UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to ________.
Commission File Number: 0-17150
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
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(Exact name of registrant as specified in its charter)
Texas 76-0147579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(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
June 30, 1998 and March 31, 1998 (Unaudited)
(In thousands)
ASSETS
June 30 March 31
------- --------
Operating investment properties:
Land $ 18,190 $ 18,190
Buildings and improvements 78,336 78,336
---------- ----------
96,526 96,526
Less accumulated depreciation (31,368) (30,710)
----------- ----------
65,158 65,816
Cash and cash equivalents 2,335 1,551
Restricted cash 2,157 2,580
Accounts receivable - 6
Prepaid and other assets 21 72
Deferred expenses, net 591 608
----------- -----------
$ 70,262 $ 70,633
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses $ 487 $ 387
Accrued interest and fees 4,979 4,823
Tenant security deposits 566 566
Mortgage loans payable 91,648 92,120
Co-venturers' share of net assets of
consolidated ventures 1,124 1,124
Partners' deficit (28,542) (28,387)
----------- -----------
$ 70,262 $ 70,633
=========== ===========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except per Unit data)
1998 1997
---- ----
Revenues:
Rental income $ 2,795 $ 2,649
Interest income 46 60
Other income 64 131
------- -------
2,905 2,840
Expenses:
Property operating expenses 1,072 871
Real estate taxes 186 234
Interest expense 1,039 1,143
Depreciation 658 653
General and administrative 105 63
------- -------
3,060 2,964
------- -------
Operating loss (155) (124)
Partnership's share of unconsolidated
venture's loss - (47)
Co-venturers' share of consolidated
ventures' losses - 8
------- -------
Net loss $ (155) $ (163)
======= =======
Net loss per Limited Partnership Unit $ (3.53) $ (3.72)
======= =======
The above net loss per Limited Partnership Unit is based upon the 41,644
Limited Partnership Units outstanding for each period.
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the three months ended June 30, 1998 and 1997 (Unaudited)
(In thousands)
General Limited
Partners Partners
-------- --------
Balance at March 31, 1997 $ (2,683) $(27,318)
Net loss (8) (155)
-------- --------
Balance at June 30, 1997 $ (2,691) $(27,473)
======== ========
Balance at March 31, 1998 $ (2,602) $(25,785)
Net loss (8) (147)
-------- --------
Balance at June 30, 1998 $ (2,610) $(25,932)
======== ========
See accompanying notes.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the three months ended June 30, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
(In thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (155) $ (163)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 658 653
Amortization of deferred financing costs 17 15
Amortization of deferred gain on forgiveness
of debt (85) (85)
Partnership's share of unconsolidated
venture's loss - 47
Co-venturers' share of consolidated ventures'
losses - (8)
Changes in assets and liabilities:
Accounts receivable 6 -
Accounts receivable - affiliates - (1)
Prepaid and other assets 51 (115)
Accounts payable and accrued expenses 100 328
Accrued interest and fees 156 251
Tenant security deposits - (24)
-------- --------
Total adjustments 903 1,061
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Net cash provided by operating activities 748 898
-------- --------
Cash flows from financing activities:
Decrease in restricted cash 423 259
Repayment of principal on long-term debt (387) (421)
-------- --------
Net cash provided by (used in)
financing activities 36 (162)
-------- --------
Net increase in cash and cash equivalents 784 736
Cash and cash equivalents, beginning of period 1,551 1,562
-------- --------
Cash and cash equivalents, end of period $ 2,335 $ 2,298
======== ========
Cash paid during the period for interest $ 951 $ 962
======== ========
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 June 30, 1998 and March 31, 1998 and revenues and expenses
for each of the three-month periods ended June 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 is to complete the Sale and Liquidation by
the end of calendar year 1998. There can be no assurances, however, that the
sales of the remaining assets and the liquidation of the Partnership will be
completed within this time frame.
2. Related Party Transactions
--------------------------
Included in general and administrative expenses for each of the
three-month periods ended June 30, 1998 and 1997 is $20,000, representing
reimbursements to an affiliate of the Managing General Partner for providing
certain financial, accounting and investor communication services to the
Partnership.
