-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2aJ+EjMbyGiGWXVuzMadtqxsE5mcGWGsnFPeNjmq103RcucU4D/tou1/yaFvQek /rRFNAWjEOnzDoiZPKHLxA== 0000714211-99-000003.txt : 19990403 0000714211-99-000003.hdr.sgml : 19990403 ACCESSION NUMBER: 0000714211-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINE WEBBER INCOME PROPERTIES FIVE LTD PARTNERSHIP CENTRAL INDEX KEY: 0000714211 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 042780287 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12087 FILM NUMBER: 99585584 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15 FL CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398118 10-K405 1 THIS IS A 10-K FOR PW5 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 SEPTEMBER 30, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______ to _______ . Commission File Number: 0-12087 PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2780287 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 439-8118 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------- ------------------------ None None Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not applicable. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - --------- ------------------- Prospectus of registrant dated Part IV May 26, 1983, as supplemented Current Reports on Form 8-K of registrant Part IV dated September 10, 1998 and September 21, 1998 PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP 1998 FORM 10-K TABLE OF CONTENTS Part I Page Item 1 Business I-1 Item 2 Properties I-3 Item 3 Legal Proceedings I-3 Item 4 Submission of Matters to a Vote of Security Holders I-3 Part II Item 5 Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters II-1 Item 6 Selected Financial Data II-1 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations II-2 Item 8 Financial Statements and Supplementary Data II-7 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-7 Part III Item 10 Directors and Executive Officers of the Partnership III-1 Item 11 Executive Compensation III-2 Item 12 Security Ownership of Certain Beneficial Owners and Management III-3 Item 13 Certain Relationships and Related Transactions III-3 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Signatures IV-2 Index to Exhibits IV-3 Financial Statements and Supplementary Data F-1 to F-30 This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Partnership's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in Item 7 in the section entitled "Certain Factors Affecting Future Operating Results" beginning on page II-6 of this Form 10-K. PART I Item 1. Business Paine Webber Income Properties Five Limited Partnership (the "Partnership") is a limited partnership formed in January 1983 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of existing income-producing operating properties such as apartments, shopping centers, office buildings, and other similar income-producing properties. The Partnership sold $34,928,000 in Limited Partnership Units (the "Units"), representing 34,928 units at $1,000 per Unit from May 26, 1983 to May 25, 1984 pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-81537). Limited Partners will not be required to make any additional contributions. The Partnership originally invested the net proceeds of the public offering, through joint venture partnerships, in five operating properties, which consisted of four multi-family apartment complexes and one retail shopping center. As discussed further below, through September 30, 1998 three of the Partnership's original investments have been sold. As of September 30, 1998, the Partnership owned interests in operating investment properties through joint venture partnerships as set forth in the following table: Name of Joint Venture Date of Name and Type of Property Acquisition Location Size of Interest Type of Ownership (1) - ---------------------------- -------- ----------- ---------------------- Amarillo Bell Associates 144,000 9/30/83 Fee ownership of land and Bell Plaza Shopping Center gross improvements (though Amarillo, Texas leasable joint venture) sq. ft. Seven Trails West Associates 532 9/13/84 Fee ownership of land and Seven Trails West Apartments units improvements (through Ballwin, Missouri joint venture) (1) See Notes to the Financial Statements filed with this Annual Report for a description of the long-term mortgage indebtedness secured by the Partnership's operating property investments and for a description of the agreements through which the Partnership has acquired these real estate investments. The Partnership previously owned an interest in Cambridge Associates, a joint venture which owned the Cambridge Apartments, a 378-unit apartment complex located in Omaha, Nebraska. On June 30, 1994, Cambridge Associates sold its operating investment property to an affiliate of the Partnership's co-venture partner for a gross purchase price of $9.7 million. After repayment of the outstanding mortgage debt and payment of transaction closing costs, net proceeds of approximately $4.7 million were available for distribution to the venture partners. In accordance with the joint venture agreement, the Partnership was entitled to and received approximately $3.7 million of such proceeds. A portion of the Cambridge sales proceeds was added to the Partnership's cash reserves in anticipation of future capital requirements at certain of the remaining joint ventures. The remainder of the proceeds, totalling approximately $2.2 million, was distributed to the Limited Partners in September 1994. On September 10, 1998, Greenbrier Associates, a joint venture which owned the Greenbrier Apartments, a 324-unit apartment complex located in Indianapolis, Indiana, sold its operating investment property to an unrelated third party for a gross sales price of $11.85 million. The Partnership received net proceeds of approximately $5,498,000 from the Greenbrier sale after deducting closing costs of approximately $119,000, closing proration adjustment of approximately $424,000, the repayment of the existing first mortgage loan of $5,400,000 and related accrued interest of approximately $26,000, and a payment of approximately $383,000 to the Partnership's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. On September 21, 1998, Randallstown Carriage Hill Associates, and Signature Partners, L.L.C., a joint venture and limited liability company which owned the Carriage Hill Village Apartments and adjoining land, sold its operating investment property and land to an unrelated third party for an aggregate sales price of $37.35 million. The Partnership received net proceeds of approximately $8,481,000 after the receipt of a credit of $1,168,000 for property adjustments and escrows held by the Department of Housing and Urban Development (HUD) for tenant security deposits, real estate taxes, property insurance and replacement reserves, and after deducting closing costs of approximately $757,000, the assumption of the existing first mortgage loan of $27,298,000 and a payment of approximately $1,982,000 to the Partnership's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. Of the total proceeds received by the Partnership of $8,481,000, as discussed further in Item 7, $4 million represented a reimbursement of funds originally advanced to buy out the selling co-venture partner's interest in the Carriage Hill joint venture on June 23, 1998. The Partnership had borrowed the $4 million required to complete the buyout of the selling partner's interest from an affiliate of the Managing General Partner. The $4 million related party loan was repaid on September 11, 1998 from the Partnership's share of the net proceeds from the sale of the Greenbrier Apartments. The Partnership's original investment objectives were to: (i) provide the Limited Partners with cash distributions which, to some extent, will not