SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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Check the appropriate box:
[ ] Preliminary proxy statement
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[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
(Name of registrant as specified in its charter)
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
(Name of person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: ______
______________________________________________________________________
(2) Aggregate number of securities to which transaction applies: ________
______________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
______________________________________________________________________
(4) Proposed maximum aggregate value of transaction: _____________________
______________________________________________________________________
(5) Total fee paid:
______________________________________________________________________
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: _____________________________________________
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(4) Date filed: _________________________________________________________
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PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
265 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
May 4, 1998
To the Limited Partners of
PaineWebber Development Partners Four, Ltd.
Fourth Development Fund, Inc. (the "Managing General Partner"), and
Property Associates 1985, L.P. (the "Associate General Partner" and together
with Managing General Partner, the "General Partners"), the General Partners
of PaineWebber Development Partners Four, Ltd. (the "Partnership"), are
pleased to report that a plan has been established for the sale of the
Partnership's two remaining properties and the liquidation and dissolution
(collectively, the "Sale and Liquidation") of the Partnership. As further
described in the enclosed Consent Solicitation Statement, the Managing
General Partner formulated this plan after a thorough evaluation of your
investment and of each of the Partnership's two remaining properties, taking
into consideration the properties' capital requirements and estimated future
cash flow distributions, as well as the increased demand for apartment
properties in the markets in which the Partnership's properties are located.
Pursuant to the Sale and Liquidation, the Managing General Partner intends to
market and sell the Partnership's two remaining properties and, thereafter,
to liquidate and dissolve the Partnership. The Managing General Partner will
only proceed with a sale of the Partnership's properties at prices which,
given market conditions, the Managing General Partner believes are favorable
to the Partnership and the Limited Partners.
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 ("Units") is required to
approve the Sale and Liquidation. The purpose of this Consent Solicitation is
to request that the Limited Partners consent to the Sale and Liquidation, on
the enclosed consent card, so as to achieve the requisite approval.
The Partnership was formed in June 1985 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. The
Partnership's original investment objectives were: (i) to preserve and
protect the original capital invested in the Partnership; (ii) to achieve
long-term capital appreciation through potential appreciation in the values
of Partnership properties; (iii) to obtain tax losses during the early years
of operations from deductions generated by investments; (iv) to provide
annual distributions of cash flow from operations of the Partnership; and (v)
to achieve accumulation of equity through reduction of mortgage loans on
Partnership properties. Although the Managing General Partner made
significant and ongoing efforts to achieve such objectives, these objectives
remain largely unfulfilled. The Managing General Partner believes that much
of the failure can be attributed to certain factors, such as generally
depressed economic conditions during much of the term of the Partnership,
changes in tax laws, oversupply of competing rental apartment properties in
the markets in which the Partnership's properties are located, and resulting
decreases in apartment property valuations.
The original amount invested by Limited Partners in each Unit was
$1,000. To date, Limited Partners have not received any distributions from
the Partnership. The Managing General Partner estimates that the Sale and
Liquidation would provide an aggregate of at least $10,000,000 for
distribution (the "Distribution Amount") after the payment of certain fees
and expenses associated with the sale of the Partnership's properties
(including real estate sales commissions, legal fees and other closing costs)
and that, under the terms of the Partnership Agreement, the Limited Partners
would receive 100% of such Distribution Amount, or at least $240 per Unit. No
part of the Distribution Amount, or any of such related fees and expenses,
will be payable to the General Partners or their respective affiliates. The
above estimate is based on a variety of assumptions relating to the
Partnership's two remaining properties, as well as general business and
economic conditions and other matters which are subject to significant
uncertainties and contingencies, many of which are beyond the Partnership's
control. Therefore, the above estimate is inherently imprecise and there can
be no assurance that it will be realized. The actual proceeds of the Sale and
Liquidation may vary materially from the amount estimated above.
The Managing General Partner believes that approval of the proposed
Sale and Liquidation will enable the Partnership to take advantage of current
favorable market conditions, thus maximizing the Limited Partners' return of
capital; however, as is the case generally in the real estate industry, there
can be no assurance that such favorable market conditions will prevail or,
alternatively, that the price at which each of the Partnership's properties
could be sold will not increase after the sale of each of such properties is
consummated. In addition, because the letter of credit that guarantees and
secures the
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Partnership's debt obligations with respect to its most valuable property,
The Lakes at South Coast Apartments, expires on December 15, 1998, approval
of the Sale and Liquidation will enable the Partnership to avoid a potential
foreclosure.
Enclosed for your review please find (i) a Consent Solicitation
Statement to the Limited Partners of the Partnership, which describes the
proposed Sale and Liquidation and (ii) a consent card. Please sign the
enclosed consent card and promptly return it in the enclosed envelope in
order to give your consent to the Sale and Liquidation.
THE MANAGING GENERAL PARTNER RECOMMENDS THAT AT YOUR EARLIEST
CONVENIENCE, BUT IN ANY EVENT BY JULY 3, 1998, YOU CONSENT TO THE PROPOSED
SALE AND LIQUIDATION BY MARKING AN "X" IN THE APPROPRIATE BOX ON THE CONSENT
CARD AND THEN SIGNING, DATING AND RETURNING THE CONSENT CARD IN THE ENCLOSED,
POSTAGE PAID ENVELOPE.
PLEASE NOTE THAT IT IS IMPORTANT THAT YOU VOTE, BECAUSE FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS WITHHOLDING CONSENT. THE MANAGING GENERAL
PARTNER WILL NOT BE ABLE TO PROCEED WITH THE SALE AND LIQUIDATION AS PROPOSED
HEREIN UNLESS LIMITED PARTNERS OWNING 51% OR MORE OF THE OUTSTANDING UNITS
VOTE TO CONSENT.
Thank you for your assistance in this matter.
Fourth Development Fund, Inc.
Property Associates 1985, L.P.,
/s/ Bruce J. Rubin
Bruce J. Rubin
President
Fourth Development Fund, Inc.
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PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
265 Franklin Street
Boston, Massachusetts 02110
-------------------------------------
CONSENT SOLICITATION STATEMENT
MAY 4, 1998
--------------------------------------
INTRODUCTION
General
This Consent Solicitation Statement is furnished in connection with
the solicitation of consents (the "Consent Solicitation") by Fourth
Development Fund, Inc., a Delaware corporation (the "Managing General
Partner"), and Property Associates 1985, L.P., a Virginia limited partnership
(the "Associate General Partner" and, together with the Managing General
Partner, the "General Partners"), the General Partners of PaineWebber
Development Partners Four, Ltd., a Texas limited partnership (the
"Partnership"). The General Partners are soliciting such consents in order to
sell the Partnership's two remaining assets and, thereafter, to liquidate and
dissolve the Partnership (collectively, the "Sale and Liquidation"). See
"Consents Required to Approve the Sale and Liquidation." This Consent
Solicitation Statement and enclosed consent card (the "Consent Card") are
being mailed to limited partners of the Partnership (the "Limited Partners")
on or about May 4, 1998. Please complete, date and sign the enclosed Consent
Card and return it to the Partnership c/o MAVRICC Management Systems, Inc.
("MMS") in the enclosed postage paid envelope. The Consent Solicitation will
expire upon the earlier of (i) the Consent Effective Date (as defined below)
or (ii) 12:00 midnight on July 3, 1998 (the "Expiration Date").
Under the Texas Revised Limited Partnership Act, a limited
partnership may be dissolved at the time or upon the happening of events
specified in its partnership agreement. The Amended and Restated Limited
Partnership Agreement and Certificate of the Partnership (the "Partnership
Agreement") provides that the affirmative vote of Limited Partners who own
51% or more of the total number of outstanding Units (as defined below) (the
"Majority Vote") is required in order for the General Partners to sell
substantially all of the Partnership's assets in a single sale, or in
multiple sales in the same 12-month period, and to terminate and dissolve the
Partnership prior to the end of its term. Following the Sale and Liquidation,
the Managing General Partner shall apply and distribute the proceeds
therefrom in the order specified in the Partnership Agreement.
See "Sale of Properties and the Liquidation Process."
The Managing General Partner anticipates that the Sale would
provide an aggregate of at least $10,000,000 for distribution (the
"Distribution Amount") after the payment of certain fees and expenses
associated with the sale of the Partnership's properties (including real
estate sales commissions, legal fees and other closing costs) and that, under
the terms of the Partnership Agreement, the Limited Partners would receive
100% of the Distribution Amount, or at least $240 per Unit. No part of the
Distribution Amount, or any of such related fees and expenses, will be
payable to the General Partners or their respective affiliates. The above
estimate is based on a variety of assumptions relating to the Partnership's
two remaining properties, as well as general business and economic conditions
and other matters which are subject to significant uncertainties and
contingencies, many of which are beyond the Partnership's control. Therefore,
the above estimate is inherently imprecise and there can be no assurance that
it will be realized. Actual proceeds of the Sale and Liquidation may vary
materially from the amount estimated above. See "The Sale and Liquidation -
Amounts Available for Distribution."
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Approval of the Sale and Liquidation
Upon approval of the Sale and Liquidation, the Managing General
Partner shall take full account of the Partnership's assets and liquidate the
assets as promptly as possible, but in an orderly and businesslike manner so
as not to involve undue sacrifice. Subsequent to the approval of the Sale and
Liquidation, the Limited Partners will have no opportunity to evaluate or
vote on the sale of, or the terms of any purchase offers for, the
Partnership's properties, including the timing of any sale and the sale
prices for such properties. See "Certain Considerations." If the Sale and
Liquidation is not approved, the Managing General Partner will continue to
manage the Partnership and its properties with a view towards preserving and
protecting the capital of the Limited Partners and obtaining capital
appreciation. In addition, the Managing General Partner will continue to
evaluate market conditions on behalf of the Partnership and the Limited
Partners in order to assess, recommend and implement disposition strategies
over a period of time longer than 12 months.
Record Date
The Managing General Partner has selected the close of business on
April 28, 1998, which is the date four business days prior to the date this
Consent Solicitation Statement is being mailed to Limited Partners, as the
record date (the "Record Date") for determining those Limited Partners
entitled to notice of and to vote the interests in the Partnership with
respect to the matters set forth herein. As of such date, there were
outstanding 41,644 units of limited partnership interests (the "Units").
Consents Required to Approve the Sale and Liquidation
The Partnership Agreement provides that, with a Majority Vote, the
General Partners may sell substantially all of the Partnership's assets and
liquidate and dissolve the Partnership. The purpose of this Consent
Solicitation is to request that the Limited Partners consent to the Sale and
Liquidation, on the enclosed Consent Card, so as to achieve the requisite
Majority Vote.
Procedure for Consenting to the Sale and Liquidation
Properly completed Consent Cards will be counted on June 18, 1998,
and approval of the Sale and Liquidation shall be effective at such time as
MMS, as agent for the Partnership, shall have received unrevoked Consent
Cards representing a Majority Vote consenting to the Sale and Liquidation
(the "Consent Effective Date"). If a Majority Vote is not obtained by the
above date, Consent Cards will continue to be received and counted for
purposes of determining the existence of a Majority Vote; provided, however,
that, pursuant to the Partnership Agreement, the Consent Effective Date may
not be later than 60 days following the mailing of this Consent Solicitation
Statement. If the Majority Vote is not obtained by such 60th day, the Sale
and Liquidation will not have been approved by the Limited Partners and will
not occur.
Each Unit shall be entitled to one vote with respect to the proposed
Sale and Liquidation. If a Limited Partner specifies a choice with respect to
the matter identified on the form of Consent Card, the Consent Card and the
associated Unit or Units will be counted in accordance with the specification
so made. If a Limited Partner executes a Consent Card but fails to check a
box marked "CONSENT" or "WITHHOLD CONSENT", such Limited Partner will be
deemed to have consented to the Sale and Liquidation and such associated Unit
or Units will count towards satisfying the Majority Vote requirement. If a
Limited Partner checks the box marked "WITHHOLD CONSENT" or does not return
the Consent Card, then such Limited Partner will be deemed not to have
consented to the Sale and Liquidation and such associated Unit or Units will
not count towards satisfying the Majority Vote requirement.
Any Limited Partner who desires to revoke a previously executed
Consent Card may do so by furnishing MMS with a later dated Consent Card or
letter or other written notice stating such Limited Partner's name and that
such Limited Partner wishes to revoke a previously executed Consent Card.
Such letter or notice must be executed and bear a later date than the
previously executed Consent Card. Such revocation will be deemed effective on
the date of receipt by MMS at the following address: PaineWebber Development
Partners Four, Ltd. c/o MAVRICC Management Systems, Inc., P.O. Box 7090,
Troy, Michigan 48007-7090. Limited Partners are hereby advised that the
delivery of a subsequently executed Consent Card will revoke all previously
executed Consent Cards. Hence, the Limited Partners may revoke their Consent
Cards at any time prior to the Consent Effective Date. After the Consent
Effective Date, no revocations can be made.
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Appraisal and Dissenters' Rights
Limited Partners are advised that neither Texas law nor the
Partnership Agreement provides them with any right to dissent from or seek an
independent appraisal of the value of the Partnership or its assets.
Consent Solicitation Expenses
The Partnership has retained D.F. King & Co., Inc. to assist in
contacting the Limited Partners and will pay such firm a base fee of
approximately $5,500 plus expenses for so acting. MMS will be paid a base fee
of approximately $1,500 to assist in tabulating the Limited Partners votes.
In addition, certain officers, representatives and regular employees of the
General Partners may also contact the Limited Partners by telephone or
telefax or in person. The entire cost of this solicitation will be borne by
the Partnership.
THE SALE AND LIQUIDATION
THE MANAGING GENERAL PARTNER BELIEVES THAT THE PROPOSED SALE AND
LIQUIDATION IS IN THE BEST INTEREST OF THE LIMITED PARTNERS AND THAT THE
LIMITED PARTNERS SHOULD VOTE TO "CONSENT" TO THE SALE AND LIQUIDATION.
Background of the Partnership
The Partnership was formed in June 1985 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. The
Partnership's original investment objectives were: (i) to preserve and
protect the original capital invested in the Partnership; (ii) to achieve
long-term capital appreciation through potential appreciation in the values
of Partnership properties; (iii) to obtain tax losses during the early years
of operations from deductions generated by investments; (iv) to provide
annual distributions of cash flow from operations of the Partnership; and (v)
to achieve accumulation of equity through reduction of mortgage loans on
Partnership properties. At the conclusion of the Partnership's initial
offering period, 41,644 Units had been issued representing capital
contributions of $41,644,000.
The Partnership originally made investments in six operating
investment properties: Clipper Cove Apartments, Quinten's Crossing
Apartments, Parrot's Landing Apartments, The Lakes at South Coast Apartments,
Harbour Pointe Apartments, and Lincoln Garden Apartments. Following the
initial investment, each of the Partnership's properties was adversely
affected by certain factors, such as generally depressed economic conditions
during much of the term of the Partnership, changes in tax laws, oversupply
of competing rental apartment properties in the markets in which the
Partnership's properties are located, and resulting decreases in apartment
property valuations. As a result of the competition caused by such
oversupply, the joint ventures' high debt service costs, and weakened local
economies, none of the joint ventures was able to meet its original debt
service obligations without contributions from the joint venture owners. By
1992, the Partnership had lost its investments in Clipper Cove Apartments,
Quinten's Crossing Apartments and Parrot's Landing Apartments, which together
comprised approximately 38% of the Partnership's original investment
portfolio, through foreclosure proceedings after the joint ventures failed to
reach agreement with their respective lenders on acceptable modifications to
their respective mortgage obligations or otherwise failed to find buyers for
the properties.
During this period, the Partnership did obtain more favorable
financing terms on its three remaining properties; however, management
realized that additional relief from debt service obligations and continued
financial support from the joint venture partners would likely be required if
the properties' operations did not improve. Through 1997, the Managing
General Partner, along with the Partnership's joint venture partners, pursued
workout negotiations with the respective mortgage holders on the remaining
properties while also seeking potential buyers. In connection with such
efforts, on September 18, 1997, the Partnership sold its interest in the
Lincoln Garden Apartments ("Lincoln Garden") joint venture to its joint
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 Lincoln Gardens 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.
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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.
Remaining Investment Properties
The Partnership formed a joint venture on May 30, 1985 in accordance
with the provisions of the laws of the State of California for the purpose of
developing, owning and operating The Lakes at South Coast Apartments, a
770-unit apartment complex located in Costa Mesa, California ("The Lakes").
On September 26, 1991, in conjunction with a refinancing and modification of
The Lakes joint venture's long-term indebtedness, the original joint venture
partner transferred its interest in The Lakes joint venture to Development
Partners, Inc., a Delaware corporation and a wholly-owned subsidiary of
PaineWebber Group, Inc., and withdrew from the venture. As a result of the
original joint venturer's withdrawal, the Partnership assumed control over
the operations of The Lakes joint venture.
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 ("Harbour Pointe"). Pursuant to an
Amended and Restated Agreement of the Limited Partnership dated August 4,
1989, the general partner interests of the joint venturers were converted to
limited partnership interests. As a result of the amendment, the Partnership,
as the sole general partner, assumed control of the operations of the
property.
The 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 restructurings described 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.
Reasons for the Sale and Liquidation
General. The Managing General Partner has performed a thorough
evaluation of whether it is now appropriate to undertake the Sale and
Liquidation and has concluded it should be undertaken if favorable prices for
The Lakes and Harbour Pointe can be achieved. The Managing General Partner
believes that the proposed Sale and Liquidation would be in the best interest
of the Limited Partners for each of the following reasons, taken together and
without specifically placing any greater or lesser importance on any of them:
o The Managing General Partner's analysis of current market
conditions indicates that the market values of The Lakes and
Harbour Pointe may be at a peak and that owning them for a
longer period will not necessarily result in sales prices
higher than those that currently could be achieved.
Accordingly, the Managing General Partner believes that a sale
of the properties in the near future will maximize the
potential return from such properties to the Limited Partners.
o Sales activity resulting from availability of investment
capital has increased in the markets where the properties are
located. The Managing General Partner believes that such
increased sales activity, coupled with the indications of
interest it has received, will enable the Partnership to
obtain fair value for such properties and provide cash
proceeds to the Limited Partners. See "Analysis of Remaining
Investment Properties."
o The letter of credit that guarantees and secures the
principal and interest payments on 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
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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 assurance that the Partnership would be able to
extend the existing letter of credit or obtain a substitute
credit facility.
o Due to the age and condition of The Lakes and Harbour Pointe
and the effects of market competition, the Partnership may
need to spend substantial capital to maintain these properties
during the next few years if they are not sold. Selling The
Lakes and Harbour Pointe will allow the Partnership to avoid
this expense and pass such savings on to the Limited Partners.
o There are numerous specific factors relating to each of the
properties described below that further substantiate the
Managing General Partner's belief that the Sale and
Liquidation is in the best interest of the Limited Partners.
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 assurance, however, that approval of the Sale
and Liquidation will enable the Partnership to recover significant portions
of its original invested capital.
Analysis of Remaining Investment Properties. 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. In
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. According to local economic data,
Orange County added 50,000 jobs from 1995 to 1996. 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 1997,as well as rental rate
increases of 10% to 15% since the beginning of 1997. The Lakes' occupancy
reached 99% in January 1997, and since that time rental rates have been
substantially increased.
Management believes that the unprecedented 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 indications
of interest 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 entered into a definitive agreement with any potential buyer and no
assurances can be given regarding a final sales price.
During the second quarter of fiscal 1998, the letter of credit issuer
on Harbour Pointe approved the joint venture's application for an extension
of the letter of credit from December 15, 1997 to December 2000. The new
terms of the letter of credit agreement require the commencement of regular
bond sinking fund contributions of $240,000 per annum to be paid in quarterly
installments of $60,000 beginning February 15, 1998. The terms of the
extension also increase the letter of credit fee from 1% to 1.25% per annum
on the outstanding amount of $9,247,500, payable on a quarterly basis
beginning February 15, 1998. The joint venture will also be required to make
annual deposits to a lender-controlled escrow account equal to 75% of Harbour
Pointe's annual net cash flow, as defined, for each fiscal year, beginning
with fiscal 1998. All funds deposited to the escrow account will be returned
to the joint venture upon the earlier of the termination and surrendering of
the letter of credit to the lender or the achievement of a loan-to-value
ratio equal to or less than 75%, as determined solely by the lender.
Recent improvements in market conditions and in the operating
performance of Harbour Pointe have increased its estimated market value to a
level that exceeds the outstanding first mortgage loan balance. Nonetheless,
significant
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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, although the Partnership does have sufficient
reserves to meet these expenses for the foreseeable future.
