UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 0-15036
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
(Exact name of registrant as specified in its charter)
Delaware 04-2841746
(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 439-8118
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_____
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
December 14, 1984, as supplemented
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
1996 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-5
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure II-5
Part III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners and
Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-19
PART I
Item 1. Business
Paine Webber Qualified Plan Property Fund Four, LP (the "Partnership") is
a limited partnership formed in October 1984 under the Uniform Limited
Partnership Act of the State of Delaware for the purpose of investing in a
diversified portfolio of income-producing operating properties through land
purchase-leaseback transactions and first mortgage loans. The Partnership sold
$44,849,650 in Limited Partnership Units (896,993 Units at $50 per Unit) from
December 14, 1984 to December 13, 1985 pursuant to a Registration Statement
filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-93962).
Limited Partners will not be required to make any additional capital
contributions.
The Partnership originally owned land and made first mortgage loans
secured by buildings with respect to six operating properties. As of August 31,
1996, the Partnership's mortgage loan and land lease investments on two of the
original properties were still outstanding and the Partnership owned two
operating properties directly as the result of foreclosures resulting from
defaults on the Partnership's mortgage loans. The Partnership's investment
properties and security for its mortgage loan investments are described below.
Property name Type of Property and Type of
and Location Date of Investment Size Ownership (1)
- -------------- ------------------ ---- -------------
Willow Creek Apartments Apartments 138 Units; Fee ownership
Wichita, KS 10/31/85 7.05 acres of land and
of land first mortgage
lien on
improvements
Martin Sunnyvale Research and 39,286 net Fee ownership
Research and Development Center leasable of land and
Development Center (2) 12/20/85 sq. ft.; improvements
Sunnyvale, CA 2.5 acres
of land
Bell Forge Square Shopping Center 126,890 net Fee ownership
Shopping Center (3) 4/29/86 leasable of land and
Nashville, TN sq. ft.; improvements
11 acres
of land
Park South Apartments 240 Units; Fee ownership
Apartments (4) 12/29/88 19 acres of land and
Charlotte, NC of land first mortgage
lien on
improvements
(1)See Notes to the Financial Statements filed with this Report for a
description of the transactions through which the Partnership has acquired
these real estate investments.
(2)On July 12, 1991, the Partnership foreclosed under the terms of the mortgage
loan secured by the Martin Sunnyvale Research and Development Center for
non-payment of the required monthly payments of interest. The Partnership has
been operating the property utilizing the services of a local management
company since the date of foreclosure. See Note 5 to the Financial Statements
accompanying this Annual Report for a further discussion of this investment.
(3)On October 4, 1991, the Partnership received a deed in lieu of foreclosure
on the mortgage loan secured by the Bell Forge Square Shopping Center due to
non-payment of the required monthly payments of interest in accordance with
the terms of the loan. The Partnership has been operating the property
utilizing the services of a local management company since the date of
foreclosure. See Note 5 to the Financial Statements accompanying this Annual
Report for a further discussion of this investment.
(4)The Partnership owns a 77% interest in the land underlying the Park South
Apartments and has an equivalent interest in the related secured mortgage
loan. The remaining 23% interest in the land and mortgage loan receivable is
owned by an affiliated partnership, PaineWebber Mortgage Partners Five, L.P.
In addition to the above properties, the Partnership previously had
investment interests in the Cordova Creek Apartments, a 196-unit, garden-style
apartment complex in Memphis, Tennessee and The Corner at Seven Corners Shopping
Center, a 70,890 leasable square foot shopping center located in Fairfax,
Virginia. On February 20, 1990, the Partnership foreclosed under the terms of
the mortgage loan secured by the Cordova Creek Apartments for non-payment of the
required monthly payments of interest in accordance with the terms of the loan.
The Partnership operated the property, utilizing the services of a local
management company, for more than five years during which time the Partnership
received the majority of the net cash flow generated from property operations
after capital improvements. The Partnership owned a 96.5% interest in the
Cordova Creek operating property. The remaining 3.5% interest in the property
was owned by an affiliated partnership, PaineWebber Qualified Plan Property Fund
Three, LP ("QP3"). On April 12, 1995, the Partnership sold the property to an
unaffiliated third party for $9,100,000. After payment of required transaction
costs, including payment to QP3 for its 3.5% equity interest, the net proceeds
realized by the Partnership from the sale transaction totalled approximately
$8.7 million. The Partnership realized a gain of approximately $1.8 million on
the sale of Cordova Creek.
The mortgage loan secured by The Corner at Seven Corners Shopping Center
became prepayable in February 1995. On December 16, 1994, the borrower notified
the Partnership of its intent to prepay the loan and exercise the option to
purchase the land during 1995. On November 22, 1995, the borrower of The Corner
at Seven Corners loan prepaid the Partnership's first leasehold mortgage loan
and purchased the Partnership's interest in the underlying land for total
consideration of $9,628,000. The principal balance of the mortgage loan was
$6,188,000, and the Partnership's cost basis in the land was $2,062,000.
Pursuant to the ground lease, the Partnership received approximately $1.4
million in excess of its land investment as its share of the appreciation in
value of the operating investment property above a specified base amount.
The Partnership's investment objectives are to:
(1) preserve and protect Limited Partners' capital and related buying power;
(2) provide the Limited Partners with cash distributions from investment
income; and
(3) achieve long-term capital appreciation in the value of the Partnership's
investments.
Through August 31, 1996, the Limited Partners had received cumulative cash
distributions totalling approximately $49,856,000, or $1,141 per original $1,000
investment for the Partnership's earliest investors. This return includes a
distribution of $215 per original $1,000 investment following the sale of the
Cordova Creek Apartments in June 1995 ($195 from the sale of Cordova Creek and
$20 of excess Partnership reserves) and a distribution of $214 per original
$1,000 investment following the mortgage prepayment and related land sale of The
Corner at Seven Corners Shopping Center. At August 31, 1996, the Partnership
retains an interest in four of the six properties underlying its original
mortgage loan and land investments.
As noted above, to date the Partnership has made distributions of capital
proceeds to the Limited Partners totalling $429 per original $1,000 investment.
The Partnership's success in meeting its capital appreciation objective will
depend upon the proceeds received from the final liquidation of its remaining
investments. The amount of such proceeds will ultimately depend upon the value
of the underlying investment properties at the time of their final liquidation,
which cannot presently be determined. The Partnership expects to finance or sell
its investments and have its mortgage loans repaid from time to time. It is
expected that most sales and repayments will be made after a period of between
seven and fifteen years after the conclusion of the offering period, although
sales and repayments may occur at earlier or later dates. Due to the combination
of relatively low mortgage interest rates and increased availability of funds
for sales and mortgage refinancings which has existed over the past three years,
the likelihood of the Partnership's loans being prepaid has increased. As
discussed further above and in Item 7, the borrower on the loan secured by The
Corners at Seven Corners Shopping Center approached the Partnership regarding a
potential prepayment transaction during fiscal 1995 and completed such a
transaction during fiscal 1996. In determining the appropriate timing for the
sale of any of the Partnership's wholly-owned investment properties, the
Managing General Partner will consider such factors as the amount of
appreciation in value, if any, to be realized, the risks of continued investment
and the anticipated advantages to be gained from continuing to hold the
investment. The proceeds from such sales, financings or refinancings of the
investments will not be reinvested but will be distributed to the Partners, so
that the Partnership will in effect be self-liquidating.
The Partnership's operating properties and the properties securing its
mortgage loan investments 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. Apartment properties in all markets also compete with
the local single family home market for prospective tenants. The availability of
low home mortgage interest rates over the past several years has generally
caused this competition to increase in all areas of the country. The shopping
center and the research and development center compete for long-term commercial
tenants with numerous projects of similar type generally on the basis of rental
rates, location and tenant improvement allowances. At the present time, real
estate values for retail shopping centers in certain markets are being adversely
impacted by the effects of overbuilding and consolidations among retailers which
have resulted in an oversupply of space. As discussed further in Item 7, during
fiscal 1996 real estate values for R&D office properties in Northern California
recovered somewhat as a result of the resurgence in the growth of the high
technology industries.
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, a 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 are Fourth Qualified Properties,
Inc. and Properties Associates 1985, L.P. (the "General Partners"). Fourth
Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the
Managing General Partner of the Partnership. The Associate General Partner is
Properties Associates 1985, L.P., a Virginia limited partnership, certain
limited partners of which are also officers of the Adviser and the Managing
General Partner. Subject to the Managing 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. Properties
As of August 31, 1996, the Partnership owned, and had leased back to the
sellers, the land related to the two investments referred to under Item 1 above
to which reference is made for the description, name and location of each
investment. Additionally, as of August 31, 1996 the Partnership owned two
properties directly as a result of foreclosures resulting from defaults on the
Partnership's mortgage loans receivable as noted in Item 1.
