UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-17150
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
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(Exact name of registrant as specified in its charter)
Texas 76-0147579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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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.
1998 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
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-7
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-7
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 Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-20
<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-6 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, 1998, the Partnership had investments, through joint
ventures and limited partnerships, in the two 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)
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, 1998, the Partnership had sold its interest in one
of these properties to its joint venture partner for a nominal payment and three
other properties had been forfeited through foreclosure proceedings. On
September 18, 1997, the Partnership sold its interest in the Lincoln Garden
joint venture to its co-venture partner for $25,000. The sale was structured in
two parts to minimize the negative tax consequences to the Lincoln Garden joint
venture. The Partnership received $19,000 on September 18, 1997, and the
remaining $6,000 will be received on or after September 19, 1998. Because
management did not foresee a potential for appreciation in the value of the
Lincoln Garden property in excess of the outstanding first mortgage loan balance
the foreseeable future, the Partnership negotiated a sale of its position to the
co-venture partner for a nominal payment. 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.
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 and resulted in the sale of the Partnership's
interest in the Lincoln Garden joint venture for a nominal amount, as discussed
further above. These four properties comprised approximately 43% of the
Partnership's original investment portfolio. 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 four disposition transactions described above which
yielded no material proceeds to the Partnership. 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 will depend upon the ultimate selling prices
obtained for the two remaining investment properties, which cannot presently be
determined.
As discussed further in Item 7, subsequent to the resolution of the
default status of the debt secured by The Lakes at South Coast Apartments in
fiscal 1998, management analyzed whether it would be in the Limited Partners'
best interests to continue to hold the two remaining assets or to pursue
potential sale opportunities with a goal of completing a liquidation of the
Partnership in the near term. Based on such analysis, management concluded that
a liquidation of the Partnership should be undertaken if favorable prices for
The Lakes and Harbour Pointe can be achieved. Under the terms of the Partnership
Agreement, the affirmative vote of Limited Partners who own 51% or more of the
total number of outstanding units of limited partnership interest in the
Partnership is required to approve the sale of all, or substantially all, of the
Partnership's assets. On May 4, 1998, the Partnership furnished a Consent
Solicitation Statement to the Limited Partners which sought the approval to sell
the Partnership's two remaining assets and, thereafter, to liquidate and
dissolve the Partnership (collectively, the "Sale and Liquidation"). Effective
June 18, 1998, the results of the Consent Solicitation Statement were finalized,
and the Sale and Liquidation was approved by the required affirmative vote of
the Limited Partners (See Item 4). Management's goal is to complete the Sale and
Liquidation by the end of calendar year 1998. Management believes that the
recent improved conditions in the apartment segment of the real estate market
have caused the values of The Lakes and Harbour Pointe to increase during recent
months to a point where such values exceed the outstanding balances of the
properties' debt encumbrances. There can be no assurances, however, that
approval of the Sale and Liquidation will enable the Partnership to recover
significant portions of its original invested capital. The Partnership's ability
to recover any significant portion of its original capital will depend
principally on the outcome of the sale of The Lakes, which represents
substantially all of the aggregate value of the Partnership's two remaining
properties. The Lakes is located in an extremely strong Orange County,
California apartment market that continues to gain momentum. The improved market
conditions in the Orange County area have resulted in a significant increase in
the estimated market value of The Lakes in recent months. Management believes
that the concurrence of aggressive apartment buyers who have access to an
abundant supply of low cost capital seeking investment opportunities, the low
interest rates on The Lakes' secured debt obligations and the dramatic increase
in rental rates and operating efficiencies have created value in The Lakes that
may not persist if any one or all of the favorable conditions were to change.
Management further believes that the dramatic rental rate increases in the
Orange County market may also be an indication that the market is approaching
its peak. As a result, management retained a national brokerage firm in November
1997 to begin a formal marketing program for the purpose of soliciting proposals
to acquire The Lakes. To date, the Partnership has received numerous proposals
that suggest that The Lakes can be sold for a price in excess of the outstanding
balance of its secured indebtedness, although the Partnership has not closed on
a sale transaction with any potential buyer and no assurances can be given
regarding a final sales price. Formal marketing efforts for the sale of the
Harbour Pointe property began subsequent to year-end.
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 a significant increase in the funds available in the
capital markets for investment in real estate and by the lack of significant new
construction activity in the multi-family apartment market over most of this
period. Over the past two years, development activity for multi-family
properties in many markets has escalated significantly.
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, 1998, the Partnership owned interests in two operating
properties through a joint venture and a limited partnership. This joint venture
and limited partnership 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 1998, along with an average
for the year, are presented below for each property in which the Partnership
owned an interest during fiscal 1998.
Percent Occupied at
----------------------------------------------------------
Fiscal
1998
6/30/97 9/30/97 12/31/97 3/31/98 Average
------- ------- -------- ------- -------
The Lakes 96% 95% 95% 96% 96%
Harbour Pointe
Apartments 95% 93% 96% 97% 95%
Lincoln Garden
Apartments 83% N/A (1) N/A N/A N/A
(1) The Partnership sold its interest in the Lincoln Garden Apartments Joint
Venture on September 18, 1997.
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 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 had been delayed pending the
resolution of an appeal of the class action settlement by two of the plaintiff
class members. In July 1997, the United States Curt of Appeals for the Second
Circuit upheld the settlement over the objections of the two 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 during fiscal 1998.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management believes that the resolution of
these matters will not 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
As discussed further in Item 7, subsequent to year-end, on May 4, 1998,
the Partnership furnished a Consent Solicitation Statement to the Limited
Partners which sought the approval to sell the Partnership's two remaining
assets and, thereafter, to liquidate and dissolve the Partnership (collectively,
the "Sale and Liquidation"). Effective June 18, 1998, the results of the Consent
Solicitation Statement were finalized, and the Sale and Liquidation was approved
by the required affirmative vote of the Limited Partners as follows:
Abstentions Total
Votes Votes and Votes
For Against Non-Votes Cast
--- ------- --------- ----
28,524 624 - 29,148
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1998 there were 3,026 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. Upon
request the Managing General Partner will endeavor to assist a Unitholder
desiring to transfer his Units and may utilize the services of PWI in this
regard. The price to be paid for the Units will be subject to negotiation by the
Unitholder. The Managing General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
<TABLE>
PaineWebber Development Partners Four, Ltd.