Also included in general and administrative expenses for the three-month
periods ended June 30, 1998 and 1997 is $1,000 and $2,000, 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
------------------------------------------------------
At June 30, 1997, the Partnership 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 will receive a final payment of
$6,000 in September 1998 for the remaining 25% of its interest. As of September
18, 1997, the Partnership's remaining position in the joint venture was
converted to a limited partnership interest, and the Partnership will have no
continuing involvement in the operations of the Lincoln Garden joint venture
through the date in September 1998 when its limited partnership interest will be
redeemed for $6,000. Consequently, the Partnership wrote off the remaining
equity method carrying value of its investment in Lincoln Garden during fiscal
1998. This write-off resulted in a gain of $2,528,000 because the venture's
prior equity method losses had exceeded the total of the Partnership's
investments and advances in the joint venture. The Partnership recorded its
share of the venture's operating losses up through the date of the September 18,
1997 sale transaction.
Summarized operations of the unconsolidated joint venture, for the period
indicated, are as follows:
Condensed Summary of Operations
For the three months ended March 31, 1997
(in thousands)
1997
----
Rental revenues $ 252
Interest and other income 16
------
268
Property operating expenses 158
Interest expense 115
Depreciation and amortization 66
------
339
------
Net loss $ (71)
======
Net loss:
Partnership's share of net loss $ (46)
Co-venturer's share of net loss (25)
------
$ (71)
======
Reconciliation of Partnership's Share of Operations
For the three months ended June 30, 1997
(in thousands)
1997
----
Partnership's share of operations,
as shown above $ (46)
Amortization of excess basis (1)
------
Partnership's share of unconsolidated
venture's loss $ (47)
======
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 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
months ended March 31, 1998 and 1997 (in thousands):
1998 1997
---- ----
Property operating expenses:
Repairs and maintenance $ 515 $ 185
Utilities 130 124
Management fees 100 99
Other operating and administrative 327 463
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$ 1,072 $ 871
======= =======
5. Long-term Debt
--------------
Long-term debt on the Partnership's balance sheet at June 30, 1998 and
March 31, 1998 consists of the following (in thousands):
June 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 is nonrecourse and is
secured by a first deed of trust
plus all future rents and income
generated by The Lakes at South
Coast Apartments. 75,600 75,600
Nonrecourse loan payable to bank
secured by a third deed of trust
plus all future rents and income
generated by The Lakes at South
Coast Apartments. 539 926
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 $2,305 and $2,220
at March 31, 1998 and December 31,
1997, respectively). 2,973 3,058
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$91,648 $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
March 31, 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, is payable to the County of Orange and was funded
by the proceeds of a public offering of tax-exempt apartment development
revenues bonds issued, at par, by the County of Orange, California in September
1991. Principal is payable upon maturity, December 1, 2006. Interest on the
bonds is variable, with the rate determined weekly by a remarketing agent
(ranging from 2.95% to 4.50% during calendar 1997), and is payable in arrears on
the first of each month. As of March 31, 1998 and December 31, 1997, the fair
value of this debt obligation approximated its carrying value.
The loan is secured by a first deed of trust plus all future rents and
income generated by the operating investment property. Bond principal and
interest payments are secured by an irrevocable letter of credit issued by a
bank in the amount of $76,569,000, expiring December 15, 1998. The Venture pays
an annual letter of credit fee equal to 1.3% of the outstanding amount, payable
83% monthly with the remaining 17% deferred and paid in accordance with the
Reimbursement Agreement (Unpaid Accrued Letter of Credit Fees). Such Unpaid
Accrued Letter of Credit Fees were $1,905,000 and $1,863,000 at March 31, 1998
and December 31, 1997, respectively. The bank letter of credit is secured by a
second deed of trust on the operating investment property and future rents and
income from the operating investment property. As discussed further in Note 1,
the Partnership is planning to sell its remaining assets and complete a
liquidation of the Partnership by December 31, 1998. There are no assurances,
however that the sale of the remaining assets will be completed within this time
frame. In the absence of a sale of The Lakes at South Coast Apartments on or by
December 15, 1998, the letter of credit referred to above would have to be
extended or replaced.
In conjunction with the 1991 Developer Loan, the Venture entered into a
Reimbursement Agreement with the letter of credit issuer regarding the
unreimbursed letter of credit draws referred to above. The letter of credit
issuer agreed to forgive all outstanding accrued interest through September 26,
1991, aggregating $1,132,000, along with a portion of the outstanding principal
in the amount of $300,000. In return, the Venture made a principal payment of
$926,000, leaving an unpaid balance of $6,523,000 (Prior Indebtedness). The
outstanding principal balance of the Prior Indebtedness bears interest payable
to the letter of credit issuer at the rate of 11% per annum. Interest accrued on
the Prior Indebtedness from the date of closing through June 1992 was forgiven
by the letter of credit issuer. Principal payments from available net cash flow
and the release of certain restricted escrow funds described below totalled
$3,112,000 through March 31, 1998, leaving an outstanding principal balance of
$3,411,000 as of March 31, 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 has a
limited right to defer payment of interest and principal on the Prior
Indebtedness and the Unpaid Accrued Letter of Credit Fees to the extent that the
net cash flow from operations is not sufficient after the payment of debt
service on the 1991 Developer Loan and the funding of certain required reserves.
