addition, the interest cap on The Lakes
debt which fixed the interest rate on the mortgage loan at less than 4% per
annum expired at the end of calendar 1993. Other income decreased by $313,000
primarily due to the receipt of real estate tax refunds by The Lakes Joint
Venture during calendar 1993. Rental revenues at the two consolidated investment
properties for calendar 1994 were fairly flat compared to the prior year, which
reflected the competitive local market conditions facing The Lakes and Harbour
Pointe Apartments. At The Lakes, a combination of a still depressed Southern
California economy and some newly constructed competing projects forced
management to offer substantial concessions to maintain average occupancy levels
in the mid-90% range. At Harbour Pointe, rental rate increases implemented in
calendar 1993 had pushed rents at the property to the top of its local market.
Competition from some newly constructed projects during calendar 1994 made it
impossible to continue the pace of these rental rate increases.
The increases in property operating expenses and interest expense and the
decrease in other income were partially offset by an increase of $64,000 in
interest income earned on short-term investments and a decrease of $66,000 in
the Partnership's share of the unconsolidated venture's loss. The increase in
interest income earned on short term investments was a result of a steady
increase in interest rates earned on such investments throughout the year. The
decrease in the Partnership's share of the unconsolidated venture's loss, which
represented the operating results of the Lincoln Garden joint venture, was
mainly the result of an increase in rental rates at the Lincoln Garden
Apartments. Although average property occupancy levels fell slightly from the
high to low 90% range during the middle two quarters of calendar 1994, rental
rates increased by approximately 6% over the prior year.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely affected
by the general economic climate, the local economic climate and local real
estate conditions, including (i) the perceptions of prospective tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide adequate management and maintenance of the property; (iii) the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; and (iv) increased operating costs. Real estate values may also be
adversely affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire, flood, extended coverage and rental loss insurance with respect to its
properties with insured limits and policy specifications that management
believes are customary for similar properties. There are, however, certain types
of losses (generally of a catastrophic nature such as wars, floods or
earthquakes) which may be either uninsurable, or, in management's judgment, not
economically insurable. Should an uninsured loss occur, the Partnership could
lose both its invested capital in and anticipated profits from the affected
property.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may become liable for the costs of the investigation,
removal and remediation of hazardous or toxic substances on, under, in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of
such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or
governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such material
expenditure. However, there can be no assurance that any non-compliance,
liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real
estate investments will be significantly impacted by the competition from
comparable properties in their local market areas. The occupancy levels and
rental rates achievable at the properties are largely a function of supply and
demand in the market. In many markets across the country, development of new
multi-family properties has surged in the past 12 months. Existing properties in
such markets have generally experienced increased vacancy levels, declines in
effective rental rates and, in some cases, declines in estimated market values
as a result of the increased competition. There are no assurances that these
competitive pressures will not adversely affect the operations and/or market
values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of certain of the
remaining investments through joint venture partnerships could adversely impact
the timing of the Partnership's planned dispositions of its remaining assets and
the amount of proceeds received from such dispositions. It is possible that the
Partnership's co-venture partners could have economic or business interests
which are inconsistent with those of the Partnership. Given the rights which
both parties have under the terms of the joint venture agreements, any conflict
between the partners could result in delays in completing a sale of the related
operating property and could lead to an impairment in the marketability of the
property to third parties for purposes of achieving the highest possible sale
price.
Availability of a Pool of Qualified Buyers. The availability of a pool of
qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such properties at the time of their final dispositions. Demand by
buyers of multi-family apartment properties is affected by many factors,
including the size, quality, age, condition and location of the subject
property, potential environmental liability concerns, the existing debt
structure, the liquidity in the debt and equity markets for asset acquisitions,
the general level of market interest rates and the general and local economic
climates.
INFLATION
- ---------
The Partnership commenced operations in 1985 and completed its eleventh
full year of operations in the current fiscal year. The effects of inflation and
changes in prices on the Partnership's operating results to date have not been
significant.
Inflation in future periods may increase revenues as well as operating
expenses at the Partnership's operating investment properties. Tenants at the
Partnership's apartment properties have short-term leases, generally of one year
or less in duration. Rental rates at these properties can be adjusted to keep
pace with inflation, to the extent market conditions allow, as the leases are
renewed or turned over. Such increases in rental income would be expected to at
least partially offset the corresponding increases in Partnership and property
operating expenses resulting from inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item
14 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership
The General Partners of the Partnership are Fourth Development Fund Inc.
(the "Managing General Partner"), a Texas corporation, which is a wholly-owned
subsidiary of PaineWebber, and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are officers and employees of the Managing General Partner.
(a) and (b) The names and ages of the directors and principal executive
officers of the Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and
Chief Financial Officer 49 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 54 6/24/85 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and officers have been elected to serve until the annual
meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber.
They are also officers and employees of PaineWebber Properties Incorporated
("PWPI"), a wholly-owned subsidiary of PWI. The business experience of each of
the directors and principal executive officers of the Managing General Partner
is as follows:
Bruce J. Rubin is President and Director of the Managing General Partner.
Mr. Rubin was named President and Chief Executive Officer of PWPI in August
1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November
1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was
employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc.
Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and
Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr.
Rubin was a First Vice President and a real estate workout specialist at
Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr.
Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr.
Rubin is a graduate of Stanford University and Stanford Law School.
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a
result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible
for the origination and execution of all of PaineWebber's REIT transactions,
advisory assignments for real estate clients and certain of the firm's real
estate debt and principal activities. He joined Kidder, Peabody in 1985 and,
beginning in 1989, was one of the senior executives responsible for building
Kidder, Peabody's real estate department. Mr. Fancher previously worked for a
major law firm in New York City. He has a J.D. from Harvard Law School, an
M.B.A. from Harvard Graduate School of Business Administration and an A.B. from
Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer
of the Managing General Partner and Senior Vice President and Chief Financial
Officer of PWPI which he joined in October 1985. Mr. Arnold joined PWI in 1983
with the acquisition of Rotan Mosle, Inc. where he had been First Vice President
and Controller since 1978, and where he continued until joining PWPI. Mr. Arnold
is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the
Managing General Partner and a First Vice President and an Assistant Treasurer
of PWPI which he joined in March 1980. From 1972 to 1980, Mr. Brooks was an
Assistant Treasurer of Property Capital Advisors and also, from March 1974 to
February 1980, the Assistant Treasurer of Capital for Real Estate, which
provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and Vice President and Treasurer of PWPI which he joined in
1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the
Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate
University in 1983 and received his Masters in Accounting from New York
University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and a
Vice President and Manager of Financial Reporting of the Adviser which he joined
in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young &
Company. Mr. Boland is a Certified Public Accountant licensed in the state of
Massachusetts. He holds a B.S. in Accounting from Merrimack College and an
M.B.A. from Boston University.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
the Partnership believes that, during the year ended March 31, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed renumeration from the Partnership.
The General Partners are entitled to receive a share of Partnership cash
distributions and a share of profits and losses. These items are described in
Item 13.