For the years ended March 31, 1998, 1997, 1996, 1995 and 1994
(in thousands except for per Unit data)
<CAPTION>
Years ended March 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 11,604 $ 11,142 $ 10,644 $ 10,275 $ 10,481
Operating loss $ (781) $ (909) $ (2,557) $ (2,047) $ (1,503)
Partnership's share of
unconsolidated ventures'
losses $ (149) $ (152) $ (124) $ (35) $ (101)
Gain on sale of joint
venture interest $ 2,528 - - - -
Net income (loss) $ 1,614 $(1,048) $ (2,613) $ (2,082) $ (1,604)
Net income (loss) per
Limited Partnership Unit $ 36.82 $(23.90) $ (59.60) $ (47.48) $ (36.59)
Total assets $ 70,633 $73,942 $ 76,127 $ 77,924 $ 80,500
Mortgage loans payable $92,120 $ 9,125 $ 9,125 $ 9,125 $ 97,948
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.
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, 1998, 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. In addition, as discussed
further below, during fiscal 1998 the Partnership sold its interest in the
Lincoln Garden joint venture to its co-venture partner for a nominal amount.
These four properties comprised approximately 43% of the Partnership's original
investment portfolio. 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 four disposition
transactions described above which yielded no material proceeds to the
Partnership. The Managing General Partner's strategy has been, and continues to
be, to marshal 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 Partnership's ability to recover
any significant portion of its original capital will depend principally on the
outcome of the sale of The Lakes at South Coast Apartments, which represents
substantially all of the aggregate value of the Partnership's two remaining
properties.
On September 18, 1997, the Partnership agreed to sell its general
partnership interest in the Lincoln Garden joint venture to its co-venture
partner for $25,000. In effecting such sale, management considered that (i)
during recent years, the operating performance of Lincoln Garden had
deteriorated, (ii) since its inception, the Partnership had not received cash
flow from this investment and no cash flow from this asset was projected for the
future, and (iii) the joint venture partner had a priority position in the joint
venture due to certain loans which it advanced to the joint venture to cover
prior operating deficits. In addition, management determined that the
outstanding first mortgage loan balance on the Lincoln Garden property was in
excess of its market value and that future increases in the property's value
were unlikely. Because the property offered little or no opportunity for a
return of equity, the Partnership negotiated a sale of its position to its joint
venture partner for a nominal amount. The sale was structured in two parts to
minimize the negative tax consequences to the Lincoln Garden joint venture.
Accordingly, the Partnership received $19,000 in September 1997 for the sale of
75% of its interest in the joint venture and will receive a final payment of
$6,000 in September 1998 for the remaining 25% of its interest. As of September
18, 1997, the Partnership's remaining position in the joint venture was
converted to a limited partnership interest, and the Partnership will have no
continuing involvement in the operations of the Lincoln Garden joint venture
through the date in September 1998 when its limited partnership interest will be
redeemed for $6,000. Consequently, the Partnership wrote off the remaining
equity method carrying value of its investment in Lincoln Garden during fiscal
1998. This write-off resulted in a gain of $2,528,000 because the venture's
prior equity method losses had exceeded the total of the Partnership's
investments and advances in the joint venture. The Partnership recorded its
share of the venture's operating losses up through the date of the September 18,
1997 sale transaction.
As previously reported, the Reimbursement Agreement which governs the
secured debt obligations of The Lakes Joint Venture contains certain restrictive
covenants, which included a requirement that the Venture provide the lender, in
September 1994 and September 1996, with certified independent appraisals of the
operating property indicating the value of the property to be equal to or
greater than $92 million and $100 million, respectively. Failure to provide such
appraisals was defined as an event of default under the Reimbursement Agreement.
Through the first quarter of fiscal 1998, The Lakes Joint Venture had not
provided the lender with an appraisal which met either the $92,000,000 or
$100,000,000 requirement and, accordingly, was in default under the
Reimbursement Agreement. In February 1996, the lender issued a formal notice of
default to the Joint Venture pursuant to the Reimbursement Agreement. For the
past several years, the Managing General Partner has had discussions with the
lender regarding possible changes to the appraisal requirements which were fully
resolved during the second quarter of fiscal 1998. On September 18, 1997, the
Partnership signed amendment documents with the lender to remove the appraisal
requirements. As a result, the Venture is no longer in technical default.
Additionally, the amendment provided for the release of funds from certain
reserve accounts that had been required by the lender. The property's improved
operations and increasing rental rates, combined with the low interest rate on
the tax-exempt bonds, make it no longer necessary to maintain these reserves.
The money from these accounts was used to pay down approximately $1,900,000 of
debt owed by the Venture to the lender. In addition, approximately $800,000 of
the previously restricted cash was reserved for the necessary painting of the
property, and another $300,000 was allocated for future capital needs. The
exterior painting project was completed subsequent to year-end.
Subsequent to the resolution of the default status of the debt secured by
The Lakes at South Coast Apartments in fiscal 1998, management analyzed whether
it would be in the Limited Partners' best interests to continue to hold the two
remaining assets or to pursue potential sale opportunities with a goal of
completing a liquidation of the Partnership in the near term. Based on such
analysis, management concluded that a liquidation of the Partnership should be
undertaken if favorable prices for The Lakes and Harbour Pointe can be achieved.
