UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from________ to ________.
Commission File Number: 0-17150
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
-------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 76-0147579
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|.
No|_|.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
September 30 March 31
------------ ---------
Operating investment properties:
Land $ 1,543 $ 18,190
Buildings and improvements 8,823 78,336
----------- ----------
10,366 96,526
Less accumulated depreciation (3,395) (30,710)
----------- ----------
6,971 65,816
Cash and cash equivalents 2,558 1,551
Restricted cash 343 2,580
Accounts receivable 126 6
Advances to consolidated venture 29 -
Prepaid and other assets - 72
Deferred expenses, net 78 608
----------- ----------
$ 10,105 $ 70,633
=========== ==========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 1,602 $ 387
Accrued interest and fees - 4,823
Tenant security deposits 33 566
Mortgage loans payable 9,125 92,120
Co-venturers' share of net assets of
consolidated ventures 1,120 1,124
Partners' deficit (1,775) (28,387)
----------- ----------
$ 10,105 $ 70,633
=========== ==========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and sixmonths ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
Three Months Ended Six Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Rental income $ 4,119 $ 2,633 $ 6,914 $ 5,282
Interest income 195 61 241 121
Other income 107 136 171 267
------- ------- ------- -------
4,421 2,830 7,326 5,670
Expenses:
Property operating expenses 1,144 1,010 2,216 1,881
Real estate taxes 320 234 506 468
Interest expense 1,794 1,187 2,833 2,330
Depreciation 924 653 1,582 1,306
General and administrative 121 57 226 120
------- ------- ------- -------
4,303 3,141 7,363 6,105
------- ------- ------- -------
Operating income (loss) 118 (311) (37) (435)
Partnership's share of
unconsolidated venture's loss - (64) - (111)
Co-venturers' share of
consolidated ventures'losses 4 24 4 32
Gain on sale of operating
investment property 51,901 - 51,901 -
------- ------- ------- -------
Income (loss) before
extraordinary gain 52,023 (351) 51,868 (514)
Extraordinary gain on
forgiveness of debt 2,854 - 2,854 -
------- ------- ------- -------
Net income (loss) $54,877 $ (351) $54,722 $ (514)
======= ======= ======= =======
Net income (loss) per
Limited Partnership Unit:
Income (loss) before
extraordinary gain $1,191.65 $(8.01) $1,188.12 $(11.73)
Extraordinary gain on
forgiveness of debt 65.37 - 65.37 -
--------- ------ --------- -------
Net income (loss) $1,257.02 $(8.01) $1,253.49 $(11.73)
========= ====== ========= =======
Cash distributions per
Limited Partnership Unit $ 675.00 $ - $ 675.00 $ -
========= ====== ========= =======
The above per Limited Partnership Unit information is based upon the
41,644 Limited Partnership Units outstanding for each period.
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (2,683) $(27,318)
Net loss (26) (488)
-------- --------
Balance at September 30, 1997 $ (2,709) $(27,806)
======== ========
Balance at March 31, 1998 $ (2,602) $(25,785)
Cash distributions - (28,110)
Net income 2,521 52,201
-------- --------
Balance at September 30, 1998 $ (81) $ (1,694)
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 54,722 $ (514)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation 1,582 1,306
Amortization of deferred financing costs 530 30
Amortization of deferred gain on forgiveness
of debt (204) (172)
Partnership's share of unconsolidated
venture's loss - 111
Co-venturers' share of consolidated ventures'
losses (4) (32)
Gain on sale of operating investment property (51,901) -
Extraordinary gain on forgiveness of debt (2,854) -
Changes in assets and liabilities:
Accounts receivable (120) -
Accounts receivable - affiliates - (2)
Advances to consolidated venture (29) -
Prepaid and other assets 72 64
Deferred expenses - (11)
Accounts payable and accrued expenses 1,215 (127)
Accrued interest and fees (4,823) 500
Tenant security deposits (533) (139)
-------- --------
Total adjustments (57,069) 1,528
-------- --------
Net cash (used in) provided by operating
activities (2,347) 1,014
-------- --------
Cash flows from investing activities:
Distribution from unconsolidated joint venture - 18
Additions to buildings and improvements (990) -
Net proceeds from sale of operating
investment property 110,154 -
-------- --------
Net cash provided by investing activities 109,164 18
-------- --------
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
(continued)
1998 1997
---- ----
Cash flows from financing activities:
Distributions to partners (28,110) -
Decrease in restricted cash 2,237 373
Repayment of principal on long-term debt (79,937) (523)
-------- --------
Net cash used in financing activities (105,810) (150)
-------- --------
Net increase in cash and cash equivalents 1,007 882
Cash and cash equivalents, beginning of period 1,551 1,562
-------- --------
Cash and cash equivalents, end of period $ 2,558 $ 2,444
======== ========
Cash paid during the period for interest $ 7,330 $ 1,972
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
Notes to Consolidated Financial Statements
(Unaudited)
1. General and Planned Liquidation
-------------------------------
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, 1998. In the opinion of
management, the accompanying financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the interim
period. All of the accounting adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of September 30, 1998 and March 31, 1998 and revenues and
expenses for each of the three-and six-month periods ended September 30, 1998
and 1997. Actual results could differ from the estimates and assumptions used.
