Item 1. Business
Paine Webber Income Properties Four Limited Partnership (the "Partnership") is a limited partnership formed in June 1981 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of existing income-producing properties including shopping centers and apartment complexes. The Partnership sold $25,698,000 in Limited Partnership units (the "Units"), representing 25,698 Units at $1,000 per unit, during the offering period pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933 (Registration No. 2-73602). Limited Partners will not be required to make any additional contributions.
The Partnership originally invested the net proceeds of the public offering, through joint venture partnerships, in five operating properties. As discussed further below, through September 30, 1997 two of the Partnership's original investments had been sold and one had been lost through foreclosure proceedings. As of September 30, 1997, the Partnership had two remaining operating property investments which were owned through joint venture partnerships as set forth below:
Name of Joint Venture Date of Name and Type of Property Acquisition Type of Location Size of Interest Ownership (1) - -------------------------------- ----- ----------- ------------------
Charter Oak Associates 284 6/8/82 Fee ownership of land Charter Oak Apartments units and improvements Creve Coeur, Missouri (through joint venture).
Arlington Towne Oaks Associates 320 8/31/82 Fee ownership of land Bristol Pointe Apartments units and improvements (formerly Towne Oaks Apartments) (through joint Arlington, Texas venture).
(1) See Notes to the Financial Statements filed with this Annual Report for a description of the long-term mortgage indebtedness secured by the Partnership's operating property investments and for a description of the agreements through which the Partnership has acquired these real estate investments.
The Partnership previously owned interests in Braesridge 305 Associates, the Glenwood Village Shopping Center and the Yorktown Office Center. On December 29, 1995, the Partnership assigned its interest in Braesridge 305 Associates, a joint venture which owned the Braesridge Apartments, a 545-unit apartment complex in Houston, Texas, to an affiliate of its co-venture partners for net cash proceeds of $1,000,000. The Partnership distributed approximately $514,000 of the Braesridge proceeds, or $20 per original $1,000 investment, in a special distribution to the Limited Partners on February 15, 1996. The remaining proceeds were added to the Partnership's cash reserves. In addition, the venture which owned the Glenwood Village Shopping Center, a 41,000 square foot strip center in Raleigh, North Carolina, sold the property to a third party on September 23, 1991. The property was sold for $4,300,000 and, after repaying the outstanding mortgage loan and paying transaction costs, the Partnership's share of the net proceeds was $1,650,000. The Partnership distributed the majority of such proceeds to the Limited Partners in the form of a special distribution of $58 per original $1,000 investment which was paid in November 1991. The Partnership agreed to transfer title to the Yorktown Office Center to the mortgage lender in March of 1991. The decision to forfeit the Partnership's interest in the Yorktown Office Center, a 99,000 square foot building located in a suburb of Chicago, Illinois, was based on the property's inability to generate sufficient income to cover its debt service obligations. The inability of the Yorktown joint venture to meet the debt service requirements of the mortgage loan resulted from the significant oversupply of competing office space in the local suburban real estate market and its negative impact on occupancy and rental rates. As a result of the transfer of title, the Partnership no longer has any ownership interest in this property.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some extent, will not constitute taxable income; (ii) preserve and protect Limited Partners' capital; (iii) obtain long-term appreciation in the value of its properties; and (iv) provide a build up of equity through the reduction of mortgage loans on its properties.
The Partnership suspended the payment of regular quarterly distributions of excess cash flow in fiscal 1987. Through September 30, 1997, the Limited Partners had received cumulative cash distributions totalling $10,006,000, or approximately $407 per original $1,000 investment for the Partnership's earliest investors. Of this amount, approximately $5,011,000, or $195 per original $1,000 investment, represents capital proceeds distributed from the refinancing of the Charter Oak Apartments in fiscal 1986, the sale of the Glenwood Village Shopping Center in fiscal 1992 and the sale of the Partnership's interest in the Braesridge joint venture in fiscal 1996. The remaining distributions have been paid from operating cash flow. A substantial portion of these distributions paid to date has been sheltered from current taxable income. As of September 30, 1997, the Partnership retained its ownership interest in two of its five original investment properties. Due to the fiscal 1996 sale of the interest in the Braesridge joint venture, which represented 31% of the Partnership's original investment portfolio, for an amount which was substantially lower than the Partnership's investment in the joint venture, combined with the fiscal 1991 foreclosure loss of the Yorktown investment, which represented 16% of the Partnership's original investment portfolio, the Partnership will be unable to return the full amount of the original capital contributed by the Limited Partners. The amount of capital which will be returned will depend upon the proceeds received from the final liquidation of the two remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined.
Both of the remaining properties in which the Partnership has an interest are located in real estate markets in which they face significant competition for the revenues they generate. The apartment complexes compete with numerous projects of similar type generally on the basis of price, location and amenities. As in all markets, the apartment projects also compete with the local single family home market for prospective tenants. The continued availability of low interest rates on home mortgage loans has increased the level of this competition in all parts of the country over the past several years. However, the impact of the competition from the single family home market has been offset by the lack of significant new construction activity in the multi-family apartment market over most of this period. Over the past year, development activity for multi-family properties in many markets has escalated significantly. See Item 7 for a further discussion of the competitive conditions impacting the Partnership's Charter Oak and Bristol Pointe apartment properties.
The Partnership has no real estate investments located outside the United States. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Fourth Income Properties Fund, Inc. and Properties Associates. Fourth Income Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. Subject to the General Partner's overall authority, the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions.
Item 2.
Item 2. Properties
As of September 30, 1997, the Partnership had interests in two operating properties through joint venture partnerships. The joint venture partnerships and the related properties are referred to under Item 1 above to which reference is made for the name, location and description of each property.
Occupancy figures for each fiscal quarter during 1997, along with an average for the year, are presented below for each property:
Percent Occupied At ------------------------------------------------- Fiscal 12/31/96 3/31/97 6/30/97 9/30/97 Average -------- ------- ------- ------- -------
Charter Oak Apartments 94% 89% 88% 89% 90%
Bristol Pointe Apartments 87% 88% 95% 96% 92%
Item 3.
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group, Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Fourth Income Properties Fund, Inc. and Properties Associates ("PA"), which are General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in Paine Webber Income Properties Four Limited Partnership, PaineWebber, Fourth Income Properties Fund, Inc. and PA failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in Paine Webber Income Properties Four Limited Partnership, also alleged that following the sale of the partnership interests, PaineWebber, Fourth Income Properties Fund, Inc. and PA misrepresented financial information about the Partnership's value and performance. The amended complaint alleged that PaineWebber, Fourth Income Properties Fund, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and PWPI, and the allocation of the $125 million settlement fund among investors in the various partnerships and REITs at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships and REITs. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement was held in December 1996, and in March 1997 the court announced its final approval of the settlement. The release of the $125 million of settlement proceeds had been delayed pending the resolution of an appeal of the settlement agreement by two of the plaintiff class members. In July 1997, the United States Court of Appeals for the Second Circuit upheld the settlement over the objections of the two class members. As part of the settlement agreement, PaineWebber agreed not to seek indemnification from the related partnerships and real estate investment trusts at issue in the litigation (including the Partnership) for any amounts that it is required to pay under the settlement.
Based on the settlement agreement discussed above covering all of the outstanding unitholder litigation, management believes that the resolution of this matter will not have a material impact on the Partnership's financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters
At September 30, 1997, there were 1,881 record holders of Units in the Partnership. There is no public market for the Units, and it is not anticipated that a public market for Units will develop. Upon request, the Managing General Partner will endeavor to assist a Unitholder desiring to transfer his Units and may utilize the services of PWI in this regard. The price to be paid for the Units will be subject to negotiation by the Unitholder. The Managing General Partner will not redeem or repurchase Units.
No cash distributions were made to the Limited Partners during fiscal 1997.
Item 6.
Item 6. Selected Financial Data
The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report.
The above per Limited Partnership Unit information is based upon the 25,698 Limited Partnership Units outstanding during each year.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Information Relating to Forward-Looking Statements - --------------------------------------------------
The following discussion of financial condition includes forward-looking statements which reflect management's current views with respect to future events and financial performance of the Partnership. These forward-looking statements are subject to certain risks and uncertainties, including those identified below under the heading "Certain Factors Affecting Future Operating Results", which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which were made based on facts and conditions as they existed as of the date of this report. The Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Liquidity and Capital Resources - -------------------------------
The Partnership offered limited partnership interests to the public from December 1981 to December 1982 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $25,698,000 were received by the Partnership and, after deducting selling expenses and offering costs, approximately $22,336,000 was originally invested, through joint venture partnerships, in five operating investment properties, comprised of three multi-family apartment complexes, one commercial office property and one retail shopping center. Through September 30, 1997, the investments in the shopping center, the office property and one of the apartment complexes had been disposed of. In September 1991, the joint venture which owned the retail shopping center sold the property and distributed the net proceeds to the venture partners. Also in fiscal 1991, the Partnership agreed to transfer title to the office property to the first mortgage lender in settlement of the outstanding debt obligation, after a protracted period of negotiations failed to produce a mutually acceptable restructuring agreement. On December 29, 1995, the Partnership assigned its interest in the Braesridge Apartments joint venture to an affiliate of its co-venture partners for net cash proceeds of $1,000,000. The Partnership distributed approximately $514,000 of the Braesridge net sale proceeds, or $20 per original $1,000 investment, in a special distribution to the Limited Partners on February 15, 1996. The remaining net sale proceeds of approximately $486,000 were retained by the Partnership to increase cash reserves maintained to fund working capital requirements and potential future capital needs of the two remaining real estate investments. Due to the fiscal 1996 sale of the Partnership's interest in the Braesridge joint venture for an amount which was substantially lower than the Partnership's investment in the joint venture and the fiscal 1991 foreclosure loss of the Yorktown investment, which represented a combined 47% of the original investment portfolio, the Partnership will be unable to return the full amount of the original capital contributed by the Limited Partners. The amount of capital which will be returned will depend upon the proceeds received from the liquidation of the Partnership's two remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. The Partnership does not have any commitments for additional investments but may be called upon to fund its portion of operating deficits or capital improvements of the joint ventures in accordance with the respective joint venture agreements.