Under the terms of the Partnership Agreement, the affirmative vote of Limited
Partners who own 51% or more of the total number of outstanding units of limited
partnership interest in the Partnership is required to approve the sale of all,
or substantially all, of the Partnership's assets. On May 4, 1998, the
Partnership furnished a Consent Solicitation Statement to the Limited Partners
which sought the approval to sell the Partnership's two remaining assets and,
thereafter, to liquidate and dissolve the Partnership (collectively, the "Sale
and Liquidation"). Effective June 18, 1998, the results of the Consent
Solicitation Statement were finalized, and the Sale and Liquidation was approved
by the required affirmative vote of the Limited Partners. Management's goal is
to complete the Sale and Liquidation by the end of calendar year 1998. There can
be no assurances, however, that the sales of the remaining assets and the
liquidation of the Partnership will be completed within this time frame. The
operations of The Lakes and Harbour Pointe have been stabilized as a result of
debt restructurings, and the properties do not currently require the use of the
Partnership's cash reserves to support operations. Without these restructurings,
the properties would most likely have been lost through foreclosure actions by
the respective lenders. Each of these properties was financed with tax-exempt
revenue bonds issued by local housing authorities. These restructured debt
obligations bear interest at variable rates that, for the past several years,
have remained 3 to 4 percent per annum below comparable conventional rates. Such
favorable rates have allowed The Lakes and Harbour Pointe to generate excess
cash flow after the payment of operating expenses and first mortgage debt
service obligations. This cash flow has been used to maintain these properties
in competitive condition and, in the case of The Lakes to pay interest and
principal on second and third mortgage loans incurred in connection with the
restructurings referred to above. If interest rates were to rise dramatically,
The Lakes and Harbour Pointe joint ventures would require advances from the
Partnership in order to continue paying their operating expenses and debt
service obligations. In addition, the letter of credit that guarantees and
secures the principal and interest payments of The Lakes' secured debt expires
on December 15, 1998. If the letter of credit is not extended by this expiration
date, such debt will become immediately due and payable and would need to be
repaid from the proceeds of a sale of The Lakes or a refinancing of the debt. If
such a sale or refinancing could not be accomplished, the property could be
subject to foreclosure by the lender. Given the high level of debt encumbering
The Lakes (which includes the first mortgage indebtedness, the second and third
mortgage obligations incurred in connection with restructuring, deferred
interest and deferred letter of credit fees), there can be no assurances that
the Partnership would be able to extend the existing letter of credit or obtain
a substitute credit facility. This impending letter of credit expiration was a
contributing factor to management's decision to pursue a sale of the remaining
assets and a liquidation of the Partnership to be completed prior to the end of
calendar 1998.
Management believes that the recent improved conditions in the apartment
segment of the real estate market have caused the values of The Lakes and
Harbour Pointe to increase during recent months to a point where such values
exceed the outstanding balances of the properties' debt encumbrances. The Lakes
is located in an extremely strong Orange County, California apartment market
that continues to gain momentum. The improved market conditions in the Orange
County area have resulted in a significant increase in the estimated market
value of The Lakes in recent months. In calendar 1997, the unemployment rate in
Orange County declined to 3.5% as compared to 5.1% in Orange County in 1995 and
9.4% for all of California at the bottom of its depressed economic conditions in
1993. Additionally, the population in Orange County has grown an estimated 11.4%
since 1990. As a result of these improved economic conditions, apartment
occupancy levels and rental rates have grown beyond pre-recession levels with
some properties reporting annual increases greater than 15%. The local market
reported an average occupancy level of approximately 95% for calendar 1997, as
well as rental rate increases of 10% to 15% since the beginning of calendar
1997. The Lakes' occupancy level reached 99% in January 1997, and since that
time rental rates have been substantially increased. Occupancy at The Lakes
averaged 96% during the year ended March 31, 1998, as compared to 97% for the
prior fiscal year. Management believes that the concurrence of aggressive
apartment buyers who have access to an abundant supply of low cost capital
seeking investment opportunities, the low interest rates on The Lakes' secured
debt obligations and the dramatic increase in rental rates and operating
efficiencies have created value in The Lakes that may not persist if any one or
all of the favorable conditions were to change. Management further believes that
the dramatic rental rate increases in the Orange County market may also be an
indication that the market is approaching its peak. As a result, management
retained a national brokerage firm in November 1997 to begin a formal marketing
program for the purpose of soliciting proposals to acquire The Lakes. During the
fourth quarter of fiscal 1998, the property was marketed extensively. Sales
packages were distributed to 200 international, national, regional and local
prospective purchases. Subsequent to year-end, the Partnership received offers
from 14 prospective buyers. Supplemental information on the property was then
provided to the top seven bidders with a requirement that best and final offers
be returned by April 30, 1998. The highest offer was from a qualified buyer and
met the Partnership's sale criteria. In June 1998, the Partnership executed a
purchase and sale agreement with this prospective buyer for an amount in excess
of the outstanding debt obligation. However, since this sale transaction remains
contingent upon, among other things, satisfactory completion of the buyer's due
diligence and formal approval by a number of third parties of the assumption of
the tax-exempt bonds secured by The Lakes, there are no assurances that a sale
will be consummated.
The Harbour Pointe Apartments averaged 95% occupancy for the year ended
March 31, 1998, as compared to 94% for the prior fiscal year. As previously
reported, in early fiscal 1998 the Partnership initiated discussions with the
issuer of the letter of credit on the Harbour Pointe Apartments, which was
scheduled to expire on December 15, 1997. During the second quarter of fiscal
1998, the letter of credit issuer approved the joint venture's application for
an extension of the letter of credit through December 2000. The new terms of the
letter of credit agreement require the commencement of regular bond sinking fund
contributions of $240,000 per annum to be paid in quarterly installments of
$60,000 beginning February 15, 1998. The terms of the extension also increased
the letter of credit fee from 1% to 1.25% per annum on the outstanding amount of
$9,247,500, payable on a quarterly basis beginning February 15, 1998. The joint
venture will also be required to make annual deposits to a lender-controlled
escrow account equal to 75% of Harbour Pointe's annual net cash flow, as
defined, for each year, beginning in calendar 1998. All funds deposited to the
escrow account will be returned to the joint venture upon the earlier of the
termination and surrendering of the letter of credit to the lender or the
achievement of a loan-to-value ratio equal to or less than 75%, as determined
solely by the lender. Recent improvements in market conditions and in the
operating performance of the Harbour Pointe Apartments have increased the
estimated market value of the property to a level which exceeds the outstanding
first mortgage loan balance. Nonetheless, significant additional appreciation
would have to occur in order to achieve a loan-to-value ratio of 75% or less. As
a result, the effect of the new terms of the Harbour Pointe letter of credit
will be that the cash flow from the property's operations will no longer be
available to cover the Partnership's future operating expenses. However, the
Partnership has sufficient cash reserves to cover operating expenses for the
next several years. With the Partnership focusing on potential disposition
strategies for its remaining investment properties and targeting a liquidation
within the next year, such reserves should be adequate to meet the Partnership's
liquidity needs during this period. The Partnership initiated marketing efforts
for the sale of the Harbour Pointe property subsequent to March 31, 1998.