In sum, because of the general and specific reasons stated above, the
Managing General Partner believes that it is in the best interest of the
Limited Partners to pursue the sale of The Lakes and Harbour Pointe and to
liquidate and dissolve the Partnership. As is the case generally in the real
estate industry, however, there can be no assurance that favorable market
conditions will prevail or, alternatively, that the price at which each of
such properties could be sold will not increase after the sale of each of
such properties is consummated.
Amounts Available for Distribution
Limited Partners originally invested $1,000 per Unit. To date,
Limited Partners have not received any distributions from the Partnership.
The Managing General Partner anticipates that the Distribution Amount would
be at least $10,000,000. This amount includes the Partnership's cash reserves
and is net of estimated fees and expenses associated with the sale of the
Partnership's properties (including real estate sales commissions, legal fees
and other closing costs) estimated to be approximately $2,500,000. Under the
terms of the Partnership Agreement, management anticipates that the Limited
Partners would receive 100% of the Distribution Amount, or at least $240 per
Unit. No part of the Distribution Amount, or any of the related fees and
expenses described above, will be payable to the General Partners or their
respective affiliates. The above estimate is based on a variety of
assumptions relating to the remaining properties, general business and
economic conditions and other matters which are subject to significant
uncertainties and contingencies, many of which are beyond the Partnership's
control; therefore, such estimate is inherently imprecise and there can be no
assurance that it will be realized. Actual proceeds of the Sale and
Liquidation paid to the Limited Partners may vary materially from the amount
estimated above.
SALE OF PROPERTIES AND THE LIQUIDATION PROCESS
Upon receipt of a Majority Vote in connection with this Consent
Solicitation, the General Partners will have the authority, pursuant to
Section 2.02 of the Partnership Agreement, to sell The Lakes and Harbour
Pointe in a single sale or in two separate sales in the same 12-month period
and, pursuant to Section 10.01 of the Partnership Agreement, to liquidate and
dissolve the Partnership. The purpose of this Consent Solicitation is to
request that the Limited Partners consent to the Sale and Liquidation, on the
enclosed Consent Card, so as to achieve the requisite Majority Vote.
In accordance with the Partnership Agreement, the Distribution Amount
will be applied and distributed as follows:
1. First, to the payment of creditors of the Partnership in the
order of priority provided by law, but excluding secured
creditors, if any, whose obligations will be assumed or
otherwise transferred upon the sale of a property. If the Sale
and Liquidation had occurred as of December 31, 1997, the
liabilities payable out of the proceeds therefrom would be
those reflected on the Partnership's balance sheet as of
December 31, 1997;
2. Second, to the establishment of any reserves for contingencies
which the Managing General Partner may consider necessary,
including reserves which may provide for certain costs and
expenses in connection with the Sale and Liquidation, the
nature and amount of which cannot currently be estimated by
the Managing General Partner; and
3. Third, to the General Partners and Limited Partners, pursuant
to Section 5.02 of the Partnership Agreement, which the
Managing General Partner expects will result in 100% of the
Distribution Amount (after satisfaction of those items listed
above) from the Sale and Liquidation being shared among the
Limited Partners.
The Limited Partners will be provided with a statement showing the
distribution of the Distribution Amount.
Section 8.04 of the Texas Revised Limited Partnership Act provides
that the General Partners may wind up the affairs of a partnership subsequent
to its dissolution and that subsequent to such a dissolution the General
Partners may, among other things, (i) prosecute and defend civil, criminal or
administrative suits and (ii) distribute to the partners of the
6
<PAGE>
Partnership any remaining assets of the limited partnership. Accordingly, any
unused funds in any reserves established by the General Partners, as
described in paragraph 2 above, will be distributed by the General Partners
in accordance with the provisions above at such time as the Managing General
Partner determines in its reasonable judgment that such amounts are no longer
necessary to satisfy their intended purpose or to satisfy any actual or
anticipated shortfalls in amounts reserved for other purposes. The Managing
General Partner intends to sell The Lakes and Harbour Pointe and distribute
the entire Distribution Amount within nine months following the Consent
Effective Date, although no assurances can be given that this timetable can
be met.
Upon approval of the Sale and Liquidation, the Managing General
Partner will use its best efforts to consummate sales of The Lakes and
Harbour Pointe upon terms and conditions, which the Managing General Partner
expects, will maximize the Distribution Amount. Although none of the final
terms of any sale of The Lakes or Harbour Pointe can be determined currently,
the Managing General Partner will only consider transactions that are solely
for cash.
CERTAIN CONSIDERATIONS
The Managing General Partner cannot predict when a sale of The Lakes
and Harbour Pointe will be consummated or when the Sale and Liquidation will
be completed. Moreover, as is the case generally in the real estate industry,
there can be no assurance that the favorable market conditions described
above will continue, or alternatively, that the price at which each of such
properties could be sold will not increase after the sale of each of such
properties is consummated.
Subsequent to the approval of the Sale and Liquidation, the Limited
Partners will have no opportunity to evaluate or vote on the sale of, or the
terms of any purchase offer for, the Partnership's properties, including the
timing of any sale and the sale prices for such properties. Limited Partners
are also advised that neither Texas law nor the Partnership Agreement
provides them with any right to dissent from or seek an independent appraisal
of the value of the Partnership or its assets. Accordingly, subsequent to
approval of the Sale and Liquidation by the Limited Partners, the Limited
Partners will receive whatever net proceeds are generated from the sale of
The Lakes and Harbour Pointe based on terms approved solely by the Managing
General Partner.
THE MANAGING GENERAL PARTNER BELIEVES THAT THE PROPOSED SALE AND
LIQUIDATION IS IN THE BEST INTEREST OF THE LIMITED PARTNERS AND THAT THE
LIMITED PARTNERS SHOULD CONSENT TO THE SALE AND LIQUIDATION.
If the Sale and Liquidation is not approved, the Managing General
Partner will continue to manage the Partnership and its properties with a
view towards preserving and protecting the capital of the Limited Partners
and obtaining capital appreciation. In addition, the Managing General Partner
will continue to evaluate market conditions on behalf of the Partnership and
the Limited Partners in order to assess, recommend and implement disposition
strategies over a period of time longer than 12 months. However, the letter
of credit that guarantees and secures the principal and interest payments on
The Lakes' secured debt expires on December 15, 1998. If the letter of credit
is not extended by this expiration date, this mortgage 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 a sale or refinancing
could not be accomplished, the property could be subject to foreclosure by
the lender. Consequently, if the Sale and Liquidation is not approved, the
portion of the Partnership's original invested capital which may be returned
to the Limited Partners, if any, will largely depend upon the Partnership's
ability to replace or extend the credit enhancement agreement for The Lakes
joint venture, as well as future market conditions affecting The Lakes and
Harbour Pointe, neither of which can presently be determined.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
As stated above, upon approval of the Sale and Liquidation, the
Managing General Partner intends to sell the Partnership's properties and
distribute the proceeds to the Limited Partners (after payment of certain
expenses and priority items). See "Sale of Properties and The Liquidation
Process." Such sales and distributions will be subject to U.S. federal income
tax in the manner described below. Section references are to the Internal
Revenue Code of 1986, as amended (the "Code").
The following discussion does not address the U.S. federal income tax
consequences of such sales and distributions to a "Non-U.S. Limited Partner".
A "Non-U.S. Limited Partner" is a Limited Partner other than (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the laws of the United
7
<PAGE>
States or of any state thereof or (iii) an estate or trust whose income is
includible in gross income for U.S. federal income tax purposes regardless of
its source.
General. As long as the Partnership is treated as a partnership for
U.S. federal income tax purposes, it will not be subject to U.S. federal
income tax. Rather, each Limited Partner and General Partner is required to
report on his own U.S. federal income tax return his share of Partnership
items of income, gain, loss, deduction and credit, including items realized
in respect of the sale of the Partnership's properties, for each taxable year
of the Partnership ending within or with his taxable year. Accordingly, each
Limited Partner and each General Partner may be subject to tax on his
distributive share of Partnership income regardless of whether any cash
distribution is made to him. Each Limited Partner's basis in his Units is
increased by the amount by which his distributable share of income exceeds
any distributions made or deemed to be made (e.g., a deemed distribution
resulting from a reduction of a Limited Partner's share of the Partnership's
liabilities) to him during such year.
Gain or Loss on the Sale of Partnership Property. Partnership real
property and depreciable property used in the Partnership's business (which
is not held for sale to customers in the ordinary course of business) and
held more than one year is "section 1231 property." Losses (if any) realized
by the Partnership from the sale of section 1231 property generally will
constitute "passive activity losses" with respect to a Limited Partner, other
than certain Limited Partners eligible to treat all of their rental real
estate activities as a single activity. Passive activity losses can only
offset passive activity income, until the Limited Partner disposes of his
entire interest in the passive activity. Gain (if any) realized by the
Partnership from the sale of section 1231 property will be "section 1231
gain" except as to depreciation subject to recapture under section 1245 of
the Code and rent recapture under section 467 of the Code. A Limited
Partner's share of any section 1231 gain from the Partnership in any year
will be combined with any other section 1231 gains and/or allowed section
1231 losses incurred by the Limited Partner. If the section 1231 gains exceed
the section 1231 losses, such net gains will be treated as long-term capital
gains. However, a taxpayer's net section 1231 gains will be treated as
ordinary income (rather than capital gain) to the extent of such taxpayer's
net section 1231 losses within the preceding five years. In the case of any
property, the gain reported by the Partnership will be measured by the excess
of the amount realized from the sale over the Partnership's adjusted basis
for that property. Consequently, the gain from any sale may exceed the actual
cash proceeds realized upon the sale.
Upon the Sale and Liquidation, a Limited Partner's share of any
Partnership losses previously suspended pursuant to the passive activity loss
rules will first be used to offset the gain, if any, realized as a result of
the Sale and Liquidation. To the extent a Limited Partner's share of
Partnership losses previously suspended exceeds that Limited Partner's share
of the gain, if any, realized from the Sale and Liquidation, any remaining
loss will be available first to offset passive income from other passive
activities, with the remainder, if any, available to offset income from any
source. To the extent a Limited Partner's share of the gain, if any, realized
from the Sale and Liquidation exceeds that Limited Partner's share of
Partnership losses previously suspended, any remaining gain from the
Liquidation may be offset by current or previously suspended losses from
other passive activities of the Limited Partner.
The distribution of cash to a Limited Partner pursuant to the Sale
and Liquidation will be treated as a taxable distribution, with the amount of
taxable gain (or loss) realized equal to the difference between (i) the
amount of cash received plus such Limited Partner's share of any reduction of
Partnership liabilities and (ii) the tax basis of such Limited Partner's
Units.
Gain or loss realized on the Sale and Liquidation will be treated as
capital gain or loss, and will be long term a Unit has been held by a Limited
Partner for more than one year when the Sale and Liquidation is consummated.
Capital losses generally are deductible only to the extent of capital gains
plus, in the case of a non-corporate Limited Partner, up to $3,000 of
ordinary income. Capital losses realized upon the Sale and Liquidation may be
utilized to offset capital gains from other sources and may be carried
forward, subject to applicable limitations.
SPECIAL CONSIDERATIONS MAY BE APPLICABLE TO PARTICULAR TYPES OF
LIMITED PARTNERS. LIMITED PARTNERS SHOULD CONSULT THEIR TAX ADVISORS
REGARDING THE SPECIFIC TAX CONSEQUENCES OF DISPOSING OF UNITS IN THE
PARTNERSHIP PURSUANT TO THE SALE AND LIQUIDATION, UNDER NOT ONLY THE U.S.
FEDERAL INCOME TAX LAWS BUT ALSO APPLICABLE STATE, LOCAL, FOREIGN OR OTHER
TAX LAWS.
8
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the Partnership's Form 10-K and Form 10-Q (each as
defined below) set forth herein as Exhibit A and Exhibit B, respectively.
PaineWebber Development Partners Four, Ltd.
For the Nine Months Ended December 31, 1997 and
1996 and the Years ended March 31, 1997, 1996,
1995, 1994 and 1993
(in thousands except for per Unit data)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, Years ended March 31,
----------------- ----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 8,522 $ 8,182 $ 11,142 $ 10,644 $ 10,275 $ 10,481 $ 10,359
Operating loss $ (949) $ (1,330) $ (909) $ (2,557) $ (2,047) $ (1,503) $ (2,141)
Partnership's share of
unconsolidated
venture losses $ (150) $ (92) $ (152) $ (124) $ (35) $ (101) $ (1,032)
Partnership's share
of gain on transfer
of assets at
foreclosure -- -- -- -- -- -- $ 821
Income (loss) before
extraordinary items $ 987 $ (1,349) $ (1,048) $ (2,613) $ (2,082) $ (1,604) $ (2,350)
Partnership's share of
extraordinary gains on
settlement of debt
obligation -- -- -- -- -- -- $ 6,968
Net income (loss) $ 987 $ (1,349) $ (1,048) $ (2,613) $ (2,082) $ (1,604) $ 4,618
Per Unit data: (1)
Income (loss) before
extraordinary items $ 20.68 $ (30.81) $ (23.90) $ (59.60) $ (47.48) ($ 36.59) $ (54.64)
Extraordinary gains -- -- -- -- -- -- $ 150.23
Net income (loss) $ 20.68 $ (30.81) $ (23.90) $ (59.60) $ (47.48) $ (36.59) $ 95.59
Total assets $ 72,744 $ 74,968 $ 73,942 $ 76,127 $ 77,924 $ 80,500 $ 83,600
Mortgage loans payable $ 94,247 $ 9,125 $ 9,125 $ 9,125 $ 9,125 $ 97,948 $ 99,856
Long-term debt in default -- $ 86,370 $ 85,903 $ 87,489 $ 87,832 -- --
<FN>
- ---------------
(1) Based on 41,644 Units outstanding at each period end.
</TABLE>
SECURITY OWNERSHIP OF GENERAL PARTNERS
As of the date hereof, each General Partner owns one Unit. In
addition, ATL, Inc., an affiliate of the Managing General Partner, owns 200
Units. Accordingly, the General Partners and their affiliates, as a group,
own less than one percent of the outstanding Units entitled to vote.
9
<PAGE>
OTHER MATTERS
Meetings
Even though the Partnership is not required to and does not conduct
Partnership meetings, the Managing General Partner may call a Partnership
meeting at any time, and is required to call a Partnership meeting within 10
days after receipt of a written request for such a meeting by Limited
Partners who are the record holders of more than 10% of the total outstanding
Units. Partnership meetings shall be held at a time and place fixed by the
Managing General Partner. As of the date hereof, the Managing General Partner
has not received any written requests by any Limited Partner for a
Partnership meeting.
IF YOU ARE A LIMITED PARTNER ON THE RECORD DATE, YOU ARE RESPECTFULLY
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING CONSENT CARD IN
THE ENCLOSED ENVELOPE AT YOUR EARLIEST CONVENIENCE, BUT IN ALL INSTANCES
BEFORE THE EXPIRATION DATE.
Legal Proceedings
The Managing General Partner is a wholly owned subsidiary of
PaineWebber Group, Inc. ("PaineWebber"). Between 1994 and 1997, PaineWebber
was involved in litigation arising out of the sponsorship by PaineWebber and
certain affiliates of various limited partnership investments and real estate
investment trusts, including those offered by the Partnership. These matters
have been settled. For further information on the foregoing legal
proceedings, refer to Item 3 of the Partnership's Form 10-K attached as
Exhibit A hereto.
Further Information
All questions about the Sale and Liquidation or about the Partnership
generally should be directed to the Partnership's Investor Services
Department at (800) 225-1174, Option 2.
Information Delivered with Consent Solicitation Statement
This Consent Solicitation Statement is accompanied by the
Partnership's Annual Report on Form 10-K for the fiscal year ended March 31,
1997 (the "Form 10-K") as Exhibit A and the Partnership's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1997 (the "Form 10-Q") as
Exhibit B. Such documents are incorporated by reference herein and shall be
deemed to be a part hereof. In addition, all reports and other documents
filed by the Partnership pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date hereof
and prior to the expiration of the Consent Solicitation shall be deemed to be
incorporated by reference herein and to be part hereof from the date of
filing of such reports and documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Consent Solicitation
Statement to the extent that a statement contained herein, or in any other
subsequently filed document that also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Consent Solicitation
Statement.
Exhibits to the Form 10-K and Form 10-Q, and any and all other
documents incorporated by reference herein, are available without charge to
any person, upon oral or written request, from PaineWebber Properties, Inc.,
265 Franklin Street, 15th Floor, Boston, Massachusetts 02110, or toll free at
(800) 225-1174, Option 2. Any document so requested will be furnished by
first-class mail or other equally prompt means within one business day of
receipt of such request.
FOURTH DEVELOPMENT FUND, INC.
as Managing General Partner of
PaineWebber Development Partners Four, Ltd.
/s/ Bruce J. Rubin
Bruce J. Rubin
Boston, Massachusetts President
May 4, 1998 Fourth Development Fund, Inc.
10
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
EXHIBITS TO
CONSENT SOLICITATION STATEMENT
DATED
MAY 4, 1998
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
A Form 10-K for Fiscal Year Ended March 31, 1997
B Form 10-Q for Fiscal Year Ended December 31, 1997
<PAGE>
EXHIBIT A
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
<PAGE>
THIS PAGE
INTENTIONALLY
LEFT
BLANK
<PAGE>
Exhbit A
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1997
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
----- -----
Commission File Number: 0-17150
-------
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Texas 76-0147579
----- ----------
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
------------------------------------------ ------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
-------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
-------------------------------------
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
----- -----
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Prospectus of registrant dated Part IV
September 11, 1985, as supplemented
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
1997 FORM 10-K
TABLE OF CONTENTS
PART I Page
- -------- ----
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote
of Security Holders I-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-23
<PAGE>
Exhibit A
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Partnership's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in Item 7 in
the section entitled "Certain Factors Affecting Future Operating Results"
beginning on page II-5 of this Form 10-K.
PART I
Item 1. Business
PaineWebber Development Partners Four, Ltd. (the "Partnership") is a
limited partnership formed in June 1985 under the Uniform Limited Partnership
Act of the State of Texas to invest either directly or through the
acquisition of joint venture interests in a diversified portfolio of
newly-constructed and to-be-constructed income-producing properties. On
September 9, 1986, the Partnership elected to extend the offering period to
the public through September 10, 1987 and reduced the maximum offering amount
to 42,000 Partnership Units (at $1,000 per Unit) from 100,000 Units. At the
conclusion of the offering period 41,644 Units had been issued representing
capital contributions of $41,644,000. Limited Partners will not be required
to make any additional capital contributions.
As of March 31, 1997, the Partnership had investments, through joint
ventures and limited partnerships, in three residential apartment complexes
referred to below:
<TABLE>
<CAPTION>
Name of Joint Venture
or Limited Partnership Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
- ---------------------------- ---- ----------- -------------
<S> <C> <C> <C>
The Lakes Joint Venture 770 units 11/1/85 Fee ownership of land and
The Lakes at South Coast Apartments improvements (through
Costa Mesa, California joint venture partnership)
Lincoln Garden Apartments 200 units 11/15/85 Fee ownership of land and
Joint Venture improvements (through
Lincoln Garden Apartments joint venture partnership)
Tucson, Arizona
71st Street Housing Partners, Ltd. 234 units 12/16/85 Fee ownership of land and
Harbour Pointe Apartments improvements (through
Bradenton, Florida limited partnership)
<FN>
(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.
</TABLE>
The Partnership originally had investments in six operating investment
properties. Through March 31, 1997, three of these properties had been
forfeited through foreclosure proceedings. During the fourth quarter of
fiscal 1991, due to a default by the Quinten's Crossing Joint Venture under
the terms of its first mortgage loan, the lender was granted, by Court order,
the right to foreclose on the venture's operating property. As a result, on
April 1, 1991, the Partnership's co-venturer filed an involuntary petition
under Chapter 11 of the United States Bankruptcy Code on behalf of the
venture. The bankruptcy petition prevented an immediate foreclosure action.
However, the venture partners and the lender were unable to reach an
agreement on an acceptable modification of the mortgage obligation.
Accordingly, on August 27, 1992, the Partnership and its co-venturer
forfeited their interests in Quinten's Crossing to the mortgage lender. The
Parrot's Landing Joint Venture had stopped making the required debt service
payments to the mortgage lender on February 1, 1990. Because of the defaults,
the mortgage lender had the right to accelerate payment on the entire balance
of the mortgage note. The mortgage
I-1
<PAGE>
lender had given the joint venture formal notice of default and had filed for
foreclosure. On October 16, 1992, the Partnership and the co-venturer
forfeited their interests in Parrot's Landing to the mortgage holder in
settlement of the foreclosure proceedings, after protracted negotiations
failed to produce an acceptable loan modification agreement. The Partnership
also originally had an investment, through a limited partnership, in the
Clipper Cove Apartments, located in Boynton Beach, Florida. On March 5, 1990,
the Clipper Cove Apartments, owned by The Landing Apartments, Ltd., was
foreclosed on by the mortgage lender. The lender was entitled to foreclose on
the property because of the inability of the venture to make the required
debt service payments due on the mortgage loan. Negotiations to modify the
loan terms and efforts by the Partnership to locate a buyer for the property
were unsuccessful. As a result of these transactions, the Partnership no
longer owns any interest in these three properties.