The Partnership originally invested the net proceeds of the offering,
through joint venture partnerships, in six rental apartment properties. As
discussed further in the Annual Report, the Partnership's operating properties
have encountered major adverse business developments which, to date, have
resulted in the loss of three of the original investments to foreclosure and the
sale of the Partnership's interest in one joint venture for a nominal amount.
Subsequent to the resolution of the default status of the debt secured by The
Lakes at South Coast Apartments in fiscal 1998 (see Note 5), management analyzed
whether it would be in the Limited Partners' best interests to continue to hold
the two remaining assets (The Lakes and Harbour Pointe) or to pursue potential
sale opportunities with a goal of completing a liquidation of the Partnership in
the near term. Based on such analysis, management concluded that a liquidation
of the Partnership should be undertaken if favorable prices for The Lakes and
Harbour Pointe could be achieved. Under the terms of the Partnership Agreement,
the affirmative vote of Limited Partners who own 51% or more of the total number
of outstanding units of limited partnership interest in the Partnership is
required to approve the sale of all, or substantially all, of the Partnership's
assets. On May 4, 1998, the Partnership furnished a Consent Solicitation
Statement to the Limited Partners which sought the approval to sell the
Partnership's two remaining assets and, thereafter, to liquidate and dissolve
the Partnership (collectively, the "Sale and Liquidation"). Effective June 18,
1998, the results of the Consent Solicitation Statement were finalized, and the
Sale and Liquidation was approved by the required affirmative vote of the
Limited Partners. Management's goal has been to complete the Sale and
Liquidation by the end of calendar year 1998. It now appears likely that the
Sale and Liquidation will not be completed until the first quarter of calendar
1999.
On August 20, 1998, The Lakes Joint Venture, a joint venture in which the
Partnership has an interest, sold The Lakes at South Coast Apartments located in
Costa Mesa, California, to an unrelated third party for $114,000,000. The
Partnership received net proceeds of approximately $25,942,000 after deducting
closing costs of $2,530,000, property proration adjustments of $2,195,000, the
assumption of the first mortgage principal balance of $75,600,000 and the
payment of approximately $7,733,000 in subordinated debt and deferred fees that
was related to the September 26, 1991 refinancing and modification of the
original first mortgage debt. In connection with the sale, the Partnership also
received approximately $2,136,000 as its share of the property's working capital
and escrows held in connection with the debt. The total proceeds received by the
Partnership of approximately $28,078,000 were included in a special capital
distribution of $28,109,700, or $675.00 per original $1,000 investment, paid on
September 9, 1998 to unitholders of record as of August 20, 1998. The
Partnership was required to withhold a seven percent income tax, or $47.25 per
original $1,000 investment, from non-California resident Limited Partners. The
total withholding was $1,437,000 and is included in accounts payable and accrued
expenses on the accompanying balance sheet as of September 30, 1998.
With the sale of The Lakes, the Partnership now has one remaining real
estate investment, the Harbour Pointe Apartments. This property has been
actively marketed for sale and on August 12, 1998, a purchase and sale agreement
was signed with a prospective buyer. This prospective buyer subsequently decided
to terminate the purchase and sale agreement and discontinued its efforts to
acquire the property. The Partnership then re-opened discussions with the other
prospective purchasers. These prospective purchasers were provided with updated
property information, and asked to submit revised offers. After reviewing the
offers, the Partnership selected a new prospective purchaser and is currently
negotiating a purchase and sale agreement. However, since the sale of the
Harbour Pointe property remains contingent upon, among other things, negotiation
of a definitive sale agreement, satisfactory completion of the buyer's due
diligence and formal approval by a number of third parties of the assumption of
the tax-exempt bonds secured by Harbour Pointe, there are no assurances that the
sale of the final asset and the liquidation of the Partnership will be completed
as planned.