At March 31, 1998, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $1,551,000. 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 two remaining joint venture investments. In addition, The Lakes
Joint Venture had a restricted cash balance of $2.5 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.
As noted above, the Partnership expects to be liquidated during calendar
year 1998. Notwithstanding this, the Partnership believes that it has made all
necessary modifications to its existing systems to make them year 2000 compliant
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Partnership's results of operations or financial
position.
Results of Operations
1998 Compared to 1997
- ---------------------
The Partnership reported net income of $1,614,000 for the fiscal year
ended March 31, 1998 as compared to a net loss of $1,048,000 for the prior year.
This favorable change in net income (loss) is primarily the result of the
$2,528,000 gain recognized on the sale of the Partnership's interest in the
Lincoln Garden joint venture in September 1997, as discussed further above. Also
contributing to the favorable change in the Partnership's net income (loss) was
a decrease in the Partnership's operating loss of $128,000. Operating loss,
which includes the consolidated results of the Lakes and Harbour Pointe joint
ventures, decreased mainly due to an increase in rental revenue of $544,000 and
a decrease in real estate tax expense of $120,000. These favorable changes were
partially offset by increases in the property operating, mortgage interest,
general and administrative, and depreciation expense categories as well as
decreases in interest and other income. Rental revenues increased primarily due
to a $518,000 increase in revenue at The Lakes as a result of the significant
increases in rental rates over the past two years, as discussed further above.
Real estate taxes decreased mainly as a result of a reduction in the assessed
value of The Lakes at South Coast Apartments for the current fiscal year.
Property operating expenses were higher mainly due to increases in repairs and
maintenance, advertising, salaries and management fees at The Lakes and an
increase in repairs and maintenance expenses at Harbour Pointe. The increase in
interest expense resulted from an increase in the average interest rate on the
variable interest rate debt secured by The Lakes property when compared with the
prior year. The increase in general and administrative expenses was largely
attributable to an increase in the costs of certain required professional
services compared to the prior year. Other income decreased mainly due to
certain real estate tax refunds received by The Lakes Joint Venture during the
prior fiscal year.
The Partnership's share of unconsolidated venture's loss, which represents
the operating results of the Lincoln Garden joint venture, decreased from
$152,000 in fiscal 1997 to $149,000 for the current year. As discussed further
above, the Partnership sold its interest in the Lincoln Garden joint venture as
of September 18, 1997. Accordingly, the Partnership's share of the venture's
operating results in the current year represents only a partial year of
operations which is the primary reason for the decrease in the venture's net
loss.
1997 Compared to 1996
- ---------------------
The Partnership's net loss for fiscal 1997 decreased by $1,565,000 when
compared to fiscal 1996. 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 fiscal 1996. Rental
revenues were up slightly at Harbour Pointe in fiscal 1997 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. 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 fiscal 1996, 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 fiscal 1995. 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 fiscal 1996 as compared
to fiscal 1995, 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 fiscal 1995 to 95% for fiscal 1996.
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 fiscal 1996 and fiscal 1995.
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 increased significantly over the past two years.
Existing properties in such markets could be expected to experience 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.
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. Due to the size of the asset and the expected selling price, a
near-term sale of The Lakes at South Coast Apartments would most likely be to a
large institutional investor. Demand by institutional buyers of real estate can
also be affected by the overall stock market performance and by the specific
stock market performance of the industry of institutional real estate investors
and the resulting impact on the availability and cost of capital.
Inflation
- ---------
The Partnership commenced operations in 1985 and completed its twelfth
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 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 50 10/29/85
David F. Brooks First Vice President and Assistant
Treasurer 55 6/24/85 *
Timothy J. Medlock Vice President and Treasurer 37 6/1/88
Thomas W. Boland Vice President and Controller 35 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.
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 and Controller of the Managing
General Partner and a Vice President and Controller 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, 1998, 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.
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, 1998 is $81,000, 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 $5,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1998. 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 1998.
(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 and Controller
Dated: June 26, 1998
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 26, 1998
--------------------------- -------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date: June 26, 1998
--------------------------- -------------
Terrence E. Fancher
Director
<PAGE>
<TABLE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
INDEX TO EXHIBITS
<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
dated September 11, 1985, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Amended and
Restated Certificate and
Agreement of Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant
filed as exhibits to registration to Section 13 or 15(d) of the
statements and amendments thereto Securities Act of 1934 and
of the registrant together with incorporated herein by reference.
all 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
1998 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 Page I-1, to which
reference is hereby made.
(27) Financial data schedule Filed as the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</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, 1998 and 1997 F-4
Consolidated statements of operations for the years ended
March 31, 1998, 1997 and 1996 F-5
Consolidated statements of changes in partners' deficit
for the years ended March 31, 1998, 1997 and 1996 F-6
Consolidated statements of cash flows for the years
ended March 31, 1998, 1997 and 1996 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-20
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, 1998 and 1997, 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, 1998. 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 $7,219,000 and $7,333,000 as of December 31, 1997 and
1996, respectively, and total revenues of $1,626,000, $1,598,000 and $1,560,000
for each of the three years in the period ended December 31, 1997. Those
statements were audited by other auditors whose report has 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 report 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 report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PaineWebber
Development Partners Four, Ltd. at March 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, based on our audits and the report 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.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 18, 1998
<PAGE>
Reznick Fedder & Silverman
Certified Public Accountants / A Professional Corporation
Two Hopkins Plaza, Suite 2100
Baltimore, MD 21201
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, 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, 1997 in conformity with generally
accepted accounting principles.