The Partnership has never paid regular quarterly distributions of excess
cash flow. Furthermore, the Partnership's Limited Partnership Units are not
actively traded on any organized exchange, and no efficient secondary market
exists. Accordingly, no accurate price information is available for these Units.
Therefore, a presentation of historical unitholder total returns would not be
meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of the
Managing General Partner, Fourth Development Fund Inc., is owned by PaineWebber.
Properties Associates 1985, L.P. the Associate General Partner, is a Virginia
limited partnership, certain limited partners of which are also officers of the
Managing General Partner. No limited partner is known by the Partnership to own
beneficially more than 5% of the outstanding interests of the Partnership.
(b) Neither directors nor officers of the Managing General Partner nor
the limited partners of the Associate General Partner, individually, own any
Units of limited partnership interest of the Partnership. No officer or director
of the Managing General Partner, nor any limited partner of the Associate
General Partner, possesses a right to acquire beneficial ownership of Units of
limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may, at a subsequent date, result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fourth Development Fund
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Managing General Partner and PaineWebber
Properties Incorporated ("PWPI"), a wholly-owned subsidiary of PaineWebber
Incorporated ("PWI"). PWI, a wholly-owned subsidiary of PaineWebber, acted as
the selling agent for the Limited Partnership Units. The General Partners, PWPI
and PWI will receive fees and compensation, determined on an agreed-upon basis,
in consideration of various services performed in connection with the sale of
the Units, the management of the Partnership and the acquisition, management,
financing and disposition of Partnership investments. The Managing General
Partner and its affiliates are reimbursed for their direct expenses relating to
the offering of Units, the administration of the Partnership and the acquisition
and operation of the Partnership's real property investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and 5% to the
General Partners. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, net income or loss of
the Partnership, other than net gains resulting from Capital Transactions, as
defined, will generally be allocated 95% to the Limited Partners and 5% to the
General Partners.
Additionally, the Partnership Agreement provides for the allocation of
net gains resulting from Capital Transactions, as defined, first, to those
partners whose capital accounts reflect a deficit balance (after all
distributions for the year and all allocations of net income and losses from
operations have been made) in the ratio of such deficits and up to an amount
equal to the sum of such deficits; second, to the General and Limited Partners
in such amounts as are necessary to bring the General Partners' capital account
balance in the ratio of 5 to 95 to the Limited Partners' capital account
balances; then, 95% to the Limited Partners and 5% to the General Partners.
Selling commissions incurred by the Partnership and paid to PWI for the
sale of Partnership interests were approximately $3,540,000 through the
completion of the offering period which expired in September of 1987.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 5% of the gross proceeds
from the sale of the Partnership units. Total acquisition fees incurred by the
Partnership and paid to PWPI aggregated $2,077,000.
The Partnership recorded as income a total of $5,000 of investor
servicing fees from certain of its joint ventures for the year ended March 31,
1997 in accordance with the terms of the joint venture agreements.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended March 31, 1997 is $76,000, representing reimbursements to this
affiliate of the Managing General Partner for providing such services to the
Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $4,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1997. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of the
Adviser.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted
as a separate section of this Report. See Index to
Financial Statements and Financial Statement
Schedule at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to
exhibits at page IV-3 are filed as part of this
Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted
as a separate section of this Report. See Index to
Financial Statements and Financial Statement
Schedule at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
------------------
Bruce J. Rubin
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
--------------------
Thomas W. Boland
Vice President
Dated: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By:/s/ Bruce J. Rubin Date: June 27, 1997
------------------------ -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 27, 1997
------------------------ -------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------- ------------------
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission pursuant to
dated September 11, 1985, as Rule 424(c) and incorporated herein
supplemented, with particular by reference.
reference to the Amended and
Restated Agreement and Certificate
of Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant to
filed as exhibits to registration Section 13 or 15(d) of the Securities
statements and amendments thereto Act of 1934 and incorporated herein
of the registrant together with all by reference.
such contracts filed as exhibits of
previously filed Forms 8-K and Forms
10-K are hereby incorporated herein
by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal year
1997 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item I of Part 1 of this
Report pages I-1 and I-2, to which
reference is hereby made.
(27) Financial Data Schedule Filed as the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference
---------
PaineWebber Development Partners Four, Ltd.:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1997 and 1996 F-4
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995 F-5
Consolidated statements of changes in partners' deficit
for the years ended March 31, 1997, 1996 and 1995 F-6
Consolidated statements of cash flows for the years ended
March 31, 1997, 1996 and 1995 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-23
Other financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included
in the consolidated financial statements, including the notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Development Partners Four, Ltd.:
We have audited the accompanying consolidated balance sheets of PaineWebber
Development Partners Four, Ltd. as of March 31, 1997 and 1996, and the related
consolidated statements of operations, changes in partners' deficit, and cash
flows for each of the three years in the period ended March 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of 71st Street Housing Partners, Ltd., which statements
reflect total assets of $7,333,000 and $7,633,000 as of December 31, 1996 and
1995, respectively, and total revenues of $1,598,000, $1,560,00, and $1,498,000
for each of the three years in the period ended December 31, 1996. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for 71st Street
Housing Partners, Ltd., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of PaineWebber Development Partners Four,
Ltd. at March 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended March 31,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, based on our audits and the reports of other auditors, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that
PaineWebber Development Partners Four, Ltd. will continue as a going concern. As
more fully described in Note 7, The Lakes Joint Venture is in default of the
loan agreement encumbering its operating investment property. In addition, as
more fully described in Notes 5 and 7, the Lincoln Garden Apartments Joint
Venture and 71st Street Housing Partners, Ltd. are both encumbered by
indebtedness which is collateralized by letters of credit, one of which has
expired and the other of which is due to expire in December 1997. These
conditions raise substantial doubt about the Partnership's ability to continue
as a going concern. Management's plans as to these matters are also described in
Notes 5 and 7. The accompanying 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.
/S/ ERNST & YOUNG LLP
-----------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 10, 1997
<PAGE>
Reznick Fedder & Silverman
Certified Public Accountants
217 East Redwood Street, Suite 1900
Baltimore, MD 21202
INDEPENDENT AUDITORS' REPORT
To the Partners
71st Street Housing Partners, Ltd.