The Partnership's original investment objectives were:
(1) to preserve and protect the original capital invested in the Partnership;
(2) to achieve long-term capital appreciation through potential appreciation
in the values of Partnership properties;
(3) to obtain tax losses during the early years of operations from deductions
generated by investments;
(4) to provide annual distributions of cash flow from operations of the
Partnership;
(5) to achieve accumulation of equity through reduction of mortgage loans on
Partnership properties.
The Partnership's operating investment properties have been adversely
affected by an oversupply of competing rental apartment properties in the
markets in which the properties are located. The effects of the resulting
competition, combined with high debt service costs and weakened local
economies, resulted in the inability of all of the joint ventures to meet
their original debt service obligations without contributions from the
venture owners. This situation has caused the Partnership to lose its
investments in the Clipper Cove Apartments, Quinten's Crossing Apartments and
Parrot's Landing Apartments through foreclosure proceedings, as discussed
above. These three properties comprised approximately 38% of the
Partnership's original investment portfolio. Furthermore, while the three
remaining ventures have obtained more favorable financing terms, additional
relief from debt service obligations and continued financial support from the
venture partners may be required if the properties' operations do not
improve. The Managing General Partner, along with the Partnership's
co-venture partners, has pursued workout negotiations with the mortgage
holders on all of the operating investment properties in efforts to obtain
relief from debt service obligations in order to protect the Partnership's
invested capital. Despite such efforts, which have been partially successful,
the Partnership will be unable to achieve most of its original objectives due
to the foreclosure losses of a substantial portion of the original investment
portfolio and the declines in value which have been experienced with respect
to the remaining investment properties.
The Managing General Partner's strategy has been, and continues to be,
to marshall the Partnership's resources for use in protecting the investment
properties with the best long-term financial prospects in order to return as
much of the invested capital as possible. The portion of the Partnership's
original invested capital which may be returned to the Limited Partners, if
any, will depend upon the ultimate selling prices obtained for the three
remaining investment properties, which cannot presently be determined. At the
present time, all three remaining properties have estimated market values
which are below the balances of their outstanding debt obligations. It
remains to be seen whether such market values will recover sufficiently over
the Partnership's remaining holding period to provide any meaningful cash
return to the Limited Partners. The Partnership has generated tax losses
since inception. However, the benefits of such losses to investors have been
significantly reduced by changes in the federal income tax laws subsequent to
the organization of the Partnership. Furthermore, the Partnership's
investment properties have not produced sufficient cash flow from operations
to provide the Limited Partners with cash distributions to date.
All of the Partnership's investment properties are located in real
estate markets in which they face significant competition for the revenues
they generate. The apartment complexes compete with numerous projects of
similar type generally on the basis of price and amenities. Apartment
properties in all markets also compete with the local single family home
market for prospective tenants. The continued availability of low interest
rates on home mortgage loans has increased the level of this competition over
the past several years. However, the impact of the competition from the
single-family home market has generally been offset by the lack of
significant new construction activity in the multi-family apartment market
over most of this period. The pace of new construction
I-2
<PAGE>
activity picked up somewhat in the local markets in which the Partnership's
properties are located beginning in fiscal 1996.
The Partnership has no real property investments located outside the
United States. The Partnership is engaged solely in the business of real
estate investment, therefore presentation of information about industry
segments is not applicable.
The Partnership has no employees; it has, however, entered into an
Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"),
which is responsible for the day-to-day operations of the Partnership. The
Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a
wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are
Fourth Development Fund Inc. and Property Associates 1985, L.P. Fourth
Development Fund Inc. (the "Managing General Partner"), a wholly-owned
subsidiary of PaineWebber, is the managing general partner of the
Partnership. The associate general partner is Properties Associates 1985,
L.P. (the "Associate General Partner"), a Virginia limited partnership,
certain limited partners of which are also officers of the Adviser and the
Managing General Partner.
The terms of transactions between the Partnership and affiliates of
the Managing General Partner of the Partnership are set forth in Items 11 and
13 below to which reference is hereby made for a description of such terms
and transactions.
Item 2. Properties
As of March 31, 1997, the Partnership owned interests in three
operating properties through joint ventures and limited partnerships. These
joint ventures and limited partnerships and the related properties are
referred to under Item 1 above to which reference is made for the name,
location and description of each property.
Occupancy figures for each fiscal quarter during 1997, along with an
average for the year, are presented below for each property:
<TABLE>
<CAPTION>
Percent Occupied at
-------------------------------------------------------
Fiscal 1997
6/30/96 9/30/96 12/31/96 3/31/97 Average
------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
The Lakes 95% 98% 98% 98% 97%
Lincoln Garden
Apartments 92% 90% 85% 90% 89%
Harbour Pointe
Apartments 93% 93% 95% 95% 94%
</TABLE>
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.
I-3
<PAGE>
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interests in PaineWebber
Development Partners Four, Ltd., PaineWebber, including Fourth Development
Fund Inc. and PA1985 (1) failed to provide adequate disclosure of the risks
involved; (2) made false and misleading representations about the safety of
the investments and the Partnership's anticipated performance; and (3)
marketed the Partnership to investors for whom such investments were not
suitable. The plaintiffs, who purported to be suing on behalf of all persons
who invested in PaineWebber Development Partners Four, Ltd., also alleged
that following the sale of the partnership interests, PaineWebber, including
Fourth Development Fund Inc. and PA1985 misrepresented financial information
about the Partnership's value and performance. The amended complaint alleged
that PaineWebber, including Fourth Development Fund Inc. and PA1985 violated
the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the
federal securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
In January 1996, PaineWebber signed a memorandum of understanding
with the plaintiffs in the New York Limited Partnership Actions outlining the
terms under which the parties have agreed to settle the case. Pursuant to
that memorandum of understanding, PaineWebber irrevocably deposited $125
million into an escrow fund under the supervision of the United States
District Court for the Southern District of New York to be used to resolve
the litigation in accordance with a definitive settlement agreement and plan
of allocation. On July 17, 1996, PaineWebber and the class plaintiffs
submitted a definitive settlement agreement which provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and PWPI, and the allocation of the $125 million settlement fund
among investors in the various partnerships and REITs at issue in the case.
As part of the settlement, PaineWebber also agreed to provide class members
with certain financial guarantees relating to some of the partnerships and
REITs. The details of the settlement are described in a notice mailed
directly to class members at the direction of the court. A final hearing on
the fairness of the proposed settlement was held in December 1996, and in
March 1997 the court announced its final approval of the settlement. The
release of the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the class action settlement by two of
the plaintiff class members. As part of the settlement agreement, PaineWebber
has agreed not to seek indemnification from the related partnerships and real
estate investment trusts at issue in the litigation (including the
Partnership) for any amounts that it is required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action
entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court
against PaineWebber Incorporated and various affiliated entities concerning
the plaintiffs' purchases of various limited partnership interests, including
those offered by the Partnership. The complaint alleged, among other things,
that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating
the risks and failing to state material facts concerning the investments. The
complaint sought compensatory damages of $15 million plus punitive damages
against PaineWebber. In June 1996, approximately 50 plaintiffs filed an
action entitled Bandrowski v. PaineWebber Inc. in Sacramento, California
Superior Court against PaineWebber Incorporated and various affiliated
entities concerning the plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint was very
similar to the Abbate action described above and sought compensatory damages
of $3.4 million plus punitive damages against PaineWebber. In September 1996,
the court dismissed many of the plaintiffs' claims in both the Abbate and
Bandrowski actions as barred by applicable securities arbitration
regulations. Mediation with respect to the Abbate and Bandrowski actions was
held in December 1996. As a result of such mediation, a settlement between
PaineWebber and the plaintiffs was reached which provided for the complete
resolution of both actions. Final releases and dismissals with regard to
these actions were received subsequent to March 31, 1997.
Based on the settlement agreements discussed above covering all of
the outstanding unitholder litigation, and notwithstanding the appeal of the
class action settlement referred to above, management does not expect that
the resolution of these matters will have a material impact on the
Partnership's financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
I-4
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
I-5
<PAGE>
Exhibit A
PART II
-------
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At March 31, 1997 there were 3,045 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for the resale of Units will develop. The
Managing General Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
PaineWebber Development Partners Four, Ltd.
For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
(in thousands except for per Unit data)
Years ended March 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 11,142 $ 10,644 $ 10,275 $ 10,481 $ 10,359
Operating loss $ (909) $ (2,557) $ (2,047) $ (1,503) $ (2,141)
Partnership's share of
unconsolidated ventures' losses $ (152) $ (124) $ (35) $ (101) $ (1,032)
Partnership's share of gain on
transfer of assets at foreclosure -- -- -- -- $ 821
Loss before extraordinary items $ (1,048) $ (2,613) $ (2,082) $ (1,604) $ (2,350)
Partnership's share of
extraordinary gains on
settlement of debt obligations -- -- -- -- $ 6,968
Net income (loss) $ (1,048) $ (2,613) $ (2,082) $ (1,604) $ 4,618
Per Limited Partnership Unit:
Loss before extraordinary items $ (23.90) $ (59.60) $ (47.48) $ (36.59) $ (54.64)
Extraordinary gains -- -- -- -- $ 150.23
Net income (loss) $ (23.90) $ (59.60) $ (47.48) $ (36.59) $ 95.59
Total assets $ 73,942 $ 76,127 $ 77,924 $ 80,500 $ 83,600
Mortgage loans payable $ 9,125 $ 9,125 $ 9,125 $ 97,948 $ 99,856
Long-term debt in default $ 85,903 $ 87,489 $ 87,832 -- --
</TABLE>
The above selected financial data should be read in conjunction with
the financial statements and related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the
41,644 Limited Partnership Units outstanding during each year.
II-1
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information Relating to Forward-Looking Statements
The following discussion of financial condition includes
forward-looking statements which reflect management's current views with
respect to future events and financial performance of the Partnership. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below under the heading "Certain Factors Affecting
Future Operating Results," which could cause actual results to differ
materially from historical results or those anticipated. The words "believe",
"expect", "anticipate," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which were made based on facts and conditions as
they existed as of the date of this report. The Partnership undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Liquidity and Capital Resources
The Partnership offered limited partnership interests to the public
from September 11, 1985 to September 5, 1987 pursuant to a Registration
Statement on Form S-11 filed under the Securities Act of 1933. Gross proceeds
of $41,644,000 were received by the Partnership and, after deducting selling
expenses and offering costs, approximately $32,751,000 was originally
invested in joint venture interests in six residential apartment properties.
The performance of the Partnership's investment properties has been adversely
impacted by an oversupply of competing apartment units throughout the country
and in the six local markets in which the properties are located. Through
March 31, 1997, these conditions had resulted in the loss of three of the
properties to foreclosure: Clipper Cove Apartments in March 1990, Quinten's
Crossing Apartments in August 1992 and Parrot's Landing Apartments in October
1992. The foreclosures of these three properties represent a loss of
approximately 38% of the Partnership's original investment portfolio.
The operations of the three remaining assets, The Lakes at South Coast
Apartments, the Harbour Pointe Apartments and the Lincoln Garden Apartments,
have been stabilized as a result of debt restructurings, and the properties
do not currently require the use of the Partnership's cash reserves to
support operations. Nonetheless, the properties would not operate at or above
breakeven under conventional financing terms based on the current outstanding
principal amounts owed. All three of these properties have been financed with
taxexempt revenue bonds issued by local housing authorities. The interest
rates on all three of these restructured debt obligations are now variable
rates which are based on comparable rates on similar taxexempt obligations.
Such rates have remained 3 to 4 percent per annum below comparable
conventional rates over the past several years. The debt modification
agreement for The Lakes was structured with certain debt service reserves and
accrual features intended to help absorb interest rate fluctuations. The
Lakes Joint Venture currently has over $1.1 million of lender-controlled
reserves in place to help cover possible future debt service shortfalls. The
additional restricted cash on the accompanying consolidated balance sheet as
of March 31, 1997 of approximately $2.5 million relates to operating cash
accounts of The Lakes Joint Venture in which disbursements are restricted by
the lender. The Harbour Pointe and Lincoln Garden joint ventures would
require advances from the venture partners, principally the Partnership in
the case of Harbour Pointe, if future cash flows are insufficient to cover
any increases in debt service payments.
The primary letter of credit which collateralizes the Lincoln Garden
mortgage loan matured during May 1997. A tentative extension to the letter of
credit for Lincoln Garden has been negotiated with the existing issuer, and
the final documents to formalize the extension are in the process of being
reviewed and executed. The new letter of credit would have a two-year term
and would expire in May 1999. There are no assurances, however, that this
agreement will be finalized. Failure to finalize the extension agreement
could result in the initiation of foreclosure proceedings on the Lincoln
Garden property. The outcome of this situation cannot presently be
determined. The Partnership has also initiated discussions with the issuer of
the letter of credit on the Harbour Pointe Apartments, which is scheduled to
expire on December 15, 1997. Management is currently evaluating its options
for renewing this letter of credit. In response to a request from the issuer,
the Partnership has filed an application to extend the letter of credit for a
three-year period. If the application is approved as submitted, the extended
letter of credit would mature in December 2000. The new terms of the letter
of credit agreement would require the commencement of regular principal
amortization payments on the underlying first mortgage loan and
II-2
<PAGE>
would restrict the Partnership's access to excess net cash flow from property
operations. If the letter of credit is not renewed, the mortgage loan would
become immediately due and payable upon the December 1997 expiration date and
would need to be repaid from the proceeds of a sale or refinancing of the
operating investment property. If a sale or refinancing could not be
accomplished, the property could be subject to foreclosure by the lender. The
outcome of this situation cannot presently be determined.
As previously reported, the Reimbursement Agreement which governs the
secured debt obligations of The Lakes Joint Venture contains certain
restrictive covenants, including, among others, a requirement that the
venture provide the lender, in September 1994 and September 1996, with
certified independent appraisals of the operating property indicating the
value of the property to be equal to or greater than $92 million and $100
million, respectively. Failure to provide such appraisals is defined as an
event of default under the Reimbursement Agreement. While the estimated
market value of the property improved significantly during fiscal 1997, based
on current cash flow levels and the prevailing market conditions the value of
the property is still estimated to be considerably less than $92 million as
of March 31, 1997. During fiscal 1996 and 1997, the Managing General Partner
had discussions with the lender regarding possible changes to the appraisal
requirements. During the most recent discussions between the Partnership and
the lender, which took place subsequent to year-end, the lender indicated a
potential willingness to waive the minimum appraised value requirements in
exchange for a principal paydown to be funded from existing cash reserves of
The Lakes Joint Venture and an increase in the currently payable portion of
the letter of credit fee. However, no definitive agreement has been reached
to date, the venture has not provided the lender with appraisals which meet
either of the minimum thresholds, and the lender has not waived or modified
the minimum appraised value requirements. In February 1996, the lender issued
a formal notice of default to the Joint Venture pursuant to the Reimbursement
Agreement. At this time, management does not expect the lender to take any
additional actions as long as progress continues to be made in negotiations
for modification to the terms of the Reimbursement Agreement. However, there
can be no assurances that the lender will ultimately grant any relief in
connection with these appraisal covenants. If management cannot reach an
agreement with The Lakes' mortgage lender regarding the appraisal covenants,
the lender could choose to initiate foreclosure proceedings. The outcome of
this situation cannot presently be determined.
While the national market for multi-family apartment properties is
several years into a recovery cycle, the current estimated market values of
all three of the Partnership remaining investment properties are still below
the amounts of the related debt obligations. Accordingly, under any
circumstances, it appears unlikely at the present time that the Partnership
will be able to return any significant amount of invested capital to the
Limited Partners. Consequently, the Managing General Partner is reviewing
potential disposition strategies for the remaining investments. While no
assurances can be given, it is currently expected that the Partnership will
complete the disposition of its remaining investment properties within the
next 2-to-3 years. The disposition of the last of the Partnership's
investment properties would be followed by a liquidation of the Partnership.
The amount of the net proceeds, if any, received from the final asset
dispositions, along with any remaining cash reserves after the payment of all
liquidation-related expenses, would be distributed to the Limited Partners
prior to the liquidation of the Partnership.
Barring a significant increase in taxexempt interest rates, the
Partnership's cash reserves, along with excess cash flow from the Harbour
Pointe joint venture, should continue to be sufficient to cover the
Partnership's operating expenses over the near term. Excess cash flow from
the Lincoln Garden joint venture has been minimal and is primarily payable to
the co-venturer for the repayment of prior advances. To the extent that the
Partnership's operating properties generate excess cash flow after current
debt service, a substantial portion of such amounts will continue to be
reinvested in the properties to make certain repairs and improvements aimed
at maximizing long-term values. At The Lakes, capital improvements for fiscal
1997 included the completion of the program to upgrade the hallways, elevator
landings, lobbies, carpeting and signage. The major expenditures being
scheduled for fiscal 1998 include exterior painting, roof repairs and
renovations to the property's clubhouse. As part of the ongoing negotiations
with the lender on The Lakes, as discussed further above, management of the
Partnership and the lender continue to discuss the possible release of
certain restricted cash amounts to pay for these improvements. Improvements
at Lincoln Garden for fiscal 1997 included renovations to the clubhouse,
additional exterior lighting and appliance replacements on an as-needed
basis. Physical improvements planned for fiscal 1998 are limited to the
replacement of carpeting, vinyl flooring, window blinds and appliances as
units are leased to new tenants. Improvements at the Harbour Pointe
Apartments during fiscal 1997 included new pool furniture, repairs to the
surface area around the swimming pool, the installation of additional
sidewalks and
II-3
<PAGE>
upgrading the unit interiors on a turnover basis. Budgeted improvements for
fiscal 1998 include exterior touch-up painting, renovations to the exercise
facility, new gutters to prevent water damage, parking lot repairs,
additional outdoor lighting and ongoing appliance, carpeting and vinyl
flooring replacements.
At March 31, 1997, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $1,562,000. Such
cash and cash equivalents will be used for the working capital requirements
of the Partnership and the consolidated ventures and, to the extent necessary
and economically justified, to fund the Partnership's share of any future
operating deficits of its remaining joint venture investments. In addition,
The Lakes Joint Venture had a restricted cash balance of $3.6 million, which
represents amounts available at the discretion of the lender for future debt
service shortfalls, principal paydowns or operating expenses of the venture.
The source of future liquidity and distributions to the partners is expected
to be from cash generated from the operations of the remaining investment
properties and from proceeds received from the sale, refinancing or other
disposition of such properties.
Results of Operations
1997 Compared to 1996
The Partnership's net loss for fiscal 1997 decreased by $1,565,000
when compared to the prior year. This favorable change in net loss resulted
from a decrease in the Partnership's operating loss of $1,648,000. Operating
loss decreased mainly due to an increase in rental income and decreases in
interest and depreciation and amortization expenses attributable to the
consolidated Lakes and Harbour Pointe joint ventures. Rental income from the
consolidated joint ventures increased by $446,000 primarily due to an
increase in rental rates and occupancy at The Lakes at South Coast Apartments
during fiscal 1997. Rental income from The Lakes was up almost 5% compared to
the prior year. Rental revenues were up slightly at Harbour Pointe in the
current year as well. Interest expense decreased by $564,000 mainly due to a
decrease in the variable interest rate on the first mortgage loan secured by
The Lakes at South Coast Apartments as well as a reduction in the outstanding
principal balance of the other debt secured by The Lakes. As discussed
further above, despite the decrease in the outstanding debt balance and the
improved operating results, the remaining debt obligation secured by The
Lakes continues to exceed the property's fair market value. Depreciation and
amortization decreased by $468,000 primarily due to various five-year assets
becoming fully depreciated at The Lakes at South Coast Apartments. A decline
in Partnership general and administrative expenses of $76,000 also
contributed to the improvement in the Partnership's net loss for fiscal 1997.
The reduction in general and administrative expenses can be attributed mainly
to a decline in certain required professional fees.
The Partnership's share of unconsolidated venture's loss, which
represents the operating results of the Lincoln Garden Joint Venture
increased by $28,000 during fiscal 1997, as compared to the prior year,
primarily due to a decrease in rental income. Rental income decreased by
$64,000 mainly due to a decline in the average occupancy level at the
property. The decrease in rental income was partially offset by a decline in
interest expense of $22,000 as a result of a decrease in the variable
interest rate on the venture's mortgage loan and by a reduction in
administrative expenses of $24,000.