2. Related Party Transactions
--------------------------
Included in general and administrative expenses for each of the six-month
periods ended September 30, 1998 and 1997 is $41,000 and $40,000, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the six-month
periods ended September 30, 1998 and 1997 is $2,000 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 previously had an investment in one unconsolidated joint
venture which owned an operating investment property (Lincoln Garden
Apartments), as discussed further in the Annual Report. The unconsolidated joint
venture was accounted for by using the equity method because the Partnership did
not have a voting control interest in the venture. Under the equity method, the
investment was carried at cost adjusted for the Partnership's share of the
unconsolidated venture's earnings, losses and distributions. The Partnership's
policy is to recognize its share of unconsolidated venture's operations three
months in arrears.
On September 18, 1997, the Partnership sold its general partnership interest
in the joint venture which owned the Lincoln Garden Apartments to its co-venture
partner for $25,000. In effecting such sale, management considered that (i)
during recent years, the operating performance of Lincoln Garden had
deteriorated, (ii) since its inception, the Partnership had not received cash
flow from this investment and no cash flow from this asset was projected for the
future, and (iii) the joint venture partner had a priority position in the joint
venture due to certain loans which it advanced to the joint venture to cover
prior operating deficits. In addition, management determined that the
outstanding first mortgage loan balance on the Lincoln Garden property was in
excess of its market value and that future increases in the property's value
were unlikely. Because the property offered little or no opportunity for a
return of equity, the Partnership negotiated a sale of its position to its joint
venture partner for a nominal amount. The sale was structured in two parts to
minimize the negative tax consequences to the Lincoln Garden joint venture.
Accordingly, the Partnership received $19,000 in September 1997 for the sale of
75% of its interest in the joint venture and received a final payment of $6,000
on October 1, 1998 for the remaining 25% of its interest. As of September 18,
1997, the Partnership's remaining position in the joint venture was converted to
a limited partnership interest, and the Partnership had no continuing
involvement in the operations of the Lincoln Garden joint venture through the
date in 1998 when its limited partnership interest was redeemed for $6,000.
Consequently, the Partnership wrote off the remaining equity method carrying
value of its investment in Lincoln Garden during fiscal 1998. This write-off
resulted in a gain of $2,528,000 because the venture's prior equity method
losses had exceeded the total of the Partnership's investments and advances in
the joint venture.
Summarized operations of the unconsolidated joint venture, for the periods
indicated, are as follows:
Condensed Summary of Operations
For the three and six months ended June 30, 1997
(in thousands)
Three Months Ended Six Months Ended
June 30, 1977 June 30, 1997
------------------ ----------------
Rental revenues $ 249 $ 501
Interest and other income 15 31
------ ------
264 532
Property operating expenses 164 322
Interest expense 132 247
Depreciation and amortization 65 131
------ ------
361 700
------ ------
Net loss $ (97) $ (168)
====== ======
Net loss:
Partnership's share of net loss $ (63) $ (109)
Co-venturer's share of net loss (34) (59)
------ ------
$ (97) $ (168)
====== ======
<PAGE>
Reconciliation of Partnership's Share of Operations
For the three and six months ended September 30, 1997
(in thousands)
Three Months Ended Six Months Ended
September 30, 1977 September 30, 1997
------------------ ------------------
Partnership's share of operations,
as shown above $ (63) $ (109)
Amortization of excess basis (1) (2)
------ -------
Partnership's share of
unconsolidated
venture's loss $ (64) $ (111)
======= =======
4. Operating Investment Properties
-------------------------------
As of September 30, 1998, the Partnership has an investment in one
consolidated joint venture partnership (two at March 31, 1998) which owns an
operating investment property as more fully described in the Partnership's
Annual Report. As discussed further in Note 1, the consolidated Lakes joint
venture sold its operating investment property on August 20, 1998, leaving the
consolidated Harbour Pointe joint venture as the Partnership's only remaining
real estate investment. The consolidated ventures have December 31 year-ends for
both tax and financial reporting purposes. Accordingly, the Partnership's policy
is to report the financial position, results of operations and cash flows of
these ventures on a three-month lag. In accordance with the Partnership's policy
of recognizing significant lag-period transactions in the period in which they
occur, the Partnership accelerated the recognition of the operating results of
The Lakes Joint Venture and recorded a gain of $51,901,000 on the sale of the
venture's operating investment property during the quarter ended September 30,
1998. All material transactions between the Partnership and the consolidated
joint ventures have been eliminated upon consolidation, except for lag-period
cash transfers. Such lag period cash transfers are accounted for as advances to
or from consolidated ventures on the accompanying balance sheets.
As discussed in the Partnership's Annual Report, 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, on December 16, 1985.
Pursuant to an Amended and Restated Agreement of the Limited Partnership dated
August 4, 1989, the general partner interests of the co-venturers were converted
to limited partnership interests. As a result of the amendment, the Partnership,
as the sole general partner, assumed control of the operations of the property.