Occupancy at the Partnership's two remaining multi-family apartment properties, Bristol Pointe (formerly Towne Oaks) and Charter Oak, averaged 92% and 90%, respectively, for fiscal 1997 compared to 93% and 93%, respectively, for fiscal 1996. Notwithstanding the slight decrease in average occupancy at Bristol Pointe, the occupancy level at the property had rebounded to 96% for the quarter ended September 30, 1997 from a low of 87% for the first quarter of fiscal 1997. The increase in occupancy at Bristol Pointe during the second half of fiscal 1997 is attributable to a new marketing program which included the renovation of the property's model unit, reduced rents on certain apartment unit types and discounts on the first month's rent to new residents. This program was implemented during the first half of fiscal 1997 and began to show positive results during the third and fourth quarters. Although the local apartment rental market in the greater Dallas, Texas area softened during 1997 due to a significant amount of new construction, improvements made to the unit interiors at Bristol Pointe over the past two years and other recent improvements made to the property in conjunction with the new marketing program increased prospective tenant traffic at Bristol Pointe dramatically over the second half of the year. The increase in traffic has brought the property's occupancy up to a level which is consistent with the competition in the local market. In addition, effective rental rates at the Bristol Pointe property improved over the last six months of fiscal 1997. Cash flow from Bristol Pointe continues to be applied to the program begun in fiscal 1995 to upgrade the apartment interiors on a turnover basis. This work is scheduled to continue over the near term until substantially all of the units have been upgraded. The interior upgrades range from repainting and carpet replacement, where needed, to the complete retrofit of the fixtures, cabinets, heating and air conditioning equipment and the replacement of all appliances in each unit. To date, 52% of the units have been substantially upgraded. Other capital improvement work completed at Bristol Pointe during fiscal 1997 included a resurfacing of the property's parking lots, which cost approximately $225,000 and was paid for out of the Partnership's cash reserves subsequent to the fiscal year-end.
At Charter Oak, refinancing reserves continue to be used for the program to upgrade individual units and the property as a whole. As with Bristol Pointe, the work to renovate the individual apartment units is being done on a turnover basis and will continue until all of the units have been upgraded. To date, 44% of the units have been upgraded. The upgraded units are generating additional rental rates of $50 to $100 per month, depending on the type of unit. The capital improvement plan at Charter Oak calls for the renovation and re-leasing of three to five units per month. The property's management and leasing team attributes the decrease in average occupancy at Charter Oak during fiscal 1997 to tenants purchasing homes. Although there is no significant new construction in the local sub-market, some of the competitive properties are undergoing substantial renovations which, when completed, may limit rental rate growth at Charter Oak. The average rental rate at the property has increased 6.5% since the beginning of fiscal 1997. As previously reported, in order to increase the occupancy level, the property's management and leasing team implemented a marketing and tenant retention program during fiscal 1997 which included improving the signage at the property, increasing the property's exposure in the local apartment guides, increasing resident referral bonuses for one-year leases and various other marketing activities.
Over the past 2 years, development activity for multi-family properties in many markets, including the greater Dallas area in which the Bristol Pointe Apartments is located, has increased significantly. The general increase in development activity may be an indication that market values for multi-family properties are nearing their peak for the current market cycle. To date, the overall St. Louis market and Charter Oak's sub-market have not experienced a significant increase in the supply of apartment units, but management continues to monitor this situation closely. As a result of the current market conditions, management will likely explore the market for potential sales opportunities for the Charter Oak and Bristol Pointe properties in the near term as the renovation programs discussed above at both properties approach completion. The sale of the remaining assets would be followed by a liquidation of the Partnership. Depending on the availability of favorable sales opportunities for the two remaining properties, the Partnership is expected to be positioned for a possible liquidation within the next 2-to-3 years. There are no assurances, however, that the Partnership will be able to achieve the sale of its remaining assets within this time frame.
At September 30, 1997, the Partnership and its consolidated joint venture had available cash and cash equivalents of $995,000. Such cash and cash equivalents will be utilized for the Partnership's working capital requirements and, if necessary, to fund property operating deficits and capital improvements of the two remaining joint ventures in accordance with the respective joint venture agreements. The source of future liquidity and distributions to the partners is expected to be through cash generated from operations of the Partnership's investment properties and proceeds from the sale or refinancing of such properties. Such sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis.
Results of Operations 1997 Compared to 1996 - ---------------------
The Partnership's net income decreased by $821,000 for the year ended September 30, 1997 as compared to the prior year. This unfavorable change is the result of a $2,111,000 gain recognized by the Partnership from the sale of the Braesridge joint venture interest in fiscal 1996. The prior year gain from the sale of the Braesridge joint venture interest was partially offset by a decrease in the Partnership's operating loss of $1,073,000 and an increase in the Partnership's share of unconsolidated ventures' income of $217,000.
The Partnership's operating loss decreased primarily due to a $1,000,000 impairment loss that was recognized in fiscal 1996 on the consolidated Bristol Pointe Apartments, as discussed further in the notes to the financial statements which accompany this Annual Report. In addition, operating loss decreased as a result of a decline in general and administrative expenses of $33,000, an increase in interest and other income of $45,000 and a reduction in the operating loss of the consolidated Bristol Pointe joint venture of $28,000. General and administrative expenses decreased mainly due to a reduction in certain required professional fees for fiscal 1997. Interest and other income increased due to an increase in the average outstanding amount of the Partnership's invested cash reserves and the receipt of a refund of prior year insurance premiums during fiscal 1997. The operating loss of the consolidated Bristol Pointe joint venture decreased primarily due to an increase in rental revenues. Rental revenues increased by approximately 6% due to an increase in effective rental rates. The increase in rental revenues at Bristol Pointe was partially offset by higher property operating expenses which were mainly related to the marketing efforts implemented during fiscal 1997, as discussed further above.
The Partnership's share of unconsolidated venture's income for the year ended September 30, 1997 increased partly due to the inclusion of the net loss of $104,000 attributable to the Braesridge joint venture through the date of sale in the prior period results. In addition, the Partnership's share of net income from the Charter Oak Apartments increased by $113,000 primarily due to an increase in rental income and decreases in repairs and maintenance and salaries expenses. Rental income improved by approximately 2% as a result of the increase in effective rental rates referred to above.
1996 Compared to 1995 - ---------------------
The Partnership reported net income of $895,000 for the year ended September 30, 1996, as compared to a net loss of $253,000 fiscal 1995. This favorable change in net operating results was a result of the fiscal 1996 gain on the sale of the Braesridge joint venture interest, which was partially offset by an increase in the Partnership's operating loss and a reduction in the Partnership's share of unconsolidated ventures' income. The Partnership accounted for its investment in the Braesridge joint venture using the equity method because the Partnership did not have voting control interest in the venture. Under the equity method, the investment in a joint venture is carried at cost adjusted for the Partnership's share of the venture's earnings or losses and distributions. Despite recovering less than 15% of its original cash investment in Braesridge, the Partnership recognized a gain of $2,111,000 in connection with the sale of its venture interest because the losses recorded in prior years under the equity method had exceeded the Partnership's initial investment amount.
Operating loss increased by $883,000 in fiscal 1996 primarily due to a $1,000,000 impairment loss recognized in fiscal 1996 on the consolidated Bristol Pointe Apartments. The impairment loss was partially offset by increases in rental revenues from Bristol Pointe and a decrease in general and administrative expenses. Fiscal 1996 rental revenues at Bristol Pointe increased by $153,000, or 9%, over prior year amounts as a result of an increase in both average occupancy and rental rates. General and administrative expenses decreased by $40,000 mainly due to certain incremental costs incurred in fiscal 1995 in connection with an independent valuation of the Partnership's operating investment properties. An increase in property operating expenses also contributed to the increase in the Partnership's operating loss in fiscal 1996. Property operating expenses from the consolidated Bristol Pointe joint venture increased by $67,000 primarily due to increases in utilities and repairs and maintenance expenses. Utilities at the property increased largely due to the severe winter experienced in the Dallas area in 1996. The increase in repairs and maintenance costs was consistent with the age of the property and management's desire not to defer any needed maintenance items.
The decrease of $80,000 in the Partnership's share of unconsolidated ventures' income in fiscal 1996 resulted primarily from the decline in income associated with the sale of the Braesridge joint venture interest during fiscal 1996. The fiscal 1995 amount included $66,000 of net income from the Braesridge joint venture which the Partnership sold on December 29, 1995. Accordingly, the Partnership's share of unconsolidated ventures' income in fiscal 1996 only included results from the Braesridge joint venture through the date of the sale, or approximately three months. Net operating income from the Partnership's remaining unconsolidated joint venture, Charter Oak Associates, declined in fiscal 1996 despite an improvement of 4% in the venture's rental revenue. The increase in revenues was offset by higher non-cash depreciation charges in fiscal 1996 resulting from capital improvements performed at the Charter Oak Apartments during fiscal 1995 and 1996.