In addition, upon a sale or other disposition of the operating property, the
Reimbursement Agreement allows for the payment to the Venture of an amount of
$5,500,000, plus accrued interest at the rate of 8% per annum, prior to the
repayment to the letter of credit issuer of the accrued interest on the Prior
Indebtedness and the Deferred Prior Letter of Credit Fees.
In November 1988, a borrowing arrangement with a bank was entered into to
provide funds for The Lakes. The Venture obtained a line of credit secured by a
third trust deed on the subleasehold interest, buildings and improvements, and
rents and income in the amount of $6,300,000. Interest on the line of credit was
originally payable monthly at 1-1/2% over the Citibank, N.A. prime rate.
However, because of the default status of this obligation during 1990, interest
had accrued at a rate of prime plus 4% through September 26, 1991. Accrued
interest on the line of credit, which is payable to the same bank which issued
the letter of credit in connection with the bonds, totalled $1,841,000 at
September 26, 1991. The outstanding principal balance of the line of credit was
$6,127,000 as of September 26, 1991. In conjunction with the refinancing of the
developer loan described above, the lender agreed to forgive all of the
outstanding accrued interest at the date of the refinancing. Interest accrues on
the outstanding principal balance at the rate of 11% per annum beginning
September 27, 1991. Payment of interest and principal on the line of credit
borrowings, prior to a sale or other disposition of the operating property, is
limited to the extent of available cash flow after the payment of debt service
on the developer loan and the funding of certain required reserves. In addition,
as with the Prior Indebtedness principal and interest described above, upon a
sale or other disposition of the operating property, the payment of accrued
interest on the line of credit borrowings is subordinated to the receipt by the
Venture of $5,500,000 plus a simple return thereon of 8% per annum. Principal
payments on the line of credit borrowings from available net cash flow totalled
$5,588,000 through March 31, 1998, leaving an outstanding principal balance of
$539,000 as of March 31, 1998.
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 March 31, 1998, $2,973,000 and
$3,058,000, respectively of such forgiven debt (net of accumulated amortization)
has been reflected on the accompanying balance sheets and $85,000 has been
amortized as a reduction of interest expense in the accompanying statements of
operations for each of the three-month periods ended March 31, 1998 and 1997.
With the exception of the 1991 Developer Loan described above, it is impractical
to estimate the fair value of the other secured indebtedness of The Lakes Joint
Venture due to the unique terms of the loans.
The 1991 Developer Loan contains several restrictive covenants, including,
among others, a requirement that the Venture furnish the letter of credit issuer
in September 1994 and September 1996 with certified independent appraisals of
the fair market value of the operating investment property for an amount equal
to or greater than $92,000,000 and $100,000,000, respectively. Failure to
provide such appraisals constitute events of default under the Reimbursement
Agreement. As of March 31, 1997, The Lakes Joint Venture had not provided the
lender with an appraisal which met either the $92,000,000 or $100,000,000
requirement. Effective September 18, 1997, the lender waived the minimum
appraised value requirement in accordance with the provisions of the Amendment
to Reimbursement Agreement and Limited Waiver, and as of March 31, 1998 and
December 31, 1997 the Joint Venture was in compliance with the covenants
required by the 1991 Developer Loan.