1996 Compared to 1995
The Partnership's net loss increased by $531,000 during fiscal 1996,
as compared to the prior year. This unfavorable change in net loss resulted
from increases in the Partnership's operating loss and the Partnership's
share of unconsolidated venture's loss of $510,000 and $89,000, respectively.
Operating loss increased mainly due to an increase in interest expense of
$950,000, attributable to an increase in the variable interest rates on the
mortgage loans secured by The Lakes at South Coast Apartments and the Harbour
Pointe Apartments. This increase in interest expense was partially offset by
an increase in rental income from the consolidated joint ventures of
$214,000, an increase in interest income of $74,000, an increase in other
income of $81,000 and a decrease in real estate taxes of $71,000. Rental
income at Harbour Pointe and The Lakes improved by 3.5% and 2%, respectively,
for calendar 1995 as compared to calendar 1994, in both cases mainly due to
increases in average rental rates. In addition, the two apartment properties
experienced identical improvement in their average occupancy levels from 94%
for calendar 1994 to 95% for calendar 1995. Interest income increased
primarily due to an increase in the average outstanding balances of the
interest-earning restricted cash accounts held by the mortgage lender of The
Lakes Joint Venture. Other income increased mainly due to a refund of prior
year
II-4
<PAGE>
real estate taxes which was received by The Lakes Joint Venture during fiscal
1996, and real estate taxes declined as a result of a reduction in the
assessed value of The Lakes.
The Partnership's share of unconsolidated venture's loss, which
represents the operating results of the Lincoln Garden joint venture,
increased by $89,000 for fiscal 1996. This increase in the Partnership's
share of the venture's net loss was mainly due to an increase in interest
expense, as a result of an increase in the variable interest rate on the
venture's mortgage loan. A decline in other income at the Lincoln Garden
joint venture for calendar 1995 was offset by a 4% increase in rental income
which resulted from an increase in rental rates. The occupancy level at the
Lincoln Garden Apartments averaged 95% for both calendar 1995 and 1994.
1995 Compared to 1994
The Partnership's net loss increased by $478,000 during fiscal 1995 as
compared to the prior year. The primary reasons for this increase in net loss
were increases in property operating expenses, an increase in interest
expense and a decrease in other income. Property operating expenses increased
by $183,000 primarily due to an increase in repairs and maintenance expenses
at The Lakes at South Coast Apartments. Repairs and maintenance expenses
increased as a result of the start of a major capital improvement and
deferred maintenance program at the property, particularly to upgrade common
areas, elevator landings and lobbies. Interest expense increased by $87,000
primarily due to an increase in the variable interest rates on the mortgage
loans secured by the Partnership's consolidated joint ventures, The Lakes at
South Coast Apartments and the Harbour Point Apartments. In addition, the
interest cap on The Lakes debt which fixed the interest rate on the mortgage
loan at less than 4% per annum expired at the end of calendar 1993. Other
income decreased by $313,000 primarily due to the receipt of real estate tax
refunds by The Lakes Joint Venture during calendar 1993. Rental revenues at
the two consolidated investment properties for calendar 1994 were fairly flat
compared to the prior year, which reflected the competitive local market
conditions facing The Lakes and Harbour Pointe Apartments. At The Lakes, a
combination of a still depressed Southern California economy and some newly
constructed competing projects forced management to offer substantial
concessions to maintain average occupancy levels in the mid-90% range. At
Harbour Pointe, rental rate increases implemented in calendar 1993 had pushed
rents at the property to the top of its local market. Competition from some
newly constructed projects during calendar 1994 made it impossible to
continue the pace of these rental rate increases.
The increases in property operating expenses and interest expense and
the decrease in other income were partially offset by an increase of $64,000
in interest income earned on short-term investments and a decrease of $66,000
in the Partnership's share of the unconsolidated venture's loss. The increase
in interest income earned on short term investments was a result of a steady
increase in interest rates earned on such investments throughout the year.
The decrease in the Partnership's share of the unconsolidated venture's loss,
which represented the operating results of the Lincoln Garden joint venture,
was mainly the result of an increase in rental rates at the Lincoln Garden
Apartments. Although average property occupancy levels fell slightly from the
high to low 90% range during the middle two quarters of calendar 1994, rental
rates increased by approximately 6% over the prior year.
Certain Factors Affecting Future Operating Results
The following factors could cause actual results to differ materially
from historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to
varying degrees of risk. Revenues and property values may be adversely
affected by the general economic climate, the local economic climate and
local real estate conditions, including (i) the perceptions of prospective
tenants of the attractiveness of the property; (ii) the ability to retain
qualified individuals to provide adequate management and maintenance of the
property; (iii) the inability to collect rent due to bankruptcy or insolvency
of tenants or otherwise; and (iv) increased operating costs. Real estate
values may also be adversely affected by such factors as applicable laws,
including tax laws, interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive
liability, fire, flood, extended coverage and rental loss insurance with
respect to its properties with insured limits and policy specifications that
management believes are customary for similar properties. There are, however,
certain types of losses (generally of a
II-5
<PAGE>
catastrophic nature such as wars, floods or earthquakes) which may be either
uninsurable, or, in management's judgment, not economically insurable. Should
an uninsured loss occur, the Partnership could lose both its invested capital
in and anticipated profits from the affected property.
Possible Environmental Liabilities. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may become liable for the costs of the
investigation, removal and remediation of hazardous or toxic substances on,
under, in or migrating from such property. Such laws often impose liability
without regard to whether the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party
or governmental authority of any non-compliance, liability or other claim in
connection with environmental conditions at any of its properties that it
believes will involve any expenditure which would be material to the
Partnership, nor is the Partnership aware of any environmental condition with
respect to any of its properties that it believes will involve any such
material expenditure. However, there can be no assurance that any
non-compliance, liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining
real estate investments will be significantly impacted by the competition
from comparable properties in their local market areas. The occupancy levels
and rental rates achievable at the properties are largely a function of
supply and demand in the market. In many markets across the country,
development of new multi-family properties has surged in the past 12 months.
Existing properties in such markets have generally experienced increased
vacancy levels, declines in effective rental rates and, in some cases,
declines in estimated market values as a result of the increased competition.
There are no assurances that these competitive pressures will not adversely
affect the operations and/or market values of the Partnership's investment
properties in the future.
Impact of Joint Venture Structure. The ownership of certain of the
remaining investments through joint venture partnerships could adversely
impact the timing of the Partnership's planned dispositions of its remaining
assets and the amount of proceeds received from such dispositions. It is
possible that the Partnership's co-venture partners could have economic or
business interests which are inconsistent with those of the Partnership.
Given the rights which both parties have under the terms of the joint venture
agreements, any conflict between the partners could result in delays in
completing a sale of the related operating property and could lead to an
impairment in the marketability of the property to third parties for purposes
of achieving the highest possible sale price.
Availability of a Pool of Qualified Buyers. The availability of a pool
of qualified and interested buyers for the Partnership's remaining assets is
critical to the Partnership's ability to realize the estimated fair market
values of such properties at the time of their final dispositions. Demand by
buyers of multi-family apartment properties is affected by many factors,
including the size, quality, age, condition and location of the subject
property, potential environmental liability concerns, the existing debt
structure, the liquidity in the debt and equity markets for asset
acquisitions, the general level of market interest rates and the general and
local economic climates.
Inflation
The Partnership commenced operations in 1985 and completed its
eleventh full year of operations in the current fiscal year. The effects of
inflation and changes in prices on the Partnership's operating results to
date have not been significant.
Inflation in future periods may increase revenues as well as operating
expenses at the Partnership's operating investment properties. Tenants at the
Partnership's apartment properties have short-term leases, generally of one
year or less in duration. Rental rates at these properties can be adjusted to
keep pace with inflation, to the extent market conditions allow, as the
leases are renewed or turned over. Such increases in rental income would be
expected to at least partially offset the corresponding increases in
Partnership and property operating expenses resulting from inflation.
II-6
<PAGE>
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.
II-7
<PAGE>
Exhibit A
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
whollyowned 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:
<TABLE>
<CAPTION>
Date elected
Name Office Age to Office
---- ------ --- ------------
<S> <C> <C> <C>
Bruce J. Rubin President and Director 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and Chief Financial
Officer 49 10/29/85
David F. Brooks First Vice President and Assistant Treasurer 54 6/24/85*
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President 34 12/1/91
<FN>
* The date of incorporation of the Managing General Partner.
</TABLE>
(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.
III-1
<PAGE>
Terrence E. Fancher was appointed a Director of the Managing General
Partner in October 1996. Mr. Fancher is the Managing Director in charge of
PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as
a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is
responsible for the origination and execution of all of PaineWebber's REIT
transactions, advisory assignments for real estate clients and certain of the
firm's real estate debt and principal activities. He joined Kidder, Peabody
in 1985 and, beginning in 1989, was one of the senior executives responsible
for building Kidder, Peabody's real estate department. Mr. Fancher previously
worked for a major law firm in New York City. He has a J.D. from Harvard Law
School, an M.B.A. from Harvard Graduate School of Business Administration and
an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial
Officer of the Managing General Partner and Senior Vice President and Chief
Financial Officer of PWPI which he joined in October 1985. Mr. Arnold joined
PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First
Vice President and Controller since 1978, and where he continued until
joining PWPI. Mr. Arnold is a Certified Public Accountant licensed in the
state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of
the Managing General Partner and a First Vice President and an Assistant
Treasurer of PWPI which he joined in March 1980. From 1972 to 1980, Mr.
Brooks was an Assistant Treasurer of Property Capital Advisors and also, from
March 1974 to February 1980, the Assistant Treasurer of Capital for Real
Estate, which provided real estate investment, asset management and
consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing
General Partner and Vice President and Treasurer of PWPI which he joined in
1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of
the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock
was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from
Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner
and a Vice President and Manager of Financial Reporting of the Adviser which
he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur
Young & Company. Mr. Boland is a Certified Public Accountant licensed in the
state of Massachusetts. He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.
(f) None of the directors and officers was involved in legal
proceedings which are material to an evaluation of his or her ability or
integrity as a director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing
General Partner, and persons who own more than ten percent of the
Partnership's limited partnership units, to file certain reports of ownership
and changes in ownership with the Securities and Exchange Commission.
Officers, directors and ten-percent beneficial holders are required by SEC
regulations to furnish the Partnership with copies of all Section 16(a) forms
they file.
Based solely on its review of the copies of such forms received by it,
the Partnership believes that, during the year ended March 31, 1997, all
filing requirements applicable to the officers and directors of the Managing
General Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General
Partner receive no current or proposed renumeration from the Partnership.
The General Partners are entitled to receive a share of Partnership
cash distributions and a share of profits and losses. These items are
described in Item 13.
The Partnership has never paid regular quarterly distributions of
excess cash flow. Furthermore, the Partnership's Limited Partnership Units
are not actively traded on any organized exchange, and no efficient
III-2
<PAGE>
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.
III-3
<PAGE>
The Partnership recorded as income a total of $5,000 of investor
servicing fees from certain of its joint ventures for the year ended
March 31, 1997 in accordance with the terms of the joint venture agreements.
An affiliate of the Managing General Partner performs certain
accounting, tax preparation, securities law compliance and investor
communications and relations services for the Partnership. The total costs
incurred by this affiliate in providing such services are allocated among
several entities, including the Partnership. Included in general and
administrative expenses for the year ended March 31, 1997 is $76,000,
representing reimbursements to this affiliate of the Managing General Partner
for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins
earned fees of $4,000 (included in general and administrative expenses) for
managing the Partnership's cash assets during fiscal 1997. Fees charged by
Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of the Adviser.
III-4
<PAGE>
Exhibit A
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 1997.
(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.
IV-1
<PAGE>
Exhibit A
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Partnership has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
----------------------------
Managing General Partner
By: /s/ Bruce J. Rubin
-----------------------------
Bruce J. Rubin
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
-----------------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
-----------------------------
Thomas W. Boland
Vice President
Dated: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Partnership and in the capacities and on the dates indicated.
By:/s/ Bruce J. Rubin Date: June 27, 1997
------------------------------------------- -------------
Bruce J. Rubin
Director
By: /s/ Terrence E. Fancher Date: June 27, 1997
------------------------------------------- -------------
Terrence E. Fancher
Director
IV-2
<PAGE>
Exhibit A
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------- -------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission pursuant to
dated September 11, 1985, as Rule 424(c) and incorporated herein
supplemented, with particular by reference.
reference to the Amended and
Restated Agreement and Certificate
of Limited Partnership
(10) Material contracts previously Filed with the Commission pursuant to
filed as exhibits to registration Section 13 or 15(d) of the Securities
statements and amendments thereto Act of 1934 and incorporated herein
of the registrant together with all by reference.
such contracts filed as exhibits of
previously filed Forms 8-K and Forms
10-K are hereby incorporated herein
by reference.
(13) Annual Report to Limited Partners No Annual Report for fiscal year
1997 has been sent to the Limited
Partners. An Annual Report will be
sent to the Limited Partners subsequent
to this filing.
(22) List of subsidiaries Included in Item I of Part 1 of this
Report pages I-1 and I-2, to which
reference is hereby made.
(27) Financial Data Schedule Filed as the last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
IV-3
<PAGE>
Exhibit A
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and Item 14(d)
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference
---------
PaineWebber Development Partners Four, Ltd.:
Reports of independent auditors F-2
Consolidated balance sheets as of March 31, 1997 and 1996 F-4
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995 F-5
Consolidated statements of changes in partners' deficit for
the years ended March 31, 1997, 1996 and 1995 F-6
Consolidated statements of cash flows for the years ended
March 31, 1997, 1996 and 1995 F-7
Notes to consolidated financial statements F-8
Schedule III - Real Estate and Accumulated Depreciation F-23
Other financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required
is included in the consolidated financial statements, including the notes
thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
PaineWebber Development Partners Four, Ltd.:
We have audited the accompanying consolidated balance sheets of
PaineWebber Development Partners Four, Ltd. as of March 31, 1997 and 1996,
and the related consolidated statements of operations, changes in partners'
deficit, and cash flows for each of the three years in the period ended March
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of 71st Street Housing
Partners, Ltd., which statements reflect total assets of $7,333,000 and
$7,633,000 as of December 31, 1996 and 1995, respectively, and total revenues
of $1,598,000, $1,560,000, and $1,498,000 for each of the three years in the
period ended December 31, 1996. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to data included for 71st Street Housing Partners, Ltd., is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the reports of other auditors, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
PaineWebber Development Partners Four, Ltd. will continue as a going concern.
As more fully described in Note 7, The Lakes Joint Venture is in default of
the loan agreement encumbering its operating investment property. In
addition, as more fully described in Notes 5 and 7, the Lincoln Garden
Apartments Joint Venture and 71st Street Housing Partners, Ltd. are both
encumbered by indebtedness which is collateralized by letters of credit, one
of which has expired and the other of which is due to expire in December
1997. These conditions raise substantial doubt about the Partnership's
ability to continue as a going concern. Management's plans as to these
matters are also described in Notes 5 and 7. The accompanying financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
June 10, 1997
F-2
<PAGE>
Exhibit A
Reznick Fedder & Silverman
Certified Public Accountants
217 East Redwood Street, Suite 1900
Baltimore, MD 21202
INDEPENDENT AUDITORS' REPORT
To the Partners
71st Street Housing Partners, Ltd.
We have audited the accompanying balance sheets of 71st Street Housing
Partners, Ltd. as of December 31, 1996 and 1995, and the related statements
of operations, changes in partners' deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 71st Street
Housing Partners, Ltd. as of December 31, 1996 and 1995, and the results of
its operations, changes in partners' deficit and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Reznick Fedder & Silverman
------------------------------
Reznick Fedder & Silverman
Baltimore, Maryland
January 10, 1997
F-3
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
(In thousands, except for per Unit data)
ASSETS
------
1997 1996
---- ----
<S> <C> <C>
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 77,896 76,995
--------- ---------
96,086 95,185
Less accumulated depreciation (28,077) (25,465)
--------- ---------
68,009 69,720
Cash and cash equivalents 1,562 1,390
Restricted cash 3,628 4,164
Accounts receivable - affiliates 21 16
Prepaid and other assets 64 68
Deferred expenses, net of accumulated
amortization of $793 ($682 in 1996) 658 769
--------- ---------
$ 73,942 $ 76,127
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Long-term debt in default $ 85,903 $ 87,489
Accounts payable and accrued expenses 287 355
Accrued interest and fees 4,587 4,258
Tenant security deposits 526 477
Equity in losses of unconsolidated joint venture
in excess of investments and advances 2,375 2,223
Mortgage loan payable 9,125 9,125
--------- ---------
Total liabilities 102,803 103,927
Co-venturers' share of net assets of
consolidated ventures 1,140 1,153
Partners' deficit:
General Partners:
Capital contributions 1 1
Cumulative net loss (2,684) (2,632)
Limited Partners ($1,000 per unit;
41,644 Units issued):
Capital contributions, net of offering costs 36,641 36,641
Cumulative net loss (63,959) (62,963)
--------- ---------
Total partners' deficit (30,001) (28,953)
--------- ---------
$ 73,942 $ 76,127
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
OPERATIONS For the years ended March 31,
1997, 1996 and 1995
(In thousands, except for per Unit data)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income $ 10,554 $ 10,108 $ 9,894
Interest income 252 237 163
Other income 336 299 218
-------- -------- --------
11,142 10,644 10,275
Expenses:
Interest expense and related
financing fees 4,593 5,157 4,207
Property operating expenses 3,716 3,735 3,744
Depreciation expense 2,612 3,079 3,047
Real estate taxes 939 962 1,033
General and administrative 184 260 285
Amortization expense 7 8 6
-------- -------- --------
12,051 13,201 12,322
-------- -------- --------
Operating loss (909) (2,557) (2,047)
Co-venturers' share of consolidated
ventures' losses 13 68 --
Partnership's share of unconsolidated
venture's losses (152) (124) (35)
-------- -------- --------
Net loss $ (1,048) $ (2,613) $ (2,082)
======== ======== ========
Net loss per Limited Partnership Unit $ (23.90) $ (59.60) $ (47.48)
======== ======== ========
</TABLE>
The above net loss per Limited Partnership Unit is based upon the 41,644
Limited Partnership Units outstanding for each year.
See accompanying notes.
F-5
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN
PARTNERS' DEFICIT For the years ended
March 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Total
-------- ------- -----
<S> <C> <C> <C>
Balance at March 31, 1994 $(2,396) $(21,862) $(24,258)
Net loss (104) (1,978) (2,082)
------- -------- --------
Balance at March 31, 1995 (2,500) (23,840) (26,340)
Net loss (131) (2,482) (2,613)
------- -------- --------
Balance at March 31, 1996 (2,631) (26,322) (28,953)
Net loss (52) (996) (1,048)
------- -------- --------
Balance at March 31, 1997 $(2,683) $(27,318) $(30,001)
======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,048) $(2,613) $(2,082)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Co-venturers' share of consolidated
ventures' losses (13) (68) --
Partnership's share of unconsolidated
venture's losses 152 124 35
Depreciation and amortization 2,619 3,087 3,053
Amortization of deferred financing costs 104 103 105
Amortization of deferred gain on
forgiveness of debt (343) (343) (343)
Changes in assets and liabilities:
Accounts receivable - affiliates (5) (5) 28
Prepaid and other assets 4 (1) --
Accounts payable and accrued expenses (68) (35) 79
Accrued interest and fees 329 1,102 440
Tenant security deposits 49 36 43
Advances from consolidated ventures -- -- (100)
------- ------- -------
Total adjustments 2,828 4,000 3,340
------- ------- -------
Net cash provided by operating
activities 1,780 1,387 1,258
Cash flows from investing activities:
Additions to buildings and improvements (901) (170) (425)
------- ------- -------
Net cash used in investing activities (901) (170) (425)
Cash flows from financing activities:
Decrease (increase) in restricted cash 536 (1,119) (145)
Repayment of long-term debt (1,243) -- (648)
------- ------- -------
Net cash used in financing activities (707) (1,119) (793)
------- ------- -------
Net increase in cash and cash equivalents 172 98 40
Cash and cash equivalents, beginning of year 1,390 1,292 1,252
------- ------- -------
Cash and cash equivalents, end of year $ 1,562 $ 1,390 $ 1,292
======= ======= =======
Cash paid for interest $ 4,446 $ 4,239 $ 3,965
======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
PaineWebber Development Partners Four, Ltd. (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of
Texas on June 24, 1985 for the purpose of investing in a diversified
portfolio of newly-constructed and to-be-constructed income-producing
real properties. On September 9, 1986 the Partnership elected to
extend the offering period to the public through September 10, 1987
(beyond its original termination date of September 10, 1986) and
reduce the maximum offering amount to 42,000 Partnership Units (at
$1,000 per Unit) from 100,000 Units. Through the conclusion of the
offering period, 41,644 Units were issued representing capital
contributions of $41,644,000.