1995 Compared to 1994 - ---------------------
The Partnership reported a net loss of $253,000 for the year ended September 30, 1995, as compared to a net loss of $484,000 recognized in the prior year. The decrease in net loss resulted from a decrease in the Partnership's operating loss of $91,000 and an increase in the Partnership's share of unconsolidated ventures' income of $140,000. The decrease in the Partnership's operating loss, which includes the results of the consolidated Bristol Pointe joint venture, was primarily the result of an increase in rental revenues from the Bristol Pointe Apartments. Rental revenues increased by $187,000 for fiscal 1995, when compared to fiscal 1994, due to the impact of certain capital improvements on occupancy and rental rates. The increase in revenues at Bristol Pointe was partially offset by increases in the consolidated venture's interest expense, depreciation expense and real estate taxes. Interest expense on the venture's debt increased by $42,000 as a result of the higher principal balance and interest rate on the new mortgage loan subsequent to the fiscal 1994 refinancing transaction. Depreciation expense increased by $25,000 due to the additional depreciation on the capital improvements at the Bristol Pointe Apartments. In addition, real estate tax expense on the Bristol Pointe property increased by $14,000 in fiscal 1995.
The improvement in the Partnership's share of unconsolidated ventures' income during fiscal 1995 was primarily due to an increase in rental revenues at both the Charter Oak and Braesridge joint ventures. Rental rates increased at Charter Oak in conjunction with a capital improvement program and Braesridge experienced increases in both average occupancy and rental rates during fiscal 1995. Average occupancy at the Braesridge Apartments was 96% for fiscal 1995, as compared to 93% for fiscal 1994. The resulting increase in combined rental revenues, of $243,000, was partially offset by increases in repairs and maintenance expense at the Braesridge joint venture along with an increase in depreciation and amortization expense at the Charter Oak joint venture as a result of additional depreciation on the capital improvements.
Certain Factors Affecting Future Operating Results - --------------------------------------------------
The following factors could cause actual results to differ materially from historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants of the attractiveness of the property; (ii) the ability to retain qualified individuals to provide adequate management and maintenance of the property; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties with insured limits and policy specifications that management believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature such as wars, floods or earthquakes) which may be either uninsurable, or, in management's judgment, not economically insurable. Should an uninsured loss occur, the Partnership could lose both its invested capital in and anticipated profits from the affected property.
Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The Partnership is not aware of any notification by any private party or governmental authority of any non-compliance, liability or other claim in connection with environmental conditions at any of its properties that it believes will involve any expenditure which would be material to the Partnership, nor is the Partnership aware of any environmental condition with respect to any of its properties that it believes will involve any such material expenditure. However, there can be no assurance that any non-compliance, liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real estate investments will be significantly impacted by the competition from comparable properties in their local market areas. The occupancy levels and rental rates achievable at the properties are largely a function of supply and demand in the markets. In many markets across the country, development of new multi-family properties has increased significantly in the past 12 months. Existing apartment properties in such markets could be expected to experience increased vacancy levels, declines in effective rental rates and, in some cases, declines in estimated market values as a result of the increased competition. There are no assurances that these competitive pressures will not adversely affect the operations and/or market values of the Partnership's investment properties in the future.
Impact of Joint Venture Structure. The ownership of the remaining investments through joint venture partnerships could adversely impact the timing of the Partnership's planned dispositions of its remaining assets and the amount of proceeds received from such dispositions. It is possible that the Partnership's co-venture partners could have economic or business interests which are inconsistent with those of the Partnership. Given the rights which both parties have under the terms of the joint venture agreements, any conflict between the partners could result in delays in completing a sale of the related operating property and could lead to an impairment in the marketability of the property to third parties for purposes of achieving the highest possible sale price.
Availability of a Pool of Qualified Buyers. The availability of a pool of qualified and interested buyers for the Partnership's remaining assets is critical to the Partnership's ability to realize the estimated fair market values of such properties at the time of their final dispositions. Demand by buyers of multi-family apartment properties is affected by many factors, including the size, quality, age, condition and location of the subject property, potential environmental liability concerns, the existing debt structure, the liquidity in the debt and equity markets for asset acquisitions, the general level of market interest rates and the general and local economic climates.
Inflation - ---------
The Partnership completed its fifteenth full year of operations in fiscal 1997 and the effects of inflation and changes in prices on revenues and expenses to date have not been significant.
Inflation in future periods may cause an increase in revenues, as well as operating expenses, at the Partnership's operating investment properties. Tenants at the Partnership's apartment properties have short-term leases, generally of six-to-twelve months in duration. Rental rates at these properties can be adjusted to keep pace with inflation, as market conditions allow, as the leases are renewed or turned over. Such increases in rental income would be expected to at least partially offset the corresponding increases in Partnership and property operating expenses caused by future inflation.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of this Annual Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Principal Executive Officers of the Partnership
The Managing General Partner of the Partnership is Fourth Income Properties Fund, Inc., a Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operations, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive officers of the Managing General Partner of the Partnership are as follows:
Date elected Name Office Age to Office ---- ------ --- ---------
Bruce J. Rubin President and Director 38 8/22/96 Terrence E. Fancher Director 44 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 50 10/29/85 David F. Brooks First Vice President and Assistant Treasurer 55 6/13/80 * Timothy J. Medlock Vice President and Treasurer 36 6/1/88 Thomas W. Boland Vice President and Controller 35 12/1/91
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors or executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which Paine Webber Properties Incorporated serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President and Controller of the Managing General Partner and a Vice President and Controller of the Adviser which he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings which are material to an evaluation of her or his ability or integrity as a director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended September 30, 1997, all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with.
Item 11.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner receive no current or proposed remuneration from the Partnership. The Partnership is required to pay certain fees to the Adviser, and the Managing General Partners are entitled to receive a share of cash distributions and a share of profits or losses. These items are described in Item 13.
The Partnership has not paid cash distributions to the Unitholders from operations over the past five years. Furthermore, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited Partnership Interest, not voting securities. All the outstanding stock of the Managing General Partner, Fourth Income Properties Fund, Inc. is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, certain general partners of which are officers of the Adviser and the Managing General Partners. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
(b) Neither directors nor officers of the Managing General Partner nor the general partners of the Associate General Partner, individually, own any Units of Limited Partnership Interest of the Partnership. No director or officer of the General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of Limited Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions
The General Partner of the Partnership is Fourth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"), and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. In connection with investing Partnership Capital, the Adviser received acquisition fees paid by the joint ventures and sellers.
All distributable cash, as defined, for each fiscal year is distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partner. All sale or refinancing proceeds shall be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax loss from operations of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partner in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partner will be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management responsibilities: to administer the day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the General Partners. The Adviser is paid a basic management fee (4% of adjusted cash flow, as defined) and an incentive management fee (5% of adjusted cash flow subordinated to a non-cumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contribution) for services rendered. The Adviser did not earn any management fees during the year ended September 30, 1997 due to the lack of distributable cash flow.
An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services allocated among several entities, including the Partnership. Included in general and administrative expenses for the year ended September 30, 1997 is $85,000, representing reimbursements to this affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $2,000 (included in general and administrative expenses) for managing the Partnership's cash assets for the year ended September 30, 1997. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this report.
(b) No Current Reports on Form 8-K were filed during the last quarter of fiscal 1997.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at Page.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
By: Fourth Income Properties Fund, Inc. Managing General Partner
By: /s/ Bruce J. Rubin ------------------ Bruce J. Rubin President and Chief Executive Officer
By: /s/ Walter V. Arnold ------------------ Walter V. Arnold Senior Vice President and Chief Financial Officer
By: /s/ Thomas W. Boland ------------------ Thomas W. Boland Vice President and Controller
Dated: January 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1998 ----------------------- ---------------- Bruce J. Rubin Director
By:/s/ Terrence E. Fancher Date: January 13, 1998 ----------------------- ---------------- Terrence E. Fancher Director
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference ---------
Paine Webber Income Properties Four Limited Partnership:
Report of independent auditors
Consolidated balance sheets at September 30, 1997 and 1996
Consolidated statements of operations for the years ended September 30, 1997, 1996 and 1995
Consolidated statements of changes in partners' capital (deficit) for the years ended September 30, 1997, 1996 and 1995
Consolidated statements of cash flows for the years ended September 30, 1997, 1996 and 1995
Notes to consolidated financial statements
Schedule III - Real Estate and Accumulated Depreciation
Charter Oak Associates:
Report of independent auditors
Balance sheets as of September 30, 1997 and 1996
Statements of income for the years ended September 30, 1997, 1996 and 1995
Statements of changes in venturers' deficit for the years ended September 30, 1997, 1996 and 1995
Statements of cash flows for the years ended September 30, 1997, 1996 and 1995
Notes to financial statements
Schedule III - Real Estate and Accumulated Depreciation
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference ---------
Braesridge 305 Associates:
Report of independent auditors
Balance sheets as of December 29, 1995 and September 30, 1995
Statements of operations for the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994
Statements of changes in venturers' capital (deficit) for the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994
Statements of cash flows for the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994
Notes to financial statements
Schedule III - Real Estate and Accumulated Depreciation
Other schedules have been omitted since the required information is not applicable, or because the information required is included in the financial statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of Paine Webber Income Properties Four Limited Partnership:
We have audited the accompanying consolidated balance sheets of Paine Webber Income Properties Four Limited Partnership as of September 30, 1997 and 1996, and the related consolidated statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paine Webber Income Properties Four Limited Partnership at September 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP --------------------- ERNST & YOUNG LLP
Boston, Massachusetts December 18, 1997
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS September 30, 1997 and 1996 (In thousands, except per Unit amounts)
ASSETS
1997 1996 ---- ---- Operating investment property: Land $ 1,300 $ 1,300 Buildings, improvements and equipment 12,350 11,842 --------- -------- 13,650 13,142 Accumulated depreciation (5,352) (4,877) --------- --------- 8,298 8,265
Cash and cash equivalents 995 654 Tax escrow deposit 121 121 Repair escrow 69 53 Prepaid and other assets 59 59 Deferred financing costs, net of accumulated amortization of $27 ($20 in 1996) 161 168 --------- -------- $ 9,703 $ 9,320 ========= ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other liabilities $ 340 $ 105 Accrued real estate taxes 116 115 Mortgage interest payable 36 37 Tenant security deposits 81 65 Losses from unconsolidated joint venture in excess of investments and advances 159 32 Long-term debt 4,783 4,852 --------- -------- Total liabilities 5,515 5,206
Partners' capital: General Partners: Capital contributions 1 l Cumulative net loss (90) (91) Cumulative cash distributions (51) (51)
Limited Partners ($1,000 per unit; 25,698 Units issued): Capital contributions, net of offering costs 23,194 23,194 Cumulative net loss (8,860) (8,933) Cumulative cash distributions (10,006) (10,006) --------- -------- Total partners' capital 4,188 4,114 --------- -------- $ 9,703 $ 9,320 ========= ========
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended September 30, 1997, 1996 and 1995 (In thousands, except per Unit amounts)
1997 1996 1995 ---- ---- ----
Revenues: Rental revenue $ 1,868 $ 1,766 $ 1,613 Interest and other income 95 50 43 --------- -------- ------- 1,963 1,816 1,656
Expenses: Loss on impairment of long-lived asset - 1,000 - Property operating expenses 964 887 820 Mortgage interest 445 451 458 Depreciation expense 475 441 420 Real estate taxes 138 136 134 General and administrative 178 211 251 --------- -------- ------- 2,200 3,126 2,083 --------- -------- -------
Operating loss (237) (1,310) (427)
Partnership's share of unconsolidated ventures' income 311 94 174
Gain on sale of joint venture interest - 2,111 - --------- -------- -------
Net income (loss) $ 74 $ 895 $ (253) ========= ======== =======
Net income (loss) per Limited Partnership Unit $ 2.83 $ 34.48 $ (9.75) ========= ======== =======
Cash distributions per Limited Partnership Unit $ - $ 20.00 $ - ========= ======== =======
The above net income (loss) and cash distributions per Limited Partnership Unit is based upon the 25,698 Limited Partnership Units outstanding during each year.