constitute taxable income; (ii) preserve and protect the Limited Partners' capital; (iii) obtain long-term appreciation in the value of its properties; and (iv) provide a build-up of equity through the reduction of mortgage loans on its properties. Through September 30, 1998, the Limited Partners had received cumulative cash distributions totalling approximately $18,047,000, or approximately $542 per original $1,000 investment for the Partnership's earliest investors, of which approximately $7,720,000, or $284 per original $1,000 investment, represents net proceeds from a refinancing of the Carriage Hill Apartments in 1987 and approximately $2,200,000, or $63 per original $1,000 investment, represents the distributed portion of the net proceeds from the sale of the Cambridge Apartments in 1994. The remaining distributions made through September 30, 1998 have been made from the net operating cash flow of the Partnership. A substantial portion of such distributions has been sheltered from current taxable income. Subsequent to year-end on October 1, 1998, the Partnership distributed approximately $3,493,000, or $100 per original $1,000 investment, from the net sale proceeds of the Greenbrier Apartments. The Partnership expects to distribute approximately $8,383,000, or $240 per original $1,000 investment, from the net proceeds from the sale of the Carriage Hill property sometime in early calendar year 1999 after it receives final approval from HUD for the assumption of the HUD-insured first mortgage loan by the buyer of the Carriage Hill property. The Partnership suspended the payment of regular quarterly distributions of excess net cash flow in fiscal 1988. As of September 30, 1998, the Partnership retains its ownership interest in two of its five original investment properties. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final liquidation of the remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot be determined with certainty at the present time. The Partnership is currently focusing on potential disposition strategies for the two remaining investments in its portfolio. Although no assurances can be given, it is currently contemplated that sales of the Partnership's Seven Trails and Bell Plaza investments could be completed by the end of calendar year 1999. The sales of the two remaining properties would be followed by an orderly liquidation of the Partnership. Both of the remaining properties in which the Partnership has an interest are located in real estate markets in which they face significant competition for the revenues they generate. The apartment complex competes 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 continued availability of low interest rates on home mortgage loans has increased the level of this competition in most markets over the past several years. However, the impact of the competition from the single-family home market has generally been offset by the lack of significant new construction activity in the multi-family apartment market over most of this period. Over the past two years, development activity for multi-family properties in many markets has escalated significantly. The shopping center competes for long-term commercial tenants with numerous projects of similar type generally on the basis of location, rental rates, tenant mix and tenant improvement allowances. The Partnership has no operating property investments located outside the United States. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable. The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"). The general partners of the Partnership (the "General Partners") are Fifth Income Properties Fund, Inc. and Properties Associates. Fifth Income Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are officers of the Adviser and the Managing General Partner. Subject to the General Partner's overall authority, the business of the Partnership is managed by the Adviser. The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. Item 2. Properties As of September 30, 1998, the Partnership owned interests in two operating properties through joint venture partnerships. The joint venture partnerships and the related properties are referred to under Item 1 above to which reference is made for the name, location and description of each property. Occupancy figures for each fiscal quarter during 1998, along with an average for the year, are presented below for each property owned during fiscal 1998: Percent Occupied At -------------------------------------------------- Fiscal 1998 12/31/97 3/31/98 6/30/98 9/30/98 Average -------- ------- ------- ------- ------- Seven Trails West Apartments 92% 94% 92% 91% 92% Bell Plaza Shopping Center 98% 97% 97% 97% 97% Greenbrier Apartments (1) 91% 91% 89% N/A N/A Carriage Hill Village Apartments (2) 95% 95% 95% N/A N/A (1)The Greenbrier Apartments property was sold on September 10, 1998 (see Item 7). (2)The Carriage Hill Village Apartments property was sold on September 21, 1998 (see Item 7). Item 3. Legal Proceedings The Partnership is not subject to any 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 September 30, 1998 there were 2,134 record holders of Units in the Partnership. There is no public market for the Units, and it is not anticipated that a public market for Units will develop. Upon request, the Managing General Partner will endeavor to assist a Unitholder desiring to transfer his Units and may utilize the services of PWI in this regard. The price to be paid for the Units will be subject to negotiation by the Unitholder. The Managing General Partner will not redeem or repurchase Units. No distributions were made to the Limited Partners during fiscal 1998. Item 6. Selected Financial Data Paine Webber Income Properties Five Limited Partnership For the years ended September 30, 1998, 1997, 1996, 1995 and 1994 (In thousands except per Unit data
Years Ended September 30, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Revenues $ 231 $ 98 $ 90 $ 106 $ 87 Operating loss $ (91) $ (138) $ (132) $ (207) $ (262) Partnership's share of ventures' income (losses) $ 529 $ 213 $ (691) $(1,182) $ (995) Partnership's share of gains on sale of operating investment properties $15,518 - - - $ 3,174 Net income (loss) $15,956 $ 75 $ (823) $(1,389) $ 1,917 Net income (loss) per Limited Partnership Unit $452.25 $ 2.13 $(23.33) $(39.37) $ 54.36 Cash distributions from sale, refinancing or other disposition transactions per Limited Partnership Unit - - - - $ 63.00 Total assets $15,719 $ 2,165 $ 1,739 $ 1,658 $ 1,836
The above selected financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this Annual Report. The above per Limited Partnership Unit information is based upon the 34,928 Limited Partnership Units outstanding during each year. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information Relating to Forward-Looking Statements - -------------------------------------------------- The following discussion of financial condition includes forward-looking statements which reflect management's current views with respect to future events and financial performance of the Partnership. These forward-looking statements are subject to certain risks and uncertainties, including those identified below under the heading "Certain Factors Affecting Future Operating Results", which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which were made based on facts and conditions as they existed as of the date of this report. The Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Liquidity and Capital Resources - ------------------------------- The Partnership offered limited partnership interests to the public from May 1983 to May 1984 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $34,928,000 were received by the Partnership and, after deducting selling expenses and offering costs, approximately $30,920,000 was invested in joint venture interests in five operating investment properties, which consisted of four residential apartment properties and one retail shopping center. Through September 30, 1998, three of the residential apartment properties had been sold, including two during fiscal 1998, as discussed further below. The Partnership does not have any commitments for additional capital expenditures or investments but may be called upon to advance funds to its existing investments in accordance with the respective joint venture agreements. On September 10, 1998, Greenbrier Associates, a joint venture in which the Partnership has an interest, sold the property known as Greenbrier Apartments located in Indianapolis, Indiana, to an unrelated third party for $11,850,000. The Partnership received net proceeds of approximately $5,498,000 after deducting closing costs of approximately $119,000, closing proration adjustments of approximately $424,000, the repayment of the existing first mortgage loan of $5,400,000 and related accrued interest of approximately $26,000 and a payment of approximately $383,000 to the Partnership's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. Because the first mortgage loan secured by the Greenbrier Apartments was scheduled to mature on June 29, 1998, the Partnership and its joint venture partner had begun to review both refinancing and sale opportunities during the latter part of fiscal 1997. During the first quarter of fiscal 1998, the Partnership and the co-venturer agreed to initiate a marketing program for the possible sale of the property. During the second quarter, the Partnership and the co-venturer engaged a national real estate brokerage firm to market Greenbrier for sale. As part of the formal marketing campaign, which began in early March, the property was marketed extensively. Sales packages were distributed to national, regional, and local prospective purchasers. As a result of these sales efforts, several offers were received. Management then asked the prospective purchasers to submit best and final offers. Management subsequently received best and final offers from five of the prospective buyers. After completing an evaluation of the final offers and the relative strength of the prospective purchasers, the Partnership and its co-venture partner selected an offer and negotiated a purchase and sale agreement. As a result of the sale of Greenbrier Apartments, the Partnership made a special distribution of $100 per original $1,000 investment, or approximately $3,493,000, on October 1, 1998 to unitholders of record as of the September 10, 1998 sale date. The remaining net proceeds from the sale of Greenbrier of approximately $2,005,000, along with an amount of the Partnership's cash reserves, were used to help pay off a $4,000,000 demand loan that the Partnership had obtained from PaineWebber Capital, Inc., an affiliate of the Managing General Partner, as discussed below. On September 21, 1998, Randallstown Carriage Hill Associates and Signature Partners LLC, a joint venture and a limited liability company in which the Partnership had interests, sold the property known as Carriage Hill Village Apartments and adjoining land located in Randallstown, Maryland, to unrelated third parties for an aggregate sale price of $37,350,000. The Partnership received net proceeds of approximately $8,481,000 after the receipt of a credit of $1,168,000 for property adjustments and escrows held by the Department of Housing and Urban Development (HUD) for tenant security deposits, real estate taxes, property insurance and replacement reserves, and after deducting closing costs of approximately $757,000, the assumption of the existing first mortgage loan of $27,298,000 and a payment of approximately $1,982,000 to the Partnership's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. Of the total proceeds received by the Partnership of $8,481,000, as discussed further below, $4 million represented a reimbursement of funds originally advanced to buy out the selling co-venture partner's interest in the Carriage Hill joint venture on June 23, 1998. The Partnership had borrowed the $4 million required to complete the buyout of the selling partner's interest from an affiliate of the Managing General Partner. The $4 million related party loan was repaid on September 11, 1998 from a combination of cash reserves and the Partnership's share of the net proceeds from the sale of the Greenbrier Apartments. On June 23, 1998, the Partnership and its original co-venture partner, JBG/Carriage Hill Village Limited Partnership, purchased the 50% interest of its other co-venture partner, Signature Carriage Hill Village Apartments Limited Partnership, in the Randallstown Carriage Hill Associates Joint Venture. The Partnership had held a 40% interest and the original co-venture partner had held a 10% interest in the Joint Venture prior to this transaction. The Partnership contributed $4,048,000 and the original co-venturer contributed $1,012,000 to complete the purchase of the other partner's interest. After the purchase, the Partnership held an 80% interest and the original co-venture partner held a 20% interest. On March 19, 1998, the Partnership was notified by Signature that it would be exercising the "buy/sell" provision in the Joint Venture agreement. Under the terms of this provision, this co-venturer, which was admitted to the Joint Venture as part of a 1988 restructuring transaction, had to propose a price at which it would either purchase the other partners' interests in the Venture or agree to the sale of its interest in the Venture to the other partners. The Partnership and its original co-venture partner in the Carriage Hill Joint Venture had 45 days to decide whether to sell their interests to the exercising partner or acquire the interest of the exercising partner at the specified gross sale price for the Venture's assets of approximately $33.3 million. At an equivalent gross sale price of $33.3 million, the net proceeds to the Partnership for the sale of its interest would have been approximately $700,000 after the assumption of the outstanding first mortgage debt of $27.4 million, the exercising partner's preferred investment return of approximately $5 million and the original co-venturer's share of the proceeds of $200,000. After a thorough review and analysis, the Partnership and the original co-venturer notified the exercising partner on May 1, 1998 of their decision to buy its interest for approximately $5 million in cash. Because the Partnership believed that improvements in the apartment segment of the real estate market would allow the Partnership to achieve a higher net sale price now than may be possible in the future, the Partnership and its remaining co-venture partner held discussions concerning the near-term sale of the Carriage Hill Village Apartments immediately after completing the purchase of the selling partner's interest in June 1998. Subsequently, the Partnership and its co-venture partner selected a national real estate firm with a strong background in selling apartments. Preliminary sale materials were then finalized and extensive sale efforts began in late June 1998. As a result of those efforts, ten offers were received. After completing an evaluation of the offers and the relative strength of the prospective purchasers, the Partnership and its co-venture partner selected an offer. On July 24, 1998, a purchase and sale agreement was signed and a non-refundable deposit of $100,000 was made by the prospective purchasers. The Carriage Hill sale allowed the Partnership to return approximately $3.7 million more in net sale proceeds and property escrows, after the repayment of the $4,000,000 buyout advance, than the $700,000 the Partnership would have received had it not acquired the selling