The Lakes Joint Venture ("Venture") was formed on May 30, 1985 in
accordance with the provisions of the laws of the State of California for the
purpose of developing, owning and operating The Lakes at South Coast Apartments,
a 770-unit apartment complex located in Costa Mesa, California. As discussed
further in the Annual Report, on September 26, 1991, in conjunction with a
refinancing and modification of the Venture's long-term indebtedness, the
original co-venture partner transferred its interest in the Venture to
Development Partners, Inc. ("DPI"), a Delaware corporation and a wholly-owned
subsidiary of Paine Webber Group, Inc., and withdrew from the Venture. As a
result of the original co-venturer's withdrawal, the Partnership assumed control
over the operations of the Venture.
The following combined summary of property operating expenses for the three
and six months ended June 30, 1998 (in thousands) includes the expenses of the
Harbour Pointe Apartments through June 30, 1998 and the expenses of the The
Lakes at South Coast Apartments through the date of the sale on August 20, 1998.
The combined property operating expenses for the three and six months ended June
30, 1997 include expenses for the two consolidated joint ventures.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Property operating expenses:
Repairs and maintenance $ 142 $ 272 $ 657 $ 457
Utilities 224 145 354 269
Management fees 121 101 221 200
Other operating and
administrative 657 492 984 955
------- ------- ------- ------
$ 1,144 $ 1,010 $ 2,216 $1,881
======= ======= ======= ======
<PAGE>
5. Long-term Debt
--------------
Long-term debt on the Partnership's balance sheet at September 30, 1998
and March 31, 1998 consists of the following (in thousands):
September 30 March 31
------------ --------
Nonrecourse mortgage note payable
which secures Manatee County
Housing Finance Authority Revenue
Refunding Bonds. The mortgage loan
is secured by a deed to secure
debt and a security agreement
covering the real and personal
property of the Harbour Pointe
Apartments. $ 9,125 $ 9,125
Developer loan payable which
secures County of Orange,
California Tax-Exempt Apartment
Development Revenue Bonds. The
mortgage loan was nonrecourse and
was secured by a first deed of
trust plus all future rents and
income generated by The Lakes at
South Coast Apartments. - 75,600
Nonrecourse loan payable to bank
secured by a third deed of trust
plus all future rents and income
generated by The Lakes at South
Coast Apartments. - 926
Prior indebtedness principal
payable to bank by The Lakes Joint
Venture. This obligation was
nonrecourse to the joint venture. - 3,411
Deferred gain from forgiveness of
debt (net of accumulated
amortization of $2,220 at December
31, 1997). - 3,058
------ -------
$9,125 $92,120
====== =======
Mortgage loan secured by the Harbour Pointe Apartments
------------------------------------------------------
Original financing for construction of the Harbour Pointe Apartments was
provided through $9,200,000 of Multi-Family Housing Mortgage Revenue Bonds,
Series 1985 E due December 1, 2007 (the original Bonds) issued by the Manatee
County Housing Finance Authority which bore interest at 8.25% plus a 1.25%
letter of credit fee. An amount of $75,000 was paid on the original bonds prior
to the refinancing. The original bond issue was refinanced on May 1, 1990 with
$9,125,000 Weekly Adjustable/Fixed Rate Multi-Family Housing Revenue Refunding
Bonds, Series 1990A, due December 1, 2007 (the Bonds).
The interest rate on the Bonds is adjusted weekly to a minimum rate that
would be necessary to remarket the Bonds in a secondary market as determined by
a bank remarketing agent. During calendar 1997, the interest rate averaged 3.78%
(3.62% in 1996). The Bonds are secured by the Harbour Pointe Apartments. As of
June 30, 1998 and December 31, 1997, the fair value of this debt obligation
approximated its carrying value.
Interest on the underlying bonds is intended to be exempt from federal
income tax pursuant to Section 103 of the Internal Revenue Code. In connection
with obtaining the mortgage, the partnership executed a Land Use Restriction
Agreement with the Manatee County Housing Finance Authority which provides,
among other things, that substantially all of the proceeds of the Bonds issued
be utilized to finance multi-family housing of which 20% or more of the units
are to be leased to low and moderate income families as established by the
United States Department of Housing and Urban Development. In the event that the
underlying Bonds do not maintain their tax-exempt status, whether by a change in
law or by noncompliance with the rules and regulations related thereto,
repayment of the note may be accelerated.