The Partnership originally invested the net proceeds of the
offering, through joint venture partnerships, in six rental apartment
properties. As further discussed in Notes 4 and 5, the Partnership's
operating properties have encountered major adverse business
developments which, to date, have resulted in the loss of three of the
original investments to foreclosure. As of March 31, 1997, the
remaining three joint ventures, which had obtained more favorable
financing terms, were generating net cash flow sufficient to satisfy
their current debt service requirements. However, as discussed further
in Note 7, one of these ventures is in default of the terms of its
debt agreement.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities as of March 31,
1997 and 1996 and revenues and expenses for each of the three years in
the period ended March 31, 1997. Actual results could differ from the
estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in three joint venture partnerships which own operating
properties. The joint ventures in which the Partnership has invested
are required to maintain their accounting records on a calendar year
basis for income tax purposes. As a result, the Partnership records
its share of ventures' income or losses based on financial information
of the ventures which is three months in arrears to that of the
Partnership.
The Partnership accounts for one of its three remaining
investments in joint venture partnerships using the equity method
because the Partnership does not have majority voting control in the
venture. Under the equity method the investment is carried at cost
adjusted for the Partnership's share of the ventures' earnings and
losses and distributions. See Note 5 for a description of the
unconsolidated joint venture partnership. As further discussed in Note
4, the Partnership acquired control of 71st Street Housing Partners,
Ltd., which owns the Harbour Pointe Apartments, in fiscal 1990. In
addition, the Partnership acquired control of The Lakes Joint Venture,
which owns The Lakes at South Coast Apartments, in fiscal 1992. As a
result, the accompanying financial statements present the financial
position and results of operations of these joint ventures on a
consolidated basis. As discussed above, the joint ventures have
December 31 year-ends and operations of the consolidated ventures
continue to be reported on a three-month lag. All material
transactions between the Partnership and the joint ventures have been
eliminated in consolidation, except for lag-period cash transfers.
Such lag period cash transfers are accounted for as advances from
consolidated ventures.
The consolidated joint ventures' operating investment properties
are carried at cost, reduced by accumulated depreciation, or an amount
less than cost if indicators of impairment are present in accordance
with statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the
F-8
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount. The Partnership generally
assesses indicators of impairment by a review of independent appraisal
reports on each operating investment property. Such appraisals make
use of a combination of certain generally accepted valuation
techniques, including direct capitalization, discounted cash flows and
comparable sales analysis. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of.
Depreciation expense is computed using the straight-line method
over estimated useful lives of five-to-thirty years. Interest and
taxes incurred during the construction period, along with acquisition
fees paid to PaineWebber Properties Incorporated and costs of
identifiable improvements, have been capitalized and are included in
the cost of the operating investment properties. Maintenance and
repairs are charged to expense when incurred.
The consolidated joint ventures lease apartment units under leases
with terms generally of one year or less. Rental income is recorded
monthly as earned.
For purposes of reporting cash flows, the Partnership considers
all highly liquid investments with original maturities of 90 days or
less to be cash equivalents.
Deferred expenses on the balance sheet at March 31, 1997 and 1996
consist of joint venture modification expense and deferred loan costs.
Joint venture modification expense represents a payment by the
Partnership to the co-venturer in 71st Street Housing Partners, Ltd.
during fiscal 1990, in return for the relinquishment of the general
partner's rights to control the operations of the joint venture, and
is being amortized on a straight-line basis over the term of the joint
venture's mortgage note payable. Deferred loan costs are being
amortized using the straight-line method, which approximates the
effective interest method, over the term of the related debt.
Amortization of deferred loan costs is included in interest expense on
the accompanying statements of operations.
No provision for income taxes has been made as the liability for
such taxes is that of the partners rather than the Partnership. Upon
the sale or disposition of the Partnership's investments, the taxable
gain or loss incurred will be allocated among the partners. In the
case where a taxable gain would be incurred, gain would first be
allocated to the General Partners in an amount at least sufficient to
eliminate their deficit capital balance. Any remaining gain would then
be allocated to the Limited Partners. In certain cases, the Limited
Partners could be allocated taxable income in excess of any
liquidation proceeds that they may receive. Additionally, in cases
where the disposition of an investment involves a foreclosure by, or
voluntary conveyance to, the mortgage lender, taxable income could
occur without distribution of cash. Income from the sale or
disposition of the Partnership's investments would represent passive
income to the partners which could be offset by each partner's
existing passive losses, including any carryovers from prior years.
The cash and cash equivalents, restricted cash and long-term debt
appearing on the accompanying consolidated balance sheets represent
financial instruments for purposes of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The carrying amount of cash and cash
equivalents and restricted cash approximates their fair value due to
the short-term maturities of these instruments. The fair value of the
non-recourse long-term debt is estimated using the estimated market
values of the real estate collateral because such values are below the
principal balances of the debt obligations.
Certain prior year amounts have been reclassified to conform to
the current year presentation.
F-9
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Development
Fund Inc. (the "Managing General Partner"), a wholly-owned subsidiary
of PaineWebber Group Inc. ("PaineWebber") and Properties Associates
1985, L.P. (the "Associate General Partner"), a Virginia limited
partnership, certain limited partners of which are also officers of
the Managing General Partner and PaineWebber Properties Incorporated
("PWPI"), a wholly-owned subsidiary of PaineWebber Incorporated
("PWI"). PWI, a wholly-owned subsidiary of PaineWebber, acted as the
selling agent for the Limited Partnership Units. The General Partners,
PWPI and PWI will receive fees and compensation, determined on an
agreed-upon basis, in consideration of various services performed in
connection with the sale of the Units, the management of the
Partnership and the acquisition, management, financing and disposition
of Partnership investments. The Managing General Partner and its
affiliates are reimbursed for their direct expenses relating to the
offering of Units, the administration of the Partnership and the
acquisition and operation of the Partnership's real property
investments.
All distributable cash, as defined, for each fiscal year shall be
distributed annually in the ratio of 95% to the Limited Partners and
5% to the General Partners. All sale or refinancing proceeds shall be
distributed in varying proportions to the Limited and General
Partners, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, net income or
loss of the Partnership, other than net gains resulting from Capital
Transactions, as defined, will generally be allocated 95% to the
Limited Partners and 5% to the General Partners.
Additionally, the Partnership Agreement provides for the
allocation of net gains resulting from Capital Transactions, as
defined, first, to those partners whose capital accounts reflect a
deficit balance (after all distributions for the year and all
allocations of net income and losses from operations have been made)
in the ratio of such deficits and up to an amount equal to the sum of
such deficits; second, to the General and Limited Partners in such
amounts as are necessary to bring the General Partners' capital
account balance in the ratio of 5 to 95 to the Limited Partners'
capital account balances; then, 95% to the Limited Partners and 5% to
the General Partners.
Selling commissions incurred by the Partnership and paid to PWI
for the sale of Partnership interests were approximately $3,540,000
through the completion of the offering period which expired in
September of 1987.
In connection with the acquisition of properties, PWPI was
entitled to receive acquisition fees in an amount not greater than 5%
of the gross proceeds from the sale of the Partnership units. Total
acquisition fees incurred by the Partnership and paid to PWPI
aggregated $2,077,000.
The Partnership recorded investor servicing fee income from
certain of its joint ventures of $5,000 for each of the years ended
March 31, 1997, 1996 and 1995 in accordance with the terms of the
joint venture agreements.
Included in general and administrative expenses for the years
ended March 31, 1997, 1996 and 1995 is $76,000, $82,000 and $84,000,
respectively, representing reimbursements to an affiliate of the
Managing General Partner for providing certain financial, accounting
and investor communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins
Institutional Investors, Inc. ("Mitchell Hutchins") for the managing
of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins
Asset Management, Inc., an independently operated subsidiary of
PaineWebber. Mitchell Hutchins earned fees of $4,000, $3,000
F-10
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and $4,000 (included in general and administrative expenses) for
managing the Partnership's cash assets during fiscal 1997, 1996 and
1995, respectively.
4. Operating Investment Properties
As of March 31, 1997 and 1996, the Partnership owns majority and
controlling interests in two joint venture partnerships which own
operating investment properties as described below. As discussed in
Note 2, the Partnership's policy is to report the operations of the
joint ventures on a three-month lag.
71st Street Housing Partners, Ltd.
On December 16, 1985, the Partnership acquired an interest in 71st
Street Housing Partners, Ltd., a joint venture formed to develop, own
and operate the Harbour Pointe Apartments, a 234-unit two-story garden
apartment complex located in Bradenton, Florida. Construction of this
complex was completed in January, 1987. The Partnership's co-venture
partners are affiliates of The Lieberman Corporation. The Partnership
made a capital investment of $2,658,000 (including an acquisition fee
of $150,000 paid to PWPI) for a 60% interest in the Joint Venture. The
property was acquired subject to a nonrecourse mortgage note in the
amount of $9,200,000. On May 1, 1990, the joint venture refinanced its
mortgage note under more favorable terms, as further discussed in Note
7. Pursuant to an Amended and Restated Agreement of the Limited
Partnership dated August 4, 1989, the general partner interests of the
co-venturers were converted to limited partnership interests. The
co-venturers received a payment of $125,000 from the Partnership in
return for their agreement to relinquish their general partner rights
and the property management contract. As a result of the amendment,
the Partnership, as the sole general partner, assumed control of the
operations of the property and hired a third-party property manager to
manage the day-to-day operations of the apartment complex.
Per the terms of the amended joint venture agreement, income is
allocated to the Partnership until such time as the Partnership's
capital account balance equals 250% of all capital contributions
theretofore made by the Partnership. Thereafter, income is allocated
60% to the Partnership and 40% to the co-venturers. Net losses are
generally allocated 95% to the Partnership and 5% to the co-venturers,
except that if one partner has a deficit balance and the other a
credit balance in their capital accounts, net losses are allocated to
the partner with the credit balance.
Allocations of gains and losses from capital transactions will be
allocated according to the formulas provided in the joint venture
agreement.
Distributions of cash from a sale or operations of the operating
property will be made in the following order of priority: first, to
repay accrued interest and principal on optional loans (none
outstanding as of March 31, 1997 and 1996); second, to the Partnership
until the Partnership has received an amount equal to 250% of all
capital contributions theretofore made by the Partnership; and third,
any remainder, will be distributed 60% to the Partnership and 40% to
the co-venturers. Distributions of cash from a refinancing of the
operating property shall be distributed 60% to the Partnership and 40%
to the co-venturers.
The Lakes Joint Venture
The Lakes Joint Venture ("Venture") was formed May 30, 1985
(inception) in accordance with the provisions of the laws of the State
of California for the purpose of developing, owning and operating a
770-unit apartment complex (operating investment property) in Costa
Mesa, California. On November 1, 1985 the Partnership acquired a 65%
general partnership interest in the joint venture. The Partnership's
original co-venture partner was The Lakes Development Company
("Developer"), a California general partnership and an affiliate of
Regis Homes Corporation. Construction of the operating investment
property was
F-11
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
completed in December 1987. The initial aggregate cash investment made
by the Partnership for its interest was approximately $16,226,000
(including an acquisition fee of $1,130,000 paid to PWPI).
Construction of the property was financed from the proceeds of a
nonrecourse $76,000,000 mortgage loan. On September 26, 1991, in
conjunction with a refinancing and modification of the Venture's
long-term indebtedness, the Developer transferred its interest in the
Venture to Development Partners, Inc. ("DPI"), a Delaware corporation
and a wholly-owned subsidiary of Paine Webber Group, Inc., and
withdrew from the Venture. As a result of the original co-venturer's
withdrawal, the Partnership assumed control over the operations of the
Venture. The debt secured by the The Lakes at South Coast Apartments
is in default as of March 31, 1997 due to the failure of the Venture
to satisfy two covenants of the loan agreement. See Note 7 for a
further discussion.
Concurrent with the Developer's withdrawal from the Venture and
the admission of DPI as a Venturer, the Venture Agreement was amended
and restated effective September 26, 1991. The Venture Agreement
between the Partnership and DPI provides that, if the Venture's
operating revenues are insufficient to pay its operating expenses, the
Venturers shall have the right, but not the obligation, to arrange
third-party loans to the Venture. Alternatively, the Venturers may
choose to make Optional Loans to the Venture. If both Venturers desire
to make such loans, the loans shall be made in the ratio of 99.98%
from the Partnership and .02% from DPI. No such Optional Loans were
outstanding as of December 31, 1996.
Distributable Funds and Net Proceeds of the Venture are to be
allocated first to the Partnership until the Partnership shall have
received cumulative distributions equal to any Additional Capital
Contributions, as defined. Thereafter, any remaining Distributable
Funds or Net Proceeds are to be distributed next to repay accrued
interest and principal on any Optional Loans and then to the
Partnership until the Partnership shall have received cumulative
distributions equal to $17,250,000. Any remainder is to be distributed
99.98% to the Partnership and .02% to DPI.
Net losses are to be allocated 99.98% to the Partnership and .02%
to DPI. Net income shall be allocated to Venturers to the extent of
and in the ratio of the distribution of Distributable Funds, with any
remainder allocated 99.98% to the Partnership and .02% to DPI. In the
event that there are no Distributable Funds, net income would be
allocated 99.98% to the Partnership and .02% to DPI. Allocations of
gain or losses from sales or other dispositions of the operating
investment property are set forth in the Venture Agreement.
The following is a summary of combined property operating expenses
for the Harbour Pointe Apartments and The Lakes at South Coast
Apartments for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Property operating expenses:
Repairs and maintenance $ 897 $ 886 $ 915
Salaries and related expenses 605 625 672
Utilities 508 522 504
Administrative and other 1,058 1,090 1,062
Management fees 381 365 349
Leasing commissions and fees 142 132 124
Insurance 125 115 118
------ ------ ------
$3,716 $3,735 $3,744
====== ====== ======
</TABLE>
F-12
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments in Unconsolidated Joint Ventures
The Partnership has an investment in one unconsolidated joint
venture at March 31, 1997 and 1996. The unconsolidated joint venture
is accounted for on the equity method in the Partnership's financial
statements. As discussed in Note 2, this joint venture reports its
operations on a calendar year basis.
Condensed financial statements of the unconsolidated joint venture, for
the periods indicated, follow.
<TABLE>
<CAPTION>
Condensed Balance Sheets
------------------------
December 31, 1996 and 1995
(in thousands)
Assets
------ 1996 1995
---- ----
<S> <C> <C>
Current assets $ 86 $ 108
Operating investment property, net 4,705 4,888
Other assets 230 292
------ ------
$5,021 $5,288
====== ======
Liabilities and Partners' Deficit
Current liabilities $ 562 $ 502
Loans payable to affiliates 537 537
Long-term debt 6,700 6,800
Partnership's share of combined deficit (2,507) (2,359)
Co-venturer's share of combined deficit (271) (192)
------- -------
$ 5,021 $ 5,288
======= =======
<CAPTION>
Condensed Summary of Operations
-------------------------------
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rental revenues $ 1,084 $ 1,148 $ 1,102
Interest and other income 68 71 109
------- ------- -------
1,152 1,219 1,211
Property operating expenses 665 685 636
Depreciation and amortization 255 236 212
Interest expense 460 482 411
------- ------- -------
1,380 1,403 1,259
------- ------- -------
Net loss $ (228) $ (184) $ (48)
======= ======= =======
Net loss:
Partnership's share of loss $ (148) $ (120) $ (31)
Co-venturer's share of loss (80) (64) (17)
------- ------- -------
$ (228) $ (184) $ (48)
======= ======= =======
</TABLE>
F-13
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Reconciliation of Partnership's Investment
------------------------------------------
March 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
<S> <C> <C>
Partnership's share of deficit
as shown above at December 31 $(2,507) $(2,359)
Partnership's share of venture's current
liabilities 60 60
Excess basis due to investment in joint
venture, net (1) 72 76
------- -------
Equity in losses of unconsolidated joint
venture in excess of investments
and advances at March 31 (2) $(2,375) $(2,223)
======= =======
<FN>
(1) At March 31, 1997 and 1996 the Partnership's investment exceeds
its share of the combined joint venture's deficit account by
approximately $72,000 and $76,000, respectively. These amounts,
which relate to certain expenses incurred by the Partnership in
connection with acquiring its remaining unconsolidated joint
venture investment, are being amortized using the straight-line
method over the estimated useful life of the related operating
investment property.
(2) Equity in losses of unconsolidated joint venture in excess of
investments and advances at March 31, 1997 and 1996 represents
the Partnership's net investment in the Lincoln Garden joint
venture partnership. This joint venture is subject to a
partnership agreement which determines the distribution of
available funds, the disposition of the venture's assets and
the rights of the partners, regardless of the Partnership's
percentage ownership interest in the venture. As a result,
substantially all of the Partnership's investment in this joint
venture is restricted as to distributions.
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Partnership's Share of Operations
---------------------------------------------------
For the years ended March 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Partnership's share of
operations, as shown above $(148) $(120) $(31)
Amortization of excess basis (4) (4) (4)
----- ----- ----
Partnership's share of
unconsolidated venture's losses $(152) $(124) $(35)
===== ===== ====
</TABLE>
A description of the property owned by the remaining
unconsolidated joint venture and certain other matters are
summarized below:
Lincoln Garden Apartments Joint Venture
On November 15, 1985, the Partnership acquired an interest
in a joint venture which developed, owns and operates Lincoln
Garden Apartments, a 200-unit complex located on an 8.1-acre
tract of land in Tucson, Arizona. Construction of this complex
was completed in June, 1986. The Partnership's co-venture
partner is an affiliate of Lincoln Property Company. The
Partnership made a cash investment of approximately $1,762,000
(including an acquisition fee of $103,125 paid
F-14
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to PWPI) for a 65% interest in the Joint Venture. The property
was acquired subject to a nonrecourse mortgage note in the
amount of $7,700,000.
During fiscal 1989, the joint venture ceased to meet the
debt service requirements of its mortgage financing and,
technically, was in default of the loan agreements. In March
1989, the Partnership refinanced its loan through the refunding
of certain tax-exempt revenue bonds issued by a local housing
authority and obtained a lower interest rate, which reduced the
venture's debt service requirements. Interest rates on the
previous financing arrangement ranged from 7.2% to 8.8% per
annum. Interest on the new bonds is paid at a variable rate
which fluctuates weekly and is tied to the market rates on
other similar tax-exempt debt instruments. The venture has
remained current on its debt service payments since the date of
the refinancing. The mortgage note had a remaining principal
balance of $6,700,000 as of December 31, 1996 and is secured by
the venture's operating investment property and a primary
letter of credit in the amount of $7,188,000, which requires
annual fees equal to 0.8% of the letter of credit amount and
expired on May 1, 1997. A tentative extension to the letter of
credit for Lincoln Garden has been negotiated with the issuer,
and the final documents to formalize the extension are in the
process of being reviewed and executed. The new letter of
credit would have a two-year term, would require annual fees
equal to 1.2% of the letter of credit amount and would expire
in May 1999. There are no assurances, however, that this
agreement will be finalized. Failure to finalize the extension
agreement could result in the initiation of foreclosure
proceedings on the Lincoln Garden property. The outcome of this
situation cannot presently be determined. The Partnership would
recognize a net gain for financial reporting purposes upon the
foreclosure of the Lincoln Garden investment property because
the prior year equity method losses and distributions from the
joint venture have exceeded the Partnership's investments and
advances in the venture. To improve the credit rating of the
outstanding bonds and provide a more favorable variable
interest rate, in 1993 the lender provided to the joint venture
a confirming letter of credit for $7,109,500. The confirming
letter of credit required annual fees equal to 0.3% of the
letter of credit amount. This confirming letter of credit
expired on June 4, 1996 and was not renewed.