co-venture partner's interest. Because the Partnership expects to receive final documentation by December 31, 1998 from HUD for the assumption of the HUD-insured first mortgage loan by the buyer of the Carriage Hill property, a special capital distribution is expected to be sent by January 15, 1999 from the sale of the Carriage Hill Village Apartments in the amount of approximately $8,383,000, or $240 per original $1,000 investment. As previously reported, the Partnership has been focusing on potential disposition strategies for the remaining investments in its portfolio. Although no assurances can be given, it is currently contemplated that sales of the Partnership's Seven Trails and Bell Plaza investments could be completed by the end of calendar year 1999. The sale of the two remaining properties would be followed by an orderly liquidation of the Partnership. Bell Plaza Shopping Center in Amarillo, Texas, was 97% leased as of September 30, 1998, compared to 99% as of September 30, 1997. The Partnership and its co-venture partner held discussions during the third quarter of fiscal 1998 concerning potential sale opportunities for the Bell Plaza property. After extensive discussions, it was agreed that marketing efforts would begin by the Partnership's fiscal year-end and would focus on regional buyers of specialty retail centers like Bell Plaza. These marketing efforts are currently underway. While Bell Plaza is 97% occupied, it was also agreed that the property's leasing team would actively pursue prospective retailers for the 5,000 square feet of currently vacant space as well as for the 24,020 square feet under the four leases that expire over the next twelve months. The largest of the four, a local theatre operator, has a June 1999 lease expiration and represents 15,050 square feet of this total. The property's leasing team is also pursuing lease renewals with these existing tenants. The occupancy level for the Seven Trails West Apartments, located in St. Louis, Missouri, averaged 92% for fiscal 1998, compared to 93% for the prior year. The Partnership and its Seven Trails co-venture partner held discussions during the fourth quarter of fiscal 1998 concerning potential opportunities for a near-term sale of this 532-unit multi-family apartment complex, and agreed to market the property for sale. Subsequent to the fiscal year-end, the Partnership and its joint venture partner selected a local brokerage firm with a strong background in selling apartment properties in the St. Louis area. Preliminary sales materials were prepared and extensive sale efforts began in mid-October. At September 30, 1998, the Partnership had cash and cash equivalents of $13,867,000. Such cash includes the net proceeds from the sales of the Greenbrier and Carriage Hill properties, as discussed further above, after the repayment of the outstanding related party loan. Approximately $3.5 million of this cash balance was distributed to the Limited Partners subsequent to year-end, on October 1, 1998. Another $8.4 million of this balance is expected to be distributed to the Limited Partners in early calendar year 1999 immediately after the Partnership receives the formal approval from HUD for the assumption of the HUD-insured mortgage loan secured by the Carriage Hill property. The remainder of such cash and cash equivalents will be utilized for the working capital requirements of the Partnership, distributions to the Limited Partners and for future capital contributions, if necessary, related to the Partnership's remaining joint ventures. The source of future liquidity and distributions to the partners is expected to be from cash generated by the Partnership's income-producing properties and from the proceeds received from the sale or refinancing of such properties or from the sale of the Partnership's interests in the joint ventures. These sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis. As noted above, the Partnership expects to be liquidated by the end of calendar year 1999. Notwithstanding this, the Partnership believes that it has made all necessary modifications to its existing systems to make them year 2000 compliant and does not expect that additional costs associated with year 2000 compliance, if any, will be material to the Partnership's results of operations or financial position. Results of Operations 1998 Compared to 1997 - --------------------- The Partnership reported net income of $15,956,000 for the year ended September 30, 1998, as compared to net income of $75,000 for the prior year. This increase in net income was primarily due to the $15,518,000 recognized as the Partnership's share of the gains on the sales of the Carriage Hill Village Apartments and the Greenbrier Apartments in September 1998. In addition, the Partnership's share of ventures' income increased by $316,000 in fiscal 1998. The increase in the Partnership's share of ventures' income was mainly due to an increase in interest and other income and decreases in interest expense and management fees. Other income was higher at Seven Trails and Greenbrier due to new management policies implemented at both properties during fiscal 1998 which resulted in additional service fee income. Interest expense decreased due to the regular principal amortization of the mortgage loans encumbering three of the four joint venture properties. Management fees decreased at the Greenbrier and Seven Trails joint ventures due to a restructuring of the related management agreements which resulted in a reduction in the percentage rate of gross rents used to calculate the monthly fees. A decrease of $47,000 in the Partnership's operating loss also contributed to the increase in net income for fiscal year 1998. The Partnership's operating loss decreased primarily due to an increase in interest and other income of $133,000. Interest income was higher due to an increase in the Partnership's average outstanding cash reserve balances as a result of the sale of the two properties in September 1998 and due to interest payments received during fiscal 1998 on a loan from the Partnership to the Seven Trails joint venture. The increase in interest income was partially offset by an increase in general and administrative expenses. The increase in general and administrative expenses was primarily due to an increase in legal expenses related to the Carriage Hill restructuring transaction and the Partnership's asset disposition efforts discussed further above. In addition, the Partnership incurred interest expense of $63,000 in fiscal 1998 due to the $4,000,000 demand note obtained by the Partnership for the purchase of the co-venturer's interest in the Carriage Hill joint venture. 