We have audited the accompanying balance sheets of 71st Street Housing
Partners, Ltd. as of December 31, 1996 and 1995, and the related statements of
operations, changes in partners' deficit and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 71st Street Housing
Partners, Ltd. as of December 31, 1996 and 1995, and the results of its
operations, changes in partners' deficit and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Reznick Fedder & Silverman
---------------------------
Reznick Fedder & Silverman
Baltimore, Maryland
January 10, 1997
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
1997 1996
---- ----
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 77,896 76,995
--------- ---------
96,086 95,185
Less accumulated depreciation (28,077) (25,465)
--------- ---------
68,009 69,720
Cash and cash equivalents 1,562 1,390
Restricted cash 3,628 4,164
Accounts receivable - affiliates 21 16
Prepaid and other assets 64 68
Deferred expenses, net of accumulated
amortization of $793 ($682 in 1996) 658 769
---------- ---------
$ 73,942 $ 76,127
========== =========
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt in default $ 85,903 $ 87,489
Accounts payable and accrued expenses 287 355
Accrued interest and fees 4,587 4,258
Tenant security deposits 526 477
Equity in losses of unconsolidated
joint venture in excess of
investments and advances 2,375 2,223
Mortgage loan payable 9,125 9,125
---------- ---------
Total liabilities 102,803 103,927
Co-venturers' share of net assets of
consolidated ventures 1,140 1,153
Partners' deficit:
General Partners
Capital contributions 1 1
Cumulative net loss (2,684) (2,632)
Limited Partners ($1,000 per unit;
41,644 Units issued):
Capital contributions, net
of offering costs 36,641 36,641
Cumulative net loss (63,959) (62,963)
---------- ----------
Total partners' deficit (30,001) (28,953)
---------- ----------
$ 73,942 $ 76,127
========= ==========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS For
the years ended March 31, 1997, 1996 and 1995
(In thousands, except for per Unit data)
1997 1996 1995
---- ---- ----
Revenues:
Rental income $ 10,554 $ 10,108 $ 9,894
Interest income 252 237 163
Other income 336 299 218
---------- ---------- ----------
11,142 10,644 10,275
Expenses:
Interest expense and
related financing fees 4,593 5,157 4,207
Property operating expenses 3,716 3,735 3,744
Depreciation expense 2,612 3,079 3,047
Real estate taxes 939 962 1,033
General and administrative 184 260 285
Amortization expense 7 8 6
---------- ---------- ----------
12,051 13,201 12,322
---------- ---------- ----------
Operating loss (909) (2,557) (2,047)
Co-venturers' share of
consolidated
ventures' losses 13 68 -
Partnership's share of
unconsolidated
venture's losses (152) (124) (35)
--------- ---------- -----------
Net loss $ (1,048) $ (2,613) $ (2,082)
========== ========== ==========
Net loss per Limited
Partnership Unit $ (23.90) $ (59.60) $ (47.48)
========= ========= =========
The above net loss per Limited Partnership Unit is based upon the 41,644 Limited
Partnership Units outstanding for each year.
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended March 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at March 31, 1994 $ (2,396) $ (21,862) $ (24,258)
Net loss (104) (1,978) (2,082)
---------- --------- ---------
Balance at March 31, 1995 (2,500) (23,840) (26,340)
Net loss (131) (2,482) (2,613)
---------- --------- ---------
Balance at March 31, 1996 (2,631) (26,322) (28,953)
Net loss (52) (996) (1,048)
---------- --------- ----------
Balance at March 31, 1997 $ (2,683) $ (27,318) $ (30,001)
========== ========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,048) $ (2,613) $ (2,082)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Co-venturers' share of consolidated ventures' losses (13) (68) -
Partnership's share of unconsolidated venture's losses 152 124 35
Depreciation and amortization 2,619 3,087 3,053
Amortization of deferred financing costs 104 103 105
Amortization of deferred gain on forgiveness of debt (343) (343) (343)
Changes in assets and liabilities:
Accounts receivable - affiliates (5) (5) 28
Prepaid and other assets 4 (1) -
Accounts payable and accrued expenses (68) (35) 79
Accrued interest and fees 329 1,102 440
Tenant security deposits 49 36 43
Advances from consolidated ventures - - (100)
----------- --------- ---------
Total adjustments 2,828 4,000 3,340
----------- --------- ---------
Net cash provided by operating activities 1,780 1,387 1,258
Cash flows from investing activities:
Additions to buildings and improvements (901) (170) (425)
----------- --------- ---------
Net cash used in investing activities (901) (170) (425)
Cash flows from financing activities:
Decrease (increase) in restricted cash 536 (1,119) (145)
Repayment of long-term debt (1,243) - (648)
------------ ---------- ---------
Net cash used in financing activities (707) (1,119) (793)
------------ ---------- ---------
Net increase in cash and cash equivalents 172 98 40
Cash and cash equivalents, beginning of year 1,390 1,292 1,252
------------- --------- ---------
Cash and cash equivalents, end of year $ 1,562 $ 1,390 $ 1,292
============= ========= =========
Cash paid for interest $ 4,446 $ 4,239 $ 3,965
============= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
PaineWebber Development Partners Four, Ltd. (the "Partnership") is a
limited partnership organized pursuant to the laws of the State of Texas
on June 24, 1985 for the purpose of investing in a diversified portfolio
of newly-constructed and to-be-constructed income-producing real
properties. On September 9, 1986 the Partnership elected to extend the
offering period to the public through September 10, 1987 (beyond its
original termination date of September 10, 1986) and reduce the maximum
offering amount to 42,000 Partnership Units (at $1,000 per Unit) from
100,000 Units. Through the conclusion of the offering period, 41,644 Units
were issued representing capital contributions of $41,644,000.
The Partnership originally invested the net proceeds of the offering,
through joint venture partnerships, in six rental apartment properties. As
further discussed in Notes 4 and 5, the Partnership's operating properties
have encountered major adverse business developments which, to date, have
resulted in the loss of three of the original investments to foreclosure.
As of March 31, 1997, the remaining three joint ventures, which had
obtained more favorable financing terms, were generating net cash flow
sufficient to satisfy their current debt service requirements. However, as
discussed further in Note 7, one of these ventures is in default of the
terms of its debt agreement.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of March 31, 1997 and
1996 and revenues and expenses for each of the three years in the period
ended March 31, 1997. Actual results could differ from the estimates and
assumptions used.
The accompanying financial statements include the Partnership's
investments in three joint venture partnerships which own operating
properties. The joint ventures in which the Partnership has invested are
required to maintain their accounting records on a calendar year basis for
income tax purposes. As a result, the Partnership records its share of
ventures' income or losses based on financial information of the ventures
which is three months in arrears to that of the Partnership.
The Partnership accounts for one of its three remaining investments
in joint venture partnerships using the equity method because the
Partnership does not have majority voting control in the venture. Under the
equity method the investment is carried at cost adjusted for the
Partnership's share of the ventures' earnings and losses and distributions.
See Note 5 for a description of the unconsolidated joint venture
partnership. As further discussed in Note 4, the Partnership acquired
control of 71st Street Housing Partners, Ltd., which owns the Harbour
Pointe Apartments, in fiscal 1990. In addition, the Partnership acquired
control of The Lakes Joint Venture, which owns The Lakes at South Coast
Apartments, in fiscal 1992. As a result, the accompanying financial
statements present the financial position and results of operations of
these joint ventures on a consolidated basis. As discussed above, the joint
ventures have December 31 year-ends and operations of the consolidated
ventures continue to be reported on a three-month lag. All material
transactions between the Partnership and the joint ventures have been
eliminated in consolidation, except for lag-period cash transfers. Such lag
period cash transfers are accounted for as advances from consolidated
ventures.