The co-venturer guaranteed to fund negative cash flow, as
defined, of the Joint Venture during the guarantee period,
which ended September 30, 1988. Operating expenses and debt
service, if any, in excess of the amounts available for
expenditure were to be funded by the co-venturer during the
guarantee period. The co-venturer's obligation to fund cash
pursuant to these guarantees was in the form of nonreturnable
capital contributions through September 30, 1987, and mandatory
additional capital contributions, as defined, through September
30, 1988. From October 1, 1988 until July 2, 1990, the
co-venturer was required to make mandatory loans, as defined,
to the Joint Venture to the extent operating revenues were
insufficient to pay the operating expenses. Thereafter, if
operating revenues are insufficient to pay operating expenses,
either the co-venturer or the Partnership may make optional
loans, as defined, to the Joint Venture, but there is no
assurance that any will be made. All mandatory and optional
loans bear interest at prime (8.25% at December 31, 1996) plus
1% per annum and are to be repaid from distributable funds, as
defined. At December 31, 1996, mandatory and optional loans
payable to the co-venturer amounted to $522,000. Unpaid
interest on mandatory and optional loans at December 31, 1996,
amounted to $383,000. Loans payable to the Partnership at
December 31, 1996, amounted to $14,000 and are being accounted
for as optional loans similar to those made by the co-venturer.
The joint venture agreement provides that distributable
funds, as defined, and net proceeds arising from the sale,
refinancing, or other disposition of the Operating Investment
Property of the Joint Venture, as defined, will be distributed
as follows: 1) for repayment of accrued interest and principal
on optional loans, 2) for repayment of accrued interest and
principal on mandatory loans, 3) to the Partnership until the
Partnership has received cumulative distributions equal to
$1,897,500, 4) to the co-venturer until the co-venturer has
received a cumulative distribution equal to, first, a
F-15
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
preferred return on mandatory additional capital contributions
of prime plus 1% per annum and, second, any mandatory
additional capital contributions, and 5) the balance, 65% to
the Partnership and 35% to the co-venturer. The obligation to
distribute distributable funds is cumulative.
Losses of the joint venture, other than losses resulting
from the sale of the Operating Investment Property, were
allocated 100% to the Partnership through December 31, 1990,
and thereafter, are allocated 65% to the Partnership and 35% to
the co-venturer unless the allocation of additional losses to
the Partnership would result in the Partnership's capital
account having a deficit balance while the co-venturer's
capital account has a credit balance. In such cases, the
co-venturer will be allocated losses until the capital account
of the co-venturer is reduced to zero. Income of the Joint
Venture, other than gains resulting from the sale or other
disposition of the Operating Investment Property, will be
allocated 65% to the Partnership and 35% to the co-venturer if
there are no distributable funds. If there are distributable
funds, income will be allocated as follows: 1) to the
Partnership to the extent of its preferred distributions, 2) to
the co-venturer to the extent of its preferred distributions,
and 3) the balance, 65% to the Partnership and 35% to the
co-venturer.
Gains arising from the sale, refinancing, or other
disposition of the Operating Investment Property are to be
allocated in accordance with specific formulas set forth in the
joint venture agreement.
6. Restricted Cash
In September 1991, The Lakes Joint Venture entered into an
agreement with its mortgage lender whereby restricted cash accounts
were established for the purpose of making specific disbursements for
debt service, property taxes and insurance, security deposit refunds,
and funding operating deficits. These accounts are controlled by the
bank in which all disbursements and transfers are dictated by the
related Reimbursement Agreement (see Note 7). These cash accounts are
included in Restricted Cash on the accompanying balance sheet
7. Long-term debt
Long-term debt on the Partnership's balance sheet at March 31,
1997 and 1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
---- ----
Nonrecourse loan payable to bank secured by a
third deed of trust plus all future rents and
income generated by The Lakes at South Coast
Apartments. 3,491 4,584
Prior indebtedness principal payable to bank.
This obligation is related to The Lakes Joint
Venture and is nonrecourse. 3,411 3,561
Deferred gain on forgiveness of debt (net of
accumulated amortization of $1,877 and $1,534 in
1997 and 1996, respectively) 3,401 3,744
------- -------
95,028 96,614
Less: Long-term debt in default (see discussion
below) (85,903) (87,489)
------- -------
$ 9,125 $ 9,125
======= =======
</TABLE>
Mortgage loan secured by the Harbour Pointe Apartments
Original financing for construction of the Harbour Pointe
Apartments was provided through $9,200,000 of Multi-Family Housing
Mortgage Revenue Bonds, Series 1985 E due December 1, 2007 (the
original Bonds) issued by the Manatee County Housing Finance Authority
which bore interest at 8.25% plus a 1.25% letter of credit fee. An
amount of $75,000 was paid on the original bonds prior to the
refinancing. The original bond issue was refinanced on May 1, 1990
with $9,125,000 Weekly Adjustable/Fixed Rate Multi-Family Housing
Revenue Refunding Bonds, Series 1990A, due December 1, 2007 (the
Bonds).
The interest rate on the Bonds is adjusted weekly to a minimum
rate that would be necessary to remarket the Bonds in a secondary
market as determined by a bank remarketing agent. During calendar
1996, the interest rate averaged 3.90% (4.38% in 1995). The Bonds are
secured by the Harbour Pointe Apartments. As of December 31, 1996, the
fair value of this debt obligation approximated $8.8 million.
Interest on the underlying bonds is intended to be exempt from
federal income tax pursuant to Section 103 of the Internal Revenue
Code. In connection with obtaining the mortgage, the partnership
executed a Land Use Restriction Agreement with the Manatee County
Housing Finance Authority which provides, among other things, that
substantially all of the proceeds of the Bonds issued be utilized to
finance multi-family housing of which 20% or more of the units are to
be leased to low and moderate income families as established by the
United States Department of Housing and Urban Development. In the
event that the underlying Bonds do not maintain their tax-exempt
status, whether by a change in law or by noncompliance with the rules
and regulations related thereto, repayment of the note may be
accelerated.
Pursuant to the financing agreement, a bank has issued an
irrevocable letter of credit to the Bond trustee in the joint
venture's name for $9,247,500. An annual fee equal to 1% of the letter
of credit balance is payable monthly to the extent of net cash
operating income available to pay such fees. In addition, the joint
venture pays annual remarketing, administrative and trustee fees
pertaining to the bonds which totalled $29,000 during 1996. The letter
of credit is scheduled to expire on December 15, 1997, at which time
the venture's mortgage debt would become immediately due and payable
if the letter of credit is not extended or
F-17
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
replaced. Subsequent to year-end, the venture has filed an application
to extend the letter-of-credit for a three-year period. There are no
assurances, however, that this application will be approved. The
outcome of this situation cannot presently be determined. The
Partnership would recognize a net gain for financial reporting
purposes upon either the sale or foreclosure of the Harbour Pointe
Apartments because the balance of the mortgage loan payable exceeds
the net carrying value of the operating investment property. The total
assets, total liabilities, gross revenues and total expenses of 71st
Street Housing Partners, Ltd. included in the fiscal 1997 consolidated
financial statements total $7,333,000, $10,356,000, $1,598,000 and
$1,611,000, respectively.
Debt secured by The Lakes at South Coast Apartments
Original financing for construction of The Lakes at South Coast
Apartments was provided from a developer loan in the amount of
$76,000,000 funded by the proceeds of a public offering of tax-exempt
apartment development revenue bonds. The Venture had been in default
of the developer loan since December 1989 for failure to make full and
timely payments on the loan. As a result of the Venture's default, the
required semi-annual interest and principal payments due to the bond
holders through June of 1991 were made by the bank which had issued an
irrevocable letter of credit securing the bonds. Under the terms of
the loan agreement, the Venture was responsible for reimbursing the
letter of credit issuer for any draws made against the letter of
credit which totalled $7,748,000.
The original bond issue was refinanced during 1991 and the
original developer loan was extinguished. The new developer loan (1991
Developer Loan), in the amount of $75,600,000, is payable to the
County of Orange and was funded by the proceeds of a public offering
of tax-exempt apartment development revenues bonds issued, at par, by
the County of Orange, California in September 1991. Principal is
payable upon maturity, December 1, 2006. Interest on the bonds is
variable, with the rate determined weekly by a remarketing agent
(ranging from 2.25% to 5.30% during calendar 1996), and is payable in
arrears on the first of each month.
The loan is secured by a first deed of trust plus all future rents
and income generated by the operating investment property. Bond
principal and interest payments are secured by an irrevocable letter
of credit issued by a bank in the amount of $76,569,000, expiring
December 15, 1998. The Venture pays an annual letter of credit fee
equal to 1.3% of the outstanding amount (1% prior to December 15,
1996), payable 73% (60% prior to December 15, 1996) monthly with the
remaining 27% (40% prior to December 15, 1996) deferred and paid in
accordance with the Reimbursement Agreement (Unpaid Accrued Letter of
Credit Fees). Such Unpaid Accrued Letter of Credit Fees were
$1,608,000 and $1,306,000 at December 31, 1996 and 1995, respectively.
The bank letter of credit is secured by a second deed of trust on the
operating investment property and future rents and income from the
operating investment property.
In conjunction with the 1991 Developer Loan, the Venture entered
into a Reimbursement Agreement with the letter of credit issuer
regarding the unreimbursed letter of credit draws referred to above.
The letter of credit issuer agreed to forgive all outstanding accrued
interest through September 26, 1991, aggregating $1,132,000, along
with a portion of the outstanding principal in the amount of $300,000.
In return, the Venture made a principal payment of $926,000, leaving
an unpaid balance of $6,523,000 (Prior Indebtedness). The outstanding
principal balance of the Prior Indebtedness bears interest payable to
the letter of credit issuer at the rate of 11% per annum. Interest
accrued on the Prior Indebtedness from the date of closing through
June 1992 was forgiven by the letter of credit issuer. Principal
payments from available net cash flow and the release of certain
restricted escrow funds described below totalled $3,112,000 through
December 31, 1996, leaving an outstanding principal balance of
$3,411,000 as of December 31, 1996. At the time of the refinancing the
Venture also owed the letter of credit issuer fees totalling
$2,184,000. The letter of credit issuer agreed to forgive $1,259,000
of such unpaid fees, leaving an unpaid balance of $925,000 (Deferred
Prior Letter of Credit Fees). The Venture has a limited right to defer
payment of interest and
F-18
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal on the Prior Indebtedness and the Unpaid Accrued Letter of
Credit Fees to the extent that the net cash flow from operations is
not sufficient after the payment of debt service on the 1991 Developer
Loan and the funding of certain required reserves. In addition, upon a
sale or other disposition of the operating property, the Reimbursement
Agreement allows for the payment to the Venture of an amount of
$5,500,000, plus accrued interest at the rate of 8% per annum, prior
to the repayment to the letter of credit issuer of the accrued
interest on the Prior Indebtedness and the Deferred Prior Letter of
Credit Fees.
In November 1988, a borrowing arrangement with a bank was entered
into to provide funds for The Lakes. The Venture obtained a line of
credit secured by a third trust deed on the subleasehold interest,
buildings and improvements, and rents and income in the amount of
$6,300,000. Interest on the line of credit was originally payable
monthly at 1-1/2% over the Citibank, N.A. prime rate. However, because
of the default status of this obligation during 1990, interest had
accrued at a rate of prime plus 4% through September 26, 1991. Accrued
interest on the line of credit, which is payable to the same bank
which issued the letter of credit in connection with the bonds,
totalled $1,841,000 at September 26, 1991. The outstanding principal
balance of the line of credit was $6,127,000 as of September 26, 1991.
In conjunction with the refinancing of the developer loan described
above, the lender agreed to forgive all of the outstanding accrued
interest at the date of the refinancing. Interest accrues on the
outstanding principal balance at the rate of 11% per annum beginning
September 27, 1991. Payment of interest and principal on the line of
credit borrowings, prior to a sale or other disposition of the
operating property, is limited to the extent of available cash flow
after the payment of debt service on the developer loan and the
funding of certain required reserves. In addition, as with the Prior
Indebtedness principal and interest described above, upon a sale or
other disposition of the operating property, the payment of accrued
interest on the line of credit borrowings is subordinated to the
receipt by the Venture of $5,500,000 plus a simple return thereon of
8% per annum. Principal payments on the line of credit borrowings from
available net cash flow totalled $2,636,000 through December 31, 1996,
leaving an outstanding principal balance of $3,491,000 as of December
31, 1996.
The restructuring of the Prior Indebtedness, the Deferred Letter
of Credit Fees and the line of credit borrowings, as described above,
have been accounted for in accordance with Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". Accordingly, the forgiveness of debt,
aggregating $5,279,000, has been deferred and is being amortized as a
reduction of interest expense prospectively using a method
approximating the effective interest method over the estimated
remaining term of the Venture's indebtedness. At December 31, 1996 and
1995, $3,401,000 and $3,744,000, respectively of such forgiven debt
(net of accumulated amortization) has been reflected in the
accompanying balance sheet and $343,000 has been amortized as a
reduction of interest expense in the accompanying statements of
operations for each of the years ended December 31, 1996, 1995 and
1994, respectively. As of December 31, 1996, the fair value of the
aggregate indebtedness secured by The Lakes at South Coast Apartments
approximated $66 million.
The 1991 Developer Loan required the establishment of a $2,000,000
deficit reserve account, funded from the Venturers' 1991
contributions. The loan also requires the funding of an additional
reserve account on a monthly basis from available cash flow (as
defined) to the extent that the interest rate on the bonds is below
6%, until the balance in this reserve account totals $1,000,000. The
requirement for this additional reserve account may be eliminated if
the operating property generates a certain minimum level of net
operating income. The $2,000,000 deficit reserve account and the
additional reserve account funded by operations may be used under
certain circumstances to fund the Venture's debt service obligations
to the extent that net operating income is insufficient. In the event
that such reserves no longer become necessary under the terms of the
Reimbursement Agreement, any remaining balances in the reserve
accounts are to be paid to the letter of credit issuer to be applied
against certain of the Venture's outstanding obligations. As of
December 31, 1996 and 1995, the balance in the deficit reserve account
totalled $1,146,000 and $1,111,000, respectively. As of December 31,
1995, the balance in the additional reserve account totalled $151,000.
During 1996, the requirement for the additional reserve account was
eliminated and the balance in the
F-19
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
account was applied against the Venture's outstanding debt
obligations. Such amounts are included in restricted cash on the
accompanying balance sheets. The remaining balance in restricted cash
relates to operating cash accounts of the Venture in which
disbursements are restricted by the bank.
The 1991 Developer Loan contains several restrictive covenants,
including, among others, a requirement that the Venture furnish the
letter of credit issuer in September 1994 and September 1996 with
certified independent appraisals of the fair market value of the
operating investment property for an amount equal to or greater than
$92,000,000 and $100,000,000, respectively. Failure to provide such
appraisals constitute events of default under the Reimbursement
Agreement. To date, the Lakes Joint Venture has not provided the
lender with an appraisal which meets either the $92,000,000 or
$100,000,000 requirement, and the lender has not waived or modified
the minimum appraised value requirements. Accordingly, the Venture is
in default under the Reimbursement Agreement. In February 1996, the
lender issued a formal notice of default to the Joint Venture pursuant
to the Reimbursement Agreement. During fiscal 1997, the Partnership
engaged in discussions with the lender regarding possible changes in
the appraisal requirements, however, no agreement has been reached to
date. Management expects to continue such discussions in fiscal 1998
but there can be no assurances that the lender will grant any relief
in connection with these appraisal covenants. Accordingly, the
carrying amount of the debt related to The Lakes Joint Venture has
been classified as long-term debt in default on the balance sheets as
of March 31, 1997 and 1996.
In the event that management is successful in negotiating a waiver
or modification of the minimum appraised value requirements described
above for The Lakes Joint Venture, the Partnership will continue to
direct the management of the remaining operating properties in order
to generate sufficient cash flow to sustain operations in the nearterm
while attempting to maximize their longterm values. Even under these
circumstances, it remains to be seen whether such a strategy would
result in the return of any significant amount of invested capital to
the Limited Partners. If management cannot reach an agreement with The
Lakes' mortgage lender regarding the appraisal covenants, the lender
could choose to initiate foreclosure proceedings. While the
Partnership is prepared to exercise all available legal remedies in
the event that the lender takes such actions, if the Partnership were
not successful with its legal defenses the result could be a
foreclosure of the operating property. In the event that the ownership
of The Lakes was transferred to the lender as a result of foreclosure
actions, the Partnership would have to weigh the costs of continued
operations against the realistic hopes for any future recovery of
capital from the other two investments. Under such circumstances, the
Managing General Partner might determine that it would be in the best
interests of the Limited Partners to liquidate the remaining
investments and terminate the Partnership. Management will reassess
its future operating strategy once the appraisal covenant compliance
issue on The Lakes is fully resolved. These conditions raise
substantial doubt about the Venture's and the Partnership's ability to
continue as going concerns. The financial statements do not include
any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty. The Partnership would recognize a net gain for financial
reporting purposes upon either the sale or foreclosure of The Lakes at
South Coast Apartments because the balance of the mortgage loan
payable exceeds the net carrying value of the operating investment
properties. The total assets, total liabilities, gross revenues and
total expenses of The Lakes Joint Venture included in the fiscal 1997
consolidated financial statements total $64,214,000, $91,108,000,
$9,469,000 and $10,202,000, respectively.
8. Legal Proceedings
In November 1994, a series of purported class actions (the "New
York Limited Partnership Actions") were filed in the United States
District Court for the Southern District of New York concerning
PaineWebber Incorporated's sale and sponsorship of various limited
partnership investments and REIT Stocks, including those offered by
the Partnership. The lawsuits were brought against PaineWebber
Incorporated and Paine Webber Group Inc. (together "PaineWebber"),
among others, by allegedly dissatisfied partnership investors.
F-20
<PAGE>
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1995, after the actions were consolidated under the title In
re PaineWebber Limited Partnership Litigation, the plaintiffs amended
their complaint to assert claims against a variety of other
defendants, including Fourth Development Fund Inc. and Properties
Associates 1985, L.P. ("PA1985"), which are the Managing General
Partners of the Partnership and affiliates of PaineWebber. On May 30,
1995, the court certified class action treatment of the claims
asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions
alleged that, in connection with the sale of interests in PaineWebber
Development Partners Four, Ltd., PaineWebber, including Fourth
Development Fund Inc. and PA1985 (1) failed to provide adequate
disclosure of the risks involved; (2) made false and misleading
representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the
Partnership to investors for whom such investments were not suitable.
The plaintiffs, who purported to be suing on behalf of all persons who
invested in PaineWebber Development Partners Four, Ltd., also alleged
that following the sale of the partnership interests, PaineWebber,
including Fourth Development Fund Inc. and PA1985 misrepresented
financial information about the Partnership's value and performance.
The amended complaint alleged that PaineWebber, including Fourth
Development Fund, Inc. and PA1985 violated the Racketeer Influenced
and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as
well as disgorgement of all fees and other income derived by
PaineWebber from the limited partnerships. In addition, the plaintiffs
also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding
with the plaintiffs in the New York Limited Partnership Actions
outlining the terms under which the parties have agreed to settle the
case. Pursuant to that memorandum of understanding, PaineWebber
irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in
accordance with a definitive settlement agreement and plan of
allocation. On July 17, 1996, PaineWebber and the class plaintiffs
submitted a definitive settlement agreement which provides for the
complete resolution of the class action litigation, including releases
in favor of the Partnership and PWPI, and the allocation of the $125
million settlement fund among investors in the various partnerships
and REITs at issue in the case. As part of the settlement, PaineWebber
also agreed to provide class members with certain financial guarantees
relating to some of the partnerships and REITs. The details of the
settlement are described in a notice mailed directly to class members
at the direction of the court. A final hearing on the fairness of the
proposed settlement was held in December 1996, and in March 1997 the
court announced its final approval of the settlement. The release of
the $125 million of settlement proceeds has not occurred to date
pending the resolution of an appeal of the settlement agreement by two
of the plaintiff class members. As part of the settlement agreement,
PaineWebber has agreed not to seek indemnification from the related
partnerships and real estate investment trusts at issue in the
litigation (including the Partnership) for any amounts that it is
required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action
entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior
Court against PaineWebber Incorporated and various affiliated entities
concerning the plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint
alleged, among other things, that PaineWebber and its related entities
committed fraud and misrepresentation and breached fiduciary duties
allegedly owed to the plaintiffs by selling or promoting limited
partnership investments that were unsuitable for the plaintiffs and by
overstating the benefits, understating the risks and failing to state
material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against
PaineWebber. In June 1996, approximately 50 plaintiffs filed an action
entitled Bandrowski v. PaineWebber Inc. in Sacramento, California
Superior Court against PaineWebber Incorporated and various affiliated
entities concerning the plaintiffs' purchases of various limited
partnership interests, including those offered by the Partnership. The
complaint was very similar to the Abbate action described above and
sought compensatory damages of $3.4
F-21
Exhibit A
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million plus punitive damages against PaineWebber. In September 1996,
the court dismissed many of the plaintiffs' claims in both the Abbate
and Bandrowski actions as barred by applicable securities arbitration
regulations. Mediation with respect to the Abbate and Bandrowski
actions was held in December 1996. As a result of such mediation, a
settlement between PaineWebber and the plaintiffs was reached which
provided for the complete resolution of both actions. Final releases
and dismissals with regard to these actions were received subsequent
to March 31, 1997.