1997 Compared to 1996 - --------------------- The Partnership reported net income of $75,000 for the year ended September 30, 1997, as compared to a net loss of $823,000 for the same period in the prior year. This favorable change of $898,000 in net operating results was primarily due to a favorable change of $904,000 in the Partnership's share of ventures' income (losses). The favorable change in the Partnership's share of ventures' operations was mainly attributable to an increase in combined rental revenues and expense recoveries of $416,000 and decreases in interest expense and property operating expenses of $452,000 and $547,000, respectively. Rental revenues and expense recoveries increased mainly due to significant increases in the average occupancy levels at the Carriage Hill and Bell Plaza properties when compared to fiscal 1996. The average occupancy levels at the Carriage Hill and Bell Plaza properties when compared to the same period in the prior year. As noted above, the average occupancy level at the Carriage Hill Apartments improved from 89% for fiscal 1996 to 94% for fiscal 1997. The average leasing level at the Bell Plaza Shopping Center increased to 99% for fiscal 1997 from a level of 93% for the prior fiscal year. Increases in effective rental rates at the Seven Trails and Carriage Hill properties also contributed to the increase in rental revenues. The decrease in interest expense was mainly due to the April 1996 refinancing of the debt secured by the Seven Trails Apartments, which significantly lowered the venture's debt service costs. Property operating expenses decreased partly due to a reduction in utilities expense at the Carriage Hill property which was mainly a result of a utilities conversion project which transferred the obligation for the utilities payments to the tenants. In addition, repairs and maintenance costs declined significantly at the Seven Trails and Greenbrier properties in fiscal 1997. A slight increase in the Partnership's operating loss of $6,000 partially offset the favorable change in the Partnership's share of ventures' operations for fiscal 1997. The Partnership's operating loss increased due to an increase in general and administrative expenses. General and administrative expenses increased mainly due to an increase in certain required professional fees. An $8,000 increase in interest income partially offset the increase in general and administrative expenses. Interest income increased due to an increase in the Partnership's average outstanding cash balances during fiscal 1997. 1996 Compared to 1995 - --------------------- The Partnership reported a net loss of $823,000 for fiscal 1996 as compared to a net loss of $1,389,000 for fiscal 1995. The primary reason for this favorable change in net operating results was that the Carriage Hill joint venture recognized an extraordinary loss on the early extinguishment of debt during fiscal 1995 of approximately $1,177,000 as a result of the write-off of unamortized deferred financing costs related to the venture's prior debt in conjunction with a June 1995 refinancing transaction. The Partnership's share of this loss was approximately $471,000. Excluding this non-recurring charge during fiscal 1995, the Partnership's share of ventures' losses decreased by $20,000 when compared to the prior year. This decrease was mainly attributable to a $503,000 increase in combined revenues from the four joint ventures. Combined revenues increased largely due to improved occupancy and rental rates at the Seven Trails West and Greenbrier Apartments. Revenues were also higher at the Bell Plaza Shopping Center in fiscal 1996 due to certain leasing improvements. In addition, combined interest expense decreased by $261,000 as a result of the lower interest rates on the debts secured by the Carriage Hill Apartments and the Bell Plaza Shopping Center, which were refinanced in fiscal 1995, and on the debt secured by the Seven Trails Apartments, which was refinanced in fiscal 1996. The increase in rental revenues and decrease in interest expense were partially offset by increases in combined property operating expenses and depreciation and amortization of $634,000 and $122,000, respectively. Property operating expenses increased primarily due to higher utility costs at the Carriage Hill Apartments resulting from more severe weather conditions during fiscal 1996. During fiscal 1996, the venture completed the process of converting the utilities at Carriage Hill Apartments to individual metering. This conversion was undertaken in order to reduce the venture's future exposure to fluctuations in utility charges caused by extreme weather conditions. Depreciation and amortization expense increased at all of the joint ventures, except for Carriage Hill, during fiscal 1996 due to capital improvements, tenant improvements and leasing commissions which were incurred during the year. The Partnership's operating loss decreased by $75,000 for fiscal 1996, when compared to the prior year. The decrease in operating loss was mainly attributable to a decrease in general and administrative expenses of $91,000. General and administrative expenses decreased mainly due to certain incremental expenses incurred in fiscal 1995 relating to an independent valuation of the Partnership's operating properties. Certain Factors Affecting Future Operating Results - -------------------------------------------------- The following factors could cause actual results to differ materially from historical results or those anticipated: Real Estate Investment Risks. Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants of the attractiveness of the property; (ii) the ability to retain qualified individuals to provide adequate management and maintenance of the property; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing. Effect of Uninsured Loss. The Partnership carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties with insured limits and policy specifications that management believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature such as wars, floods or earthquakes) which may be either uninsurable, or, in management's judgment, not economically insurable. Should an uninsured loss occur, the Partnership could lose both its invested capital in and anticipated profits from the affected property. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The Partnership is not aware of any notification by any private party or governmental authority of any non-compliance, liability or other claim in connection with environmental conditions at any of its properties that it believes will involve any expenditure which would be material to the Partnership, nor is the Partnership aware of any environmental condition with respect to any of its properties that it believes will involve any such material expenditure. However, there can be no assurance that any non-compliance, liability, claim or expenditure will not arise in the future. Competition. The financial performance of the Partnership's remaining real estate investments will be significantly impacted by the competition from comparable properties in their local market areas. The occupancy levels and rental rates achievable at the properties are largely a function of supply and demand in the markets. In many markets across the country, development of new multi-family properties has increased significantly over the past two years. Existing apartment properties in such markets could be expected to experience increased vacancy levels, declines in effective rental rates and, in some cases, declines in estimated market values as a result of the increased competition. The retail segment of the real estate market continues to suffer from an oversupply of space in many markets resulting from overbuilding in recent years and the trend of consolidations and bankruptcies among retailers prompted by the generally flat rate of growth in overall retail sales. There are no assurances that these competitive pressures will not adversely affect the operations and/or market values of the Partnership's investment properties in the future. Impact of Joint Venture Structure. The ownership of the remaining investments through joint venture partnerships could adversely impact the timing of the Partnership's planned dispositions of its remaining assets and the amount of proceeds received from such dispositions. It is possible that the Partnership's co-venture partners could have economic or business interests which are inconsistent with those of the Partnership. Given the rights which both parties have under the terms of the joint venture agreements, any conflict between the partners could result in delays in completing a sale of the related operating property and could lead to an impairment in the marketability of the property to third parties for purposes of achieving the highest possible sale price. Availability of a Pool of Qualified Buyers. The availability of a pool of qualified and interested