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended September 30, 1997, 1996 and 1995 (In thousands)
General Limited Partners Partners Total -------- -------- -----
Balance at September 30, 1994 $ (147) $ 4,133 $ 3,986
Net loss (3) (250) (253) ------- ------- -------
Balance at September 30, 1995 (150) 3,883 3,733
Net income 9 886 895
Cash distributions - (514) (514) ------- ------- -------
Balance at September 30, 1996 (141) 4,255 4,114
Net income 1 73 74 ------- ------- -------
Balance at September 30, 1997 $ (140) $ 4,328 $ 4,188 ======= ======= =======
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 1997, 1996 and 1995 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 74 $ 895 $ (253) Adjustments to reconcile net incom (loss) to net cash provided by operating activities: Loss on impairment of long-lived assets - 1,000 - Gain on sale of joint venture interest - (2,111) - Depreciation expense 475 441 420 Amortization of deferred financing costs 7 7 9 Partnership's share of unconsolidated ventures' income (311) (94) (174) Changes in assets and liabilities: Tax escrow deposit - (11) 46 Prepaid and other assets - (2) (18) Accounts payable and other liabilities 235 (39) (3) Accrued real estate taxes 1 14 8 Mortgage interest payable (1) - (1) Tenant security deposits 16 7 2 ------- --------- -------- Total adjustments 422 (788) 289 ------- --------- -------- Net cash provided by operating activities 496 107 36 ------- --------- --------
Cash flows from investing activities: Proceeds from the sale of joint venture interest - 1,000 - Distributions from unconsolidated joint venture 438 263 409 Additional investments in unconsolidated joint ventures - - (41) Additions to operating investment property (508) (274) (976) (Deposits to) decrease in repair escrow (16) 6 735 ------- --------- -------- Net cash (used in) provided by investing activities (86) 995 127 ------- --------- --------
Cash flows from financing activities: Distributions to Limited Partners - (514) - Principal repayments on long-term debt (69) (63) (58) ------- --------- -------- Net cash used in financing activities (69) (577) (58) ------- --------- --------
Net increase in cash and cash equivalents 341 525 105
Cash and cash equivalents, beginning of year 654 129 24 ------- --------- --------
Cash and cash equivalents, end of year $ 995 $ 654 $ 129 ======= ========= ========
Cash paid during the year for interest $ 439 $ 444 $ 450 ======= ========= ========
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP Notes to Consolidated Financial Statements
1. Organization and Nature of Operations -------------------------------------
Paine Webber Income Properties Four Limited Partnership (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in July 1981 for the purpose of investing in a diversified portfolio of income-producing properties. The Partnership authorized the sale of units (the "Units") of partnership interest (at $1,000 per Unit) of which 25,698 were subscribed and issued between December 1981 and December 1982.
The Partnership originally invested the net proceeds of the public offering, through joint venture partnerships, in five operating properties, comprised of three multi-family apartment complexes, one commercial office property and one retail shopping center. As discussed further in Note 5, the sale of the Partnership's interest in one of the apartment properties occurred in fiscal 1996. In addition, in September 1991 the joint venture which owned the retail shopping center sold the property and distributed the net proceeds to the venture partners. Also in fiscal 1991, the Partnership agreed to transfer title to the office property to the first mortgage lender in settlement of the outstanding debt obligation after a protracted period of negotiations failed to produce a mutually acceptable restructuring agreement. The Partnership's two remaining investments are described in Notes 4 and 5.
2. Use of Estimates and Summary of Significant Accounting Policies ---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require 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, 1997 and 1996 and revenues and expenses for each of the three years in the period ended September 30, 1997. Actual results could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's investments in certain joint venture partnerships which own operating properties. Except as described below, the Partnership accounts for its investments in joint venture partnerships using the equity method because the Partnership does not have a voting control interest in the ventures. Under the equity method the investment in a joint venture is carried at cost adjusted for the Partnership's share of the venture's earnings or losses and distributions. See Note 5 for a description of the unconsolidated joint venture partnerships.
As discussed further in Note 4, effective December 31, 1990 the co-venture partner of Arlington Towne Oaks Associates assigned its general partnership interest to Fourth Income Properties Fund, Inc., the Managing General Partner of the Partnership (see Note 3). The assignment gave the Partnership control over the affairs of the joint venture. Accordingly, the accompanying financial statements present the financial position, results of operations and cash flows of this joint venture on a consolidated basis. All transactions between the Partnership and the joint venture have been eliminated in consolidation.
Effective for fiscal 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to account for its operating investment properties. In accordance with SFAS 121, an impairment loss with respect to an operating investment property is recognized when the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value, where fair value is defined as the amount at which the asset could be bought or sold in a current transaction between willing parties, that is other than a forced or liquidation sale. In conjunction with the adoption of SFAS 121, an impairment loss on the operating investment property owned by the consolidated joint venture was recognized in fiscal 1996. Such loss is described in more detail in Note 4.
Depreciation on the operating investment property is computed using the straight-line method over an estimated useful life of forty years for the buildings and improvements and five years for the equipment. Acquisition fees paid to an affiliate in connection with the investment in the Arlington Towne Oaks joint venture have been capitalized and are included in the cost of the operating investment property.
Deferred financing costs represent loan financing fees and other long-term debt acquisition costs which have been capitalized and are being amortized on a straight-line basis, which approximates the effective interest method, over the term of the consolidated joint venture's mortgage loan. Amortization of deferred financing costs is included in mortgage interest expense and related financing costs on the accompanying statements of operations.
The consolidated joint venture leases apartment units under leases with terms usually of one year or less. Rental income is recorded on the accrual basis as earned. Security deposits typically are required of all tenants.
For purposes of reporting cash flows, the Partnerships considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
The cash and cash equivalents and escrow deposits appearing on the accompanying balance sheets represent financial instruments for purposes of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The carrying amount of these assets approximates their fair value as of September 30, 1997 and 1996 due to the short-term maturities of these instruments. The long-term debt is also a financial instrument for purposes of SFAS 107. The fair value of the long-term debt is estimated using discounted cash flow analysis based on the current market rate for a similar type of borrowing arrangement (see Note 6).
No provision for income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. Upon sale or disposition of the Partnership's investments, the taxable gain or the taxable loss incurred will be allocated among the partners. In cases where the disposition of the investment involves the lender foreclosing on the investment, taxable income could occur without distribution of cash. This income would represent passive income to the partners which could be offset by each partners' existing passive losses, including any passive loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions --------------------------------------------------------
The General Partners of the Partnership are Fourth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"), and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax losses of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax losses arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management responsibilities: to administer day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow, as defined) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the limited partners equal to 6% based upon their adjusted capital contribution) for services rendered. The Adviser did not earn any basic management fees during the three-year period ended September 30, 1997 due to the lack of distributable cash flow. No incentive management fees have been paid to date.
In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to 3/4% based on the selling price of the property, subordinated to the payment of certain amounts to the Limited Partners. No such fees have been earned to date.
Included in general and administrative expenses for the years ended September 30, 1997, 1996 and 1995 is $85,000, $82,000 and $86,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned $2,000, $2,000 and $1,000, respectively, (included in general and administrative expenses) for the years ended September 30, 1997, 1996 and 1995 for managing the Partnership's cash assets.