Occupancy figures for each fiscal quarter during 1996 along with an
average for the year, are presented below for each property:
Percent Occupied At
-----------------------------------------------
Fiscal
1996
11/30/95 2/29/96 5/31/96 8/31/96 Average
-------- ------- ------- ------- -------
Willow Creek Apartments 88% 90% 93% 95% 92%
Martin Sunnyvale Research
and Development Center 100% 100% 100% 100% 100%
Bell Forge Square Shopping
Center 97% 97% 96% 100% 98%
Park South Apartments 94% 90% 92% 94% 93%
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 Qualified Properties, Inc. and Properties
Associates ("PA"), which are the 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 Qualified Plan
Property Fund Four, LP, PaineWebber, Fourth Qualified Properties, Inc. and PA
(1) failed to provide adequate disclosure of the risks involved; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs, who
purported to be suing on behalf of all persons who invested in Paine Webber
Qualified Plan Property Fund Four, LP, also alleged that following the sale of
the partnership interests, PaineWebber, Fourth Qualified Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Fourth Qualified
Properties, 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 have agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which has been preliminarily approved by the court and provides for the complete
resolution of the class action litigation, including releases in favor of the
Partnership and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships 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.
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 is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleges, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims as barred
by applicable securities arbitration regulations. Mediation hearings are
scheduled to be held in December 1996. The eventual outcome of this litigation
and the potential impact, if any, on the Partnership's unitholders cannot be
determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber affiliates could be entitled to
indemnification for expenses and liabilities in connection with the litigation
described above. However, PaineWebber has agreed not to seek indemnification for
any amounts it is required to pay in connection with the settlement of the New
York Limited Partnership Actions. At the present time, the General Partners
cannot estimate the impact, if any, of the potential indemnification claims on
the Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome of
these matters has been made in the accompanying financial statements of the
Partnership.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At August 31, 1996, there were 7,571 record holders of Units in the
Partnership. There is no public market for the resale of Units, and it is not
anticipated that a public market for Units will develop. The Managing General
Partner will not redeem or repurchase Units.
Item 6. Selected Financial Data
PaineWebber Qualified Plan Property Fund Four, LP
For the years ended August 31, 1996, 1995, 1994, 1993 and 1992
(In thousands, except per Unit data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $1,287 $ 2,150 $ 1,963 $ 2,005 $ 1,852
Operating income $1,140 $ 1,375 $ 1,250 $ 1,297 $ 1,140
Recovery of (provision for)
possible investment loss $ 900 - $ (150) $ (250) $ (800)
Gain on sale of land $ 1,378 - - - -
Gain on sale of
investment property
held for sale - $ 1,779 - - -
Income from
investment properties
held for sale $ 1,034 $ 1,274 $ 1,703 $ 1,494 $ 1,437
Net income $ 4,452 $ 4,428 $ 2,803 $ 2,541 $ 1,777
Per Limited Partnership Unit:
Net income $ 4.91 $ 4.89 $ 3.09 $ 2.80 $ 1.96
Cash distributions from
operations $ 1.77 $ 3.00 $ 3.00 $ 3.00 $ 3.24
Cash distributions from
sale, refinancing and
other disposition
transactions $ 10.70 $ 10.75 - - -
Total assets $ 22,801 $29,551 $ 37,461 $37,429 $37,586
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 net income and cash distributions per Limited Partnership Unit
are based upon the 896,993 Limited Partnership Units outstanding during each
year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership offered Limited Partnership Interests to the public from
December 14, 1984 to December 13, 1985 pursuant to a Registration Statement
filed under the Securities Act of 1933. Gross proceeds of $44,849,650 were
received by the Partnership and, after deducting selling expenses and offering
costs, approximately $37,650,500 was originally invested in six operating
property investments in the form of first mortgage loans and land
purchase-leaseback transactions. Since the time that the original investments
were made, the Partnership has assumed direct ownership of the Cordova Creek,
Martin Sunnyvale and Bell Forge Square properties as a result of foreclosure
proceedings resulting from uncured monetary defaults on the Partnership's first
mortgage loans. During fiscal 1995, the Partnership sold the Cordova Creek
Apartments, and as discussed further below, in fiscal 1996 the borrower of the
mortgage loan secured by The Corner at Seven Corners Shopping Center prepaid the
loan and purchased the Partnership's interest in the underlying land. The net
proceeds of both transactions were distributed to the Limited Partners.
On November 22, 1995, the borrower of The Corner at Seven Corners loan
prepaid the Partnership's first leasehold mortgage loan and purchased the
Partnership's interest in the underlying land for total consideration of
$9,628,000. Such consideration included repayment of the principal balance of
the mortgage loan, of $6,188,000, plus interest accrued through November 22,
1995, of $43,000. The Partnership's cost basis in the land was $2,062,000.
Pursuant to the ground lease, the Partnership received $1,378,000 in excess of
its land investment as its share of the appreciation in value of the operating
investment property above a specified base amount. The net proceeds from this
prepayment transaction were distributed to the Limited Partners as part of a
special distribution paid on January 31, 1996 in the amount of approximately
$9,598,000, or $214 per original $1,000 investment. Management believes that the
amount paid to the Partnership under the terms of the ground lease reflected the
fair value of the property as of the date of the prepayment transaction, as
supported by the Partnership's most recent independent appraisal. As a result of
the dispositions of the Cordova Creek and The Corner at Seven Corners
investments, cash flow from the Partnership's remaining investments was not
sufficient to support the prior distribution rate of 5.75% per annum on
remaining invested capital. As a result, the distribution rate was reduced to
4.5% per annum effective for the payment made on April 15, 1996 for the quarter
ended February 29, 1996.
The Partnership's wholly-owned, 39,000 square foot Martin Sunnyvale
Research and Development Center was 100% occupied by three tenants as of August
31, 1996. During fiscal 1996, real estate values for R&D office properties in
Northern California recovered somewhat, after several years of depressed
conditions, as a result of the resurgence in the growth of the high technology
industries. Such recovery was evident in the leasing activity at the Martin
Sunnyvale property during fiscal 1996. During the fourth quarter, a tenant
occupying 9,502 square feet exercised its option to extend its lease for an
additional two years. The lease renewal was negotiated at a rental rate 40%
higher than the previous rental rate. A second tenant occupying 12,334 square
feet opted not to renew its lease, which had an expiration date of February 28,
1997. The lease was terminated effective August 27, 1996 when a new tenant, a
bio-technology firm, signed a five-year lease at a rental rate 60% higher than
the rate paid by the prior tenant. The third tenant, which occupies 17,784
square feet, plans to vacate at the end of its lease term in November 1996. The
property manager and leasing agent are working closely with prospective tenants
to re-lease this space at a higher rental rate. Declining market vacancy levels
and increasing rental rates, together with the favorable terms achieved on the
two leases described above, contributed to a significant increase in the
estimated fair value of the Martin Sunnyvale property as of August 31, 1996. The
current estimated fair value is slightly higher than the estimated value as of
the fiscal 1991 date of the Partnership's foreclosure acquisition, of
$3,400,000, but remains substantially below the Partnership's original cost
basis in the Martin Sunnyvale land and loan investments, of $5,100,000. As
previously reported, during fiscal 1994 the Partnership engaged the management
and leasing agent to explore the market for potential buyers for the Martin
Sunnyvale property. Subsequent to the time that the Partnership began to market
the property for sale, the Partnership was notified by a California state water
agency of a potential environmental problem at Martin Sunnyvale. As a result of
governmental required testing, management has learned that there has been a
contamination of the underground soil and water at the site. The state water
agency has issued a final report identifying two tenants which had occupied the
property prior to 1985 and may have caused the potential environmental problem.
Both prior tenants are Fortune 500 companies and both have been ordered at their
own expense to perform the necessary testing, cleanup and documentation as
required by the California state water agency. Management has engaged local
counsel to monitor all legal actions to insure that the Partnership's rights are
fully protected. In addition, management will seek full indemnification from the
parties identified as being responsible. The Partnership had suspended its
marketing efforts during fiscal 1995 and 1996 as a result of this environmental
matter. Subsequent to August 31, 1996, management began to analyze whether
sufficient progress has been made in the remediation process to allow for the
continuation of the marketing efforts. Management does not believe that this
situation will have any long-term impact on the market value of the Martin
Sunnyvale property.
At the Partnership's other wholly-owned commercial investment property,
the Bell Forge Square Shopping Center in Nashville, Tennessee, the occupancy
level at August 31, 1996 was 100%. Although Discovery Zone, which occupies 9% of
the center's net rentable area, has filed for protection under Chapter 11 of the
U.S. Bankruptcy Code, it continues to pay its post-petition rent and operate its
store at Bell Forge Square. While there are likely to be some store closings as
part of the company's bankruptcy reorganization plan, it is uncertain at this
time whether the Bell Forge Square location would be affected by such actions.