buyers for the Partnership's remaining assets is critical to the Partnership's ability to realize the estimated fair market values of such properties at the time of their final dispositions. Demand by buyers of multi-family apartment and retail properties is affected by many factors, including the size, quality, age, condition and location of the subject property, the quality and stability of the tenant roster, the terms of any long-term leases, potential environmental liability concerns, the existing debt structure, the liquidity in the debt and equity markets for asset acquisitions, the general level of market interest rates and the general and local economic climates. Inflation - --------- The Partnership completed its fifteenth full year of operations in fiscal 1998 and the effects of inflation and changes in prices on revenues and expenses to date have not been significant. Inflation in future periods may increase revenues, as well as operating expenses, at the Partnership's operating investment properties. Most of the existing leases with tenants at the Partnership's retail shopping center contain rental escalation and/or expense reimbursement clauses based on increases in tenant sales or property operating expenses which would tend to rise with inflation. Tenants at the Partnership's apartment project have short-term leases, generally of 6-to-12 months in duration. Rental rates at this property can be adjusted to keep pace with inflation, as market conditions allow, as the leases are renewed or turned over. Such increases in rental income would be expected to at least partially offset the corresponding increases in Partnership and property operating expenses caused by future inflation. Item 8. 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 Fifth Income Properties Fund, Inc. a Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are 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 39 8/22/96 Terrence E. Fancher Director 45 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 51 10/29/85 David F. Brooks First Vice President and Assistant Treasurer 56 11/19/82 * Timothy J. Medlock Vice President and Treasurer 37 6/1/88 Thomas W. Boland Vice President and Controller 36 12/1/91 * The date of incorporation of the Managing General Partner. (c) There are no other significant employees in addition to the directors and principal executive officers mentioned above. (d) There is no family relationship among any of the foregoing directors and executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner. (e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which PaineWebber Properties Incorporated serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows: Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School. Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College. Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and 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. David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services. Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the 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 and Controller of the Managing General Partner and a Vice President and Controller of the Adviser which he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University. (f) None of the directors and officers were involved in legal proceedings which are material to an evaluation of 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 September 30, 1998, 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 Partnership cash distributions and a share of profits and losses. These items are described under Item 13. The Partnership has not paid regular cash distributions to the Unitholders over the past five years. Regular quarterly distributions of excess cash flow were suspended in 1988. Furthermore, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful. Item 12. 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, Fifth Income Properties Fund, Inc., is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, the general partners of which are also officers of the Adviser and the Managing General Partner. One limited partner referred to below is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. ================================================================================ Amount Name and Address Beneficially Percent Title of Class of Beneficial Owner Owned of Class - -------------- ------------------- ----- -------- Units of Limited Kensington Investments, Inc. 2,730 7.81% Partnership 4 Orinda Way, Suite 220-D Units Orinda, CA 94563 ================================================================================ (b) The directors and officers of the Managing General Partner do not directly own any Units of limited partnership interest of the Partnership. No director or officer of the Managing General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of limited partnership interest of the Partnership. (c) There exists no arrangement, known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions The General Partners of the Partnership are Fifth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed generally 85% to the Limited Partners and 15% to the General Partners, after the prior receipt by the Limited Partners of their adjusted capital contributions and a cumulative, noncompounded return on their average adjusted capital contributions ranging from 10% to 6% depending on when a Limited Partner was admitted to the Partnership. All sale and refinancing proceeds received by the Partnership to date have been distributed to the Limited Partners in accordance with the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income and tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and to the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities: to administer day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contribution) for services rendered. No management fees were earned during fiscal 1998. 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 September 30, 1998 is $88,000, 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"), an affiliate of the Managing General Partner, 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 $15,000 for managing the Partnership's cash assets in fiscal 1998, which amount is included in general and administrative expenses on the accompanying statement of operations. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI. PART IV Item 14. 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 Schedule: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedule at page F-1. (3) Exhibits: The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report. (b) Current Reports on Form 8-K were filed on September 10, 1998 and September 21, 1998 reporting the sales of the Greenbrier Apartments and Carriage Hill Village Apartments, respectively, and are hereby incorporated herein by reference. (c) Exhibits See (a)(3) above. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedule at page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP By: Fifth Income Properties Fund, Inc. ---------------------------------- Managing General Partner By: /s/ Bruce J. Rubin ------------------ Bruce J. Rubin President and Chief Executive Officer By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer By: /s/ Thomas W. Boland -------------------- Thomas W. Boland Vice President and Controller Dated: January 13, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacity and on the dates indicated. By:/s/ Bruce J. Rubin Date: January 13, 1999 ----------------------- ---------------- Bruce J. Rubin Director By:/s/ Terrence E. Fancher Date: January 13, 1999 ----------------------- ---------------- Terrence E. Fancher Director ANNUAL REPORT ON FORM 10-K Item 14(a)(3) PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP INDEX TO EXHIBITS