4. Operating Investment Property ----------------------------
Operating investment property at September 30, 1997 and 1996 represents the land, buildings and equipment of Arlington Towne Oaks Associates, a joint venture in which the Partnership has a controlling interest, as described below. On August 31, 1982 the Partnership acquired an interest in Arlington Towne Oaks Associates, a Texas general partnership organized to purchase and operate the Bristol Pointe (formerly Towne Oaks) Apartments, a 320-unit apartment complex in Arlington, Texas. The aggregate cash investment by the Partnership for its interest was approximately $5,258,000 (including an acquisition fee of $550,000 paid to the Adviser). The Partnership's original co-venture partner was an affiliate of the Trammell Crow organization. Effective December 31, 1990, the co-venture partner of Arlington Towne Oaks Associates withdrew from the venture and assigned its interest to the Managing General Partner of the Partnership in return for a release of any further obligations. As a result of the assignment, the Partnership assumed control over the affairs of the joint venture.
As discussed in Note 2, the Partnership elected early adoption of SFAS 121 effective for fiscal 1996. The effect of such application was the recognition of an impairment loss on the operating investment property owned by Arlington Towne Oaks Associates. The impairment loss resulted because, in management's judgment, the venture is unlikely to be able to recover the carrying value of the asset within the Partnership's practicable remaining holding period. The Partnership expects to have possible opportunities to sell its remaining investments over the next 2-to-3 years. Arlington Towne Oaks Associates recognized an impairment loss of $1,000,000 to write down the operating investment property to its estimated fair value of approximately $8.3 million as of September 30, 1996. Fair value was estimated using an independent appraisal of the operating property. Such appraisal makes use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis.
The joint venture agreement provides that the Partnership will receive from cash flow, to the extent available, a non-cumulative preferred return, payable monthly, of $483,000 for each year. After the Partnership's preferred return requirements are met, the co-venturer is then entitled to receive quarterly, non-cumulative subordinated returns of $14,000 for each quarter thereafter. The next $300,000 of available annual cash flow in any year is to be distributed 90% to the Partnership and 10% to the co-venturer. The next $200,000 of cash flow in any year is to be distributed 80% to the Partnership and 20% to the co-venturer. Any remaining cash flow is to be used to liquidate any unpaid principal and accrued interest on any notes made by the joint venture to any partners, and any remaining cash flow is to be distributed 70% to the Partnership and 30% to the co-venturer.
Distributions of sale and/or refinancing proceeds will be as follows, after the payment of mortgage debts and to the extent not previously returned to each partner: 1) payment of notes and accrued interest payable to partners, 2) to the Partnership in an amount equal to the Partnership's gross investment, 3) to the manager for any unpaid subordinated management fees, 4) the next $3,000,000 to the Partnership and co-venturer allocated 90% and 10%, respectively, 5) the next $2,000,000 to the Partnership and co-venturer allocated 80% and 20%, respectively, 6) the next $2,000,000 to the Partnership and co-venturer allocated 70% and 30%, respectively (increased by $200,000 for each year or partial year succeeding the fifth year of ownership by the Partnership), 7) remaining balance to the Partnership and co-venturer allocated 60% and 40%, respectively.
Tax profits, as defined, will be allocated to the Partnership and the co-venturer in amounts equal to cash distributions, with the balance of the taxable income allocated 70% to the Partnership and 30% to the co-venturer. Tax losses, as defined, are allocated 80% to the Partnership and 20% to the co-venturer. Profits resulting from the sale or refinancing of the Operating Investment Property will be allocated as follows: 1) to the Partnership and the co-venturer on a proportionate basis to restore any negative capital accounts to zero, 2) any remaining gain equal to the excess of the capital proceeds, as defined, over the aggregate capital balances of all partners, to the Partnership and the co-venturer on a proportionate basis, and 3) to the Partnership and the co-venturer in a manner similar to cash distributions described in the preceding paragraph. Losses from the sale or refinancing of the Operating Investment Property will be allocated as follows: 1) losses equal to the excess of the aggregate positive capital accounts of all partners who have positive capital balances over the capital proceeds, as defined, to the Partnership and the co-venturer on a proportionate basis and 2) remaining losses 70% to the Partnership and 30% to the co-venturer. Internal Revenue Service regulations require partnership allocations of income and loss to the respective partners to have "substantial economic effect". This requirement resulted in the joint venture's net loss for the years ended September 30, 1997, 1996 and 1995 being allocated in a manner different from that provided in the joint venture agreement, as set forth above. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the actual allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the venture, the Partnership and the co-venturer shall loan the required funds to the venture in the proportions of 70% and 30%, respectively. In the event a partner defaults in its obligations to make a loan, the other partner may make all or any part of the loan required by the defaulting partner. Cumulative loans advanced to the joint venture by the Partnership totalled $1,551,000 as of September 30, 1997. Such loans bear interest at the lesser of 12% per annum or the prime rate and are repayable only from the venture's net cash flow or sale or refinancing proceeds. Such loans and the related accrued interest have been eliminated in consolidation.
The following is a summary of property operating expenses for the years ended September 30, 1997, 1996 and 1995 (in thousands):
1997 1996 1995 ---- ---- ---- Property operating expenses: Salaries $ 296 $ 262 $ 263 Repairs and maintenance 261 255 241 Utilities 153 136 105 Insurance 25 23 10 Management fees 87 83 78 Administrative and other 142 128 123 ------- ------ ----- $ 964 $ 887 $ 820 ======= ====== =====
5. Investments in Unconsolidated Joint Ventures --------------------------------------------
At September 30, 1997 and 1996, the Partnership had an investment in one unconsolidated joint venture, Charter Oak Associates, which owned an operating investment property. At October 1, 1995, the Partnership's unconsolidated joint venture investments included Braesridge 305 Associates which also owned an operating investment property. On December 29, 1995, the Partnership assigned its investment interest in Braesridge 305 Associates to an affiliate of its co-venture partners for net cash proceeds of $1,000,000 (see below for a further discussion). The unconsolidated joint ventures are accounted for on the equity method in the Partnership's financial statements. Under the equity method, the assets, liabilities, revenues and expenses of the joint ventures do not appear in the Partnership's financial statements. Instead, the investments are carried at cost adjusted for the Partnership's share of the ventures' earnings, losses and distributions. Condensed combined financial statements of the unconsolidated joint ventures follow. The condensed combined summary of operations for fiscal 1996 includes the results of the Braesridge joint venture through the date of the sale of the Partnership's interest.
Condensed Balance Sheets September 30, 1997 and 1996 (in thousands)
Assets 1997 1996 ---- ----
Current assets $ 676 $ 721 Operating investment property, net 8,770 8,908 Other assets, net 203 210 -------- -------- $ 9,649 $ 9,839 ======== ========
Liabilities and Venturers' Deficit
Current liabilities (including current portion of mortgage notes payable) $ 596 $ 718 Long-term mortgage debt, less current portion 9,883 9,971
Partnership's share of combined deficit (376) (376) Co-venturers' share of combined deficit (454) (474) -------- -------- $ 9,649 $ 9,839 ======== ========
Reconciliation of Partnership's Investment September 30, 1997 and 1996
1997 1996 ---- ----
Partnership's share of combined deficit, as shown above $ (376) $ (376) Partnership's share of current liabilities and long-term debt 188 313 Excess basis due to investment in joint ventures, net (1) 29 31 -------- -------- Losses from unconsolidated joint venture in excess of investment and advances $ (159) $ (32) ======== ========
(1) At September 30, 1997 and 1996, the Partnership's investment exceeds its share of the joint venture's capital and liabilities by approximately $29,000 and $31,000, respectively. This amount, which relates to certain expenses incurred by the Partnership in connection with acquiring its joint venture investment, is being amortized on a straight-line basis over the estimated useful life of the property.
Condensed Combined Summary of Operations For the years ended September 30, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 ---- ---- ----
Rental income $ 2,546 $ 3,200 $ 5,168 Interest and other income 92 101 129 -------- -------- ------- 2,638 3,301 5,297
Interest expense and related financing fees 742 977 1,779 Property operating expenses 1,017 1,686 2,663 Depreciation expense 510 512 640 -------- -------- ------- 2,269 3,175 5,082 -------- -------- ------- Net income $ 369 $ 126 $ 215 ======== ======== =======
Net income: Partnership's share of combined operations $ 313 $ 98 $ 179 Co-venturers' share of combined operations 56 28 36 -------- ------- ------- $ 369 $ 126 $ 215 ======== ======= =======
Reconciliation of Partnership's Share of Operations
1997 1996 1995 ---- ---- ----
Partnership's share of combined operations, as shown above $ 313 $ 98 $ 179 Amortization of excess basis (2) (4) (5) -------- ------- ------ Partnership's share of unconsolidated ventures' income $ 311 $ 94 $ 174 ======= ====== ======
The remaining unconsolidated joint venture is subject to a partnership agreement which determines the distribution of available funds, the disposition of the venture's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the venture. Substantially all of the Partnership's investment in this joint venture is restricted as to distributions.
A description of the unconsolidated ventures' properties and the terms of the joint venture agreements are summarized below:
a) Charter Oak Associates ----------------------
On June 8, 1982, the Partnership acquired an interest in Charter Oak Associates, a Missouri general partnership organized to purchase and operate Charter Oak Apartments, a 284-unit apartment complex in Creve Coeur, Missouri. The Partnership is a general partner in the joint venture. The Partnership's co-venture partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest was approximately $5,289,000 (including an acquisition fee of $530,000 paid to the Adviser). The apartment complex was acquired subject to an institutional nonrecourse first mortgage with a balance of $5,036,000 at the time of closing. At September 30, 1985, Charter Oak Associates refinanced the first mortgage loan on the Charter Oak apartment complex. A non-recourse first mortgage in the amount of $8,600,000 was obtained at that time. The mortgage loan had a term of seven years and bore interest at the rate of 11.3% per year. The proceeds from the refinancing were used to repay the remaining balance on the existing first mortgage loan of $4,670,000, to pay expenses of closing the new loan and for distributions to the joint venture partners. Refinancing proceeds of $3,000,000 and $600,000 were distributed to the Partnership and the co-venturer, respectively, on September 30, 1985. During fiscal 1993, the property's existing debt was refinanced again through the receipt of a loan issued in conjunction with an insured loan program of the U.S. Department of Housing and Urban Development (HUD). The new loan, which had an initial principal balance of $10,262,000, is a nonrecourse obligation secured by the operating investment property and an assignment of rents and leases. The loan, which is fully assumable, has a 35-year maturity and bears interest at a fixed rate of 7.35% . As part of the HUD insured loan program, the operating investment property was required to establish an escrow account for a replacement reserve and other required repairs. The excess loan proceeds, after repayment of the outstanding indebtedness, were used to pay transaction costs and to fund certain of the aforementioned reserve requirements.