Subsequent to August 31, 1996, a 6,402 square foot furniture store, occupying 5%
of the center's rentable area, closed its operations after generating poor sales
despite strong marketing efforts. This tenant remains current on its rental
obligations to date although it seeks to terminate its lease as soon as a new
tenant can be found. The property's leasing team has begun marketing this vacant
space to prospective tenants. At the present time, real estate values for retail
shopping centers in certain markets are being adversely impacted by the effects
of overbuilding and consolidations among retailers which have resulted in an
oversupply of space. Current market conditions in the Nashville, Tennessee
submarket in which Bell Forge Square is located remain strong. It remains to be
seen whether the Bell Forge Square property will eventually be affected by this
general trend.
The mortgage loan secured by the Willow Creek Apartments bears interest at
a rate of 11.00% per annum. As previously reported, since current market
interest rates for first mortgage loans are considerably lower than this rate,
and with the continued availability of credit in the capital markets for real
estate transactions, the likelihood of the Partnership's mortgage loan
investment being prepaid has been high since the time that the terms of such
mortgage loan allowed for prepayment. The Willow Creek loan became prepayable in
November 1995. However, the Willow Creek loan includes a prepayment premium for
any prepayment between November 1995 and October 2000 at rates between 5% and 1%
of the mortgage loan balance. The average occupancy level at Willow Creek for
the quarter ended August 31, 1996 was 95%, up from 93% for the previous quarter
and 86% for the same period a year ago. This was the fifth straight quarterly
increase in average occupancy at Willow Creek. These improvements in occupancy
are the result of an aggressive marketing program that has included the use of
lower rental rates, concessions and shorter than one-year lease terms. The
owner's property management team expects to implement rental rate increases in
the second quarter of fiscal 1997.
The average occupancy level at Park South Apartments in Charlotte, North
Carolina, was 94% for the quarter ended August 31, 1996. Operations of the
property continue to fully support the debt service and ground lease payments
owed to the Partnership in addition to providing a small amount of supplemental
rent under the terms of the ground lease. Over the past year, more than 3,900
new apartment units have been added to the overall Charlotte market.
Approximately 1,500 of these new units are in Southeast Charlotte, where Park
South is located, and 708 of these new units are in Park South's submarket. In
addition, a new rental community is under construction within one mile of Park
South which will include 400 rental units, a retail center and a movie theater.
This property's pre-leasing program began in late August. In order to remain
competitive with these new units, Park South currently offers reduced rental
rates and/or discounted move-in rates to prospective tenants. As an incentive to
renew leases, current tenants are offered minimal rental rate increases at the
expiration of their leases. The use of rental concessions and renewal incentives
is expected to continue during fiscal 1997. Park South's capital improvement
program continues to progress in line with the owner's budget. In addition to
replacing carpeting, vinyl flooring, appliances and heating and air conditioning
units on an as-needed basis, renovations to the clubhouse, including the
addition of a fitness room and business center, are underway and were 60%
completed as of August 31, 1996.
At August 31, 1996, the Partnership had available cash and cash equivalents
of $2,060,000. Such cash and cash equivalents will be used for the working
capital needs of the Partnership, distributions to the partners and, if
necessary, for tenant improvement expenses and other leasing costs of the
Partnership's wholly-owned investment properties. The source of future liquidity
and distributions to the partners is expected to be through cash generated from
the Partnership's real estate and mortgage loan investments, the repayment of
the mortgage loans receivable and the future sales or refinancings of the
underlying land and the investment properties. Such sources of liquidity are
expected to be adequate to meet the Partnership's needs on both a short-term and
long-term basis.
Results of Operations
1996 Compared to 1995
The Partnership's net income increased by $24,000 for the year ended August
31, 1996, when compared to the prior year, despite a decrease in the
Partnership's operating income of $707,000. This decrease in operating income,
together with a gain of $1,779,000 recognized in fiscal 1995 from the sale of
the Cordova Creek Apartments and a decrease in income from investment properties
held for sale of $240,000, were offset by a recovery of $900,000 from prior
provisions for possible investment loss with respect to the Martin Sunnyvale
property, a $472,000 recovery of an allowance for uncollectible amounts related
to the Partnership's mortgage loans receivable and a gain of $1,378,000
recognized in fiscal 1996 in connection with the sale of the land underlying The
Corner at Seven Corners Shopping Center. Operating income decreased primarily as
a result of a decrease in revenues of $863,000. Revenues decreased mainly due to
reductions in interest earned on mortgage loans of $538,000 and land rent
revenue of $310,000. Interest earned on mortgage loans and land rent revenue
decreased as a result of The Corner at Seven Corners mortgage repayment and
related land sale which occurred in November 1995. The decline in revenues was
partially offset by a decrease of $84,000 in both management fees and general
and administrative expenses. Management fees decreased due to a reduction in
adjusted capital contributions, upon which such fees are based, as a result of
the capital distributions which followed the sales of the Cordova Creek
Apartments and The Corner at Seven Corners investments. General and
administrative expenses declined as a result of a decrease in certain required
professional services in the current year.
The decrease in income from operations of investment properties held for
sale is primarily attributable to the inclusion of the operating results of the
Cordova Creek Apartments, through the date of sale in April 1995, in the prior
year's income. The decrease in income from Cordova Creek was partially offset by
an increase in income at the Bell Forge Square Shopping Center. Net income
increased at Bell Forge Square primarily due to an increase in rental income of
$83,000 and a decrease in capital improvement expenditures of $88,000. Rental
income increased due to an increase in occupancy from an average of 94% in
fiscal 1995 to an average of 98% for the current fiscal year. Capital
improvement expenditures were significantly higher in the prior year due to the
repair and improvement of the property's exterior facade. In accordance with the
Partnership's accounting policy for assets held for sale, capital improvement
costs are expensed as incurred.
The $900,000 recovery of possible investment loss in fiscal 1996 resulted
from the significant increase in the estimated fair value of the Martin
Sunnyvale property due to the leasing activity and improving market conditions
discussed further above. In accordance with the Partnership's policy of
accounting for foreclosed assets, increases in the estimated fair value of such
assets result in reductions of the related valuation allowance, but not below
zero. The $472,000 balance of a general loan loss reserve was reversed during
fiscal 1996 as well. Subsequent to the repayment in full of the mortgage loan
secured by The Corner at Seven Corners Shopping Center in fiscal 1996, the
Partnership's two remaining mortgage loans are secured by residential apartment
properties. As a result of the continued improvement in the operating
performance of these two properties and in the market for residential apartment
properties in general, management determined that this reserve account was no
longer required.
1995 Compared to 1994
The Partnership's net income increased by $1,625,000 for the year ended
August 31, 1995, when compared to the prior year. The primary reason for the
increase in net income was the gain realized by the Partnership from the sale of
the Cordova Creek Apartments on April 12, 1995 of $1,779,000. In addition,
operating income increased by $125,000 primarily as a result of an increase in
interest income on cash equivalents of $141,000. Interest income increased due
to higher interest rates earned on invested cash reserves in fiscal 1995 when
compared to the prior year and a significant increase in average cash balances
as a result of the receipt and temporary investment of the Cordova Creek sale
proceeds. As discussed further above, the net proceeds of $8.7 million were
received in April 1995 and were invested pending the distribution to the Limited
Partners which occurred in June 1995. In addition, land rent revenue increased
by $46,000 due to an increase in additional rent received under the terms of The
Corner at Seven Corners and Park South ground leases. The increases in interest
income earned on short-term investments and land rent revenue were partially
offset by an increase in general and administrative expenses of $74,000. General
and administrative expenses increased mainly due to an increase in legal and
other professional fees as a result of the potential environmental problem
referred to above at the wholly-owned Martin Sunnyvale property.
The gain realized from the sale of the Cordova Creek Apartments and the
increase in the Partnership's operating income were partially offset by a
decrease in income from operations of investment properties held for sale of
$429,000 in fiscal 1995. This decrease was partly a result of the sale of the
Cordova Creek Apartments on April 12, 1995, as less than eight months of Cordova
Creek's operations were included in the fiscal 1995's results. In addition,
significant capital improvement expenses were incurred at the Bell Forge Square
Shopping Center during fiscal 1995 in connection with the repair and improvement
of the property's exterior facade. As noted above, in accordance with the
Partnership's accounting policy for assets held for sale, capital improvement
costs are expensed as incurred.
1994 Compared to 1993
Net income was comprised of operating income and income from operations of
the investment properties held for sale. The Partnership's net income increased
by $262,000 for the year ended August 31, 1994 when compared to the prior year.