/s/ Reznick Fedder & Silverman
------------------------------
Reznick Fedder & Silverman
Baltimore, Maryland
January 18, 1998
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(In thousands, except for per Unit data)
ASSETS
1998 1997
---- ----
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 78,336 77,896
---------- ----------
96,526 96,086
Less accumulated depreciation (30,710) (28,077)
---------- ----------
65,816 68,009
Cash and cash equivalents 1,551 1,562
Restricted cash 2,580 3,628
Accounts receivable 6 -
Accounts receivable - affiliates - 21
Prepaid and other assets 72 64
Deferred expenses, net of accumulated
amortization of $657 ($793 in 1997) 608 658
---------- ----------
$ 70,633 $ 73,942
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt in default $ - $ 85,903
Accounts payable and accrued expenses 387 287
Accrued interest and fees 4,823 4,587
Tenant security deposits 566 526
Losses of unconsolidated joint venture
in excess of investments and advances - 2,375
Mortgage loans payable 92,120 9,125
---------- ----------
Total liabilities 97,896 102,803
Co-venturers' share of net assets of
consolidated ventures 1,124 1,140
Partners' deficit:
General Partners:
Capital contributions 1 1
Cumulative net loss (2,603) (2,684)
Limited Partners ($1,000 per unit;
41,644 Units issued):
Capital contributions, net of offering costs 36,641 36,641
Cumulative net loss (62,426) (63,959)
---------- ----------
Total partners' deficit (28,387) (30,001)
---------- ----------
$ 70,633 $ 73,942
========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 31, 1998, 1997 and 1996
(In thousands, except for per Unit data)
1998 1997 1996
---- ---- ----
Revenues:
Rental income $ 11,098 $ 10,554 $ 10,108
Interest income 239 252 237
Other income 267 336 299
--------- --------- --------
11,604 11,142 10,644
Expenses:
Interest expense and related
financing fees 4,688 4,593 5,157
Property operating expenses 3,991 3,716 3,735
Depreciation expense 2,633 2,612 3,079
Real estate taxes 819 939 962
General and administrative 247 184 260
Amortization expense 7 7 8
--------- --------- --------
12,385 12,051 13,201
--------- --------- --------
Operating loss (781) (909) (2,557)
Co-venturers' share of consolidated
ventures' losses 16 13 68
Partnership's share of unconsolidated
venture's losses (149) (152) (124)
Gain on sale of joint venture interest 2,528 - -
--------- --------- --------
Net income (loss) $ 1,614 $ (1,048) $ (2,613)
========= ========= =========
Net income (loss) per Limited
Partnership Unit $ 36.82 $ (23.90) $ (59.60)
========= ========= =========
The above net income (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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
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)
Net income 81 1,533 1,614
--------- ---------- ---------
Balance at March 31, 1998 $ (2,602) $ (25,785) $ (28,387)
========= ========== =========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,614 $ (1,048) $ (2,613)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Co-venturers' share of consolidated
ventures' losses (16) (13) (68)
Partnership's share of unconsolidated
venture's losses 149 152 124
Gain on sale of joint venture interest (2,528) - -
Depreciation and amortization 2,640 2,619 3,087
Amortization of deferred financing costs 61 104 103
Amortization of deferred gain on
forgiveness of debt (343) (343) (343)
Changes in assets and liabilities:
Accounts receivable - affiliates - (5) (5)
Prepaid and other assets (8) 4 (1)
Accounts payable and accrued expenses 100 (68) (35)
Accrued interest and fees 236 329 1,102
Tenant security deposits 40 49 36
--------- --------- ---------
Total adjustments 331 2,828 4,000
--------- --------- ---------
Net cash provided by operating
activities 1,945 1,780 1,387
--------- --------- ---------
Cash flows from investing activities:
Additions to buildings and improvements (440) (901) (170)
Proceeds from sale of joint venture
interest 19 - -
--------- --------- ---------
Net cash used in investing
activities (421) (901) (170)
--------- --------- ---------
Cash flows from financing activities:
Decrease (increase) in restricted cash 1,048 536 (1,119)
Payment of deferred financing fees (18) - -
Repayment of long-term debt (2,565) (1,243) -
--------- --------- ---------
Net cash used in financing
activities (1,535) (707) (1,119)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (11) 172 98
Cash and cash equivalents, beginning of year 1,562 1,390 1,292
--------- --------- ---------
Cash and cash equivalents, end of year $ 1,551 $ 1,562 $ 1,390
========= ========= =========
Cash paid for interest $ 4,752 $ 4,446 $ 4,239
========= ========= =========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Planned Liquidation
--------------------------------------
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 and the sale of the
Partnership's interest in one joint venture for a nominal amount. Subsequent to
the resolution of the default status of the debt secured by The Lakes at South
Coast Apartments in fiscal 1998 (see Note 7), management analyzed whether it
would be in the Limited Partners' best interests to continue to hold the two
remaining assets (The Lakes and Harbour Pointe) or to pursue potential sale
opportunities with a goal of completing a liquidation of the Partnership in the
near term. Based on such analysis, management concluded that a liquidation of
the Partnership should be undertaken if favorable prices for The Lakes and
Harbour Pointe can be achieved. Under the terms of the Partnership Agreement,
the affirmative vote of Limited Partners who own 51% or more of the total number
of outstanding units of limited partnership interest in the Partnership is
required to approve the sale of all, or substantially all, of the Partnership's
assets. On May 4, 1998, the Partnership furnished a Consent Solicitation
Statement to the Limited Partners which sought the approval to sell the
Partnership's two remaining assets and, thereafter, to liquidate and dissolve
the Partnership (collectively, the "Sale and Liquidation"). Effective June 18,
1998, the results of the Consent Solicitation Statement were finalized, and the
Sale and Liquidation was approved by the required affirmative vote of the
Limited Partners. Management's goal is to complete the Sale and Liquidation by
the end of calendar year 1998. There can be no assurances, however, that the
sales of the remaining assets and the liquidation of the Partnership will be
completed within this time frame.
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, 1998 and 1997 and revenues and expenses for each
of the three years in the period ended March 31, 1998. Actual results could
differ from the estimates and assumptions used.
As of March 31, 1998, the Partnership had investments in two joint venture
partnerships which own operating properties (three at March 31, 1997). 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 has accounted for its investment in the Lincoln Garden
joint venture (which was sold on September 18, 1997) using the equity method
because the Partnership did 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
discussed further 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 consolidated joint ventures have been eliminated
in consolidation.
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.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the operating investment properties, generally 5 years
for the furniture and fixtures and 30 years for the buildings. 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 sheets at March 31, 1998 and 1997 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, where practical, using discounted cash
flow analysis, based on current market rates for similar types of borrowing
arrangements (see Note 7).