The joint venture agreement and an amendment thereto (the "Agreement") dated September 30, 1985 provides that the first distribution of cash flow for any year shall be used collectively to reduce the other partner's deficit. The other partner's deficit is defined to be an amount equal to 10% of the excess aggregate amount required to be loaned to Charter Oak over the aggregate amount actually so loaned to Charter Oak by such partner. During fiscal 1993, the Partnership advanced 100% of the funds required to close the refinancing transaction referred to above, which totalled approximately $25,000. The joint venture agreement provides that the next $220,000 of net cash flow be distributed to the Partnership, on a noncumulative annual basis, payable monthly (preference return of the Partnership) and that the next $19,000 of cash flow be distributed to the co-venturer on a noncumulative annual basis, payable quarterly (preference return of the co-venturer); the next $213,000 of annual cash flow will be distributed 85% to the Partnership and 15% to the co-venturer, and any remaining annual cash flow will be distributed 70% to the Partnership and 30% to the co-venturer. The amount and timing of actual cash distributions are restricted by the Computation of Surplus Cash, Distributions and Residual Receipts as defined under the HUD financing agreement.
Depreciation and an amount of gross taxable income equal to the amount paid to amortize the indebtedness of Charter Oak Associates shall be allocated 94% to the Partnership and 6% to the co-venturer. Any remaining taxable income or tax loss shall be allocated in the same proportions as cash is distributed. Allocations of the venture's operations between the Partnership and co-venturer for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
Any proceeds arising from a refinancing, sale, exchange or other disposition of property will be distributed first to the payment of unpaid principal and accrued interest on any outstanding mortgage loans. Any remaining proceeds will be distributed according to the September 30, 1985 Amendment to the Agreement in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes; $2,230,000 to the Partnership; $200,000 to the co-venturer; $4,000,000 to the Partnership and the co-venturer in the proportions of 85% and 15%, respectively; with the remaining balance to the Partnership and the co-venturer in the proportions of 70% and 30%, respectively, unless distributions of net cash flow and certain proceeds have reached specified levels, in which case the remaining balance is distributed equally.
If additional cash is required in connection with Charter Oak Associates, it may be provided by the Partnership and the co-venturer as loans to Charter Oak Associates. The agreement calls for such loans to be provided 70% by the Partnership and 30% by the co-venturer.
The joint venture entered into a property management contract with an affiliate of the co-venturer, cancelable at the option of the Partnership upon the occurrence of certain events. The management fee is 5% of gross rental revenues.
b) Braesridge 305 Associates -------------------------
On September 30, 1982, the Partnership acquired an interest in Braesridge 305 Associates (Braesridge), a Texas general partnership organized to purchase and operate Braesridge Apartments, a 545-unit apartment complex. The apartment complex is located in Houston, Texas. The aggregate cash investment by the Partnership for its interest was approximately $6,879,000 (including an acquisition fee of $725,000 paid to the Adviser of the Partnership). The Partnership was a general partner in the joint venture. The Partnership's co-venture partners were Stanford Capital Corporation and certain individuals.
On December 29, 1995, the Partnership assigned its interest in Braesridge to an affiliate of the co-venture partners for net cash proceeds of $1 million. Management had been actively marketing the Braesridge Apartments for sale during fiscal 1995 and received several offers from prospective purchasers. The purchase contract signed with the co-venture partners was at a price which exceeded all third party offers. The net sale price for the Partnership's equity interest is based on an agreed upon fair value of the property of approximately $11.7 million. The agreed upon fair market value is supported by management's most recent independent appraisal of the Braesridge Apartments and by the marketing efforts to third-parties which were conducted during fiscal 1995. Under the terms of the Braesridge joint venture agreement, the co-venture partner had the right to match any third-party offer to purchase the property. Accordingly, a negotiated sale to the co-venturer at the appropriate market price represented the most expeditious and advantageous way for the Partnership to sell this investment. The Partnership's investment in the Braesridge Apartments represented 31% of the original investment portfolio. Despite recovering less than 15% of its original cash investment in Braesridge, the Partnership recognized a gain of $2,126,000 in fiscal 1996 in connection with the sale of this venture interest because the cumulative losses and distributions recorded in prior years under the equity method exceeded the Partnership's investment in the joint venture. The Partnership distributed approximately $514,000 of the net sale proceeds, or approximately $20 per original $1,000 investment, in a Special Distribution to the Limited Partners on February 15, 1996. The remaining net sale proceeds of approximately $486,000 were retained by the Partnership as additional working capital reserves.
Taxable income or tax loss of the joint venture through the date of the sale of the Partnership's interest was allocated in the same proportion as cash is distributed and if no cash was distributed, 100% to the Partnership. Allocations of the venture's operations among the Partnership and co-venturers for financial accounting purposes were made in conformity with the allocations of taxable income or tax loss.
The joint venture had entered into a property management contract with an affiliate of the co-venturers for fees equal to 4% of the gross receipts from operations of the apartment complex.
6. Long-term Debt --------------
Long-term debt at September 30, 1997 and 1996 relates to the consolidated joint venture, Arlington Towne Oaks Associates, and is summarized as follows (in thousands):
1997 1996 ---- ---- 9.08% mortgage note due March 1, 2019, payable in monthly installments of $42, including interest, collateralized by the operating investment property. The fair value of this note payable approximated its carrying value as of September 30, 1997 and 1996. $4,783 $4,852 ====== ======
Scheduled maturities of long-term debt are summarized as follows (in thousands):
1998 $ 75 1999 83 2000 90 2001 99 2002 109 Thereafter 4,327 --------- $ 4,783 =========
REPORT OF INDEPENDENT AUDITORS
The Partners Charter Oak Associates
We have audited the accompanying balance sheets of Charter Oak Associates (Partnership) as of September 30, 1997 and 1996, and the related statements of income, changes in venturers' capital (deficit), and cash flows for the each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Charter Oak Associates at September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP --------------------- ERNST & YOUNG LLP
Boston, Massachusetts November 20, 1997
CHARTER OAK ASSOCIATES
Balance Sheets September 30, 1997 and 1996 (In thousands)
1997 1996 ----- ---- Assets Current assets: Cash $ 272 $ 175 Tenant security deposits, funded 82 61 Restricted escrow deposits 299 461 Prepaid expenses 23 24 --------- -------- Total current assets 676 721
Operating investment property: Land 1,420 1,420 Buildings, improvements and equipment 11,997 11,625 -------- -------- 13,417 13,045 Less accumulated depreciation (4,647) (4,137) --------- --------- 8,770 8,908
Deferred expenses (net of accumulated amortization of $28 in 1997 and $21 in 1996) 203 210 -------- --------- $ 9,649 $ 9,839 ======== =========
Liabilities and Venturers' Deficit
Current liabilities: Current portion of long-term debt $ 87 $ 81 Accounts payable and accrued expenses 6 27 Real estate taxes payable 125 118 Accrued interest 61 61 Tenant security deposits 82 61 Payable to property manager - 3 Distributions payable to co-venturer 35 42 Distributions payable to PWIP4 200 325 -------- --------- Total current liabilities 596 718
Long-term debt 9,883 9,971
Venturers' deficit (830) (850) -------- --------- $ 9,649 $ 9,839 ======== =========
See accompanying notes.
CHARTER OAK ASSOCIATES
Statements of Income For the years ended September 30, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 ---- ---- ---- Revenue: Rental income $2,546 $2,499 $2,401 Interest income 21 19 31 Other 71 58 61 ------ ------ ------ 2,638 2,576 2,493
Expenses: Depreciation 510 431 315 Interest expense 742 751 756 Repairs and maintenance 204 267 279 Salaries and related costs 218 276 283 Real estate taxes 162 157 144 Management fees 126 128 123 Utilities 130 126 123 General and administrative 92 90 80 Mortgage insurance 46 50 59 General insurance 32 33 24 Professional fees 7 22 17 Bad debts - 3 6 ------ ------ ------ 2,269 2,334 2,209 ------ ------ ------ Net income $ 369 $ 242 $ 284 ====== ====== ======
See accompanying notes.
CHARTER OAK ASSOCIATES
Statements of Changes in Venturers' Deficit For the years ended September 30, 1997, 1996 and 1995 (In thousands)
PaineWebber Income Paragon/ Properties Charter Oak Four Limited Associates, Partnership Ltd. Total ----------- ---- -----
Balance at September 30, 1994 $ (147) $ (478) $ (625)
Distributions (348) (41) (389)
Net income 242 42 284 --------- ------- -------
Balance at September 30, 1995 $ (253) $ (477) $ (730)
Distributions (325) (37) (362)
Net income 202 40 242 --------- ------- ------- Balance at September 30, 1996 $ (376) $ (474) $ (850)
Distributions (313) (36) (349)
Net income 313 56 369 --------- ------- -------
Balance at September 30, 1997 $ (376) $ (454) $ (830) ======= ======= =======
See accompanying notes.