Net income increased primarily as a result of an increase in income from
investment properties held for sale. This increase in the combined net operating
results of the Cordova Creek, Bell Forge Square and Martin Sunnyvale properties,
of $209,000, was primarily due to increases in rental income at Cordova Creek
and Bell Forge Square. Rental income at Cordova Creek increased due to an
increase in rental rates and a slight increase in occupancy. Rental income
increased at Bell Forge Square as a result of a significant increase in
occupancy from 85% at August 31, 1993 to 95% at August 31, 1994. In addition,
property operating expenses decreased at both of these properties. The increases
in rental income and decreases in property operating expenses at Cordova Creek
and Bell Forge Square were partially offset by increases in real estate taxes at
both properties, which resulted from the receipt of tax refunds in the prior
year. Net operating income at Martin Sunnyvale remained relatively unchanged in
fiscal 1994 when compared to fiscal 1993 as a small increase in rental income
was offset by an increase in property operating expenses. Net income also
increased as a result of a decrease of $100,000 in the provision for possible
investment loss. The provision represents the net adjustments to the carrying
values of the Partnership's investment properties held for sale to reflect
changes in management's estimate of the fair values of such properties. In
fiscal 1993, the Partnership recognized a net provision of $250,000 comprised of
a write down of the Sunnyvale property in the amount of $550,000, offset by an
adjustment to reduce the Bell Forge valuation account by $300,000 to reflect an
increase in its estimated fair value over the prior year. In fiscal 1994, the
Partnership recognized a provision of $150,000 to reflect a further decline in
the estimated fair value of the Sunnyvale property. The increase in the income
from investment properties held for sale and the decrease in the provision for
possible investment loss were partially offset by a small decrease in the
Partnership's operating loss of $47,000 mainly due to a decrease in land rent
revenue of $50,000. This decrease in land rent revenue was the result of a
decline in the additional rents received from The Corner at Seven Corners land
lease.
Inflation
The Partnership completed its eleventh full year of operations in 1996 and
the effects of inflation and changes in prices on revenues and expenses to date
have not been significant.
The impact of inflation in future periods may be offset, in part, by an
increase in revenues because the Partnership's land leases provide for
additional rent based upon increases in the revenues of the related operating
properties which would tend to rise with inflation. In addition, revenues at the
wholly owned Martin Sunnyvale and Bell Forge Square properties would be expected
to rise with inflation because the tenant leases contain rental escalation
and/or expense reimbursement clauses based on increases in tenant sales and
property operating expenses. Such increases in revenues would be expected to at
least partially offset the increases in Partnership and property operating
expenses resulting from inflation.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14
of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Fourth Qualified
Properties, Inc. a Delaware corporation, which is a wholly-owned subsidiary of
PaineWebber. The Associate General Partner of the Partnership is Properties
Associates 1985, L.P., a Virginia limited partnership, certain limited partners
of which are also officers of the Adviser and the Managing General Partner. The
Managing General Partner has overall authority and responsibility for the
Partnership's operation, 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 37 8/22/96
Terrence E. Fancher Director 43 10/10/96
Walter V. Arnold Senior Vice President and Chief
Financial Officer 49 10/29/85
James A. Snyder Senior Vice President 51 7/6/92
David F. Brooks First Vice President and Assistant
Treasurer 54 9/19/84*
Timothy J. Medlock Vice President and Treasurer 35 8/4/89
Thomas W. Boland Vice President 34 12/1/91
Dorothy F. Haughey Secretary 70 9/19/84*
* 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 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 PaineWebber Properties Incorporated ("PWPI") 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 a 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.
James A. Snyder is a Senior Vice President of the Managing General Partner
and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in
July 1992 having served previously as an officer of PWPI from July 1980 to
August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution
Trust Corporation where he served as the Vice President of Asset Sales prior to
re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am
Investors, Inc., a real estate investment company. During the period August 1987
to February 1989, Mr. Snyder was Executive Vice President and Chief Financial
Officer of Southeast Regional Management Inc., a real estate development
company.
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 a 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 Managing General Partner and the Adviser. From 1983 to 1986,
Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated
from Colgate University in 1983 and received his Masters in Accounting from New
York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and a
Vice President and Manager of Financial Reporting of the Adviser which he joined
in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young &
Company. Mr. Boland is a Certified Public Accountant licensed in the state of
Massachusetts. He holds a B.S. in Accounting from Merrimack College and an
M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner, Assistant
Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined PaineWebber in
1962.
(f) None of the directors and officers was involved in legal proceedings
which are material to an evaluation of his or her ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended August 31, 1996, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser and the
General Partners are entitled to receive a share of cash distributions and a
share of profits and losses. These items are described in Item 13.
The Partnership has paid cash distributions to the Unitholders on a
quarterly basis at rates ranging from 4.5% to 7% per annum on remaining invested
capital over the past five years. However, 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. 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 Qualified Properties, Inc., is owned by
PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is
a Virginia limited partnership, limited partners of which are also officers of
the Adviser and the Managing General Partner. Properties Associates 1985 was the
Initial Limited Partner of the Partnership. No limited partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) Neither the directors and officers of the Managing General Partner nor
the limited partners of the Associate General Partner individually own any Units
of Limited Partnership interest of the Partnership. No director or officer of
the Managing General Partner nor the limited partners of the Associate General
Partner possess a right to acquire beneficial ownership of Units of Limited
Partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fourth Qualified Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber
Group Inc. ("PaineWebber"), and Properties Associates 1985, L.P. (the "Associate
General Partner"), a Virginia limited partnership, certain limited partners of
which are also officers of the Adviser and the Managing General Partner. Subject
to the Managing General Partner's overall authority, the business of the
Partnership is managed by 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 and disposition of Partnership
investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an
asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed generally, 95% to the Limited
Partners, 3.99% to the Adviser as an asset management fee and 1.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 12%, as set
forth in the Amended Partnership Agreement.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% 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 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. 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.
Acquisition fees in the amount of 3% of the gross offering proceeds were
paid to the Adviser for analyzing, structuring and negotiating the acquisitions
of the Partnership's investments. The Adviser may receive a commission, in an
amount not yet determinable, upon the disposition of certain Partnership
investments.
The Adviser has been contracted to perform specific management
responsibilities, to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser will be paid a basic management fee of 1/2 of 1% of
the gross proceeds of the offering, in addition to the asset management fee
described above, for these services. Basic and asset management fees totalling
$156,000 were earned for the year ended August 31, 1996.
The Managing General Partner and the Adviser are reimbursed for their
direct expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended August 31, 1996 is $169,000, 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 $15,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1996. Fee 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. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this report. See Index to Financial Statements and
Financial Statement Schedules at page F-1.
Financial statements for the properties securing the Partnership's
mortgage loans have not been included since the Partnership has no
contractual right to the information and cannot otherwise
practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page
IV-3 are filed as part of this Report.
(b) No reports on Form 8-K were filed during the fourth quarter of fiscal
1996.
(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 F-1.
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 QUALIFIED PLAN
PROPERTY FUND FOUR, LP
By: Fourth Qualified Properties, Inc.
Managing General Partner
By: /s/ Bruce J. Rubin
Bruce J. Rubin
President and Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
By: /s/ Thomas W. Boland
Thomas W. Boland
Vice President
Dated: November 22, 1996
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: November 22, 1996
---------------------- -----------------
Bruce J. Rubin
Director
By:/s/ Terrence E. Fancher Date November 22, 1996
----------------------- -----------------
Terrence E. Fancher
Director
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document or Other Reference
- ----------- ----------------------- --------------------------
(3) and (4) Prospectus of the Registrant Filed with the Commission
dated December 3, 1985, supplemented, pursuant to Rule 424(c)
with particular reference to the and incorporated herein by
Restated Certificate and Agreement reference.
Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission
exhibits to registration statements and pursuant to Section 13 or
amendments thereto of the registrant 15(d) of the Securities
together with all such contracts filed Exchange Act of 1934 and
as exhibits of previously filed Forms incorporated herein by
8-K and Forms 10-K are hereby reference.
incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the
year ended August 31, 1996
has been sent to the
Limited Partners. Annual
Report will be sent to the
Limited Partners
subsequent to this filing.
(27) Financial Data Schedule Filed as last page of
EDGAR submission following
the Financial Statements
and Financial Statement
Schedule required by
Item 14.