Page Number in the Report Exhibit No. Description of Document or Other Reference - ----------- ----------------------- ------------------------- C> (3) and (4) Prospectus of the Registrant Filed with the Commission dated May 26, 1983, 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 15(d) amendments thereto of the registrant of the Securities Exchange Act together with all such contracts filed of 1934 and incorporated as exhibits of previously filed Forms herein by reference. 8-K and Forms 10-K are hereby incorporated herein by reference. (13) Annual Reports to Limited Partners No Annual Report for the year ended September 30, 1998 has been sent to the Limited Partners. An Annual Report will be sent to the Limited Partners subsequent to this filing. (21) List of Subsidiaries Included in Item 1 of Part I of this Report Page I-1, to which reference is hereby made. (27) Financial Data Schedule Filed as last page of EDGAR submission following the Financial Statements and Financial Statement Schedule as required by Item 14.
ANNUAL REPORT ON FORM 10-K Item 14(a) (1) and (2) and 14(d) PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Reference --------- Paine Webber Income Properties Five Limited Partnership: Reports of independent auditors F-2 Balance sheets as of September 30, 1998 and 1997 F-4 Statements of operations for the years ended September 30, 1998, 1997 and 1996 F-5 Statements of changes in partners' capital (deficit) for the years ended September 30, 1998, 1997 and 1996 F-6 Statements of cash flows for the years ended September 30, 1998, 1997 and 1996 F-7 Notes to financial statements F-8 Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership: Reports of independent auditors F-18 Combined balance sheets as of September 30, 1998 and 1997 F-20 Combined statements of operations and changes in venturers' capital (deficit) for the years ended September 30, 1998, 1997 and 1996 F-21 Combined statements of cash flows for the years ended September 30, 1998, 1997 and 1996 F-22 Notes to combined financial statements F-23 Schedule III - Real estate and accumulated depreciation F-30 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 Income Properties Five Limited Partnership: We have audited the accompanying balance sheets of Paine Webber Income Properties Five Limited Partnership as of September 30, 1998 and 1997, and the related statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Randallstown Carriage Hill Associates (a joint venture in which the Partnership has an 80% and 40% interest as of September 30, 1998 and 1997, respectively) as of September 30, 1998 and 1997 and for the years then ended have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the financial statements relates to data included for Randallstown Carriage Hill Associates as of September 30, 1998 and 1997 and for the years then ended, it is based solely on their report. In the financial statements, the Partnership's investment in Randallstown Carriage Hill Associates is stated at $(6,207,000) at September 30, 1997, the Partnership's share of the net income (loss) of Randallstown Carriage Hill Associates is stated at $182,000 and $(123,000) for the years ended September 30, 1998 and 1997, respectively, and the Partnership's share of gain on sale of operating investment property is stated at $9,537,000 for the year ended September 30, 1998. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Paine Webber Income Properties Five Limited Partnership at September 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. /s/ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP Boston, Massachusetts December 18, 1998 Reznick Fedder & Silverman Certified Public Accountants 217 East Redwood Street, Suite 1900 Baltimore, MD 21202 INDEPENDENT AUDITORS' REPORT The Partners Randallstown Carriage Hill Associates: We have audited the accompanying balance sheets of Randallstown Carriage Hill Associates as of September 30, 1998 and 1997 and the related statements of operations, changes in partners' equity and cash flows for the years then ended. These financial statements are the responsibility of partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Randallstown Carriage Hill Associates as of September 30, 1998 and the results of its operations, the changes in partners' equity and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/Reznick Fedder & Silverman ----------------------------- Reznick Fedder & Silverman Baltimore, Maryland November 10, 1998 PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP BALANCE SHEETS September 30, 1998 and 1997 (In thousands, except per Unit amounts) ASSETS 1998 1997 ---- ---- Investments in joint venture, at equity $ 1,507 $ - Cash and cash equivalents 13,867 2,165 Accounts receivable - affiliates 345 - --------- -------- $ 15,719 $ 2,165 ========= ======== LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) Losses in excess of investments and advances in joint ventures $ - $ 3,305 Accounts payable - affiliates 878 - Accounts payable and accrued expenses 72 47 --------- -------- Total liabilities 950 3,352 Partners' capital (deficit): General Partners: Capital contributions 1 1 Cumulative net income (loss) 14 (146) Cumulative cash distributions (60) (60) Limited Partners ($1,000 per Unit; 34,928 Units issued): Capital contributions, net of offering costs 31,554 31,554 Cumulative net income (loss) 1,307 (14,489) Cumulative cash distributions (18,047) (18,047) --------- -------- Total partners' capital (deficit) 14,769 (1,187) --------- -------- $ 15,719 $ 2,165 ========= ======== See accompanying notes. PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS For the years ended September 30, 1998, 1997 and 1996 (In thousands, except per Unit amounts) 1998 1997 1996 ---- ---- ---- Revenues: Interest and other income $ 231 $ 98 $ 90 Expenses: Interest expense 63 - - General and administrative 259 236 222 ------- ----- ------- 322 236 222 ------- ----- ------- Operating loss (91) (138) (132) Partnership's share of ventures' income (losses) 529 213 (691) Partnership's share of gains on sale of operating investment properties 15,518 - - ------- ----- ------- Net income (loss) $15,956 $ 75 $ (823) ======= ===== ======= Net income (loss) per Limited Partnership Unit $452.25 $2.13 $(23.33) ======= ===== ======= The above net income (loss) per Limited Partnership Unit is based upon the 34,928 Limited Partnership Units outstanding during each year. See accompanying notes. PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended September 30, 1998, 1997 and 1996 (In thousands) General Limited Partners Partners Total -------- -------- ----- Balance at September 30, 1995 $ (198) $ (241) $ (439) Net loss (8) (815) (823) -------- -------- --------- Balance at September 30, 1996 (206) (1,056) (1,262) Net income 1 74 75 -------- -------- --------- Balance at September 30, 1997 (205) (982) (1,187) Net income 160 15,796 15,956 -------- -------- --------- Balance at September 30, 1998 $ (45) $ 14,814 $ 14,769 ======== ======== ========= See accompanying notes. PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the years ended September 30, 1998, 1997 and 1996 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 15,956 $ 75 $ (823) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Partnership's share of ventures' income (losses) (529) (213) 691 Partnership's share of gain on sales of operating investment properties (15,518) - - Changes in assets and liabilities: Accounts payable - affiliates 878 - - Accounts payable and accrued expenses 25 17 (8) --------- ------- ------- Total adjustments (15,144) (196) 683 --------- ------- ------- Net cash provided by (used in) operating activities 812 (121) (140) --------- ------- ------- Cash flows from investing activities: Distributions from joint ventures 15,080 533 249 Additional investments in and advances to joint ventures (4,190) (14) (628) Repayment of advances to joint ventures - 28 600 --------- ------- ------- Net cash provided by investing activities 10,890 547 221 --------- ------- ------- Net increase in cash and cash equivalents 11,702 426 81 Cash and cash equivalents, beginning of year 2,165 1,739 1,658 --------- ------- ------- Cash and cash equivalents, end of year $ 13,867 $ 2,165 $ 1,739 ========= ======= ======= Cash paid for interest $ 63 $ - $ - ========= ======= =======