Pursuant to the financing agreement, a bank issued an irrevocable letter
of credit to the Bond trustee in the joint venture's name for $9,247,500. An
annual fee equal to 1% of the letter of credit balance was payable monthly to
the extent of net cash operating income available to pay such fees. The letter
of credit was scheduled to expire on December 15, 1997. Effective December 15,
1997, the bank extended the letter of credit through December 15, 2000. The
agreement provides for an annual fee equal to 1.25% per annum on the letter of
credit. In addition, the joint venture is required to make quarterly bond
sinking fund deposits of $60,000 beginning on February 15, 1998 under the terms
of the letter of credit. Also pursuant to the agreement, the joint venture is
required to make payments equal to 75% of annual net cash flow, as defined in
the agreement to serve as additional collateral. Any funds held will be released
upon the termination of the letter of credit, payment of the outstanding bonds
or the achievement of a 75% loan-to-value ratio.
Debt secured by The Lakes at South Coast Apartments
---------------------------------------------------
Original financing for construction of The Lakes at South Coast Apartments
was provided from a developer loan in the amount of $76,000,000 funded by the
proceeds of a public offering of tax-exempt apartment development revenue bonds.
The Venture had been in default of the developer loan since December 1989 for
failure to make full and timely payments on the loan. As a result of the
Venture's default, the required semi-annual interest and principal payments due
to the bond holders through June of 1991 were made by the bank which had issued
an irrevocable letter of credit securing the bonds. Under the terms of the loan
agreement, the Venture was responsible for reimbursing the letter of credit
issuer for any draws made against the letter of credit which totalled
$7,748,000.
The original bond issue was refinanced during 1991 and the original
developer loan was extinguished. The new developer loan (1991 Developer Loan),
in the amount of $75,600,000, was 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 was payable upon maturity on December 1, 2006. Interest on the
bonds was variable, with the rate determined weekly by a remarketing agent
(ranging from 2.95% to 4.50% during calendar 1997), and was payable in arrears
on the first of each month. As of December 31, 1997, the fair value of this debt
obligation approximated its carrying value. As discussed in Note 1, the bond
issue was assumed by the buyer of The Lakes at South Coast Apartments on August
20, 1998.
The loan was secured by a first deed of trust plus all future rents and
income generated by the operating investment property. Bond principal and
interest payments were secured by an irrevocable letter of credit issued by a
bank in the amount of $76,569,000, expiring December 15, 1998. The bank letter
of credit was secured by a second deed of trust on the operating investment
property and future rents and income from the operating investment property. The
Venture paid an annual letter of credit fee equal to 1.3% of the outstanding
amount, payable 83% monthly with the remaining 17% deferred and paid in
accordance with the Reimbursement Agreement (Unpaid Accrued Letter of Credit
Fees). Such Unpaid Accrued Letter of Credit Fees were $1,863,000 at December 31,
1997. Unpaid Accrued Letter of Credit Fees of $1,965,000 were repaid out of the
sales proceeds from The Lakes on August 20, 1998.
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 bore 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
$3,452,000 through August 20, 1998, leaving an outstanding principal balance of
$3,071,000 as of August 20, 1998. 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
had 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 was not sufficient after the payment of debt
service on the 1991 Developer Loan and the funding of certain required reserves.
The Prior Indebtedness of $3,071,000, deferred unpaid interest of $574,000 and
Deferred Prior Letter of Credit Fees of $925,000 were repaid out of the sales
proceeds from The Lakes at South Coast Apartments on August 20, 1998.
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 was 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 accrued 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, was
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. The line of
credit borrowings was paid in full from available net cash flow during fiscal
1999 prior to the sale of the property. Deferred unpaid interest of $1,134,000
was repaid out of the sales proceeds from The Lakes at South Coast Apartments on
August 20, 1998.