ANNUAL REPORT ON FORM 10-K
Item 14(a)(1) and (2) and 14(d)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Four, LP:
Report of independent auditors F-2
Balance sheets as of August 31, 1996 and 1995 F-3
Statements of income for the years ended August 31, 1996, 1995
and 1994 F-4
Statements of changes in partners' capital (deficit) for the years
ended August 31, 1996, 1995 and 1994 F-5
Statements of cash flows for the years ended August 31, 1996,
1995 and 1994 F-6
Notes to financial statements F-7
Financial Statement Schedules:
Schedule III - Real Estate Owned F-17
Schedule IV - Investments in Mortgage Loans on Real Estate F-19
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of
Paine Webber Qualified Plan Property Fund Four, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified
Plan Property Fund Four, LP as of August 31, 1996 and 1995, and the related
statements of income, changes in partners' capital (deficit) and cash flows for
each of the three years in the period ended August 31, 1996. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedules 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 Paine Webber Qualified Plan
Property Fund Four, LP at August 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
November 15, 1996
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
BALANCE SHEETS
August 31, 1996 and 1995
(In thousands, except per Unit data)
ASSETS
1996 1995
---- ----
Real estate investments:
Investment properties held for sale, net
of allowance for possible investment
loss of $300 ($1,200 in 1995) $12,100 $11,200
Land 1,115 3,177
Mortgage loans, net of allowance for possible
uncollectible amounts of $472 in 1995 7,285 13,001
------- -------
20,500 27,378
Cash and cash equivalents 2,060 1,851
Interest receivable 60 118
Accounts receivable 14 23
Deferred expenses, net of accumulated
amortization of $266 ($227 in 1995) 99 138
Other assets 68 43
------- -------
$22,801 $29,551
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 32 $ 44
Accounts payable and accrued expenses 201 137
Unearned rental income 26 26
Tenant security deposits 45 47
Other liabilities - 50
------- --------
Total liabilities 304 304
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net income 404 359
Cumulative cash distributions (394) (378)
Limited Partners ($50 per Unit,
896,993 Units issued):
Capital contributions, net of offering costs 40,309 40,309
Cumulative net income 32,033 27,626
Cumulative cash distributions (49,856) (38,670)
------- -------
Total partners' capital 22,497 29,247
------- -------
$22,801 $29,551
======= =======
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF INCOME
For the years ended August 31, 1996, 1995 and 1994
(In thousands, except per Unit data)
1996 1995 1994
---- ---- ----
Revenues:
Interest from mortgage loans $ 875 $ 1,413 $ 1,413
Land rent 202 512 466
Interest earned on cash equivalents
and other income 210 225 84
--------- ------- -------
1,287 2,150 1,963
Expenses:
Management fees 156 240 252
General and administrative 424 508 434
Amortization of deferred expenses 39 27 27
Recovery of allowance for
uncollectible amounts (472) - -
--------- ------- -------
147 775 713
--------- ------- -------
Operating income 1,140 1,375 1,250
Investment properties held for sale:
Recovery of (provision for)
possible investment loss 900 - (150)
Gain on sale of land 1,378 - -
Gain on sale of investment property
held for sale - 1,779 -
Income from investment properties
held for sale, net 1,034 1,274 1,703
--------- -------- -------
3,312 3,053 1,553
--------- -------- -------
Net income $ 4,452 $ 4,428 $ 2,803
========= ======== =======
Net income per Limited Partnership Unit $ 4.91 $ 4.89 $3.09
====== ======= =====
Cash distributions per Limited
Partnership Unit $12.47 $13.75 $3.00
====== ====== =====
The above net income and cash distributions per Limited Partnership Unit are
based upon the 896,993 Units ($50 per Unit) of Limited Partnership Interest
outstanding during each year.
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended August 31, 1996, 1995 and 1994
(In thousands)
General Limited
Partners Partners Total
-------- -------- -----
Balance at August 31, 1993 $ (36) $ 37,131 $ 37,095
Net income 28 2,775 2,803
Cash distributions (27) (2,691) (2,718)
------ ---------- ----------
Balance at August 31, 1994 (35) 37,215 37,180
Net income 45 4,383 4,428
Cash distributions (28) (12,333) (12,361)
------ -------- ---------
Balance at August 31, 1995 (18) 29,265 29,247
Net income 45 4,407 4,452
Cash distributions (16) (11,186) (11,202)
------ -------- ---------
Balance at August 31, 1996 $ 11 $ 22,486 $ 22,497
====== ======== ========
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1996, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 4,452 $ 4,428 $ 2,803
Adjustments to reconcile net income to net
cash provided by operating activities:
Recovery of allowance for
uncollectible amounts (472) - -
Recovery of (provision for) possible
investment loss (900) - 150
Gain on sale of land (1,378) - -
Gain on sale of investment property
held for sale - (1,779) -
Amortization of deferred expenses 39 27 27
Changes in assets and liabilities:
Interest receivable 58 - -
Accounts receivable 9 14 15
Tax and tenant security deposits
escrows - 94 (9)
Other assets (25) 43 (43)
Accounts payable - affiliates (12) (12) (34)
Accounts payable and accrued expenses 64 7 (44)
Tenant security deposits (2) (22) 6
Unearned rental income - - 18
Other liabilities (50) 50 -
-------- ------- -----
Total adjustments (2,669) (1,578) 86
-------- ------- -----
Net cash provided by
operating activities 1,783 2,850 2,889
-------- ------- -----
Cash flows from investing activities:
Net proceeds from sale of land 3,440 - -
Repayment of mortgage loan receivable 6,188 - -
Net proceeds from sale of
investment property held for sale - 8,680 -
-------- -------- ------
Net cash provided by
investing activities 9,628 8,680 -
-------- -------- ------
Cash flows from financing activities:
Distributions to partners (11,202) (12,361) (2,718)
--------- -------- --------
Net increase (decrease) in cash and
cash equivalents 209 (831) 171
Cash and cash equivalents,
beginning of year 1,851 2,682 2,511
--------- -------- --------
Cash and cash equivalents,
end of year $ 2,060 $ 1,851 $ 2,682
========= ======= =======
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Paine Webber Qualified Plan Property Fund Four, LP (the "Partnership") is a
limited partnership organized pursuant to the laws of the State of Delaware
in October 1984 for the purpose of investing in a diversified portfolio of
existing income-producing real properties through land purchase-leasebacks
and first mortgage loans. The Partnership authorized the issuance of Units
(the "Units") of Limited Partnership Interest of which 896,993 Units (at $50
per Unit) were subscribed and issued between December 14, 1984 and December
13, 1985.
The Partnership originally owned land and made first mortgage loans secured
by buildings with respect to six operating investment properties. To date,
the Partnership has sold or been prepaid on its investments with respect to
two of the original operating properties. As of August 31, 1996, the
Partnership's mortgage loans and land lease investments on two of the
original properties were still outstanding, and the Partnership owned two
operating properties directly as a result of foreclosing under the terms of
its mortgage loans receivable. See Notes 4 and 5 for a further discussion of
the Partnership's outstanding real estate investments.
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 August 31, 1996 and 1995 and
revenues and expenses for each of the three years in the period ended August
31, 1996. Actual results could differ from the estimates and assumptions
used.
Investment properties held for sale represent assets acquired by the
Partnership through foreclosure proceedings on first mortgage loans. The
Partnership's policy is to carry these assets at the lower of cost or
estimated fair value (net of selling expenses). The Partnership's cost basis
is equal to the fair value of the assets at the date of foreclosure.
Declines in the estimated fair value of the assets subsequent to foreclosure
are recorded through the use of a valuation allowance. Subsequent increases
in the estimated fair value of the assets result in reductions of the
valuation allowance, but not below zero. All costs incurred to hold the
assets are charged to expense and no depreciation expense is recorded.
The Partnership's investments in land subject to ground leases are carried
at the lower of cost or net realizable value. The net realizable value of a
real estate investment held for long-term investment purposes is measured by
the recoverability of the investment through expected future cash flows on
an undiscounted basis, which may exceed the property's current market value.
The net realizable value of a property held for sale approximates its
current market value. None of the Partnership's land investments were held
for sale as of August 31, 1996 or 1995. The Partnership has reviewed FAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of" which is effective for financial statements for
years beginning after December 15, 1995, and believes this new pronouncement
will not have a material effect on the Partnership's financial statements.
Mortgage loans receivable are carried at the lower of cost or fair value.
The Partnership's policy is to provide for any valuation allowances for its
mortgage loan investments on a specific identification basis, principally by
evaluating the market value of the underlying collateral since the loans are
collateral dependent. In addition, a general loan loss reserve of $860,000
was recorded in fiscal 1990 reflecting management's assessment of the
general credit risk applicable to the Partnership's portfolio of mortgage
loan investments taken as a whole. During fiscal 1991, $388,000 of this loan
loss reserve was reversed due to the acquisition of certain properties
through foreclosure on the outstanding mortgage loans receivable. In fiscal
1996, the remainder of this loan loss reserve, of $472,000, was reversed as
a result of continued improvements in the operating performances of the
underlying collateral properties and in real estate market conditions in
general (see Note 4).
Deferred expenses represent acquisition fees paid to PaineWebber Properties
Incorporated (the "Adviser") as compensation for analyzing, structuring and
negotiating the Partnership's real estate investments. These fees are being
amortized using the straight-line method over the terms of the remaining
mortgage loans receivable, which range from thirteen to fifteen years.