CHARTER OAK ASSOCIATES
Statements of Cash Flows For the years ended September 30, 1997, 1996 and 1995 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 369 $ 242 $ 284 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation 510 431 315 Amortization of deferred loan costs 7 9 6 Changes in operating assets and liabilities: Tenant security deposits, funded (21) (8) (13) Restricted escrow deposits 162 204 724 Prepaid expenses 1 2 (6) Accounts payable and accrued expenses (21) (22) (10) Real estate taxes payable 7 9 (1) Accrued interest - (1) - Tenant security deposits 21 19 3 Payable to property manager (3) (8) (1) -------- ------- -------- Total adjustments 663 635 1,017 -------- ------- -------- Net cash flows provided by operating activities 1,032 877 1,301
Cash flows from investing activities: Additions to operating investment property (372) (548) (781)
Cash flows from financing activities: Cash distributions to venturers (481) (300) (420) Payment of principal on long-term debt (82) (75) (70) Payment of operating note - - (25) -------- ------- -------- Net cash flows used in financing activities (563) (375) (515) -------- ------- --------
Net increase (decrease) in cash 97 (46) 5
Cash at beginning of year 175 221 216 -------- ------- --------
Cash at end of year $ 272 $ 175 $ 221 ======== ======= ========
Cash paid during the year for interest $ 735 $ 742 $ 749 ======== ======= ========
See accompanying notes.
CHARTER OAK ASSOCIATES Notes to Financial Statements
1. Organization and Nature of Operations -------------------------------------
Charter Oak Associates (Partnership) was organized on June 8, 1982 in accordance with a Partnership Agreement between PaineWebber Income Properties Four Limited Partnership (PWIP4), the general partner, and Paragon/Charter Oak Associates, Ltd. (Limited Partnership). The Partnership was organized to purchase and operate an apartment complex in St. Louis County, Missouri. The complex consists of 284 units.
2. Use of Estimates and Summary of Significant Accounting Policies ---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require 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, 1997 and 1996 and revenues and expenses for each of the three years in the period ended September 30, 1997. Actual results could differ from the estimates and assumptions used.
Tenant Security Deposits - ------------------------
Tenant security deposits are held in a separate bank account in the name of the Partnership. Use of these funds is restricted, and funds can be withdrawn only at the termination of the lease. Funds are returned to the lessee in accordance with the property's lease settlement policy.
Restricted Deposits and Funded Reserves - ---------------------------------------
The agreement with the U.S. Department of Housing and Urban Development (HUD) to insure the long-term debt requires the Partnership to maintain separate escrow accounts for property taxes and property and mortgage insurance premiums and a reserve for replacement of investment property. The funds are held and controlled by a federally insured depository. Use of these funds must be approved by HUD.
Operating Investment Property - -----------------------------
The operating investment property is recorded at cost, reduced by accumulated depreciation, or an amount less than cost if indicators of impairment are present in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Management generally assesses indicators of impairment by a review of independent appraisal reports on the operating investment property. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis.
Depreciation is computed on a straight-line basis based on useful lives of 40 years for the buildings and improvements and 5 years for furniture and fixtures. Professional fees and other costs relating to the formation of the Partnership have been capitalized and are included in the cost of the property. Minor maintenance and repair expenses are charged to expense when incurred, while major renewals and betterments are capitalized.
Deferred Expenses - -----------------
Deferred expenses consist of financing costs, which are being amortized on a straight-line basis, which approximates the effective interest method, over the life of the long-term debt. The amortization of deferred financing costs is included in interest expense on the accompanying income statements.
Income Tax Matters - ------------------
The Partnership is not a taxable entity, and the results of its operations are included in the tax returns of the partners. Accordingly, no income tax provision is reflected in the accompanying financial statements.
Rental Activities - -----------------
The Partnership leases apartment units under leases with terms usually of one year or less. Rental income is recorded as earned. Security deposits are typically required of all tenants.
Reclassification - ----------------
Certain reclassifications have been made to the prior year's financial statements to conform with current year presentation.
Fair Value Estimates - --------------------
The fair value of the Partnership's long-term debt is estimated using discounted cash flow analysis, based on the Partnership's current incremental borrowing rate for a similar borrowing agreement.
3. Partnership Agreement ---------------------
The Partnership Agreement and an amendment thereto dated September 30, 1985 (collectively, the Agreement) provide that the cash flow, as defined in the Agreement, for any year shall first be distributed to a partner in the amount of the other partner's deficit. The other partner's deficit is defined to be an amount equal to 10 percent of the excess aggregate amount required to be loaned to the Partnership, if any, over the aggregate amount actually loaned to the Partnership by such partner. In 1993, the Partnership received partner loan proceeds as part of refinancing its long-term debt. PWIP4 funded 100 percent of the loan, instead of 70 percent as required by the Agreement. This loan was paid in full during 1995. The allocation of cash available for distribution for 1994 included a distribution in the amount of the other partner's deficit.
Cash flow for any year shall next be distributed to PWIP4 in the amount of $220,000 on a noncumulative annual basis, payable monthly (preference return of PWIP4). The next $19,000 will be distributed to the Limited Partnership on a noncumulative annual basis, payable quarterly (preference return of the Limited Partnership); the next $213,000 of annual cash flow will be distributed 85 percent to PWIP4 and 15 percent to the Limited Partnership, and any remaining annual cash flow will be distributed 70 percent to PWIP4 and 30 percent to the Limited Partnership. Actual cash distributions are restricted by the Computation of Surplus Cash, Distributions, and Residual Receipts as defined by the U.S. Department of Housing and Urban Development.
Depreciation and an amount of gross income equal to the amount paid to amortize the indebtedness of the Partnership shall be allocated 94 percent to PWIP4 and 6 percent to the Limited Partnership. Any remaining taxable income or taxable losses shall be allocated in the same proportion as cash distributions.
Any proceeds arising from a refinancing, sale, exchange, or other disposition of property will be distributed first to the payment of unpaid principal and accrued interest on any outstanding mortgage notes. Any remaining proceeds will be distributed in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes; $2,230,000 to PWIP4; $200,000 to the Limited Partnership; $4,000,000 to PWIP4 and the Limited Partnership in the proportions of 85 percent and 15 percent, respectively; with any remaining balance to PWIP4 and the Limited Partnership in the proportions of 70 percent and 30 percent, respectively, unless distributions of net cash flow and certain proceeds have reached specified levels, in which case the remaining balance is distributed equally.
If additional cash is required in connection with the Partnership, it may be provided by PWIP4 and the Limited Partnership as loans (evidenced by operating notes) to the Partnership. Such loans would be provided 70 percent by PWIP4 and 30 percent by the Limited Partnership.
4. Related-Party Transactions --------------------------
The Partnership has a property management contract with an affiliate (property manager) of the Limited Partnership. The management fee to the property manager is 5 percent of gross revenues.
The payable to the property manager of $3,412 at September 30, 1996 represented the balances in an intercompany account maintained between the property manager and the Partnership. This liability was paid in full during fiscal year 1997.
5. Long-Term Debt --------------
Long-term debt consists of a 7.35 percent nonrecourse mortgage secured by the operating investment property and assignment of rents and leases. The mortgage is payable in monthly installments, including principal and interest of $68,094 through August l, 2028, with the final installment due and payable on September l, 2028. In addition, the property submits monthly escrow deposits of $19,000 for tax and insurance escrows and the replacement reserve. The loan is insured by the U.S. Department of Housing and Urban Development.
Scheduled maturities of the long-term debt are as follows (in thousands):
1998 $ 87 1999 94 2000 101 2001 109 2002 118 Thereafter 9,461 --------- $ 9,970 ========= The carrying amount and fair value of the Partnership's long-term debt at September 30, 1997 were $9,970,000 and $9,031,000, respectively.
REPORT OF INDEPENDENT AUDITORS
The Partners Braesridge 305 Associates:
We have audited the accompanying balance sheet of Braesridge 305 Associates (the Partnership) as of September 30, 1995, and the related statements of operations, changes in partners' deficit, and cash flows for the years ended September 30, 1995 and 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Braesridge 305 Associates at September 30, 1995, and the results of its operations and its cash flows for the years ended September 30, 1995 and 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The accompanying financial statements as of December 29, 1995 and for the period October 1, 1995 through December 29, 1995 were not audited by us and, accordingly, we do not express an opinion on them.
/s/ Ernst & Young LLP --------------------- ERNST & YOUNG LLP
Boston, Massachusetts November 1, 1995
BRAESRIDGE 305 ASSOCIATES
BALANCE SHEETS December 29, 1995 and September 30, 1995 (In thousands)
ASSETS
December 29, 1995 September 30, 1995 ----------------- ------------------ (Unaudited)
Cash and cash equivalents $ - $ 40 Real estate tax and insurance escrow deposits 246 164 Property maintenance escrow 36 19 Prepaid insurance 20 33 Other receivables 10 - -------- -------- Total current assets 312 256
Operating investment property, at cost: Land 1,699 1,699 Buildings, improvements and equipment 11,647 11,629 -------- -------- 13,346 13,328 Less accumulated depreciation (3,984) (3,902) -------- -------- Net operating investment property 9,362 9,426
Deferred expenses, net of accumulated amortization of $16 ($13 in 1995) 69 72 -------- --------
Total assets $ 9,743 $ 9,754 ======== ========
LIABILITIES AND PARTNERS' DEFICIT
Cash overdraft $ 165 $ - Accounts payable 50 31 Accrued real estate taxes payable 246 185 Accrued interest 357 432 Other accrued expenses - 34 Tenant security deposits 75 77 Operating loans from partners 516 516 Long-term debt 9,897 9,926 -------- -------- Total liabilities 11,306 11,201
Partners' deficit (1,563) (1,447) -------- --------
Total liabilities and partners' deficit $ 9,743 $ 9,754 ======== ========
See accompanying notes.