The consolidated joint ventures' operating investment properties are
carried at cost, reduced by accumulated depreciation, or an amount less
than cost if indicators of impairment are present in accordance with
statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount. The Partnership generally
assesses indicators of impairment by a review of independent appraisal
reports on each operating investment property. Such appraisals make use of
a combination of certain generally accepted valuation techniques,
including direct capitalization, discounted cash flows and comparable
sales analysis. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of.
Depreciation expense is computed using the straight-line method over
estimated useful lives of five-to-thirty years. Interest and taxes
incurred during the construction period, along with acquisition fees paid
to PaineWebber Properties Incorporated and costs of identifiable
improvements, have been capitalized and are included in the cost of the
operating investment properties. Maintenance and repairs are charged to
expense when incurred.
The consolidated joint ventures lease apartment units under leases
with terms generally of one year or less. Rental income is recorded
monthly as earned.
For purposes of reporting cash flows, the Partnership considers all
highly liquid investments with original maturities of 90 days or less to be
cash equivalents.
Deferred expenses on the balance sheet at March 31, 1997 and 1996
consist of joint venture modification expense and deferred loan costs.
Joint venture modification expense represents a payment by the Partnership
to the co-venturer in 71st Street Housing Partners, Ltd. during fiscal
1990, in return for the relinquishment of the general partner's rights to
control the operations of the joint venture, and is being amortized on a
straight-line basis over the term of the joint venture's mortgage note
payable. Deferred loan costs are being amortized using the straight-line
method, which approximates the effective interest method, over the term of
the related debt. Amortization of deferred loan costs is included in
interest expense on the accompanying statements of operations.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership. Upon the sale
or disposition of the Partnership's investments, the taxable gain or loss
incurred will be allocated among the partners. In the case where a taxable
gain would be incurred, gain would first be allocated to the General
Partners in an amount at least sufficient to eliminate their deficit
capital balance. Any remaining gain would then be allocated to the Limited
Partners. In certain cases, the Limited Partners could be allocated
taxable income in excess of any liquidation proceeds that they may
receive. Additionally, in cases where the disposition of an investment
involves a foreclosure by, or voluntary conveyance to, the mortgage
lender, taxable income could occur without distribution of cash. Income
from the sale or disposition of the Partnership's investments would
represent passive income to the partners which could be offset by each
partner's existing passive losses, including any carryovers from prior
years.
The cash and cash equivalents, restricted cash and long-term debt
appearing on the accompanying consolidated balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments." The carrying amount of cash and cash equivalents and
restricted cash approximates their fair value due to the short-term
maturities of these instruments. The fair value of the non-recourse
long-term debt is estimated using the estimated market values of the real
estate collateral because such values are below the principal balances of
the debt obligations.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
<PAGE>
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Development Fund
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. ("PaineWebber") and Properties Associates 1985,
L.P. (the "Associate General Partner"), a Virginia limited partnership,
certain limited partners of which are also officers of the Managing
General Partner and PaineWebber Properties Incorporated ("PWPI"), a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). PWI, a
wholly-owned subsidiary of PaineWebber, acted as the selling agent for the
Limited Partnership Units. The General Partners, PWPI and PWI will receive
fees and compensation, determined on an agreed-upon basis, in
consideration of various services performed in connection with the sale of
the Units, the management of the Partnership and the acquisition,
management, financing and disposition of Partnership investments. The
Managing General Partner and its affiliates are reimbursed for their
direct expenses relating to the offering of Units, the administration of
the Partnership and the acquisition and operation of the Partnership's
real property investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and 5% to
the General Partners. All sale or refinancing proceeds shall be
distributed in varying proportions to the Limited and General Partners, as
specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, net income or loss
of the Partnership, other than net gains resulting from Capital
Transactions, as defined, will generally be allocated 95% to the Limited
Partners and 5% to the General Partners.
Additionally, the Partnership Agreement provides for the allocation of
net gains resulting from Capital Transactions, as defined, first, to those
partners whose capital accounts reflect a deficit balance (after all
distributions for the year and all allocations of net income and losses
from operations have been made) in the ratio of such deficits and up to an
amount equal to the sum of such deficits; second, to the General and
Limited Partners in such amounts as are necessary to bring the General
Partners' capital account balance in the ratio of 5 to 95 to the Limited
Partners' capital account balances; then, 95% to the Limited Partners and
5% to the General Partners.
Selling commissions incurred by the Partnership and paid to PWI for
the sale of Partnership interests were approximately $3,540,000 through
the completion of the offering period which expired in September of 1987.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 5% of the gross
proceeds from the sale of the Partnership units. Total acquisition fees
incurred by the Partnership and paid to PWPI aggregated $2,077,000.
The Partnership recorded investor servicing fee income from certain of
its joint ventures of $5,000 for each of the years ended March 31, 1997,
1996 and 1995 in accordance with the terms of the joint venture
agreements.
Included in general and administrative expenses for the years ended
March 31, 1997, 1996 and 1995 is $76,000, $82,000 and $84,000,
respectively, representing reimbursements to an affiliate of the Managing
General Partner for providing certain financial, accounting and investor
communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell
Hutchins earned fees of $4,000, $3,000 and $4,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1997, 1996 and 1995, respectively.
4. Operating Investment Properties
As of March 31, 1997 and 1996, the Partnership owns majority and
controlling interests in two joint venture partnerships which own
operating investment properties as described below. As discussed in Note
2, the Partnership's policy is to report the operations of the joint
ventures on a three-month lag.
71st Street Housing Partners, Ltd.
----------------------------------
On December 16, 1985, the Partnership acquired an interest in 71st
Street Housing Partners, Ltd., a joint venture formed to develop, own and
operate the Harbour Pointe Apartments, a 234-unit two-story garden
apartment complex located in Bradenton, Florida. Construction of this
complex was completed in January, 1987. The Partnership's co-venture
partners are affiliates of The Lieberman Corporation. The Partnership made
a capital investment of $2,658,000 (including an acquisition fee of
$150,000 paid to PWPI) for a 60% interest in the Joint Venture. The
property was acquired subject to a nonrecourse mortgage note in the amount
of $9,200,000. On May 1, 1990, the joint venture refinanced its mortgage
note under more favorable terms, as further discussed in Note 7. Pursuant
to an Amended and Restated Agreement of the Limited Partnership dated
August 4, 1989, the general partner interests of the co-venturers were
converted to limited partnership interests. The co-venturers received a
payment of $125,000 from the Partnership in return for their agreement to
relinquish their general partner rights and the property management
contract. As a result of the amendment, the Partnership, as the sole
general partner, assumed control of the operations of the property and
hired a third-party property manager to manage the day-to-day operations
of the apartment complex.