Based on the settlement agreements discussed above covering all of
the outstanding unitholder litigation, and notwithstanding the appeal
of the class action settlement referred to above, management does not
expect that the resolution of these matters will have a material
impact on the Partnership's financial statements, taken as a whole.
F-22
<PAGE>
Exhibit A
Schedule III - Real Estate and Accumulated Depreciation
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
March 31, 1997
(In thousands)
Initial Cost to Cost
Consolidated Capitalized Gross Amount at Which Carried
Joint Venture Subsequent to at End of Year
-------------------- Acquisition ------------------------------
Buildings & Buildings & Buildings &
Description Encumbrances Land Improvements Improvements Land Improvements Total
- ----------- ------------ ---- ------------ ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Apartment Complex
Bradenton, FL $ 9,125 $ 1,543 $ 8,309 $ 408 $ 1,543 $ 8,717 $10,260
Apartment Complex
Costa Mesa, CA 82,502 16,647 64,350 4,829 16,647 69,179 85,826
------- ------- ------- ------ ------- ------- -------
$91,627 $18,190 $72,659 $5,237 $18,190 $77,896 $96,086
======= ======= ======= ====== ======= ======= =======
<CAPTION>
Life on Which
Depreciation
in Latest
Income
Accumulated Date of Dare Statement
Description Depreciation Construction Acquired is Computed
- ----------- ------------ ------------ -------- --------------
<S> <C> <C> <C> <C>
Apartment Complex
Bradenton, FL $ 2,943 1987 12/16/85 5 - 30 yrs.
Apartment Complex
Costa Mesa, CA 25,134 1987 11/1/85 5 - 30 yrs.
-------
$28,077
=======
</TABLE>
Notes
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal
income tax purposes is approximately $85,320.
(B) See Note 7 to the financial statements for a description of the terms of
the debt encumbering the property.
(C) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $95,185 $95,015 $94,590
Increase due to additions 901 170 425
------- ------- -------
Balance at end of period $96,086 $95,185 $95,015
======= ======= =======
(D) Reconciliation of accumulated depreciation:
Balance at beginning of period $25,465 $22,386 $19,339
Depreciation expense 2,612 3,079 3,047
------- ------- -------
Balance at end of period $28,077 $25,465 $22,386
======= ======= =======
</TABLE>
F-23
EXHIBIT B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
QUARTERLY REPORT ON FORM 10-Q
<PAGE>
THIS PAGE
INTENTIONALLY
LEFT
BLANK
<PAGE>
Exhibit B
=============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-17150
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0147579
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X|. No|_|.
=============================================================================
Page 1 of 22
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1997 (Unaudited)
(In thousands)
ASSETS
------
December 31 March 31
----------- --------
<S> <C> <C>
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 77,896 77,896
-------- --------
96,086 96,086
Less accumulated depreciation (30,036) (28,077)
-------- --------
66,050 68,009
Cash and cash equivalents 2,363 1,562
Restricted cash 3,638 3,628
Accounts receivable - affiliates 25 21
Prepaid and other assets 46 64
Deferred expenses, net 622 658
-------- --------
$ 72,744 $ 73,942
======== ========
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
<S> <C> <C>
Accounts payable and accrued expenses $ 198 $ 287
Accrued interest and fees 5,336 4,587
Tenant security deposits 379 526
Losses of unconsolidated joint venture
in excess of investments and advances 534 2,375
Mortgage loans payable 94,247 95,028
Co-venturers' share of net assets of
consolidated ventures 1,064 1,140
Partners' deficit (29,014) (30,001)
-------- --------
$ 72,744 $ 73,942
======== ========
<FN>
See accompanying notes.
</TABLE>
-2-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS For the three
and nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 2,665 $ 2,572 $ 7,947 $ 7,545
Interest income 64 36 185 166
Other income 123 125 390 471
------- ------- ------- -------
2,852 2,733 8,522 8,182
Expenses:
Property operating expenses 1,140 903 3,021 2,803
Real estate taxes 234 248 702 745
Interest expense 1,256 1,175 3,586 3,528
Depreciation 653 773 1,959 2,309
General and administrative 83 50 203 127
------- ------- ------- -------
3,366 3,149 9,471 9,512
------- ------- ------- -------
Operating loss (514) (416) (949) (1,330)
Gain on sale of joint venture interest 2,010 -- 2,010 --
Partnership's share of unconsolidated
venture's loss (39) (31) (150) (92)
Co-venturers' share of consolidated
ventures' losses 44 31 76 73
------- ------- ------- -------
Net income (loss) $ 1,501 $ (416) $ 987 $(1,349)
======= ======= ======= =======
Net income (loss) per Limited
Partnership Unit $ 32.41 $ (9.53) $ 20.68 $(30.81)
======= ======= ======= =======
<FN>
The above net income (loss) per Limited Partnership Unit is based
upon the 41,644 Limited Partnership Units outstanding for each period.
See accompanying notes.
</TABLE>
-3-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT For
the nine months ended December 31, 1997 and 1996 (Unaudited)
(In thousands)
General Limited
Partners Partners
<S> <C> <C>
Balance at March 31, 1996 $ (2,631) $(26,322)
Net loss (66) (1,283)
-------- --------
Balance at December 31, 1996 $ (2,697) $(27,605)
======== ========
Balance at March 31, 1997 $ (2,683) $(27,318)
Net income 126 861
-------- --------
Balance at December 31, 1997 $ (2,557) $(26,457)
======== ========
<FN>
See accompanying notes.
</TABLE>
-4-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 987 $(1,349)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation 1,959 2,304
Amortization of deferred financing costs 86 83
Amortization of deferred gain on forgiveness of debt (257) (257)
Gain on sale of joint venture interest (2,010) --
Partnership's share of unconsolidated venture's loss 150 92
Co-venturers' share of consolidated ventures' losses (76) (73)
Changes in assets and liabilities:
Accounts receivable - affiliates (4) (4)
Prepaid and other assets 18 (10)
Deferred expenses (50) --
Accounts payable and accrued expenses (89) 545
Accrued interest and fees 749 743
Tenant security deposits (147) 2
------- -------
Total adjustments 329 3,425
------- -------
Net cash provided by operating activities 1,316 2,076
------- -------
Cash flows from investing activities:
Additions to buildings and improvements -- (571)
Proceeds from sale of joint venture interest 19 --
------- -------
Net cash provided by (used in) investing activities 19 (571)
------- -------
Cash flows from financing activities:
(Increase) decrease in restricted cash (10) 386
Repayment of principal on long-term debt (524) (862)
------- -------
Net cash used in financing activities (534) (476)
------- -------
Net increase in cash and cash equivalents 801 1,029
Cash and cash equivalents, beginning of period 1,562 1,390
------- -------
Cash and cash equivalents, end of period $ 2,363 $ 2,419
======= =======
Cash paid during the period for interest $ 3,008 $ 2,959
======= =======
<FN>
See accompanying notes.
</TABLE>
-5-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
-------
The accompanying financial statements, footnotes and discussions
should be read in conjunction with the financial statements and footnotes
contained in the Partnership's Annual Report for the year ended March 31,
1997. In the opinion of management, the accompanying financial statements,
which have not been audited, reflect all adjustments necessary to present
fairly the results for the interim period. All of the accounting adjustments
reflected in the accompanying interim financial statements are of a normal
recurring nature.
The accompanying financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of December 31, 1997 and March 31, 1997
and revenues and expenses for each of the three- and nine-month periods ended
December 31, 1997 and 1996. Actual results could differ from the estimates
and assumptions used.
2. Related Party Transactions
--------------------------
Accounts receivable - affiliates as of December 31, 1997 and March
31, 1997 consist of investor servicing fees due from the unconsolidated joint
venture.
Included in general and administrative expenses for the nine-month
periods ended December 31, 1997 and 1996 is $60,000 and $55,000,
respectively, representing reimbursements to an affiliate of the Managing
General Partner for providing certain financial, accounting and investor
communication services to the Partnership.
Also included in general and administrative expenses for the
nine-month periods ended December 31, 1997 and 1996 is $4,000 and $3,000,
respectively, representing fees earned by an affiliate, Mitchell Hutchins
Institutional Investors, Inc., for managing the Partnership's cash assets.
3. Investment in Unconsolidated Joint Venture Partnership
------------------------------------------------------
The Partnership has an investment in one unconsolidated joint venture
which owns an operating investment property (Lincoln Garden Apartments), as
discussed further in the Annual Report. The unconsolidated joint venture is
accounted for by using the equity method because the Partnership does not
have a voting control interest in the venture. Under the equity method, the
investment is carried at cost adjusted for the Partnership's share of the
unconsolidated venture's earnings, losses and distributions. The
Partnership's policy is to recognize its share of unconsolidated venture's
operations three months in arrears.
-6-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
On September 18, 1997, the Partnership sold 75% of its interest in the
Lincoln Garden joint venture to its co-venture partner for $18,845. The
remaining 25% will be acquired by the co-venture partner for $6,155 on or
after September 19, 1998. Upon completion of this sale, the total net
proceeds to the Partnership will be $25,000. The sale was structured in two
parts to minimize the negative tax consequences to the Lincoln Garden joint
venture. Management does not believe that the value of the Lincoln Garden
property has reached the point where it exceeds the outstanding first
mortgage loan balance. Because management does not foresee a potential for
appreciation in the value of the property in the foreseeable future, the
Partnership negotiated a sale of its position to the co-venture partner for a
nominal payment. During recent years, the operating performance of the
Lincoln Garden Apartments has deteriorated, as evidenced by declining
occupancy levels, lower rental income and an inability to generate positive
cash flow. Since its inception, the Partnership has not received cash flow
from this investment, and no cash flow from this asset is projected for the
future. The Partnership recognized a gain for financial reporting purposes on
the sale of its interest in Lincoln Garden because the equity method carrying
value of the investment is negative, as prior year losses have exceeded the
amount of the Partnership's initial investment. The gain related to the sale
of the 75% portion of the Partnership's investment is reflected in the
financial statements for the third quarter of fiscal 1998 due to the
Partnership's three-month reporting lag.
Summarized operations of the unconsolidated joint venture, for the
periods indicated, are as follows:
<TABLE>
<CAPTION>
Condensed Summary of Operations
---------------------------------------------------------------
For the three and nine months ended September 30, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental revenues $ 275 $ 277 $ 776 $ 836
Interest and other income 12 14 43 45
------- ------- ------- -------
287 291 819 881
Property operating expenses 143 157 465 471
Interest expense 128 115 375 357
Depreciation and amortization 74 64 205 189
------- ------- ------- -------
345 336 1,045 1,017
------- ------- ------- -------
Net loss $ (58) $ (45) $ (226) $ (136)
======= ======= ======= =======
</TABLE>
-7-
<PAGE>
Exhibit B
<TABLE>
<CAPTION>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss:
Partnership's share of net loss $(38) $(30) $(147) $ (89)
Co-venturer's share of net loss (20) (15) (79) (47)
---- ---- ----- ----
$(35) $(45) $(226) $(136)
==== ==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Partnership's Share of Operations For
-------------------------------------------------------
the three and nine months ended December 31, 1997 and 1996
(in thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Partnership's share
of operations, as shown
above $(38) $(30) $ (147) $ (89)
Amortization of excess basis (1) (1) (3) (3)
---- ---- ----- ----
Partnership's share of
unconsolidated
venture's loss $(39) $(31) $ (150) $ (92)
---- ---- ----- ----
</TABLE>
4. Operating Investment Properties
-------------------------------
The Partnership consolidates the results of two majority-owned and
controlled joint ventures in its financial statements. The Partnership's
policy is to report the operations of the consolidated joint ventures on a
three-month lag.
On December 16, 1985, the Partnership acquired an interest in 71st
Street Housing Partners, Ltd., a joint venture formed to develop, own and
operate the Harbour Pointe Apartments, a 234-unit two-story garden apartment
complex located in Bradenton, Florida. Pursuant to an Amended and Restated
Agreement of the Limited Partnership dated August 4, 1989, the general
partner interests of the co-venturers were converted to limited partnership
interests. As a result of the amendment, the Partnership, as the sole general
partner, assumed control of the operations of the property.
The Lakes Joint Venture ("Venture") was formed on May 30, 1985 in
accordance with the provisions of the laws of the State of California for the
purpose of developing, owning and operating The Lakes at South Coast
Apartments, a 770-unit apartment complex located in Costa Mesa, California.
As
-8-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
discussed further in the Annual Report, on September 26, 1991, in
conjunction with a refinancing and modification of the Venture's long-term
indebtedness, the original co-venture partner transferred its interest in the
Venture to Development Partners, Inc. ("DPI"), a Delaware corporation and a
wholly-owned subsidiary of Paine Webber Group, Inc., and withdrew from the
Venture. As a result of the original co-venturer's withdrawal, the
Partnership assumed control over the operations of the Venture.
The following is a combined summary of property operating expenses
for the Harbour Pointe Apartments and The Lakes at South Coast Apartments for
the three and nine months ended September 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Property operating expenses:
Repairs and maintenance $ 324 $213 $ 781 $ 713
Utilities 169 147 438 447
Management fees 100 96 300 283
Other operating and administrative 547 447 1,502 1,360
------- ------- ------- ------
$ 1,140 $903 $3,021 $2,803
======= ======= ======= ======
</TABLE>
5. Long-term Debt
--------------
Long-term debt on the Partnership's balance sheet at December 31,
1997 and March 31, 1997 consists of the following (in thousands):
December 31 March 31
----------- --------
Nonrecourse mortgage note payable
which secures Manatee County Housing
Finance Authority Revenue Refunding
Bonds. The mortgage loan is secured
by a deed to secure debt and a security
agreement covering the real and personal
property of the Harbour Pointe Apartments. $ 9,125 $ 9,125
Developer loan payable which secures
County of Orange, California
Tax-Exempt Apartment Development
Revenue Bonds. The mortgage loan is
-9-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
nonrecourse and is secured by
a first deed of trust plus all
future rents and income generated
by The Lakes at South Coast
Apartments. 75,600 75,600
Nonrecourse loan payable to bank
secured by a third deed of trust
plus all future rents and income
generated by The Lakes at
South Coast Apartments. 2,967 3,491
Prior indebtedness principal
payable to bank by The Lakes
Joint Venture. This obligation
is nonrecourse to the joint
venture. 3,411 3,411
Deferred gain from forgiveness of
debt (net of accumulated
amortization of $2,134 and $1,877
at September 30, 1997 and
December 31, 1996, respectively). 3,144 3,401
------- -------
$94,247 $95,028
======= =======
Mortgage loan secured by the Harbour Pointe Apartments:
-------------------------------------------------------
Original financing for construction of the Harbour Pointe Apartments
was provided through $9,200,000 of Multi-Family Housing Mortgage Revenue
Bonds, Series 1985 E due December 1, 2007 (the original Bonds) issued by the
Manatee County Housing Finance Authority which bore interest at 8.25% plus a
1.25% letter of credit fee. An amount of $75,000 was paid on the original
bonds prior to the refinancing. The original bond issue was refinanced on May
1, 1990 with $9,125,000 Weekly Adjustable/Fixed Rate Multi-Family Housing
Revenue Refunding Bonds, Series 1990A, due December 1, 2007 (the Bonds). The
interest rate on the Bonds is adjusted weekly to a minimum rate that would be
necessary to remarket the Bonds in a secondary market as determined by a bank
remarketing agent. The Bonds are secured by the Harbour Pointe Apartments.
The fair market value of this debt obligation approximated $8.8 million as of
September 30, 1997 and December 31, 1996.
Interest on the underlying bonds is intended to be exempt from
federal income tax pursuant to Section 103 of the Internal Revenue Code. In
connection with obtaining the mortgage, the Harbour Pointe joint venture
executed a Land Use Restriction Agreement with the Manatee County Housing
Finance Authority which provides, among other things, that substantially all
of the proceeds of the Bonds issued be utilized to finance multi-family
housing of which 20% or more of the units are to be leased to low and
-10-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
moderate income families as established by the United States Department of
Housing and Urban Development. In the event that the underlying Bonds do not
maintain their tax-exempt status, whether by a change in law or by
noncompliance with the rules and regulations related thereto, repayment of
the note may be accelerated.
Pursuant to the financing agreement, a bank has issued an irrevocable
letter of credit to the Bond trustee in the joint venture's name for
$9,247,500. An annual fee equal to 1% of the letter of credit balance is
payable monthly to the extent of net cash operating income available to pay
such fees. The letter of credit was scheduled to expire on December 15, 1997.
During the second quarter of fiscal 1998, the letter of credit issuer
approved the joint venture's application for an extension of the letter of
credit through December 15, 2000. The new terms of the letter of credit
agreement require the commencement of regular principal amortization payments
on the underlying first mortgage loan of $60,000 per quarter beginning on
February 15, 1998. The terms of the extension also increase the letter of
credit fee to 1.25% per annum on the outstanding amount of $9,247,500,
payable on a quarterly basis beginning February 15, 1998. The joint venture
will also be required to make annual deposits to a lender-controlled escrow
account equal to 75% of Harbour Pointe's annual net cash flow, as defined,
for each fiscal year, beginning with fiscal 1998. All funds deposited to the
escrow account will be returned to the joint venture upon the earlier of the
termination and surrendering of the letter of credit to the lender or the
achievement of a loan-to-value ratio equal to or less than 75%, as determined
solely by the lender.
Debt secured by The Lakes at South Coast Apartments:
----------------------------------------------------
Original financing for construction of The Lakes at South Coast
Apartments was provided from a developer loan in the amount of $76,000,000
funded by the proceeds of a public offering of tax-exempt apartment
development revenue bonds. The Lakes Joint Venture ("the Venture") had been
in default of the developer loan since December 1989 for failure to make full
and timely payments on the loan. As a result of the Venture's default, the
required semi-annual interest and principal payments due to the bond holders
through June of 1991 were made by the bank which had issued an irrevocable
letter of credit securing the bonds. Under the terms of the loan agreement,
the Venture was responsible for reimbursing the letter of credit issuer for
any draws made against the letter of credit which totalled $7,748,000.
The original bond issue was refinanced during 1991 and the original
developer loan was extinguished. The new developer loan (1991 Developer
Loan), in the amount of $75,600,000, is payable to the County of Orange and
was funded by the proceeds of a public offering of tax-exempt apartment
development revenues bonds issued, at par, by the County of Orange,
California in September 1991. Principal is payable upon maturity, December 1,
2006. Interest on the bonds is variable, with the rate determined weekly by a
remarketing agent and is payable in arrears on the first of each month.
-11-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
The loan is secured by a first deed of trust plus all future rents
and income generated by the operating investment property. Bond principal and
interest payments are secured by an irrevocable letter of credit issued by a
bank in the amount of $76,569,000, expiring December 15, 1998. The Venture
pays an annual letter of credit fee equal to 1.3% of the outstanding amount,
payable 73% monthly with the remaining 27% deferred and paid in accordance
with the Reimbursement Agreement (Unpaid Accrued Letter of Credit Fees).
Unpaid Accrued Letter of Credit Fees were $2,735,000 and $2,533,000 at
September 30, 1997 and December 31, 1996, respectively. The bank letter of
credit is secured by a second deed of trust on the operating investment
property and future rents and income from the operating investment property.
In conjunction with the 1991 Developer Loan, the Venture entered into
a Reimbursement Agreement with the letter of credit issuer regarding the
unreimbursed letter of credit draws referred to above. The letter of credit
issuer agreed to forgive all outstanding accrued interest through September
26, 1991, aggregating $1,132,000, along with a portion of the outstanding
principal in the amount of $300,000. In return, the Venture made a principal
payment of $925,000, 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. Interest
forgiven during this period, along with related legal fees for the
restructuring transaction, aggregated $746,000. Principal payments from
available net cash flow and the release of certain restricted escrow funds
described below totalled $3,112,000 through September 30, 1997, leaving an
outstanding principal balance of $3,411,000 as of September 30, 1997. At the
time of the refinancing the Venture also owed the letter of credit issuer
fees totalling $2,184,000. The letter of credit issuer agreed to forgive
$1,259,000 of such unpaid fees, leaving an unpaid balance of $925,000
(Deferred Prior Letter of Credit Fees). The Venture has a limited right to
defer payment of interest and principal on the Prior Indebtedness and the
Unpaid Accrued Letter of Credit Fees to the extent that the net cash flow
from operations is not sufficient after the payment of debt service on the
1991 Developer Loan and the funding of certain required reserves. In
addition, upon a sale or other disposition of the operating property, the
Reimbursement Agreement allows for the payment to the Venture of an amount of
$5,500,000, plus accrued interest at the rate of 8% per annum, prior to the
repayment to the letter of credit issuer of the accrued interest on the Prior
Indebtedness and the Deferred Prior Letter of Credit Fees.