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
The mortgage loans receivable, cash and cash equivalents, interest
receivable, accounts receivable, accounts payable - affiliates and accounts
payable and accrued liabilities 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." With the exception of mortgage loans receivable, the carrying
amount of these assets and liabilities approximates their fair value as of
August 31, 1996 due to the short-term maturities of these instruments.
Information regarding the fair value of the Partnership's mortgage loans
receivable is provided in Note 4. The fair value of mortgage loans
receivable is estimated using discounted cash flow analysis and further
considers independent appraisals of the underlying collateral properties.
Such appraisals make use of a combination of certain generally accepted
valuation techniques, including direct capitalization, discounted cash flows
and comparable sales analysis (see Note 4 for a further discussion).
No provision for income taxes has been made as the liability for such taxes
is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Qualified Properties,
Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. ("PaineWebber"), and Properties Associates 1985, L.P.
(the "Associate General Partner"), a Virginia limited partnership, certain
limited partners of which are also officers of the Adviser and the Managing
General Partner. Subject to the Managing General Partner's overall
authority, the business of the Partnership is managed by the Adviser
pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary
of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber.
Acquisition fees in the amount of 3% of the gross offering proceeds were
paid to the Adviser for analyzing, structuring and negotiating the
acquisitions of the Partnership's investments. The Adviser may receive a
commission, in an amount not yet determinable, upon the disposition of
certain Partnership investments.
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 and disposition of Partnership
investments.
Distributable Cash, as defined, of the Partnership will be distributed 98%
to the Limited Partners, 1% to the General Partners and 1% to the Adviser as
an asset management fee. Residual proceeds resulting from disposition of
Partnership investments will be distributed generally, 95% to the Limited
Partners, 3.99% to the Adviser as an asset management fee and 1.01% to the
General Partners after the prior receipt by the Limited Partners of their
original capital contributions and a cumulative annual return of 12%, as set
forth in the Amended Partnership Agreement.
All taxable income or tax loss (other than from a Capital Transaction) of
the Partnership will be allocated 98.989899% to the Limited Partners and
1.010101% 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 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. 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.
The Adviser has been contracted to perform specific management
responsibilities, to administer the day-to-day operations of the Partnership
and to report periodically the performance of the Partnership to the
Managing General Partner. The Adviser will be paid a basic management fee of
1/2 of 1% of the gross proceeds of the offering, in addition to the asset
management fee described above, for these services. Basic and asset
management fees totalling $156,000, $240,000 and $252,000 were earned for
the years ended August 31, 1996, 1995 and 1994, respectively. Accounts
payable - affiliates at August 31, 1996 and 1995 consists of management fees
of $32,000 and $44,000, respectively, payable to the Adviser.
The Managing General Partner and the Adviser are reimbursed for their direct
expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
Included in general and administrative expenses for the years ended August
31, 1996, 1995 and 1994 is $169,000, $207,000 and $186,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins
earned fees of $15,000, $5,000 and $7,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1996, 1995 and 1994, respectively.
4. Real Estate Investments
The following first mortgage loans were outstanding at August 31, 1996 and
1995 (in thousands):
Date of
Amount of Loan Loan and
Property 1996 1995 Interest Rate Maturity
-------- ---- ---- ------------- --------
The Corner at $ - $ 6,188 11.25% 1/9/85
Seven Corners 2/1/98
Shopping Center
Fairfax, VA (1)
Willow Creek 3,055 3,055 Years 1 to 5 - 10.50% 10/31/85
Apartments Thereafter 11% 10/31/00
Wichita, KS
Park South 4,230 4,230 9% 12/29/88
Apartments 12/28/01
Charlotte, NC
7,285 13,473
Less: Allowance
for
possible
uncollectible
amounts (2) - (472)
------ -------
$ 7,285 $13,001
======= =======
(1) As discussed further below, the mortgage loan secured by The Corner at Seven
Corners Shopping Center was prepaid on November 22, 1995.
(2) The balance of the allowance for possible uncollectible amounts at August
31, 1995 represented a general loan loss reserve recorded during fiscal 1990
(see Note 2). This balance was reduced to $472,000 during fiscal 1991 from
its original balance of $860,000 as a result of the foreclosures of Martin
Sunnyvale Research and Development Center and Bell Forge Square Shopping
Center (see Note 5). Subsequent to the repayment in full of the mortgage
loan secured by The Corner at Seven Corners Shopping Center in fiscal 1996,
the Partnership's two remaining mortgage loans are secured by residential
apartment properties. As a result of the continued improvement in the
operating performance of these two properties and in the market for
residential apartment properties in general, the Partnership reversed the
remainder of this loan loss reserve in fiscal 1996. The recovery of $472,000
is reflected on the accompanying income statement.
In general, the loans are secured by first mortgages on the properties, the
owner's leasehold interest in the land and an assignment of all tenant leases,
where applicable. Interest is payable monthly and the principal is due at
maturity.
In relation to the above-mentioned mortgage loans, the following land
purchase-leaseback transactions had also been entered into as of August 31, 1996
and 1995 (in thousands):
Cost of Land
to the Partnership
Property 1996 1995 Annual Base Rent
-------- ---- ---- ----------------
The Corner at Seven $ - $ 2,062 $232
Corners Shopping
Center
Fairfax, VA (1)
Willow Creek Apartments 345 345 Years 1 to 5 - $36
Wichita, KS Thereafter - $38
Park South Apartments (2) 770 770 $ 69
Charlotte, NC ------ -------
$ 1,115 $ 3,177
======= =======
(1)As discussed further below, the Partnership sold the land underlying The
Corner at Seven Corners Shopping Center on November 22, 1995.
(2)The Partnership owns a 77% interest in the land underlying the Park South
Apartments and has an equivalent interest in the first secured mortgage loan
secured by the improvements. The remaining 23% interest in the land and
mortgage loan receivable is owned by an affiliated partnership, PaineWebber
Mortgage Partners Five, L.P.
The land leases have terms of 40 years. Among the provisions of the lease
agreements, the Partnership is entitled to additional rent based upon gross
revenues from the operating properties in excess of a base amount, as defined.
During fiscal 1995 and 1994, the Partnership received additional rent of
$126,000 and $98,000, respectively, from The Corner at Seven Corners Shopping
Center land investment. In addition, during fiscal 1996, 1995 and 1994, the
Partnership received additional rent of $44,000, $47,000 and $29,000,
respectively, from the Park South Apartments land investment. The lessees have
the option to purchase the land for specified periods of time, beginning in
November 1995 for Willow Creek and December of 1997 for Park South, at a price
based on the fair market value, as defined, but not less than the original cost
to the Partnership.
The objectives of the Partnership with respect to its mortgage loan and land
investments are to provide current income from fixed mortgage interest payments
and base land rents, then to provide increases to this current income through
participation in the annual revenues generated by the property as they increase
above a specified base amount. In addition, the Partnership's investments are
structured to share in the appreciation in value of the underlying real estate.
Accordingly, upon either sale, refinancing, maturity of the mortgage or exercise
of the option to repurchase the land, the Partnership will receive a 40% to 50%
share of the appreciation above a specified base amount.
The mortgage loan secured by The Corner at Seven Corners Shopping Center became
prepayable in February 1995. On December 16, 1994, the borrower notified the
Partnership of its intent to prepay the loan and exercise the option to purchase
the land in conjunction with a refinancing of the operating property. Along with
such formal notice, the borrower sent a $50,000 deposit to the Partnership in
accordance with the terms of the ground lease. During the current year, the
Partnership and the borrower agreed to terms for the repayment of the mortgage
loan and purchase of the underlying land. The terms of the transaction included
the full repayment of the Partnership's mortgage loan of $6,188,000 and the
payment of $3,440,000 for obligations owing under the ground lease, representing
the repurchase of the $2,062,000 ground investment and $1,378,000 as the
Partnership's share of the appreciation in value of the property. On November
22, 1995, the transaction closed and the Partnership received gross proceeds of
$9.6 million. Management believes that the amount paid to the Partnership under
the terms of the ground lease reflected the fair value of the property, as
supported by the Partnership's most recent independent appraisal. The proceeds
of this transaction were distributed to the Limited Partners in the second
quarter of fiscal 1996.
The Willow Creek mortgage loan became prepayable in November 1995. Management
believes that the potential for a near term prepayment of this loan is high. As
a result of these circumstances, based on an expected short-term maturity, the
estimated fair value of the Willow Creek mortgage loan approximates its carrying
value as of August 31, 1996 since the estimated fair value of the collateral
property exceeds the principal balance of the loan. The fair value of the Park
South loan, which does not become prepayable until December 1997, has been
estimated using discounted cash flow analysis and also approximates the loan's
carrying value as of August 31, 1996.
5. Investment Properties Held for Sale
At August 31, 1996 and August 31, 1995, the Partnership owned two operating
investment properties directly as a result of foreclosure proceedings prompted
by defaults under the terms of the first mortgage loans held by the Partnership.