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partners of the Partnership are Fourth Development Fund Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Managing General Partner and PaineWebber
Properties Incorporated ("PWPI"), a wholly-owned subsidiary of PaineWebber
Incorporated ("PWI"). PWI, a wholly-owned subsidiary of PaineWebber, acted as
the selling agent for the Limited Partnership Units. The General Partners, PWPI
and PWI will receive fees and compensation, determined on an agreed-upon basis,
in consideration of various services performed in connection with the sale of
the Units, the management of the Partnership and the acquisition, management,
financing and disposition of Partnership investments. The Managing General
Partner and its affiliates are reimbursed for their direct expenses relating to
the offering of Units, the administration of the Partnership and the acquisition
and operation of the Partnership's real property investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and 5% to the
General Partners. All sale or refinancing proceeds shall be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, net income or loss of
the Partnership, other than net gains resulting from Capital Transactions, as
defined, will generally be allocated 95% to the Limited Partners and 5% to the
General Partners.
Additionally, the Partnership Agreement provides for the allocation of net
gains resulting from Capital Transactions, as defined, first, to those partners
whose capital accounts reflect a deficit balance (after all distributions for
the year and all allocations of net income and losses from operations have been
made) in the ratio of such deficits and up to an amount equal to the sum of such
deficits; second, to the General and Limited Partners in such amounts as are
necessary to bring the General Partners' capital account balance in the ratio of
5 to 95 to the Limited Partners' capital account balances; then, 95% to the
Limited Partners and 5% to the General Partners.
Selling commissions incurred by the Partnership and paid to PWI for the
sale of Partnership interests were approximately $3,540,000 through the
completion of the offering period which expired in September of 1987.
In connection with the acquisition of properties, PWPI was entitled to
receive acquisition fees in an amount not greater than 5% of the gross proceeds
from the sale of the Partnership units. Total acquisition fees incurred by the
Partnership and paid to PWPI aggregated $2,077,000.
The Partnership recorded investor servicing fee income from its
unconsolidated joint venture of $5,000 for both of the years ended March 31,
1997 and 1996 in accordance with the terms of the joint venture agreement. No
investor servicing fee income was recorded for the year ended March 31, 1998.
Included in general and administrative expenses for the years ended March
31, 1998, 1997 and 1996 is $81,000, $76,000 and $82,000, 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 $5,000, $4,000 and $3,000 (included in general and administrative expenses)
for managing the Partnership's cash assets during fiscal 1998, 1997 and 1996,
respectively.
4. Operating Investment Properties
-------------------------------
As of March 31, 1998 and 1997, 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. As discussed in Note 1, management plans to
sell the remaining investment properties and complete a liquidation of the
Partnership during calendar 1998. Formal marketing efforts for the sale of the
Harbour Pointe Apartments began subsequent to year-end. There are no assurances,
however, that such efforts will result in a sale transaction.
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, 1998
and 1997); 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.
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
March 31, 1998 and 1997.
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.
As discussed in Note 1, management plans to sell the remaining investment
properties and complete a liquidation of the Partnership during calendar 1998.
As a result, management retained a national brokerage firm in November 1997 to
begin a formal marketing program for the purpose of soliciting proposals to
acquire The Lakes. During the fourth quarter of fiscal 1998, the property was
marketed extensively. Sales packages were distributed to 200 international,
national, regional and local prospective purchases. Subsequent to year-end, the
Partnership received offers from 14 prospective buyers. Supplemental information
on the property was then provided to the top seven bidders with a requirement
that best and final offers be returned by April 30, 1998. The highest offer was
from a qualified buyer and met the Partnership's sale criteria. In June 1998,
the Partnership executed a purchase and sale agreement with this prospective
buyer for an amount in excess of the outstanding debt obligations. However,
since this sale transaction remains contingent upon, among other things,
satisfactory completion of the buyer's due diligence and formal approval by a
number of third parties of the assumption of the tax-exempt bonds secured by The
Lakes, there are no assurances that a sale will be consummated.
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, 1997 1996 and 1995 (in thousands):
<PAGE>
1997 1996 1995
---- ---- ----
Property operating expenses:
Repairs and maintenance $ 1,274 $ 1,105 $ 1,044
Salaries and related expenses 843 784 809
Utilities 573 574 617
Administrative and other 640 605 653
Management fees 394 381 365
Leasing commissions and fees 152 142 132
Insurance 115 125 115
------- ------- -------
$ 3,991 $ 3,716 $ 3,735
======= ======= =======
5. Investments in Unconsolidated Joint Ventures
--------------------------------------------
The Partnership had an investment in one unconsolidated joint venture at
March 31, 1997. The unconsolidated joint venture is accounted for on the equity
method in the Partnership's financial statements. On September 18, 1997, the
Partnership sold its general partnership interest in the joint venture which
owned the Lincoln Garden Apartments to its co-venture partner for $25,000. In
effecting such sale, management considered that (i) during recent years, the
operating performance of Lincoln Garden had deteriorated, (ii) since its
inception, the Partnership had not received cash flow from this investment and
no cash flow from this asset was projected for the future, and (iii) the joint
venture partner had a priority position in the joint venture due to certain
loans which it advanced to the joint venture to cover prior operating deficits.