In November 1988, a borrowing arrangement with a bank was entered
into to provide funds for The Lakes. The Venture obtained a line of credit
secured by a third trust deed on the subleasehold interest, buildings and
improvements, and rents and income in the amount of $6,300,000. Interest on
the line of credit was originally payable monthly at 1-1/2% over the
Citibank, N.A. prime rate. However, because of the default status of this
obligation during 1990, interest had accrued at a rate of prime plus 4%
through September 26, 1991. Accrued interest on the line of credit, which is
payable to the same bank which issued the letter of credit in connection with
the bonds, totalled $1,841,000 at September 26, 1991. The outstanding
principal balance of the line of credit was $6,127,000 as of September 26,
1991. In conjunction with the refinancing of the developer loan described
above, the lender agreed to forgive all of the outstanding accrued
-12-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
interest at the date of the refinancing. Interest accrues on the outstanding
principal balance at the rate of 11% per annum beginning September 27, 1991.
Payment of interest and principal on the line of credit borrowings, prior to
a sale or other disposition of the operating property, is limited to the
extent of available cash flow after the payment of debt service on the
developer loan and the funding of certain required reserves. In addition, as
with the Prior Indebtedness principal and interest described above, upon a
sale or other disposition of the operating property, the payment of accrued
interest on the line of credit borrowings is subordinated to the receipt by
the Venture of $5,500,000 plus a simple return thereon of 8% per annum.
Principal payments on the line of credit borrowings from available net cash
flow totalled $3,160,000 through September 30, 1997, leaving an outstanding
principal balance of $2,967,000 as of September 30, 1997.
The restructuring of the Prior Indebtedness, the Deferred Letter of
Credit Fees and the line of credit borrowings, as described above, have been
accounted for in accordance with Statement of Financial Accounting Standards
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings". Accordingly, the forgiveness of debt, aggregating
$5,278,000, has been deferred and is being amortized as a reduction of
interest expense prospectively using a method approximating the effective
interest method over the estimated remaining term of the Venture's
indebtedness. At September 30, 1997 and December 31, 1996, $3,144,000 and
$3,401,000, respectively, of such forgiven debt (net of accumulated
amortization) has been reflected on the accompanying balance sheets and
$257,000 has been amortized as a reduction of interest expense in the
accompanying statements of operations for each of the nine-month periods
ended September 30, 1997 and 1996.
The 1991 Developer Loan required the establishment of a $2,000,000
deficit reserve account, funded from the Venturers' 1991 contributions. The
loan also required the funding of an additional reserve account on a monthly
basis from available cash flow (as defined) to the extent that the interest
rate on the bonds was below 6%, until the balance in this reserve account
totalled $1,000,000. During fiscal 1997, the requirement for the additional
reserve account was eliminated and the balance in the account was applied
against the Venture's outstanding debt obligations. The $2,000,000 deficit
reserve may be used under certain circumstances to fund the Venture's debt
service obligations to the extent that net operating income is insufficient.
As of September 30, 1997 and December 31, 1996, the balance in the deficit
reserve account totalled $1,184,000 and $1,146,000, respectively. Such
amounts are included in restricted cash on the accompanying balance sheets.
The remaining balance in restricted cash relates to operating cash accounts
of the Venture in which disbursements are restricted by the bank.
The 1991 Developer Loan contains several restrictive covenants,
including, among others, a requirement that the Venture furnish the letter of
credit issuer in September 1994 and September 1996 with certified independent
appraisals of the fair market value of the operating investment property for
an amount equal to or greater than $92,000,000 and $100,000,000,
respectively. Failure to provide such appraisals was defined as an event of
default under the Reimbursement Agreement. Through the first quarter of
fiscal 1998, the Lakes Joint Venture had not provided the lender with an
appraisal which met either the $92,000,000 or
-13-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
$100,000,000 requirement and, accordingly, was in default under the
Reimbursement Agreement. In February 1996, the lender issued a formal notice
of default to the Joint Venture pursuant to the Reimbursement Agreement. For
the past several years, the Managing General Partner has had discussions with
the lender regarding possible changes to the appraisal requirements which
were fully resolved during the second quarter of fiscal 1998. On September
18, 1997, the Partnership signed amendment documents with the lender to
remove the appraisal requirements. As a result, the Venture is no longer in
technical default. Additionally, the amendment allows the release of funds
from certain reserve accounts that have been required by the lender. The
property's improved operations and increasing rental rates, combined with the
low interest rate on the tax-exempt bonds, make 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. Such
principal paydown will be reflected in the fourth quarter financial
statements because the release of cash from the restricted accounts occurred
subsequent to September 30, 1997. In addition, approximately $800,000 of the
previously restricted cash has been reserved for the necessary painting of
the property, and another $300,000 has been allocated for future capital
needs. The fair value of the aggregate indebtedness secured by The Lakes at
South Coast Apartments cannot presently be determined due to its unique terms
and conditions.
-14-
<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
The following discussion of financial condition includes
forward-looking statements which reflect management's current views with
respect to future events and financial performance of the Partnership. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified in Item 7 of the Partnership's Annual Report on
Form 10-K for the year ended March 31, 1997 under the heading "Certain
Factors Affecting Future Operating Results", which could cause actual results
to differ materially from historical results or those anticipated. The words
"believe", "expect", "anticipate," and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which were made based on facts and
conditions as they existed as of the date of this report. The Partnership
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
As previously reported, the Partnership is currently focusing on
potential disposition strategies for the remaining investments in its
portfolio. Management believes that the improvements in the apartment segment
of the real estate market may provide the Partnership with favorable
opportunities to sell The Lakes at South Coast Apartments and the Harbour
Pointe Apartments in the near term. Management believes that due to improving
market conditions, the values of The Lakes at South Coast Apartments and the
Harbour Pointe Apartments have increased during recent months and are
approaching or have exceeded the outstanding balances of the properties' debt
encumbrances. However, it remains to be seen whether continued improvement in
market conditions will be sufficient for the Partnership to recover
significant portions of its original investments in the remaining properties.
The Partnership's ability to recover any significant portion of its original
capital will depend principally on the outcome of the sale of The Lakes at
South Coast Apartments, which represents the majority of the Partnership's
remaining portfolio. The rapidly improving market conditions in the Orange
County area where The Lakes at South Coast Apartments is located have
resulted in a significant increase in the estimated market value of The Lakes
in recent months. As previously reported, during the quarter ended September
30, 1997, the Partnership received several unsolicited expressions of
interest from potential purchasers of The Lakes which suggest that a sale
price in excess of the outstanding balance of the secured indebtedness might
be achievable. 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 has selected a national brokerage firm to market The Lakes
and expects to begin formal marketing efforts in February 1998 with a goal of
completing a sale during calendar 1998. It is currently
-15-
<PAGE>
Exhibit B
contemplated that sales of all of the Partnership's remaining assets could be
accomplished within the next 1 to 2 years. The sale of the remaining assets
would be followed by the formal liquidation of the Partnership. There are no
assurances, however, that the sale of the remaining assets and the
liquidation of the Partnership will be completed within this time frame.
The operations of the three remaining assets, The Lakes at South
Coast Apartments, the Harbour Pointe Apartments and the Lincoln Garden
Apartments, have been stabilized as a result of debt restructurings, and the
properties do not currently require the use of the Partnership's cash
reserves to support operations. Without these restructurings, the properties
would most likely have been lost through foreclosure actions by the
respective lenders. All three of these properties were financed with
tax-exempt revenue bonds issued by local housing authorities. The interest
rates on all three of these restructured debt obligations are now variable
rates, which are based on comparable rates on similar tax-exempt obligations.
Such rates have remained 3 to 4 percent per annum below comparable
conventional rates over the past several years which has allowed the
properties, for the most part, to generate excess cash flow after the payment
of operating expenses and debt service obligations. This cash flow has been
used to maintain these properties in competitive condition. If interest rates
were to rise dramatically, The Lakes at South Coast Apartments and Harbour
Pointe Apartments would require advances from the Partnership in order to
continue paying their operating expenses and debt service obligations.
As reported in the second quarter, on September 18, 1997 the
Partnership sold 75% of its interest in the joint venture that owns the
Lincoln Garden Apartments to its co-venture partner for $18,845. The
remaining 25% will be acquired by the co-venture partner for $6,155 on or
after September 19, 1998. Upon completion of this sale, the total net
proceeds to the Partnership will be $25,000. The sale was structured in two
parts to minimize the negative tax consequences to the Lincoln Garden joint
venture. Unlike the Lakes and Harbour Pointe investments, management does not
believe that the value of the Lincoln Garden property has reached the point
where it exceeds the outstanding first mortgage loan balance. In addition,
the co-venture partner has a priority position in the joint venture due to
certain loans which it advanced to the venture to cover prior operating
deficits. Because management does not foresee a potential for appreciation in
the value of the property in the foreseeable future, the Partnership
negotiated a sale of its position to the co-venture partner for a nominal
payment. During recent years, the operating performance of the Lincoln Garden
Apartments has deteriorated, as evidenced by declining occupancy levels,
lower rental income and an inability to generate positive cash flow. Since
its inception, the Partnership has not received cash flow from this
investment, and no cash flow from this asset is projected for the future. The
property is located in Tucson, Arizona, where a significant number of new
apartment units have been constructed during recent years. These new
apartment developments have placed negative competitive pressures on Lincoln
Garden which is an older property located outside of Tucson's growing
residential areas. The Partnership recognized a gain for financial reporting
purposes on the sale of its interest in Lincoln Garden because the equity
method carrying value of the investment is negative, as prior year losses
have exceeded the amount of the Partnership's initial investment.
-16-
<PAGE>
Exhibit B
The Harbour Pointe Apartments averaged 96% occupancy during the
quarter ended December 31, 1997, a 3% increase from the previous quarter. As
previously reported, the Partnership had initiated discussions with the
issuer of the letter of credit on the Harbour Pointe Apartments, which was
scheduled to expire on December 15, 1997. During the second quarter of fiscal
1998, the letter of credit issuer approved the joint venture's application
for an extension of the letter of credit through December 2000. The new terms
of the letter of credit agreement require the commencement of regular bond
sinking fund contributions of $240,000 per annum to be paid in quarterly
installments of $60,000 beginning February 15, 1998. The terms of the
extension also increase the letter of credit fee from 1% to 1.25% per annum
on the outstanding amount of $9,247,500, payable on a quarterly basis
beginning February 15, 1998. The joint venture will also be required to make
annual deposits to a lender-controlled escrow account equal to 75% of Harbour
Pointe's annual net cash flow, as defined, for each fiscal year, beginning
with fiscal 1998. All funds deposited to the escrow account will be returned
to the joint venture upon the earlier of the termination and surrendering of
the letter of credit to the lender or the achievement of a loan-to-value
ratio equal to or less than 75%, as determined solely by the lender. Recent
improvements in market conditions and in the operating performance of the
Harbour Pointe Apartments have increased the estimated market value of the
property to a level which slightly exceeds the outstanding first mortgage
loan balance. Nonetheless, significant additional appreciation would have to
occur in order to achieve a loan-to-value ratio of 75% or less. As a result,
the effect of the new terms of the Harbour Pointe letter of credit will be
that the cash flow from the property's operations will no longer be available
to cover the Partnership's future operating expenses. However, the
Partnership has sufficient cash reserves to cover operating expenses for the
next several years. With the Partnership focusing on potential disposition
strategies for its remaining investment properties and targeting a
liquidation within the next 1 to 2 years, such reserves should be adequate to
meet the Partnership's liquidity needs during this period. The Partnership
plans to initiate marketing efforts for the sale of the Harbour Ponte
property within the next several months.
As previously reported, the Reimbursement Agreement which governs the
secured debt obligations of The Lakes Joint Venture contains certain
restrictive covenants, including, among others, a requirement that the
venture provide the lender, in September 1994 and September 1996, with
certified independent appraisals of the operating property indicating the
value of the property to be equal to or greater than $92 million and $100
million, respectively. Failure to provide such appraisals was defined as an
event of default under the Reimbursement Agreement. Through the first quarter
of fiscal 1998, the Lakes Joint Venture had not provided the lender with an
appraisal which met either the $92,000,000 or $100,000,000 requirement and,
accordingly, was in default under the Reimbursement Agreement. In February
1996, the lender issued a formal notice of default to the Joint Venture
pursuant to the Reimbursement Agreement. For the past several years, the
Managing General Partner has had discussions with the lender regarding
possible changes to the appraisal requirements which were fully resolved
during the second quarter of fiscal 1998. On September 18, 1997, the
Partnership signed amendment documents with the lender to remove the
appraisal requirements. As a result, the Venture is no longer in technical
default. Additionally, the amendment provided for the release of funds from
certain reserve accounts that had been required by the lender. The property's
improved
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<PAGE>
Exhibit B
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. Such
principal paydown will be reflected in the fourth quarter financial
statements because the release of cash from the restricted accounts occurred
subsequent to September 30, 1997. In addition, approximately $800,000 of the
previously restricted cash has been reserved for the necessary painting of
the property, and another $300,000 has been allocated for future capital
needs. The exterior painting project began during the third quarter. To date,
two of the property's nine residential buildings have been painted. During
January and February, the painting project will focus on the fencing, light
posts and the clubhouse. In late February, the painting of the residential
buildings will resume as the weather permits.
The Lakes at South Coast Apartments had an average occupancy level of
95% for the quarter ended December 31, 1997, unchanged from the prior
quarter. The property's leasing team was able to sustain a 95% occupancy
level each month of the past quarter while implementing significant rental
rate increases upon lease expirations. All new tenant leases are signed at
the increased market rental rates which were raised substantially throughout
the past year. In some instances, the new market rental rate is as much as
$100 over the rent an existing tenant paid on their expiring lease. In order
to minimize turnover of these apartments, existing tenants that elect to
renew their leases are given 5% increases. Property management surveys
indicate that 25% of tenants that did not renew their leases during the past
quarter chose not to remain at the property due to the rent increases.
Although turnover has increased compared to the same period last year,
traffic has correspondingly increased and the occupancy level remains high
despite the aggressive rental rate increases.
At December 31, 1997, the Partnership and its consolidated joint
ventures had available cash and cash equivalents of approximately $2,356,000.
Such cash and cash equivalents will be used for the working capital
requirements of the Partnership and the consolidated ventures and, to the
extent necessary and economically justified, to fund the Partnership's share
of any future capital improvements or operating deficits of its remaining
joint venture investments. As noted above, approximately $1.1 million of
capital improvements planned at The Lakes will be paid from the balances in
the restricted escrow accounts formerly required by the property's mortgage
lender. The source of future liquidity and distributions to the partners is
expected to be from cash generated from the operations of the remaining
investment properties and from proceeds received from the sale, refinancing
or other disposition of such properties.
Results of Operations
Three Months Ended December 31, 1997
For the three months ended December 31, 1997, the Partnership
reported net income of $1,501,000 as compared to a net loss of $416,000 for
the same period in the prior year. This favorable change in net income (loss)
is primarily the result of a $2,010,000 gain recognized on the sale of 75% of
the Partnership's
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<PAGE>
Exhibit B
interest in the Lincoln Garden joint venture in September 1997, as discussed
further above. This favorable change in net income (loss) was partially
offset by an increase in the Partnership's operating loss of $85,000
(including the co-venturers' share of consolidated ventures' losses) an
increase in the Partnership's share of unconsolidated venture's loss of
$8,000. The Partnership's operating loss, which includes the consolidated
results of the Lakes and Harbour Pointe joint ventures, increased mainly due
to an increase in property operating expenses and interest charges which were
partially offset by an increase in rental revenues and a decrease in
depreciation expense. Property operating expenses increased by $237,000
mainly due to an increase in repairs and maintenance related expenditures at
both consolidated properties during the current three-month period. Interest
expense increased mainly due to an increase in the annual letter of credit
fee on the debt of The Lakes Joint Venture from 1% to 1.3% effective December
16, 1996, as discussed further in the Annual Report. Rental revenues
increased mainly due to an $82,000 increase in revenue at The Lakes as a
result of increases in rental rates. Depreciation expense decreased by
$115,000 as a result of certain assets having become fully depreciated at The
Lakes during fiscal 1997.
The Partnership's share of unconsolidated venture's loss, which
represents the operating results of the Lincoln Garden joint venture,
increased by $8,000 in the current three-month period mainly due to a $13,000
increase in interest expense and a $10,000 increase in depreciation and
amortization expense which were partially offset by a $14,000 decrease in
property operating expenses.
Nine Months Ended December 31, 1997
The Partnership reported net income of $987,000 for the nine-month
period ended December 31, 1997 as compared to a net loss of $1,349,000 for
the same period in the prior year. This favorable change in net income (loss)
is primarily the result of a $2,010,000 gain recognized on the sale of 75% 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 $384,000 (including the co-venturers' share of consolidated
ventures' losses) which was partially offset by a $58,000 increase in the
Partnership's share of unconsolidated venture's loss. 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 $402,000
and a decrease in depreciation expense of $345,000. Rental revenues increased
primarily due to a $386,000 increase in revenue at The Lakes as a result of
increases in rental rates compared to the same period in the prior year.
Depreciation expense declined as a result of certain assets having become
fully depreciated at The Lakes during fiscal 1997. The increase in rental
revenue and decrease in depreciation expense were partially offset by an
$81,000 decrease in other income and increases in the property operating,
general and administrative, and interest expense categories. Other income
decreased mainly due to real estate tax refunds received by The Lakes Joint
Venture during the prior 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 general and administrative
expenses was largely
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<PAGE>
Exhibit B
attributable to an increase in certain required professional services
compared to the same period in the prior year.
The Partnership's share of unconsolidated venture's loss, which
represents the operating results of the Lincoln Garden joint venture,
increased by $58,000 in the current nine-month period due to a $60,000
decrease in rental income. Rental income decreased mainly as a result of a
decline in average occupancy when compared to the same period in the prior
year due to the competitive conditions referred to above.
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<PAGE>
Exhibit B
PART II
Other Information
Item 1. Legal Proceedings NONE
- ------------------------
Item 2. through 5. NONE
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Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the
quarter for which this report is filed.
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<PAGE>
Exhibit B
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
------------------------------
Managing General Partner
By: /s/ Walter V. Arnold
---------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: February 17, 1998
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<PAGE>
PaineWebber Development Partners Four, Ltd.
265 Franklin Street, Boston, Massachusetts 02110
CONSENT OF THE LIMITED PARTNERS
FOR THE SALE OF SUBSTANTIALLY ALL PROPERTIES AND
LIQUIDATION AND DISSOLUTION OF THE PARTNERSHIP
May 4, 1998
The undersigned is a Limited Partner of PaineWebber Development Partners
Four, Ltd. (the "Partnership") on April 28, 1998, the Record Date with
respect to the number of units of limited partnership interests ("Units")
that are set forth to the left of the signature of this Consent Card. The
undersigned hereby takes the action indicated below with respect to the sale
of the remaining properties held by the Partnership and the liquidation and
dissolution of the Partnership (collectively, the "Sale and Liquidation".) If
this Consent Card is executed and dated but no action is indicated below, the
delivery of this Consent Card shall be deemed to be a consent for the Sale
and Liquidation. Unless otherwise indicated, it will be assumed that all
Units held by the undersigned as of the Record Date are subject to this
Consent Card.
THE GENERAL PARTNERS RECOMMEND A VOTE TO CONSENT TO THE FOLLOWING PROPOSAL:
To effect the Sale and Liquidation, as more fully described in the Consent
Solicitation Statement dated May 4, 1998.
[ ] CONSENT [ ] WITHHOLD CONSENT
Please mark an "X" in the appropriate box above and then sign, date, and
return this Consent Card promptly by using the enclosed postage-paid envelope
or by mailing to PaineWebber Development Partners Four, Ltd., c/o Investor
Services, P.O. Box 7090, Troy, MI 48007-7090.
Your signature is required on reverse
<PAGE>
This Consent Card must be signed by the Limited Partner(s) exactly as the
name(s) appear(s) on the Units that are being voted hereunder. Joint owners
should both sign. If the party executing this Consent Card is a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a
corporation, or another acting in a fiduciary or representative capacity,
please indicate such capacity or title.
ACCOUNT NUMBER:
UNITS:
----------------------------
Signature
----------------------------
Signature of Joint Owner
----------------------------
Capacity or Title
----------------------------
Date
PLEASE SIGN, DATE AND RETURN PROMPTLY