Per the terms of the amended joint venture agreement, income is
allocated to the Partnership until such time as the Partnership's capital
account balance equals 250% of all capital contributions theretofore made
by the Partnership. Thereafter, income is allocated 60% to the Partnership
and 40% to the co-venturers. Net losses are generally allocated 95% to the
Partnership and 5% to the co-venturers, except that if one partner has a
deficit balance and the other a credit balance in their capital accounts,
net losses are allocated to the partner with the credit balance.
Allocations of gains and losses from capital transactions will be
allocated according to the formulas provided in the joint venture
agreement.
Distributions of cash from a sale or operations of the operating
property will be made in the following order of priority: first, to repay
accrued interest and principal on optional loans (none outstanding as of
March 31, 1997 and 1996); second, to the Partnership until the Partnership
has received an amount equal to 250% of all capital contributions
theretofore made by the Partnership; and third, any remainder, will be
distributed 60% to the Partnership and 40% to the co-venturers.
Distributions of cash from a refinancing of the operating property shall
be distributed 60% to the Partnership and 40% to the co-venturers.
The Lakes Joint Venture
-----------------------
The Lakes Joint Venture ("Venture") was formed May 30, 1985
(inception) in accordance with the provisions of the laws of the State of
California for the purpose of developing, owning and operating a 770-unit
apartment complex (operating investment property) in Costa Mesa,
California. On November 1, 1985 the Partnership acquired a 65% general
partnership interest in the joint venture. The Partnership's original
co-venture partner was The Lakes Development Company ("Developer"), a
California general partnership and an affiliate of Regis Homes
Corporation. Construction of the operating investment property was
completed in December 1987. The initial aggregate cash investment made by
the Partnership for its interest was approximately $16,226,000 (including
an acquisition fee of $1,130,000 paid to PWPI). Construction of the
property was financed from the proceeds of a nonrecourse $76,000,000
mortgage loan. On September 26, 1991, in conjunction with a refinancing
and modification of the Venture's long-term indebtedness, the Developer
transferred its interest in the Venture to Development Partners, Inc.
("DPI"), a Delaware corporation and a wholly-owned subsidiary of Paine
Webber Group, Inc., and withdrew from the Venture. As a result of the
original co-venturer's withdrawal, the Partnership assumed control over
the operations of the Venture. The debt secured by the The Lakes at South
Coast Apartments is in default as of March 31, 1997 due to the failure of
the Venture to satisfy two covenants of the loan agreement. See Note 7 for
a further discussion.
Concurrent with the Developer's withdrawal from the Venture and the
admission of DPI as a Venturer, the Venture Agreement was amended and
restated effective September 26, 1991. The Venture Agreement between the
Partnership and DPI provides that, if the Venture's operating revenues are
insufficient to pay its operating expenses, the Venturers shall have the
right, but not the obligation, to arrange third-party loans to the
Venture. Alternatively, the Venturers may choose to make Optional Loans to
the Venture. If both Venturers desire to make such loans, the loans shall
be made in the ratio of 99.98% from the Partnership and .02% from DPI. No
such Optional Loans were outstanding as of December 31, 1996.
Distributable Funds and Net Proceeds of the Venture are to be
allocated first to the Partnership until the Partnership shall have
received cumulative distributions equal to any Additional Capital
Contributions, as defined. Thereafter, any remaining Distributable Funds
or Net Proceeds are to be distributed next to repay accrued interest and
principal on any Optional Loans and then to the Partnership until the
Partnership shall have received cumulative distributions equal to
$17,250,000. Any remainder is to be distributed 99.98% to the Partnership
and .02% to DPI.
Net losses are to be allocated 99.98% to the Partnership and .02% to
DPI. Net income shall be allocated to Venturers to the extent of and in
the ratio of the distribution of Distributable Funds, with any remainder
allocated 99.98% to the Partnership and .02% to DPI. In the event that
there are no Distributable Funds, net income would be allocated 99.98% to
the Partnership and .02% to DPI. Allocations of gain or losses from sales
or other dispositions of the operating investment property are set forth
in the Venture Agreement.
The following is a summary of combined property operating expenses for
the Harbour Pointe Apartments and The Lakes at South Coast Apartments for
the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 897 $ 886 $ 915
Salaries and related expenses 605 625 672
Utilities 508 522 504
Administrative and other 1,058 1,090 1,062
Management fees 381 365 349
Leasing commissions and fees 142 132 124
Insurance 125 115 118
------- ------- -------
$ 3,716 $ 3,735 $ 3,744
======= ======= =======
5. Investments in Unconsolidated Joint Ventures
The Partnership has an investment in one unconsolidated joint venture
at March 31, 1997 and 1996. The unconsolidated joint venture is accounted
for on the equity method in the Partnership's financial statements. As
discussed in Note 2, this joint venture reports its operations on a
calendar year basis.
Condensed financial statements of the unconsolidated joint venture,
for the periods indicated, follow.
Condensed Balance Sheets
December 31, 1996 and 1995
(in thousands)
Assets
1996 1995
---- ----
Current assets $ 86 $ 108
Operating investment property, net 4,705 4,888
Other assets 230 292
--------- ---------
$ 5,021 $ 5,288
========= =========
Liabilities and Partners' Deficit
Current liabilities $ 562 $ 502
Loans payable to affiliates 537 537
Long-term debt 6,700 6,800
Partnership's share of combined deficit (2,507) (2,359)
Co-venturer's share of combined deficit (271) (192)
--------- ---------
$ 5,021 $ 5,288
========= =========
<PAGE>
Condensed Summary of Operations
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
Rental revenues $ 1,084 $ 1,148 $ 1,102
Interest and other income 68 71 109
--------- --------- ---------
1,152 1,219 1,211
Property operating expenses 665 685 636
Depreciation and amortization 255 236 212
Interest expense 460 482 411
--------- --------- ---------
1,380 1,403 1,259
--------- --------- ---------
Net loss $ (228) $ (184) $ (48)
========= ========= =========
Net loss:
Partnership's share of loss $ (148) $ (120) $ (31)
Co-venturer's share of loss (80) (64) (17)
--------- --------- ---------
$ (228) $ (184) $ (48)
========= ========= =========
Reconciliation of Partnership's Investment
March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
Partnership's share of deficit
as shown above at December 31 $ (2,507) $ (2,359)
Partnership's share of venture's current
liabilities 60 60
Excess basis due to investment in joint
venture, net (1) 72 76
--------- ---------
Equity in losses of unconsolidated joint
venture in excess of investments
and advances at March 31 (2) $ (2,375) $ (2,223)
========= =========
(1) At March 31, 1997 and 1996 the Partnership's investment exceeds
its share of the combined joint venture's deficit account by
approximately $72,000 and $76,000, respectively. These amounts,
which relate to certain expenses incurred by the Partnership in
connection with acquiring its remaining unconsolidated joint
venture investment, are being amortized using the straight-line
method over the estimated useful life of the related operating
investment property.