BRAESRIDGE 305 ASSOCIATES
STATEMENTS OF OPERATIONS
For the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994
(In thousands)
December 29, September 30, September 30, 1995 1995 1994 ------------ ------------- ------------- (Unaudited) Revenues: Rental revenue $ 702 $ 2,767 $ 2,637 Interest income 1 1 2 Other income 23 36 51 -------- ------- ------- Total revenues 726 2,804 2,690
Expenses: Interest 226 972 932 Depreciation 82 324 307 Salaries and related costs 77 436 471 Repairs and maintenance 246 349 285 Real estate taxes 62 241 231 Utilities 57 236 273 General and administrative 27 95 145 Management fees 29 113 106 Insurance 13 49 48 Professional fees 23 18 23 Other - 39 35 -------- ------- -------
Total expenses 842 2,872 2,856 -------- ------- -------
Net loss $ (116) $ (68) $ (166) ======= ======= =======
See accompanying notes.
BRAESRIDGE 305 ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994
(In thousands)
See accompanying notes.
BRAESRIDGE 305 ASSOCIATES
STATEMENTS OF CASH FLOWS For the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994 Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
See accompanying notes.
BRAESRIDGE 305 ASSOCIATES Notes to Financial Statements
1. Organization and Nature of Operations -------------------------------------
Braesridge 305 Associates (the Partnership) was formed as a general partnership with a cash contribution by Paine Webber Income Properties Four Limited Partnership (PWIP4) of $6,775,000 on September 30, 1982. PWIP4's co-venture partners were Stanford Capital Corporation, a Texas corporation, and Braesridge Apartments, a Texas general partnership. The Partnership was formed for the purpose of acquiring and operating an apartment complex consisting of two phases, Braesridge I and Braesridge II. On the same date, the Partnership acquired from a partner the assets, subject to certain liabilities, of Braesridge I and the adjacent site for Braesridge II. Braesridge II was completed in August 1983. On a combined basis, Phase I and II consist of 545 units.
2. Use of Estimates and Summary of Significant Accounting Policies ---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of December 29, 1995 and September 30, 1995 and revenues and expenses for the period October 1, 1995 to December 29, 1995 and the years ended September 30, 1995 and 1994. Actual results could differ from the estimates and assumptions used.
Cash Equivalents - ----------------
The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Operating Investment Property - -----------------------------
The operating investment property is recorded at cost. Professional fees and other costs relating to the formation of the Partnership have been capitalized and are included in the cost of the property. Depreciation is computed on a straight-line basis based on useful lives of 40 years for the buildings and improvements and 5 years for furniture and fixtures. Minor maintenance and repair expenses are charged to expense when incurred, while major renewals and betterments are capitalized.
In March 1995, the FASB issued statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, (FAS 121) which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addressed the accounting for long-lived assets that are expected to be disposed of. FAS 121 is effective for fiscal years beginning after December 15, 1995 and therefore the Partnership will address FAS 121 in fiscal year 1997. Based on current circumstances management does not believe the effect of adoption will be material.
Deferred Expenses -----------------
Deferred expenses represent loan brokerage fees which are paid in conjunction with the purchase or refinancing of the real property, and are being amortized on a straight-line basis, which approximates the effective interest method, over the expected life of the mortgage loan (see Note 4). The amortization of deferred financing costs is included in interest expense on the accompanying statements of operations.
Rental Activities - -----------------
The Partnership leases apartment units under leases with terms usually of one year or less. Rental income is recorded as earned. Security deposits are typically required of all tenants.
Federal Income Taxes - --------------------
No provision is made for federal income taxes, as the income or loss of the Partnership is reportable in the tax returns of the partners.
Reclassifications - -----------------
Certain prior year amounts have been reclassified to conform with current period presentation.
3. Related Party Transactions --------------------------
In prior years, the Partnership charged Stanford Capital Corporation (Stanford) and Braesridge Apartments for cash deficiency funds under the terms of a guarantee of payment of expenses and a cash flow preferences agreement which were in effect through September 30, 1986. An allowance for uncollectibility was established at September 30, 1986 for unpaid amounts of $588,590. Of this total, $300,000 relates to cash flow preferences which the Partners have agreed are to be repaid by distribution as a preferred item upon dissolution of the Partnership.
Affiliates of Stanford provided property repair and maintenance services totaling $65,206 and $153,796 during the years ended September 30, 1995 and 1994, respectively. Additionally, management fees and fees for accounting services rendered totaling $135,738 and $137,758 were paid by the Partnership to Stanford and affiliates of Stanford for fiscal year 1995 and 1994, respectively. Management fees are paid by the Partnership to Stanford and affiliates of Stanford at .50% and 3.5%, respectively, of certain gross revenues.
As provided for in the Partnership agreement, the first $100,000 of deficit funding is to be treated as a special operating loan. The special operating loans from partners accrue interest on principal only at 16%. Any deficit funding thereafter is to be treated as an operating loan which shall accrue interest on principal only at the greater of Bank of Boston prime plus 1% or 12%. The prime rate at September 30, 1995 was 8.75% and at September 30, 1994 was 7.75%. During 1995, the partners loaned an additional $81,500 to the Partnership under the same terms stated previously. Of the total special operating and operating loans at September 30, 1995, $223,955, $178,250, and $66,795 is payable to Braesridge Apartments, PWIP4, and Stanford, respectively. Interest incurred on the special operating loans and operating loans totaled $57,427 and $50,500 during 1995 and 1994, respectively. Interest payable to the partners on the special operating and operating loans was $357,393 and $299,965 at September 30, 1995 and 1994, respectively. See Notes 6 and 8 for additional information regarding obligations to partners.
4. Long-Term Debt --------------
Effective August 1, 1994, the Partnership modified its mortgage obligation. The new note is secured by the operating investment property and requires principal and interest payments of $84,413 on the first day of each month beginning September 1994. The interest rate on the new obligation is 9% with provisions to adjust the rate after the first 7 years of the note. The life of the mortgage obligation is not to exceed 25 years. The agreement contains a call option that, with six months advance written notice on either the 7th, 14th, or 21st anniversary date of the note, would require the payment of the unpaid principal and accrued interest. Given 30 days advance written notice, the Partnership is allowed to make prepayments of up to 10% of the original principal on any interest paying date during the first 7 years of the note without prepayment consideration. The entire balance may be prepaid during the six full calendar months immediately preceding the 7th, 14th, and 21st anniversary date of the note or immediately preceding the maturity date of August 1, 2019, given 30 days advance written notice.
The note payments due in each of the next five fiscal years and thereafter are as follows (in thousands):
1996 $ 125 1997 136 1998 149 1999 163 2000 178 Thereafter 9,177 --------- $ 9,928 =========
Additionally, the partnership is required to make property maintenance escrow payments of $16,667 each month that the escrow does not maintain a balance of $300,000. Amounts in the property maintenance escrow are to be used, subject to approval by the lender, for major repairs, replacements, and renovations to the property or to offset operating deficits incurred in connection with the property. The partnership is also required to make real estate taxes escrow payments.
5. Capital Expenditure Reserve ---------------------------
Under the Partnership agreement, the Partnership shall establish and maintain a separate reserve to be used for capital repairs and replacements to the property. Additionally, amounts in the reserve may be temporarily used for working capital purposes. At September 30, 1995 and 1994, there were no funds reserved for capital repairs and replacements to the property under the provisions of the Partnership agreement.
6. Partners' Deficit -----------------
The Partnership agreement provides that the net cash flow (as defined), after certain adjustments, shall be distributed monthly as a preferred return to PWIP4 from the date of the agreement as follows: September 30, 1983 - $510,000; September 30, 1984 - $555,000; September 30, 1985 and thereafter - $600,000. Any such amounts not distributed prior to sale of the property will be distributed as a preference item to PWIP4 upon dissolution of the Partnership. Unpaid amounts at September 30, 1995 total $6,300,000. If any net cash flow remains after the payment to PWIP4 and payment of interest on the special operating loans for years subsequent to September 30, 1995, a noncumulative annual preferred return of up to $200,000 will be paid to Stanford Capital Corporation and Braesridge Apartments (the "remaining partners") on a quarterly basis. Any net cash flow remaining after payment of the preferred returns subsequent to September 30, 1995 will be distributed annually as follows: the first 100,000 distributed 75% to PWIP4 and 25% to the remaining partners and any remainder distributed 50% to PWIP4 and 50% to the remaining partners (see Note 8).
If there is a sale, exchange, or refinancing of encumbered operating investment property, the first payment (after certain adjustments) will be to PWIP4 to the extent of its gross investment (presently $6,775,000), the next will be to pay the principal and any accrued interest thereon of any outstanding special operating loans, the next $2,250,000 will be to the remaining partners, the next $1,000,000 will be to PWIP4, and the next $500,000 will be to the remaining partners. Any excess will be distributed 50% to PWIP4 and 50% to the remaining partners (see Note 8).
Taxable income or loss in each year shall be allocated in accordance with the partners' tax basis interests in the partnership. Additional working capital required in connection with operating the property prior to September 30, 1986 was to be provided by the remaining partners. Working capital required subsequent to September 30, 1986 is to be provided by the partners as loans to the Partnership.
7. Uncertainty -----------
The Partnership has incurred recurring operating losses and, as a result, has a working capital deficiency and deficit capital accounts. The continued operations of the Partnership are dependent upon additional financial support from the partners. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments to reflect possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Partnership to continue as a going concern.
8. Assignment of Partnership Interest ----------------------------------
On December 29, 1995, PWIP4 assigned its entire partnership interest to Braesridge 1995 Equity (Braesridge), an affiliate of the co-venture partners, for net cash proceeds of $1,000,000. Under the terms of the assignment, PWIP4 relinquished all rights and obligations associated with its interest in the Partnership, including any loans outstanding and interest related thereto.