The 1991 restructuring of the Prior Indebtedness, the Deferred Letter of
Credit Fees and the line of credit borrowings, as described above, was 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, was deferred and
was being amortized as a reduction of interest expense prospectively using a
method approximating the effective interest method over the estimated remaining
term of the Venture's indebtedness. At March 31, 1998, $3,058,000 of such
forgiven debt (net of accumulated amortization) was reflected on the
accompanying balance sheet and $204,000 and $172,000 was amortized as a
reduction of interest expense in the accompanying statements of operations for
fiscal 1999 (through the date of the sale) and the six-month period ended June
30, 1997, respectively. The remaining unamortized balance of $2,854,000 was
recognized as an extraordinary gain on forgiveness of debt upon the sale of The
Lakes on August 20, 1998.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information Relating to Forward-Looking Statements
- --------------------------------------------------
The following discussion of financial condition includes forward-looking
statements which reflect management's current views with respect to future
events and financial performance of the Partnership. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified in Item 7 of the Partnership's Annual Report on Form 10-K for the
year ended March 31, 1998 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 discussed further in the Annual Report, subsequent to the resolution of
the default status of the debt secured by The Lakes at South Coast Apartments in
fiscal 1998, management analyzed whether it would be in the Limited Partners'
best interests to continue to hold the two remaining assets or to pursue
potential sale opportunities with a goal of completing a liquidation of the
Partnership in the near term. Based on such analysis, management concluded that
a liquidation of the Partnership should be undertaken if favorable prices for
The Lakes and Harbour Pointe could be achieved. Under the terms of the
Partnership Agreement, the affirmative vote of Limited Partners who own 51% or
more of the total number of outstanding units of limited partnership interest in
the Partnership is required to approve the sale of all, or substantially all, of
the Partnership's assets. On May 4, 1998, the Partnership furnished a Consent
Solicitation Statement to the Limited Partners which sought the approval to sell
the Partnership's two remaining assets and, thereafter, to liquidate and
dissolve the Partnership (collectively, the "Sale and Liquidation"). Effective
June 18, 1998, the results of the Consent Solicitation Statement were finalized,
and the Sale and Liquidation was approved by the required affirmative vote of
the Limited Partners. Management's goal has been to complete the Sale and
Liquidation by the end of calendar year 1998. It now appears likely that the
Sale and Liquidation will not be completed until the first quarter of calendar
1999. There can be no assurances, however, that the sale of the remaining asset
and the liquidation of the Partnership will be completed within this time frame.
As previously reported, 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 at South Coast Apartments. During the fourth
quarter of fiscal 1998, the property was marketed extensively. Sales packages
were distributed to 200 international, national, regional and local prospective
purchases. During the quarter ended June 30, 1998, the Partnership received
offers from 14 prospective buyers. Supplemental information on the property was
then provided to the top seven bidders with a requirement that best and final
offers be returned by April 30, 1998. The highest offer was from a qualified
buyer and met the Partnership's sale criteria. In June 1998, the Partnership
executed a purchase and sale agreement with this prospective buyer for an amount
in excess of the outstanding debt obligation. On August 20, 1998, the
Partnership sold The Lakes to this unrelated third party for $114,000,000. The
Partnership received net proceeds of approximately $25,942,000 after deducting
closing costs of $2,530,000, property proration adjustments of $2,195,000, the
assumption of the first mortgage principal balance of $75,600,000 and the
payment of approximately $7,733,000 in subordinated debt and deferred fees that
was related to the September 26, 1991 refinancing and modification of the
original first mortgage debt. In connection with the sale, the Partnership also
received approximately $2,136,000 as its share of the property's working capital
and escrows held in connection with the debt. The total proceeds received by the
Partnership of approximately $28,078,000 was included in a special capital
distribution of $28,109,700, or $675.00 per original $1,000 investment, paid on
September 9, 1998 to unitholders of record as of August 20, 1998. The
Partnership was required to withhold a seven percent income tax, or $47.25 per
original $1,000 investment, from non-California resident Limited Partners. The
total withholding was $1,437,000 and is included in accounts payable and accrued
expenses on the accompanying balance sheet as of September 30, 1998.
As discussed further in the Annual Report, on September 18, 1997 the
Partnership agreed to sell its general partnership interest in the Lincoln
Garden joint venture to its co-venture partner for $25,000. In effecting such
sale, management considered that (i) during recent years, the operating
performance of Lincoln Garden had deteriorated, (ii) since its inception, the
Partnership had not received cash flow from this investment and no cash flow
from this asset was projected for the future, and (iii) the joint venture
partner had a priority position in the joint venture due to certain loans which
it advanced to the joint venture to cover prior operating deficits. In addition,
management determined that the outstanding first mortgage loan balance on the
Lincoln Garden property was in excess of its market value and that future
increases in the property's value were unlikely. Because the property offered
little or no opportunity for a return of equity, the Partnership negotiated a
sale of its position to its joint venture partner for a nominal amount. The sale
was structured in two parts to minimize the negative tax consequences to the
Lincoln Garden joint venture. Accordingly, the Partnership received $19,000 in
September 1997 for the sale of 75% of its interest in the joint venture and
received a final payment of $6,000 on October 1, 1998 for the remaining 25% of
its interest. As of September 18, 1997, the Partnership's remaining position in
the joint venture was converted to a limited partnership interest, and the
Partnership had no continuing involvement in the operations of the Lincoln
Garden joint venture through the date in 1998 when its limited partnership
interest was redeemed for $6,000. Consequently, the Partnership wrote off the
remaining equity method carrying value of its investment in Lincoln Garden
during fiscal 1998. This write-off resulted in a gain of $2,528,000 because the
venture's prior equity method losses had exceeded the total of the Partnership's
investments and advances in the joint venture.