(2) Equity in losses of unconsolidated joint venture in excess of
investments and advances at March 31, 1997 and 1996 represents
the Partnership's net investment in the Lincoln Garden joint
venture partnership. This joint venture is subject to a
partnership agreement which determines the distribution of
available funds, the disposition of the venture's assets and the
rights of the partners, regardless of the Partnership's
percentage ownership interest in the venture. As a result,
substantially all of the Partnership's investment in this joint
venture is restricted as to distributions.
<PAGE>
<TABLE>
<CAPTION>
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Partnership's share of
operations, as shown above $ (148) $ (120) $ (31)
Amortization of excess basis (4) (4) (4)
------- ------- --------
Partnership's share of
unconsolidated venture's losses $ (152) $ (124) $ (35)
====== ====== =======
</TABLE>
A description of the property owned by the remaining unconsolidated
joint venture and certain other matters are summarized below:
Lincoln Garden Apartments Joint Venture
---------------------------------------
On November 15, 1985, the Partnership acquired an interest in
a joint venture which developed, owns and operates Lincoln Garden
Apartments, a 200-unit complex located on an 8.1-acre tract of
land in Tucson, Arizona. Construction of this complex was
completed in June, 1986. The Partnership's co-venture partner is
an affiliate of Lincoln Property Company. The Partnership made a
cash investment of approximately $1,762,000 (including an
acquisition fee of $103,125 paid to PWPI) for a 65% interest in
the Joint Venture. The property was acquired subject to a
nonrecourse mortgage note in the amount of $7,700,000.
During fiscal 1989, the joint venture ceased to meet the debt
service requirements of its mortgage financing and, technically,
was in default of the loan agreements. In March 1989, the
Partnership refinanced its loan through the refunding of certain
tax-exempt revenue bonds issued by a local housing authority and
obtained a lower interest rate, which reduced the venture's debt
service requirements. Interest rates on the previous financing
arrangement ranged from 7.2% to 8.8% per annum. Interest on the
new bonds is paid at a variable rate which fluctuates weekly and
is tied to the market rates on other similar tax-exempt debt
instruments. The venture has remained current on its debt service
payments since the date of the refinancing. The mortgage note had
a remaining principal balance of $6,700,000 as of December 31,
1996 and is secured by the venture's operating investment property
and a primary letter of credit in the amount of $7,188,000, which
requires annual fees equal to 0.8% of the letter of credit amount
and expired on May 1, 1997. A tentative extension to the letter of
credit for Lincoln Garden has been negotiated with the issuer, and
the final documents to formalize the extension are in the process
of being reviewed and executed. The new letter of credit would
have a two-year term, would require annual fees equal to 1.2% of
the letter of credit amount and would expire in May 1999. There
are no assurances, however, that this agreement will be finalized.
Failure to finalize the extension agreement could result in the
initiation of foreclosure proceedings on the Lincoln Garden
property. The outcome of this situation cannot presently be
determined. The Partnership would recognize a net gain for
financial reporting purposes upon the foreclosure of the Lincoln
Garden investment property because the prior year equity method
losses and distributions from the joint venture have exceeded the
Partnership's investments and advances in the venture. To improve
the credit rating of the outstanding bonds and provide a more
favorable variable interest rate, in 1993 the lender provided to
the joint venture a confirming letter of credit for $7,109,500.
The confirming letter of credit required annual fees equal to 0.3%
of the letter of credit amount. This confirming letter of credit
expired on June 4, 1996 and was not renewed.
The co-venturer guaranteed to fund negative cash flow, as
defined, of the Joint Venture during the guarantee period, which
ended September 30, 1988. Operating expenses and debt service, if
any, in excess of the amounts available for expenditure were to be
funded by the co-venturer during the guarantee period. The
co-venturer's obligation to fund cash pursuant to these guarantees
was in the form of nonreturnable capital contributions through
September 30, 1987, and mandatory additional capital
contributions, as defined, through September 30, 1988. From
October 1, 1988 until July 2, 1990, the co-venturer was required
to make mandatory loans, as defined, to the Joint Venture to the
extent operating revenues were insufficient to pay the operating
expenses. Thereafter, if operating revenues are insufficient to
pay operating expenses, either the co-venturer or the Partnership
may make optional loans, as defined, to the Joint Venture, but
there is no assurance that any will be made. All mandatory and
optional loans bear interest at prime (8.25% at December 31, 1996)
plus 1% per annum and are to be repaid from distributable funds,
as defined. At December 31, 1996, mandatory and optional loans
payable to the co-venturer amounted to $522,000. Unpaid interest
on mandatory and optional loans at December 31, 1996, amounted to
$383,000. Loans payable to the Partnership at December 31, 1996,
amounted to $14,000 and are being accounted for as optional loans
similar to those made by the co-venturer.
The joint venture agreement provides that distributable funds,
as defined, and net proceeds arising from the sale, refinancing,
or other disposition of the Operating Investment Property of the
Joint Venture, as defined, will be distributed as follows: 1) for
repayment of accrued interest and principal on optional loans, 2)
for repayment of accrued interest and principal on mandatory
loans, 3) to the Partnership until the Partnership has received
cumulative distributions equal to $1,897,500, 4) to the
co-venturer until the co-venturer has received a cumulative
distribution equal to, first, a preferred return on mandatory
additional capital contributions of prime plus 1% per annum and,
second, any mandatory additional capital contributions, and 5) the
balance, 65% to the Partnership and 35% to the co-venturer. The
obligation to distribute distributable funds is cumulative.
Losses of the joint venture, other than losses resulting from
the sale of the Operating Investment Property, were allocated 100%
to the Partnership through December 31, 1990, and thereafter, are
allocated 65% to the Partnership and 35% to the co-venturer unless
the allocation of additional losses to the Partnership would
result in the Partnership's capital account having a deficit
balance while the co-venturer's capital account has a credit
balance. In such cases, the co-venturer will be allocated losses
until the capital account of the co-venturer is reduced to zero.
Income of the Joint Venture, other than gains resulting from the
sale or other disposition of the Operating Investment Property,
will be allocated 65% to the Partnership and 35% to the
co-venturer if there are no distributable funds. If there are
distributable funds, income will be allocated as follows: 1) to
the Partnership to the extent of its preferred distributions, 2)
to the co-venturer to the extent of its preferred distributions,
and 3) the balance, 65% to the Partnership and 35% to the
co-venturer.
Gains arising from the sale, refinancing, or other disposition
of the Operating Investment Property are to be allocated in
accordance with specific formulas set forth in the joint venture
agreement.