In addition, management determined that the outstanding first mortgage loan
balance on the Lincoln Garden property was in excess of its market value and
that future increases in the property's value were unlikely. Because the
property offered little or no opportunity for a return of equity, the
Partnership negotiated a sale of its position to its joint venture partner for a
nominal amount. The sale was structured in two parts to minimize the negative
tax consequences to the Lincoln Garden joint venture. Accordingly, the
Partnership received $19,000 in September 1997 for the sale of 75% of its
interest in the joint venture and will receive a final payment of $6,000 in
September 1998 for the remaining 25% of its interest. As of September 18, 1997,
the Partnership's remaining position in the joint venture was converted to a
limited partnership interest, and the Partnership will have no continuing
involvement in the operations of the Lincoln Garden joint venture through the
date in September 1998 when its limited partnership interest will be redeemed
for $6,000. Consequently, the Partnership wrote off the remaining equity method
carrying value of its investment in Lincoln Garden during fiscal 1998. This
write-off resulted in a gain of $2,528,000 because the venture's prior equity
method losses had exceeded the total of the Partnership's investments and
advances in the joint venture. The Partnership recorded its share of the
venture's operating losses up through the date of the September 18, 1997 sale
transaction. As discussed in Note 2, the unconsolidated joint venture reported
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
(in thousands)
Assets
1996
----
Current assets $ 86
Operating investment property, net 4,705
Other assets 230
--------
$ 5,021
========
Liabilities and Partners' Deficit
Current liabilities $ 562
Loans payable to affiliates 537
Long-term debt 6,700
Partnership's share of combined deficit (2,507)
Co-venturer's share of combined deficit (271)
--------
$ 5,021
========
<PAGE>
Condensed Summary of Operations
For the period January 1, 1997 to September 18, 1997 and
for the years ended December 31, 1996 and 1995
(in thousands)
January 1, 1997 to
September 18, 1997 1996 1995
------------------ ---- ----
Rental revenues $ 740 $ 1,084 $ 1,148
Interest and other income 40 68 71
-------- --------- ---------
780 1,152 1,219
Property operating expenses 454 665 685
Depreciation and amortization 196 255 236
Interest expense 357 460 482
-------- --------- ---------
1,007 1,380 1,403
-------- --------- ---------
Net loss $ (227) $ (228) $ (184)
======== ========= =========
Net loss:
Partnership's share of loss $ (148) $ (148) $ (120)
Co-venturer's share of loss (79) (80) (64)
-------- --------- ---------
$ (227) $ (228) $ (184)
======== ========= =========
Reconciliation of Partnership's Investment
March 31, 1997
(in thousands)
1997
----
Partnership's share of deficit
as shown above at December 31 $ (2,507)
Partnership's share of venture's current
liabilities 60
Excess basis due to investment in joint
venture, net (1) 72
---------
Losses of unconsolidated joint
venture in excess of investments
and advances at March 31 $ (2,375)
=========
(1)At March 31, 1997 the Partnership's investment exceeded its share of
the joint venture's deficit account by approximately $72,000. This
amount, which relates to certain expenses incurred by the Partnership
in connection with acquiring the unconsolidated joint venture
investment, was being amortized using the straight-line method over the
estimated useful life of the related operating investment property.
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
Partnership's share of
operations, as shown above $ (148) $ (148) $ (120)
Amortization of excess basis (1) (4) (4)
------ ------ ------
Partnership's share of
unconsolidated venture's losses $ (149) $ (152) $ (124)
====== ====== ======
A description of the property owned by the 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
was 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.
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 were insufficient to pay operating expenses, either the
co-venturer or the Partnership could make optional loans, as defined, to the
Joint Venture. All mandatory and optional loans bore interest at prime plus 1%
per annum and were 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 these mandatory and optional loans at
December 31, 1996 amounted to $383,000.
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, were allocated 65% to the Partnership
and 35% to the co-venturer.
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 sheets.
7. Long-term debt
--------------
Long-term debt on the Partnership's balance sheets at March 31, 1998 and
1997 consists of the following (in thousands):
1998 1997
---- ----
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. 926 3,491
Prior indebtedness principal
payable to bank. This
obligation is related to The
Lakes Joint Venture and is
nonrecourse. 3,411 3,411
Deferred gain on forgiveness of
debt (net of accumulated
amortization of $2,220 and
$1,877 in 1998 and 1997,
respectively) 3,058 3,401
------- --------
92,120 95,028
Less: Long-term debt in
default (see discussion below) - (85,903)
------- --------
$92,120 $ 9,125
======= ========
<PAGE>
Mortgage loan secured by the Harbour Pointe Apartments
------------------------------------------------------
Original financing for construction of the Harbour Pointe Apartments was
provided through $9,200,000 of Multi-Family Housing Mortgage Revenue Bonds,
Series 1985 E due December 1, 2007 (the original Bonds) issued by the Manatee
County Housing Finance Authority which bore interest at 8.25% plus a 1.25%
letter of credit fee. An amount of $75,000 was paid on the original bonds prior
to the refinancing. The original bond issue was refinanced on May 1, 1990 with
$9,125,000 Weekly Adjustable/Fixed Rate Multi-Family Housing Revenue Refunding
Bonds, Series 1990A, due December 1, 2007 (the Bonds).
The interest rate on the Bonds is adjusted weekly to a minimum rate that
would be necessary to remarket the Bonds in a secondary market as determined by
a bank remarketing agent. During calendar 1997, the interest rate averaged 3.78%
(3.62% in 1996). The Bonds are secured by the Harbour Pointe Apartments. As of
December 31, 1997, the fair value of this debt obligation approximated its
carrying value.
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 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 was 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 $33,000 during 1997. The letter of credit
was scheduled to expire on December 15, 1997. Effective December 15, 1997, the
bank extended the letter of credit through December 15, 2000. The agreement
provides for an annual fee equal to 1.25% per annum on the letter of credit. In
addition, the joint venture is required to make quarterly bond sinking fund
deposits of $60,000 beginning on February 15, 1998 under the terms of the letter
of credit. Also pursuant to the agreement, the joint venture is required to make
payments equal to 75% of annual net cash flow, as defined in the agreement to
serve as additional collateral. Any funds held will be released upon the
termination of the letter of credit, payment of the outstanding bonds or the
achievement of a 75% loan-to-value ratio.
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 2.95% to 4.50% during calendar 1997), and is payable in arrears on
the first of each month. As of December 31, 1997, the fair value of this debt
obligation approximated its carrying value.
The loan is secured by a first deed of trust plus all future rents and
income generated by the operating investment property. Bond principal and
interest payments are secured by an irrevocable letter of credit issued by a
bank in the amount of $76,569,000, expiring December 15, 1998. The Venture pays
an annual letter of credit fee equal to 1.3% of the outstanding amount, payable
83% monthly with the remaining 17% deferred and paid in accordance with the
Reimbursement Agreement (Unpaid Accrued Letter of Credit Fees). Such Unpaid
Accrued Letter of Credit Fees were $1,863,000 and $1,608,000 at December 31,
1997 and 1996, respectively. The bank letter of credit is secured by a second
deed of trust on the operating investment property and future rents and income
from the operating investment property. As discussed further in Note 1, the
Partnership is planning to sell its remaining assets and complete a liquidation
of the Partnership by December 31, 1998. There are no assurances, however that
the sale of the remaining assets will be completed within this time frame. In
the absence of a sale of The Lakes at South Coast Apartments on or by December
15, 1998, the letter of credit referred to above would have to be extended or
replaced.