With the sale of The Lakes and the final redemption of the Partnership's
interest in the Lincoln Garden joint venture, the Partnership now has one
remaining real estate investment, the Harbour Pointe Apartments. As previously
reported, in early fiscal 1998 the Partnership initiated discussions with the
issuer of the letter of credit on the Harbour Pointe Apartments, which was
scheduled to expire on December 15, 1997. During the second quarter of fiscal
1998, the letter of credit issuer approved the joint venture's application for
an extension of the letter of credit through December 2000. The new terms of the
letter of credit agreement require the commencement of regular bond sinking fund
contributions of $240,000 per annum to be paid in quarterly installments of
$60,000 beginning February 15, 1998. The terms of the extension also increased
the letter of credit fee from 1% to 1.25% per annum on the outstanding amount of
$9,247,500, payable on a quarterly basis beginning February 15, 1998. The joint
venture is also required to make annual deposits to a lender-controlled escrow
account equal to 75% of Harbour Pointe's annual net cash flow, as defined, for
each year beginning in calendar 1998. All funds deposited to the escrow account
will be returned to the joint venture upon the earlier of the termination and
surrendering of the letter of credit to the lender or the achievement of a
loan-to-value ratio equal to or less than 75%, as determined solely by the
lender.
Recent improvements in market conditions and in the operating performance
of the Harbour Pointe Apartments have increased the estimated market value of
the property to a level which exceeds the outstanding first mortgage loan
balance. Accordingly, during the fourth quarter of fiscal 1998 the Partnership
initiated discussions with several real estate brokerage firms in order to
define potential marketing strategies for selling the Harbour Pointe property
and solicited marketing proposals from three of these firms. After reviewing
their respective proposals and conducting extensive interviews, the Partnership
selected a national firm that is a leading seller of apartment properties
encumbered by tax-exempt bond financing. During the first quarter of fiscal
1999, a marketing package was finalized, and extensive sales efforts began in
May 1998. As a result of such efforts, several offers to purchase Harbour Pointe
were received. On August 12, 1998, a purchase and sale agreement was signed with
a prospective buyer. This prospective buyer subsequently decided to terminate
the purchase and sale agreement and discontinued its efforts to acquire the
property. The Partnership then re-opened discussions with the other prospective
purchasers. These prospective purchasers were provided with updated property
information, and asked to submit revised offers. After reviewing the offers, the
Partnership selected a new prospective purchaser and is currently negotiating a
purchase and sale agreement. However, since the sale of the Harbour Pointe
property remains contingent upon, among other things, negotiation of a
definitive sale agreement, satisfactory completion of the buyer's due diligence
and formal approval by a number of third parties of the assumption of the
tax-exempt bonds secured by Harbour Pointe, there are no assurances that the
sale of the final asset and the liquidation of the Partnership will be completed
as planned.
At September 30, 1998, the Partnership and its consolidated joint ventures
had available cash and cash equivalents of approximately $2,558,000. Such cash
and cash equivalents will be used for the working capital requirements of the
Partnership and the remaining consolidated venture, with the remainder to be
returned to the Limited Partners, along with the net proceeds received from the
sale of the final operating investment property, after the payment of all
liquidation-related expenses in conjunction with the formal liquidation of the
Partnership. Such a liquidation is expected to be completed by the end of the
first quarter of calendar 1999.
Results of Operations
Three Months Ended September 30, 1998
- -------------------------------------
As noted above, the consolidated Lakes at South Coast operating investment
property was sold on August 20, 1998. In accordance with the Partnership's
policy to recognize significant lag-period transactions in the period in which
they occur, the Partnership accelerated the recognition of the operating results
of The Lakes Joint Venture during the quarter ended September 30, 1998 and
recognized a gain of $51,901,000 on the sale of The Lakes property. The
Partnership reported net income of $54,877,000 for the three months ended
September 30, 1998, as compared to a net loss of $351,000 for the same period in
the prior year. This favorable change of $55,228,000 in the Partnership's net
operating results was primarily due to the gain on the sale of The Lakes
operating investment property and a related extraordinary gain on forgiveness of
debt. The 1991 restructuring of the debt secured by The Lakes at South Coast
Apartments was 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, was deferred and was 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. The remaining
unamortized balance of $2,854,000 was recognized as an extraordinary gain on
forgiveness of debt upon the sale of The Lakes on August 20, 1998.