6. Restricted Cash
In September 1991, The Lakes Joint Venture entered into an agreement
with its mortgage lender whereby restricted cash accounts were established
for the purpose of making specific disbursements for debt service,
property taxes and insurance, security deposit refunds, and funding
operating deficits. These accounts are controlled by the bank in which all
disbursements and transfers are dictated by the related Reimbursement
Agreement (see Note 7). These cash accounts are included in Restricted
Cash on the accompanying balance sheet
7. Long-term debt
Long-term debt on the Partnership's balance sheet at March 31, 1997
and 1996 consists of the following (in thousands):
1997 1996
---- ----
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. 3,491 4,584
Prior indebtedness principal
payable to bank. This obligation is
related to The Lakes Joint Venture
and is nonrecourse. 3,411 3,561
Deferred gain on forgiveness
of debt (net of accumulated
amortization of $1,877 and $1,534
in 1997 and 1996, respectively) 3,401 3,744
-------- ------
95,028 96,614
Less: Long-term debt in
default (see discussion below) (85,903) (87,489)
--------- -------
$ 9,125 $ 9,125
========= ==========
Mortgage loan secured by the Harbour Pointe Apartments
------------------------------------------------------
Original financing for construction of the Harbour Pointe Apartments
was provided through $9,200,000 of Multi-Family Housing Mortgage Revenue
Bonds, Series 1985 E due December 1, 2007 (the original Bonds) issued by
the Manatee County Housing Finance Authority which bore interest at 8.25%
plus a 1.25% letter of credit fee. An amount of $75,000 was paid on the
original bonds prior to the refinancing. The original bond issue was
refinanced on May 1, 1990 with $9,125,000 Weekly Adjustable/Fixed Rate
Multi-Family Housing Revenue Refunding Bonds, Series 1990A, due December
1, 2007 (the Bonds).
The interest rate on the Bonds is adjusted weekly to a minimum rate
that would be necessary to remarket the Bonds in a secondary market as
determined by a bank remarketing agent. During calendar 1996, the interest
rate averaged 3.90% (4.38% in 1995). The Bonds are secured by the Harbour
Pointe Apartments. As of December 31, 1996, the fair value of this debt
obligation approximated $8.8 million.
Interest on the underlying bonds is intended to be exempt from federal
income tax pursuant to Section 103 of the Internal Revenue Code. In
connection with obtaining the mortgage, the partnership executed a Land
Use Restriction Agreement with the Manatee County Housing Finance
Authority which provides, among other things, that substantially all of
the proceeds of the Bonds issued be utilized to finance multi-family
housing of which 20% or more of the units are to be leased to low and
moderate income families as established by the United States Department of
Housing and Urban Development. In the event that the underlying Bonds do
not maintain their tax-exempt status, whether by a change in law or by
noncompliance with the rules and regulations related thereto, repayment of
the note may be accelerated.
Pursuant to the financing agreement, a bank has issued an irrevocable
letter of credit to the Bond trustee in the joint venture's name for
$9,247,500. An annual fee equal to 1% of the letter of credit balance is
payable monthly to the extent of net cash operating income available to
pay such fees. In addition, the joint venture pays annual remarketing,
administrative and trustee fees pertaining to the bonds which totalled
$29,000 during 1996. The letter of credit is scheduled to expire on
December 15, 1997, at which time the venture's mortgage debt would become
immediately due and payable if the letter of credit is not extended or
replaced. Subsequent to year-end, the venture has filed an application to
extend the letter-of-credit for a three-year period. There are no
assurances, however, that this application will be approved. The outcome
of this situation cannot presently be determined. The Partnership would
recognize a net gain for financial reporting purposes upon either the
sale or foreclosure of the Harbour Pointe Apartments because the balance
of the mortgage loan payable exceeds the net carrying value of the
operating investment property. The total assets, total liabilities, gross
revenues and total expenses of 71st Street Housing Partners, Ltd.
included in the fiscal 1997 consolidated financial statements total
$7,333,000, $10,356,000, $1,598,000 and $1,611,000, respectively.
Debt secured by The Lakes at South Coast Apartments
---------------------------------------------------
Original financing for construction of The Lakes at South Coast
Apartments was provided from a developer loan in the amount of $76,000,000
funded by the proceeds of a public offering of tax-exempt apartment
development revenue bonds. The Venture had been in default of the
developer loan since December 1989 for failure to make full and timely
payments on the loan. As a result of the Venture's default, the required
semi-annual interest and principal payments due to the bond holders
through June of 1991 were made by the bank which had issued an irrevocable
letter of credit securing the bonds. Under the terms of the loan
agreement, the Venture was responsible for reimbursing the letter of
credit issuer for any draws made against the letter of credit which
totalled $7,748,000.
The original bond issue was refinanced during 1991 and the original
developer loan was extinguished. The new developer loan (1991 Developer
Loan), in the amount of $75,600,000, is payable to the County of Orange
and was funded by the proceeds of a public offering of tax-exempt
apartment development revenues bonds issued, at par, by the County of
Orange, California in September 1991. Principal is payable upon maturity,
December 1, 2006. Interest on the bonds is variable, with the rate
determined weekly by a remarketing agent (ranging from 2.25% to 5.30%
during calendar 1996), 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). Such Unpaid Accrued
Letter of Credit Fees were $1,608,000 and $1,306,000 at December 31, 1996
and 1995, respectively. The bank letter of credit is secured by a second
deed of trust on the operating investment property and future rents and
income from the operating investment property.
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 December 31, 1996, leaving an outstanding principal
balance of $3,411,000 as of December 31, 1996. 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 $2,636,000
through December 31, 1996, leaving an outstanding principal balance of
$3,491,000 as of December 31, 1996.
The restructuring of the Prior Indebtedness, the Deferred Letter of
Credit Fees and the line of credit borrowings, as described above, have
been accounted for in accordance with Statement of Financial Accounting
Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". Accordingly, the forgiveness of debt, aggregating
$5,279,000, has been deferred and is being amortized as a reduction of
interest expense prospectively using a method approximating the effective
interest method over the estimated remaining term of the Venture's
indebtedness. At December 31, 1996 and 1995, $3,401,000 and $3,744,000,
respectively of such forgiven debt (net of accumulated amortization) has
been reflected in the accompanying balance sheet and $343,000 has been
amortized as a reduction of interest expense in the accompanying
statements of operations for each of the years ended December 31, 1996,
1995 and 1994, respectively. As of December 31, 1996, the fair value of
the aggregate indebtedness secured by The Lakes at South Coast Apartments
approximated $66 million.
The 1991 Developer Loan required the establishment of a $2,000,000
deficit reserve account, funded from the Venturers' 1991 contributions.
The loan also requires the funding of an additional reserve account on a
monthly basis from available cash flow (as defined) to the extent that the
interest rate on the bonds is below 6%, until the balance in this reserve
account totals $1,000,000. The requirement for this additional reserve
account may be eliminated if the operating property generates a certain
minimum level of net operating income. The $2,000,000 deficit reserve
account and the additional reserve account funded by operations may be
used under certain circumstances to fund the Venture's debt service
obligations to the extent that net operating income is insufficient. In
the event that such reserves no longer become necessary under the terms of
the Reimbursement Agreement, any remaining balances in the reserve
accounts are to be paid to the letter of credit issuer to be applied
against certain of the Venture's outstanding obligations. As of December
31, 1996 and 1995, the balance in the deficit reserve account totalled
$1,146,000 and $1,111,000, respectively. As of December 31, 1995, the
balance in the additional reserve account totalled $151,000. During 1996,
the requirement for the additional reserve account was eliminated and the
balance in the account was applied against the Venture's outstanding debt
obligations. 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, however, no agreement has been
reached to date. Management expects to continue such discussions in fiscal
1998 but there can be no assurances that the lender will grant any relief
in connection with these appraisal covenants. Accordingly, the carrying
amount of the debt related to The Lakes Joint Venture has been classified
as long-term debt in default on the balance sheets as of March 31, 1997
and 1996.