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, 1997, leaving an outstanding principal balance
of $3,411,000 as of December 31, 1997. At the time of the refinancing the
Venture also owed the letter of credit issuer fees totalling $2,184,000. The
letter of credit issuer agreed to forgive $1,259,000 of such unpaid fees,
leaving an unpaid balance of $925,000 (Deferred Prior Letter of Credit Fees).
The Venture has a limited right to defer payment of interest and principal on
the Prior Indebtedness and the Unpaid Accrued Letter of Credit Fees to the
extent that the net cash flow from operations is not sufficient after the
payment of debt service on the 1991 Developer Loan and the funding of certain
required reserves. In addition, upon a sale or other disposition of the
operating property, the Reimbursement Agreement allows for the payment to the
Venture of an amount of $5,500,000, plus accrued interest at the rate of 8% per
annum, prior to the repayment to the letter of credit issuer of the accrued
interest on the Prior Indebtedness and the Deferred Prior Letter of Credit Fees.
In November 1988, a borrowing arrangement with a bank was entered into to
provide funds for The Lakes. The Venture obtained a line of credit secured by a
third trust deed on the subleasehold interest, buildings and improvements, and
rents and income in the amount of $6,300,000. Interest on the line of credit was
originally payable monthly at 1-1/2% over the Citibank, N.A. prime rate.
However, because of the default status of this obligation during 1990, interest
had accrued at a rate of prime plus 4% through September 26, 1991. Accrued
interest on the line of credit, which is payable to the same bank which issued
the letter of credit in connection with the bonds, totalled $1,841,000 at
September 26, 1991. The outstanding principal balance of the line of credit was
$6,127,000 as of September 26, 1991. In conjunction with the refinancing of the
developer loan described above, the lender agreed to forgive all of the
outstanding accrued interest at the date of the refinancing. Interest accrues on
the outstanding principal balance at the rate of 11% per annum beginning
September 27, 1991. Payment of interest and principal on the line of credit
borrowings, prior to a sale or other disposition of the operating property, is
limited to the extent of available cash flow after the payment of debt service
on the developer loan and the funding of certain required reserves. In addition,
as with the Prior Indebtedness principal and interest described above, upon a
sale or other disposition of the operating property, the payment of accrued
interest on the line of credit borrowings is subordinated to the receipt by the
Venture of $5,500,000 plus a simple return thereon of 8% per annum. Principal
payments on the line of credit borrowings from available net cash flow totalled
$5,201,000 through December 31, 1997, leaving an outstanding principal balance
of $926,000 as of December 31, 1997.
The restructuring of the Prior Indebtedness, the Deferred Letter of Credit
Fees and the line of credit borrowings, as described above, have been accounted
for in accordance with Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings".
Accordingly, the forgiveness of debt, aggregating $5,279,000, 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, 1997 and 1996, $2,967,000
and $3,401,000, respectively of such forgiven debt (net of accumulated
amortization) has been reflected on the accompanying balance sheets 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, 1997, 1996 and
1995, respectively. With the exception of the 1991 Developer Loan described
above, it is impractical to estimate the fair value of the other secured
indebtedness of The Lakes Joint Venture due to the unique terms of the loans.
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. During calendar 1997 and 1996, respectively,
the additional reserve account and deficit reserve account requirements were
eliminated, and in calendar 1997 the balances in these accounts were applied
against the Venture's outstanding obligations. As of December 31, 1996, the
balance in the deficit reserve account totalled $1,146,000. The remaining
balance in restricted cash on the accompanying balance sheets 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. As of December 31, 1996, The Lakes Joint Venture had not provided the
lender with an appraisal which met either the $92,000,000 or $100,000,000
requirement. In February 1996, the lender issued a formal notice of default to
the Joint Venture pursuant to the Reimbursement Agreement. Accordingly, the
carrying amount of the debt related to The Lakes Joint Venture was classified as
long-term debt in default on the balance sheet at March 31, 1997. Effective
September 18, 1997, the lender waived the minimum appraised value requirement in
accordance with the provisions of the Amendment to Reimbursement Agreement and
Limited Waiver, and, as of December 31, 1997, the Joint Venture was in
compliance with the covenants required by the 1991 Developer Loan.
<PAGE>
<TABLE>
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1998
(In thousands)
<CAPTION>
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 $ 514 $ 1,543 $ 8,823 $ 10,366 $ 3,244 1987 12/16/85 5 - 30 yrs.
Apartment
Complex
Costa Mesa,
CA 82,995 16,647 64,350 5,163 16,647 69,513 86,160 27,466 1987 11/1/85 5 - 30 yrs.
------- ------- ------- ------ ------- ------- ------- -------
$92,120 $18,190 $72,659 $5,677 $18,190 $78,336 $96,526 $30,710
======= ======= ======= ====== ======= ======= ======= =======
Notes
(A) The aggregate cost of real estate owned at December 31, 1997 for Federal income tax purposes is approximately $85,581.
(B) See Note 7 to the financial statements for a description of the terms of the debt encumbering the properties.
(C) Reconciliation of real estate owned:
1997 1996 1995
---- ---- ----
Balance at beginning of period $ 96,086 $ 95,185 $ 95,015
Increase due to additions 440 901 170
-------- -------- --------
Balance at end of period $ 96,526 $ 96,086 $ 95,185
======== ======== ========
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $ 28,077 $ 25,465 $ 22,386
Depreciation expense 2,633 2,612 3,079
-------- -------- --------
Balance at end of period $ 30,710 $ 28,077 $ 25,465
======== ======== ========
</TABLE>
<PAGE>
<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, 1998 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,551
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,209
<PP&E> 96,526
<DEPRECIATION> 30,710
<TOTAL-ASSETS> 70,633
<CURRENT-LIABILITIES> 5,776
<BONDS> 92,120
0
0
<COMMON> 0
<OTHER-SE> (28,387)
<TOTAL-LIABILITY-AND-EQUITY> 70,633
<SALES> 0
<TOTAL-REVENUES> 14,132
<CGS> 0
<TOTAL-COSTS> 7,697
<OTHER-EXPENSES> 133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,688
<INCOME-PRETAX> 1,614
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,614
<EPS-PRIMARY> 36.82
<EPS-DILUTED> 36.82
</TABLE>