In addition to the gain recognized on the sale of The Lakes and the
extraordinary gain from forgiveness of debt, the Partnership had operating
income of $118,000 for the three months ended September 30, 1998 as compared to
an operating loss of $311,000 for the same period in the prior year. The current
year's results include four and two-thirds months of operating results for The
Lakes consolidated joint venture as compared to three months of operating
results for The Lakes for the same period in the prior year as a result of the
acceleration of the lag-period referred to above. The favorable change was also
partly a result of a significant increase in rental rates at The Lakes during
the current period. In addition, interest income increased by $134,000 mainly
due to interest earned on the net proceeds from the sale of The Lakes which were
temporarily invested pending the distribution to the Limited Partners which
occurred on September 9, 1998. The increases in rental income and interest
income were partially offset by increases in interest expense of $607,000 and
depreciation expense of $271,000. Interest expense increased primarily due to
the write-off of unamortized deferred financing costs of $526,000 in connection
with the sale of The Lakes. Depreciation expense increased partly due to prior
year capitalized additions to the operating investment properties.
The Partnership's share of unconsolidated venture's loss, which represented
the operating results of the Lincoln Garden joint venture, decreased by $64,000
as a result of the sale of the Partnership's interest in the Lincoln Garden
joint venture in September 1997, as discussed further above.
Six Months Ended September 30, 1998
- -----------------------------------
As noted above, the consolidated Lakes at South Coast operating investment
property was sold on August 20, 1998. In accordance with the Partnership's
policy to recognize significant lag-period transactions in the period in which
they occur, the Partnership accelerated the recognition of the operating results
of The Lakes Joint Venture during the quarter ended September 30, 1998 and
recognized a gain of $51,901,000 on the sale of The Lakes property. The
Partnership reported net income of $54,722,000 for the six months ended
September 30, 1998, as compared to a net loss of $514,000 for the same period in
the prior year. This favorable change of $55,236,000 in the Partnership's net
operating results was primarily due to the gain on the sale of The Lakes
operating investment property and a related extraordinary gain on forgiveness of
debt. The 1991 restructuring of the debt secured by The Lakes at South Coast
Apartments was 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, was deferred and was 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. The remaining
unamortized balance of $2,854,000 was recognized as an extraordinary gain on
forgiveness of debt upon the sale of The Lakes on August 20, 1998.
In addition to the gain recognized on the sale of The Lakes and the
extraordinary gain from forgiveness of debt, the Partnership's operating loss
decreased by $398,000 for the six months ended September 30, 1998 as compared to
the same period in the prior year. The current year's results include seven and
two-thirds months of operating results for The Lakes consolidated joint venture
as compared to six months of operating results for The Lakes for the same period
in the prior year as a result of the acceleration of the lag-period referred to
above. The favorable change was also partly a result of a significant increase
in rental rates at The Lakes during the current period. In addition, interest
income increased by $120,000 mainly due to interest earned on the net proceeds
from the sale of The Lakes which were temporarily invested pending the
distribution to the Limited Partners which occurred on September 9, 1998. The
increases in rental income and interest income were partially offset by
increases in interest expense of $503,000 and depreciation expense of $276,000.
Interest expense increased primarily due to the write-off of unamortized
deferred financing costs of $526,000 in connection with the sale of The Lakes.
Depreciation expense increased partly due to prior year capitalized additions to
the operating investment properties.
The Partnership's share of unconsolidated venture's loss, which represented
the operating results of the Lincoln Garden joint venture, decreased by $111,000
as a result of the sale of the Partnership's interest in the Lincoln Garden
joint venture in September 1997, as discussed further above.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated August 20, 1998 was filed by the
registrant during the quarter ended September 30, 1998 to report the sale of The
Lakes at South Coast Apartments and is hereby incorporated herein by reference.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
---------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: November 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's unaudited financial statements for the quarter ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Sep-30-1998
<CASH> 2,558
<SECURITIES> 0
<RECEIVABLES> 126
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,056
<PP&E> 10,366
<DEPRECIATION> 3,395
<TOTAL-ASSETS> 10,105
<CURRENT-LIABILITIES> 1,635
<BONDS> 9,125
0
0
<COMMON> 0
<OTHER-SE> (1,775)
<TOTAL-LIABILITY-AND-EQUITY> 10,105
<SALES> 0
<TOTAL-REVENUES> 59,227
<CGS> 0
<TOTAL-COSTS> 4,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,833
<INCOME-PRETAX> 51,868
<INCOME-TAX> 0
<INCOME-CONTINUING> 51,868
<DISCONTINUED> 0
<EXTRAORDINARY> 2,854
<CHANGES> 0
<NET-INCOME> 54,722
<EPS-PRIMARY> 1,253.49
<EPS-DILUTED> 1,253.49
</TABLE>