<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 is to complete the Sale and Liquidation
by the end of calendar year 1998. There can be no assurances, however, that the
sales of the remaining assets and the liquidation of the Partnership will be
completed within this time frame. The operations of The Lakes and Harbour Pointe
have been stabilized as a result of debt restructurings, and the properties do
not currently require the use of the Partnership's cash reserves to support
operations. Without these restructurings, the properties would most likely have
been lost through foreclosure actions by the respective lenders. Each of these
properties was financed with tax-exempt revenue bonds issued by local housing
authorities. These restructured debt obligations bear interest at variable rates
that, for the past several years, have remained 3 to 4 percent per annum below
comparable conventional rates. Such favorable rates have allowed The Lakes and
Harbour Pointe to generate excess cash flow after the payment of operating
expenses and first mortgage debt service obligations. This cash flow has been
used to maintain these properties in competitive condition and, in the case of
The Lakes, to pay interest and principal on other secured indebtedness incurred
in connection with the 1991 debt restructuring. If interest rates were to rise
dramatically, The Lakes and Harbour Pointe joint ventures would require advances
from the Partnership in order to continue paying their operating expenses and
debt service obligations. In addition, the letter of credit that guarantees and
secures the principal and interest payments of The Lakes' secured debt expires
on December 15, 1998. If the letter of credit is not extended by this expiration
date, such debt will become immediately due and payable and would need to be
repaid from the proceeds of a sale of The Lakes or a refinancing of the debt. If
such a sale or refinancing could not be accomplished, the property could be
subject to foreclosure by the lender. Given the high level of debt encumbering
The Lakes (which includes the first mortgage indebtedness, other secured
indebtedness incurred in connection with the restructuring, deferred interest
and deferred letter of credit fees), there can be no assurances that the
Partnership would be able to extend the existing letter of credit or obtain a
substitute credit facility. This impending letter of credit expiration was a
contributing factor to management's decision to pursue a sale of the remaining
assets and a liquidation of the Partnership to be completed prior to the end of
calendar 1998.
Management believes that the recent improved conditions in the apartment
segment of the real estate market have caused the values of The Lakes and
Harbour Pointe to increase during recent months to a point where such values
exceed the outstanding balances of the properties' debt encumbrances. The Lakes
is located in an extremely strong Orange County, California apartment market
that continues to gain momentum. The improved market conditions in the Orange
County area have resulted in a significant increase in the estimated market
value of The Lakes in recent months. In calendar 1997, the unemployment rate in
Orange County declined to 3.5% as compared to 5.1% in Orange County in 1995 and
9.4% for all of California at the bottom of its depressed economic conditions in
1993. Additionally, the population in Orange County has grown an estimated 11.4%
since 1990. As a result of these improved economic conditions, apartment
occupancy levels and rental rates have grown beyond pre-recession levels with
some properties reporting annual increases greater than 15%. The local market
reported an average occupancy level of approximately 95% for calendar 1997, as
well as rental rate increases of 10% to 15% since the beginning of calendar
1997. The Lakes' occupancy level reached 99% in January 1997, and since that
time rental rates have been substantially increased. Despite such increases, the
occupancy level remains in the high 90% range. Management believes that the
concurrence of aggressive apartment buyers who have access to an abundant supply
of low cost capital seeking investment opportunities, the low interest rates on
The Lakes' secured debt obligations and the dramatic increase in rental rates
and operating efficiencies have created value in The Lakes that may not persist
if any one or all of the favorable conditions were to change. Management further
believes that the dramatic rental rate increases in the Orange County market may
also be an indication that the market is approaching its peak. As a result,
management retained a national brokerage firm in November 1997 to begin a formal
marketing program for the purpose of soliciting proposals to acquire The Lakes.
During the fourth quarter of fiscal 1998, the property was marketed extensively.
Sales packages were distributed to 200 international, national, regional and
local prospective purchases. 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. However, since
this sale transaction remains contingent upon, among other things, formal
approval by a number of third parties of the assumption of the tax-exempt bonds
secured by The Lakes, there are no assurances that a sale will be consummated.
As previously reported, in early fiscal 1998 the Partnership initiated
discussions with the issuer of the letter of credit on the Harbour Pointe
Apartments, which was scheduled to expire on December 15, 1997. During the
second quarter of fiscal 1998, the letter of credit issuer approved the joint
venture's application for an extension of the letter of credit through December
2000. The new terms of the letter of credit agreement require the commencement
of regular bond sinking fund contributions of $240,000 per annum to be paid in
quarterly installments of $60,000 beginning February 15, 1998. The terms of the
extension also increased the letter of credit fee from 1% to 1.25% per annum on
the outstanding amount of $9,247,500, payable on a quarterly basis beginning
February 15, 1998. The joint venture will also be required to make annual
deposits to a lender-controlled escrow account equal to 75% of Harbour Pointe's
annual net cash flow, as defined, for each year beginning in calendar 1998. All
funds deposited to the escrow account will be returned to the joint venture upon
the earlier of the termination and surrendering of the letter of credit to the
lender or the achievement of a loan-to-value ratio equal to or less than 75%, as
determined solely by the lender. Recent improvements in market conditions and in
the operating performance of the Harbour Pointe Apartments have increased the
estimated market value of the property to a level which exceeds the outstanding
first mortgage loan balance. Nonetheless, significant additional appreciation
would have to occur in order to achieve a loan-to-value ratio of 75% or less. As
a result, the effect of the new terms of the Harbour Pointe letter of credit
will be that the cash flow from the property's operations will no longer be
available to cover the Partnership's future operating expenses. However, the
Partnership has sufficient cash reserves to cover operating expenses for the
next several years. With the Partnership focusing on potential disposition
strategies for its remaining investment properties and targeting a liquidation
within the next year, such reserves should be adequate to meet the Partnership's
liquidity needs during this period. 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 10, 1998, a purchase and sale agreement
was signed with a prospective buyer. However, since this transaction remains
continent upon, among other things, satisfactory completion of the buyer's due
diligence and formal approval by a number of third parties of the assumption of
the tax-exempt bonds secured by Harbour Pointe, there are no assurances that a
sale will be consummated.