In addition, the Partnership sold an operating investment property which it had
owned directly during fiscal 1995. The balance of investment properties held for
sale on the accompanying balance sheet at August 31, 1996 and 1995 is comprised
of the following net carrying values (in thousands):
1996 1995
---- ----
Martin Sunnyvale Research and
Development Center $ 3,400 $ 2,500
Bell Forge Square Shopping Center 8,700 8,700
------- -------
$12,100 $11,200
======= =======
The Partnership complies with the guidelines set forth in the Statement of
Position entitled "Accounting for Foreclosed Assets", issued by the American
Institute of Certified Public Accountants, to account for its investment
properties acquired through foreclosures. Under the Statement of Position, a
foreclosed asset is recorded at the lower of cost or estimated fair value,
reduced by the estimated costs to sell the asset. Cost is defined as the fair
value of the asset at the date of the foreclosure. Declines in the estimated
fair value of the assets subsequent to foreclosure are recorded through the use
of a valuation allowance. Subsequent increases in the estimated fair value of
the assets result in reductions of the valuation allowance, but not below zero.
As of August 31, 1996, the aggregate cost basis of the investment properties
held for sale for federal income tax purposes is approximately $14,764,000.
Descriptions of the transactions through which the Partnership acquired these
properties and of the properties themselves are summarized below:
Martin Sunnyvale Research and Development Center
On July 12, 1991, the Partnership foreclosed under the terms of the
mortgage loan secured by the Martin Sunnyvale Research and Development
Center. The borrower had defaulted on the payment terms of the loan due to
significant lease turnover during 1991. The property, which was 100% occupied
as of August 31, 1996, is comprised of 39,286 leasable square feet and is
located in Sunnyvale, California. The Partnership recognized a loss on
foreclosure of $1,742,000 in fiscal 1991 in connection with its acquisition
of the property. The loss consisted of a write-down of $1,700,000 to the
combined cost basis of the land and the face amount of the mortgage loan and
a $42,000 write-off of the unamortized balance of deferred expenses incurred
in connection with the original acquisition of the investment in 1985. The
$1,700,000 write-down reflected management's estimate of the fair value of
the investment property, net of selling expenses, at the date of the
foreclosure. The combined carrying value of the original land and loan
investments, of $5,100,000, was adjusted to this estimate of $3,400,000, and
reclassified to investment properties held for sale. During fiscal 1994, 1993
and 1992, the Partnership recorded provisions for possible investment loss of
$150,000, $550,000 and $200,000, respectively, to write down the carrying
value of the Martin Sunnyvale investment property to reflect additional
declines in its estimated fair value, net of selling expenses. The resulting
net carrying value of $2,500,000 is included in the balance of investment
properties held for sale on the accompanying balance sheet at August 31,
1995. During fiscal 1996, real estate values for R&D office properties in
Northern California recovered somewhat as a result of the resurgence in the
growth of the high technology industries. Such recovery was evident in the
leasing activity at the Martin Sunnyvale property during fiscal 1996. During
the fourth quarter, a tenant occupying 9,502 square feet exercised its option
to extend its lease for an additional two years. The lease renewal was
negotiated at a rental rate 40% higher than the previous rental rate. A
second tenant occupying 12,334 square feet opted not to renew its lease,
which had an expiration date of February 28, 1997. The lease was terminated
effective August 27, 1996 when a new tenant signed a five-year lease at a
rental rate 60% higher than the rate paid by the prior tenant. The third
tenant, which occupies 17,784 square feet, plans to vacate at the end of its
lease term in November 1996. The property manager and leasing agent are
working closely with prospective tenants to re-lease this space at a higher
rental rate. As a result of lower market vacancy levels and increasing rental
rates, the estimated fair value of the Martin Sunnyvale property improved
significantly during fiscal 1996 to an amount which exceeds the cost basis
established for the property in fiscal 1991 of $3,400,000. Accordingly, the
Partnership adjusted the valuation account with respect to the Martin
Sunnyvale property and recognized a recovery of possible investment loss of
$900,000 in the fiscal 1996 income statement. The carrying value of the
investment, of $3,400,000, is included in the balance of investment
properties held for sale on the accompanying balance sheet as of August 31,
1996.
During fiscal 1994, the Partnership engaged the management and leasing
agent to explore the market for potential buyers for the Martin Sunnyvale
investment property. Subsequent to the time that the Partnership began to
market the property for sale, the Partnership was notified by a California
state water agency of a potential environmental problem at Martin Sunnyvale.
As a result of governmental required testing, management has learned that
there has been a contamination of the underground soil and water at the site.
This contamination may have been caused by either a previous occupant at the
site or by an occupant of a nearby property. The environmental testing was
paid for by one of the parties identified as a potential contaminator.
Management believes that this contamination occurred prior to the
Partnership's initial mortgage loan and ground lease investments in the
property, which were made in 1985. The California state water agency has
issued a site cleanup order identifying two companies which had occupied the
Martin Sunnyvale property prior to the Partnership's investment. Management
has engaged local counsel to monitor all legal actions to insure that the
Partnership's rights are fully protected. Management will seek full
indemnification from the parties identified as being potentially responsible.
The Partnership had suspended its marketing efforts during fiscal 1995 and
1996 as a result of this environmental matter. Subsequent to August 31, 1996,
management began to analyze whether sufficient progress has been made in the
remediation process to allow for the continuation of the marketing efforts.
Bell Forge Square Shopping Center
On October 4, 1991, the Partnership received a deed in lieu of foreclosure
on the mortgage loan secured by the Bell Forge Square Shopping Center. The
property, which was 100% occupied as of August 31, 1996, is comprised of
126,890 leasable square feet and is located in Nashville, Tennessee. The
Managing General Partner estimated that the fair value of the investment
property, net of selling expenses, at the date title to the mortgaged
property was transferred was approximately equal to the combined cost of the
land and the face amount of the Partnership's mortgage loan. The Partnership
recognized a loss in fiscal 1991 of $101,000, representing the write-off of
the unamortized balance of deferred expenses incurred in connection with the
original acquisition of the Bell Forge Square investment. The combined value
of the land and the face amount of the mortgage loan, of $9,000,000, was
reclassified to investment properties held for sale. During fiscal 1992, the
Partnership had recorded a provision for possible investment loss of $600,000
to write down the carrying value of the Bell Forge Square investment property
to reflect a decline in its estimated fair value, net of selling expenses, as
of August 31, 1992. During fiscal 1993, the Partnership recorded an
adjustment to reduce the valuation allowance by $300,000 to reflect an
increase in the estimated fair value of the Bell Forge Square property as of
August 31, 1993. The resulting net carrying value of $8,700,000 is included
in the balance of investment properties held for sale on the accompanying
balance sheet at August 31, 1996 and 1995.
Cordova Creek Apartments
The Partnership foreclosed under the terms of the mortgage loan secured by
Cordova Creek Apartments on February 20, 1990, due to non-payment of the
required interest payments. As a result of the foreclosure, the Partnership
owned the land and improvements and employed a local property management
company to manage the day-to-day operations of the apartment complex, which
is located in Memphis, Tennessee. An affiliated partnership, PaineWebber
Qualified Plan Property Fund Three, LP ("QP3"), originally invested $250,000
for a 3.5% interest in the mortgage loan secured by Cordova Creek and the
related ground lease. As a result of the foreclosure, QP3 retained a 3.5%
interest in the net cash flow and the eventual sale proceeds related to the
operating property. The fair value of the operating property, net of selling
expenses, at the date of foreclosure was estimated by management to be
approximately equal to the combined cost basis of the land and the original
face amount of the mortgage loan, totalling $6,900,500.
On April 12, 1995, the Partnership sold the Cordova Creek Apartments to an
unaffiliated third party for $9,100,000. After payment of required
transaction costs, including payment to QP3 for its 3.5% equity interest, the
net proceeds realized by the Partnership from the sale were approximately
$8.7 million. A special distribution of $215 per original $1,000 investment,
or $9,643,000, was made to Limited Partners on June 15, 1995, which
represented approximately $195 from the Cordova Creek net sales proceeds and
$20 as a distribution from cash reserves which were deemed to be in excess of
the Partnership's expected future requirements.