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. The total assets, total
liabilities, gross revenues and total expenses of The Lakes Joint Venture
included in the fiscal 1997 consolidated financial statements total
$64,214,000, $91,108,000, $9,469,000 and $10,202,000, respectively.
8. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District
Court for the Southern District of New York concerning PaineWebber
Incorporated's sale and sponsorship of various limited partnership
investments and REIT Stocks, including those offered by the Partnership.
The lawsuits were brought against PaineWebber Incorporated and Paine
Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership
Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Fourth Development Fund
Inc. and Properties Associates 1985, L.P. ("PA1985"), which are the
Managing General Partners of the Partnership and affiliates of
PaineWebber. On May 30, 1995, the court certified class action treatment
of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interests in PaineWebber
Development Partners Four, Ltd., PaineWebber, including Fourth Development
Fund Inc. and PA1985 (1) failed to provide adequate disclosure of the
risks involved; (2) made false and misleading representations about the
safety of the investments and the Partnership's anticipated performance;
and (3) marketed the Partnership to investors for whom such investments
were not suitable. The plaintiffs, who purported to be suing on behalf of
all persons who invested in PaineWebber Development Partners Four, Ltd.,
also alleged that following the sale of the partnership interests,
PaineWebber, including Fourth Development Fund Inc. and PA1985
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, including
Fourth Development Fund, Inc. and PA1985 violated the Racketeer Influenced
and Corrupt Organizations Act ("RICO") and the federal securities laws.
The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all
fees and other income derived by PaineWebber from the limited
partnerships. In addition, the plaintiffs also sought treble damages under
RICO.
In January 1996, PaineWebber signed a memorandum of understanding
with the plaintiffs in the New York Limited Partnership Actions outlining
the terms under which the parties have agreed to settle the case. Pursuant
to that memorandum of understanding, PaineWebber irrevocably deposited
$125 million into an escrow fund under the supervision of the United
States District Court for the Southern District of New York to be used to
resolve the litigation in accordance with a definitive settlement
agreement and plan of allocation. On July 17, 1996, PaineWebber and the
class plaintiffs submitted a definitive settlement agreement which
provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PWPI, and the
allocation of the $125 million settlement fund among investors in the
various partnerships and REITs at issue in the case. As part of the
settlement, PaineWebber also agreed to provide class members with certain
financial guarantees relating to some of the partnerships and REITs. The
details of the settlement are described in a notice mailed directly to
class members at the direction of the court. A final hearing on the
fairness of the proposed settlement was held in December 1996, and in
March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to
date pending the resolution of an appeal of the settlement by two of the
plaintiff class members. As part of the settlement agreement, PaineWebber
has agreed not to seek indemnification from the related partnerships and
real estate investment trusts at issue in the litigation (including the
Partnership) for any amounts that it is required to pay under the
settlement.
In February 1996, approximately 150 plaintiffs filed an action
entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior
Court against PaineWebber Incorporated and various affiliated entities
concerning the plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint
alleged, among other things, that PaineWebber and its related entities
committed fraud and misrepresentation and breached fiduciary duties
allegedly owed to the plaintiffs by selling or promoting limited
partnership investments that were unsuitable for the plaintiffs and by
overstating the benefits, understating the risks and failing to state
material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against
PaineWebber. In June 1996, approximately 50 plaintiffs filed an action
entitled Bandrowski v. PaineWebber Inc. in Sacramento, California Superior
Court against PaineWebber Incorporated and various affiliated entities
concerning the plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint was
very similar to the Abbate action described above and sought compensatory
damages of $3.4 million plus punitive damages against PaineWebber. In
September 1996, the court dismissed many of the plaintiffs' claims in both
the Abbate and Bandrowski actions as barred by applicable securities
arbitration regulations. Mediation with respect to the Abbate and
Bandrowski actions was held in December 1996. As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached
which provided for the complete resolution of both actions. Final releases
and dismissals with regard to these actions were received subsequent to
March 31, 1997.
Based on the settlement agreements discussed above covering all of
the outstanding unitholder litigation, and notwithstanding the appeal of
the class action settlement referred to above, management does not expect
that the resolution of these matters will have a material impact on the
Partnership's financial statements, taken as a whole.
<PAGE>
<TABLE>
<CAPTION>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1997
(In thousands)
Cost Life on Which
Initial Cost to Capitalized Depreciation
Consolidated Subsequent to Gross Amount at Which Carried at in Latest
Joint Venture Acquisition End of Year Income
----------------- ------------------------
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ------------ ---- ------------ ------------ ---- ------------ ----- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Complex
Bradenton,
FL $ 9,125 $ 1,543 $ 8,309 $ 408 $ 1,543 $ 8,717 $ 10,260 $ 2,943 1987 12/16/85 5 - 30 yrs.
Apartment
Complex
Costa Mesa,
CA 82,502 16,647 64,350 4,829 16,647 69,179 85,826 25,134 1987 11/1/85 5 - 30 yrs.
-------- -------- -------- ------- ------- ------- -------- -------
$ 91,627 $ 18,190 $ 72,659 $ 5,237 $18,190 $77,896 $ 96,086 $ 28,077
======== ======== ======== ======== ======= ======= ======== ========
Notes:
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal income tax purposes is approximately $85,320.
(B) See Note 7 to the financial statements for a description of the terms of the debt encumbering the property.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 95,185 $ 95,015 $ 94,590
Increase due to additions 901 170 425
-------- --------- ---------
Balance at end of period $ 96,086 $ 95,185 $ 95,015
======== ========= =========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 25,465 $ 22,386 $ 19,339
Depreciation expense 2,612 3,079 3,047
-------- --------- ---------
Balance at end of period $ 28,077 $ 25,465 $ 22,386
======== ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended March 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,562
<SECURITIES> 0
<RECEIVABLES> 21
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,275
<PP&E> 96,086
<DEPRECIATION> 28,077
<TOTAL-ASSETS> 73,942
<CURRENT-LIABILITIES> 91,303
<BONDS> 9,125
0
0
<COMMON> 0
<OTHER-SE> (30,001)
<TOTAL-LIABILITY-AND-EQUITY> 73,942
<SALES> 0
<TOTAL-REVENUES> 11,142
<CGS> 0
<TOTAL-COSTS> 7,458
<OTHER-EXPENSES> 139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,593
<INCOME-PRETAX> (1,048)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,048)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,048)
<EPS-PRIMARY> (23.90)
<EPS-DILUTED> (23.90)
</TABLE>