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 will
receive a final payment of $6,000 in September 1998 for the remaining 25% of its
interest. As of September 18, 1997, the Partnership's remaining position in the
joint venture was converted to a limited partnership interest, and the
Partnership will have no continuing involvement in the operations of the Lincoln
Garden joint venture through the date in September 1998 when its limited
partnership interest will be redeemed for $6,000. Consequently, the Partnership
wrote off the remaining equity method carrying value of its investment in
Lincoln Garden during fiscal 1998. This write-off resulted in a gain of
$2,528,000 because the venture's prior equity method losses had exceeded the
total of the Partnership's investments and advances in the joint venture. The
Partnership recorded its share of the venture's operating losses up through the
date of the September 18, 1997 sale transaction.
At June 30, 1998, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately $2,335,000. 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.
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 June 30, 1998
- --------------------------------
The Partnership reported a net loss of $155,000 for the three months ended
June 30, 1998 as compared to a net loss of $163,000 for the same period in the
prior year. This decrease in net loss is primarily attributable to a $47,000
decrease in the Partnership's share of unconsolidated venture's loss which was
partially offset by a $31,000 increase in the Partnership's operating loss. The
Partnership's share of unconsolidated venture's loss, which represented the
operating results of the Lincoln Garden joint venture, decreased as a result of
the sale of the Partnership's interest in the Lincoln Garden joint venture in
September 1997, as discussed further above.
The increase in the Partnership's operating loss is attributable to a
$96,000 increase in operating expenses which was partially offset by a $65,000
increase in operating revenues. Expenses increased mainly due to an increase in
property operating expenses from the consolidated joint ventures and higher
Partnership general and administrative expenses which were partially offset by
decreases in interest expense and real estate taxes. Property operating expenses
increased by $201,000 largely due to increased repairs and maintenance costs at
The Lakes as a result of exterior painting performed during the current period.
The increase in general and administrative expenses was mainly due to an
increase in legal fees relating to the potential sale of the Partnership's
operating properties and Partnership liquidation-related matters. Interest
expense decreased due to the significant paydown of principal which has occurred
on the long-term debt secured by The Lakes over the past two years. Real estate
taxes decreased due to a reduction in the tax rate at The Lakes. The increase in
rental revenues was primarily due to increases in rental rates at The Lakes and
a combination of increases in effective rental rates and occupancy at Harbour
Pointe. The increase in rental revenues was partially offset by a decrease in
other income mainly as a result of a decline in furniture rental income at The
Lakes in the current year.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings NONE
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the registrant during the quarter
for which this report is filed.
<PAGE>
PAINEWEBBER DEVELOPMENT PARTNERS FOUR, LTD.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINEWEBBER DEVELOPMENT
PARTNERS FOUR, LTD.
By: Fourth Development Fund Inc.
----------------------------
Managing General Partner
By: /s/ Walter V. Arnold
--------------------
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: August 14, 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 June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 2,335
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,513
<PP&E> 96,526
<DEPRECIATION> 31,368
<TOTAL-ASSETS> 70,262
<CURRENT-LIABILITIES> 6,032
<BONDS> 91,648
0
0
<COMMON> 0
<OTHER-SE> (28,542)
<TOTAL-LIABILITY-AND-EQUITY> 70,262
<SALES> 0
<TOTAL-REVENUES> 2,905
<CGS> 0
<TOTAL-COSTS> 2,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,039
<INCOME-PRETAX> (155)
<INCOME-TAX> 0
<INCOME-CONTINUING> (155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155)
<EPS-PRIMARY> (3.53)
<EPS-DILUTED> (3.53)
</TABLE>