The Partnership recognizes income from the investment properties held for
sale equal to its share of the excess of the properties' gross revenues over
property operating expenses (including capital improvement costs), taxes and
insurance. Combined summarized operating results of the Cordova Creek
Apartments (through the date of sale), Martin Sunnyvale Research and
Development Center and Bell Forge Square Shopping Center for the years ended
August 31, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994
---- ---- ----
Rental income and expense
reimbursements $1,449 $2,121 $2,498
Other income 277 282 250
1,726 2,403 2,748
Property operating expenses (1) 461 774 722
Property taxes and insurance 231 329 297
------ ------ ------
692 1,103 1,019
------ ------ ------
Income from operations, net $1,034 $1,300 $1,729
====== ====== ======
Partnership's share of combined
operations $1,034 $1,274 $1,703
QP3's share of Cordova Creek
operations - 26 26
------ ------ ------
$1,034 $1,300 $1,729
====== ====== ======
(1) As discussed in Note 2, in accordance with the Partnership's accounting
policy for assets held for sale, capital improvement costs are expensed as
incurred. Included in property operating expenses for the years ended August
31, 1996, 1995 and 1994 is capital improvement costs of $239,000, $326,000
and $72,000, respectively.
6. Leases
The Martin Sunnyvale and Bell Forge Square investment properties have
operating leases with tenants which provide for fixed minimum rents and
reimbursements of certain operating costs. Rental revenues are recognized on
a straight-line basis over the life of the related lease agreements. Minimum
future rental revenues to be received by the Partnership under
noncancellable operating leases for the next five years and thereafter are
as follows (in thousands):
Year ending August 31, Amount
---------------------- ------
1997 $1,298
1998 1,148
1999 954
2000 733
2001 563
Thereafter 1,145
------
$5,841
======
7. Contingencies
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 Qualified Properties, Inc. and
Properties Associates ("PA"), which are the 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
Qualified Plan Property Fund Four, LP, PaineWebber, Fourth Qualified
Properties, Inc. and PA (1) failed to provide adequate disclosure of the
risks involved; (2) made false and misleading representations about the
safety of the investments and the Partnership's anticipated performance;
and (3) marketed the Partnership to investors for whom such investments
were not suitable. The plaintiffs, who purported to be suing on behalf of
all persons who invested in Paine Webber Qualified Plan Property Fund
Four, LP, also alleged that following the sale of the partnership
interests, PaineWebber, Fourth Qualified Properties, Inc. and PA
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber, Fourth
Qualified Properties, 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 have agreed to settle the case. Pursuant to
that memorandum of understanding, PaineWebber irrevocably deposited $125
million into an escrow fund under the supervision of the United States
District Court for the Southern District of New York to be used to resolve
the litigation in accordance with a definitive settlement agreement and
plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs
submitted a definitive settlement agreement which has been preliminarily
approved by the court and provides for the complete resolution of the
class action litigation, including releases in favor of the Partnership
and the General Partners, and the allocation of the $125 million
settlement fund among investors in the various partnerships 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. 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 is scheduled to
continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court
against PaineWebber Incorporated and various affiliated entities
concerning the plaintiffs' purchases of various limited partnership
interests, including those offered by the Partnership. The complaint
alleges, among other things, that PaineWebber and its related entities
committed fraud and misrepresentation and breached fiduciary duties
allegedly owed to the plaintiffs by selling or promoting limited
partnership investments that were unsuitable for the plaintiffs and by
overstating the benefits, understating the risks and failing to state
material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages against
PaineWebber. In September 1996, the court dismissed many of the
plaintiffs' claims as barred by applicable securities arbitration
regulations. Mediation hearings are scheduled to be held in December 1996.
The eventual outcome of this litigation and the potential impact, if any,
on the Partnership's unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber affiliates could
be entitled to indemnification for expenses and liabilities in connection
with the litigation described above. However, PaineWebber has agreed not
to seek indemnification for any amounts it is required to pay in
connection with the settlement of the New York Limited Partnership
Actions. At the present time, the General Partners cannot estimate the
impact, if any, of the potential indemnification claims on the
Partnership's financial statements, taken as a whole. Accordingly, no
provision for any liability which could result from the eventual outcome
of these matters has been made in the accompanying financial statements.
8. Subsequent Event
On October 15, 1996, the Partnership distributed $3,000 to the General
Partners, $320,000 to the Limited Partners and $3,000 to the Adviser as an
asset management fee for the quarter ended August 31, 1996.
Schedule III - Real Estate Owned
Paine Webber Qualified Plan Property Fund Four, LP
August 31, 1996
(In thousands)
Gross Amount at
Cost of Which Carried Date of
Investment to at Close of Original Size of
Description (A) Partnership (B) Period (B) Investment Investment
Land underlying $ 345 $ 345 10/31/85 7.05 acres
apartment complex
Wichita, KS
Research and 5,100 3,400 (1) 12/20/85 2.5 acres
Development Center 39,286
Sunnyvale, CA sq. ft.
Shopping Center 9,000 9,000 (2) 4/29/86 11 acres
Nashville, TN 126,890
sq. ft.
Land underlying 770 770 12/29/88 19 acres
apartment complex
Charlotte, NC ------- -------
$15,215 $13,515
======= =======
Notes:
(A) Senior mortgages on the properties related to the land investments listed
above are held by Paine Webber Qualified Plan Property Fund Four, LP as of
August 31, 1996. See Schedule IV.
(B) These amounts represent the cost of each investment and the gross amount
at which the investment is carried on the balance sheet as of August 31,
1996. The aggregate cost of the investments for federal income tax
purposes is approximately $15,879,000.
(C) Reconciliation of real estate owned:
1996 1995 1994
---- ---- ----
Balance at beginning of year $15,577 $22,478 $22,478
Sale of land and investment
property (3) (2,062) (6,901) -
------- ------- -------
Balance at end of year $13,515 $15,577 $22,478
======= ======= =======
(1)The Partnership foreclosed on the mortgage loan secured by the Martin
Sunnyvale Research and Development Center on July 12, 1991. The combined
cost of the land and the face amount of the mortgage loan were estimated by
management to be greater than the fair value of the investment, net of
selling costs, at the date of foreclosure by $1,700,000. During fiscal 1994,
1993 and 1992, the Partnership recorded provisions for possible investment
loss of $150,000, $550,000 and $200,000, respectively, to provide for
further declines in the estimated fair value, net of selling expenses, of
the Martin Sunnyvale investment property. During fiscal 1996, the
Partnership recorded a recovery of possible investment loss of $900,000 to
reverse the existing allowance account as a result of a significant increase
in the estimated fair value of the operating property. The carrying value of
$3,400,000 is included in the balance of investment properties held for sale
on the accompanying balance sheet at August 31, 1996. See discussion in Note
5 to the financial statements.
Schedule III - Real Estate Owned (continued)
(2)On October 4, 1991, the Partnership received a deed in lieu of foreclosure
on the mortgage loan secured by the Bell Forge Square Shopping Center. The
fair value of the investment, net of estimated selling costs, at the date of
foreclosure was estimated to be approximately equal to the combined cost of
the land and face amount of the mortgage loan. At August 31, 1991, the
balance of the mortgage loan and land investments of $9,000,000 was
reclassified to investment property subject to acquisition by foreclosure.
During fiscal 1992, the Partnership recorded a provision for possible
investment loss of $600,000 to provide for a decline in the estimated fair
value, net of selling costs, of the Bell Forge Square investment property.
During fiscal 1993, the Partnership recorded an adjustment to reduce the
valuation allowance by $300,000 to reflect an increase in the estimated fair
value of the property. The net carrying value of $8,700,000 is included in
the balance of investment properties held for sale on the accompanying
balance sheet as of August 31, 1996. See discussion in Note 5 to the
financial statements.
(3)See discussion in Note 5 to the financial statements regarding the fiscal
1996 sale of the land underlying The Corner at Seven Corners Shopping Center
and the fiscal 1995 sale of the Cordova Creek Apartments.
Schedule IV - Investments in Mortgage Loans on Real Estate
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND FOUR, LP
August 31, 1996
(In thousands)
Principal
amount of
loans subject
Periodic Face Carrying to delinquent
Interest Final maturit payment amount of amount of principal
Description rate date terms mortgage mortgage or interest
- ----------- --------- ----------------- ------ -------- -------- -----------
First Mortgage Loans:
Apartment Complex 11% October 31, 2000 Interest monthly, $ 3,055 $ 3,055 -
Wichita, KS principal at
maturity
Apartment Complex 9% December 28, 2001 Interest monthly, 4,230 4,230 -
Charlotte, NC principal at
maturity ------- -------
TOTALS $ 7,285 $ 7,285
======= ========
1996 1995 1994
---- ---- ----
Balance at beginning of year $13,001 $13,001 $13,001
Additions during the year (1) 472 - -
Reductions during year (2) (6,188) - -
-------- ------- -------
Balance at end of year $ 7,285 $13,001 $13,001
======== ======= =======
(1) See Notes 2 and 4 to the accompanying financial statements for information
regarding the fiscal 1996 adjustment of a certain valuation account related
to the outstanding mortgage loans receivable.
(2)As discussed further in Note 4 to the accompanying financial statements,
the Partnership's mortgage loan receivable secured by The Corner at Seven
Corners Shopping Center was repaid in full on November 22, 1995.