See accompanying notes. PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP Notes to Financial Statements 1. Organization and Nature of Operations ------------------------------------- Paine Webber Income Properties Five Limited Partnership (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in January 1983 for the purpose of investing in a diversified portfolio of income-producing properties. The Partnership authorized the issuance of units (the "Units") of limited partnership interest (at $1,000 per Unit) of which 34,928 were subscribed and issued between May 26, 1983 and May 25, 1984. The Partnership originally invested the net proceeds of the public offering, through joint venture partnerships, in five operating investment properties, comprised of four multi-family apartment complexes and one retail shopping center. To date, three of the Partnership's original investments in multi-family apartment complexes have been sold, including two during fiscal 1998. See Note 4 for a further discussion of the Partnership's remaining real estate investments. The Partnership is currently focusing on potential disposition strategies for the two remaining investments in its portfolio. Although no assurances can be given, it is currently contemplated that sales of the Partnership's Seven Trails and Bell Plaza investments could be completed by the end of calendar year 1999. The sales of the two remaining properties would be followed by an orderly liquidation of the Partnership. 2. Use of Estimates and Summary of Significant Accounting Policies --------------------------------------------------------------- The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of September 30, 1998 and 1997 and revenues and expenses for each of the three years in the period ended September 30, 1998. Actual results could differ from the estimates and assumptions used. The accompanying financial statements include the Partnership's investments in certain joint venture partnerships which own operating properties. The Partnership accounts for its investments in joint venture partnerships using the equity method because the Partnership does not have a voting control interest in the ventures. Under the equity method the ventures are carried at cost adjusted for the Partnership's share of the ventures' earnings and losses and distributions. The Partnership's policy is to identify any permanent impairment to the carrying value of its joint venture investments on a specific identification basis. At September 30, 1998 and 1997, the carrying value of one of the Partnership's joint ventures is adjusted for an allowance for possible investment loss. See Note 4 for a discussion of this allowance account and a description of the joint venture partnerships. For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments which have original maturities of 90 days or less. The cash and cash equivalents appearing on the accompanying balance sheets represent financial instruments for purposes of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The carrying amount of cash and cash equivalents approximates their fair value as of September 30, 1998 and 1997 due to the short-term maturities of these instruments. No provision for income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. The principal difference between the Partnership's accounting on a federal income tax basis and the accompanying financial statements prepared in accordance with generally accepted accounting principals (GAAP) relates to the methods used to determine the depreciation expense on the unconsolidated operating investment properties. As a result of the difference in depreciation, the gains calculated upon the sale of the operating investment properties for GAAP purposes differ from those calculated for federal income tax purposes. 3. The Partnership Agreement and Related Party Transactions -------------------------------------------------------- The General Partners of the Partnership are Fifth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed generally 85% to the Limited Partners and 15% to the General Partners, after the prior receipt by the Limited Partners of their adjusted capital contributions and a cumulative, noncompounded return on their average adjusted capital contributions ranging from 10% to 6% depending on when a Limited Partner was admitted to the Partnership. All sale and refinancing proceeds received by the Partnership to date have been distributed to the Limited Partners in accordance with the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income and tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and to the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities: to administer day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee (4% of adjusted cash flow) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contribution) for services rendered. No management fees were earned during the three-year period ended September 30, 1998. Included in general and administrative expenses for the years ended September 30, 1998, 1997 and 1996 is $88,000, $85,000 and $81,000, 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"), an affiliate of the Managing General Partner, 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 $15,000, $6,000 and $4,000 for managing the Partnership's cash assets in fiscal 1998, 1997 and 1996, respectively, which amounts are included in general and administrative expenses on the accompanying statements of operations. Accounts receivable - affiliates at September 30, 1998 represents the Partnership's remaining share of the net sale proceeds and operating cash flow to be received from Greenbrier Associates subsequent to the sale of the Greenbrier Apartments (see Note 4). Such amount was received subsequent to year-end. Accounts payable - affiliates at September 30, 1998 represents the co-venturer's remaining share of the net sales proceeds to be distributed from the sale of the Carriage Hill Village Apartments and adjoining land. 4. Investments in Joint Venture Partnerships ----------------------------------------- As of September 30, 1998, the Partnership had investments in two joint ventures (four at September 30, 1997). The joint ventures are accounted for on the equity method in the Partnership's financial statements. Condensed combined financial statements of these joint ventures are as follows: Condensed Combined Balance Sheet September 30, 1998 and 1997 (in thousands) Assets 1998 1997 ---- ---- Current assets $ 2,014 $ 2,642 Operating investment properties, net 21,039 42,890 Other assets, net 413 2,200 --------- -------- $ 23,466 $ 47,732 ========= ======== Liabilities and Venturers' Deficit Current liabilities $ 1,877 $ 7,779 Other liabilities 878 878 Long-term mortgage debt, less current portion 19,266 46,893 Partnership's share of combined capital (deficit) 937 (3,798) Co-venturers' share of combined capital (deficit) 508 (4,020) --------- -------- $ 23,466 $ 47,732 ========= ======== Reconciliation of Partnership's Investments (in thousands) 1998 1997 ---- ---- Partnership's share of capital (deficit), as shown above $ 937 $ (3,798) Partnership's share of distributions and notes payable to venturers 870 793 Less: Allowance for possible investment loss (1) (300) (300) --------- -------- Investments in joint ventures, at equity, net $ 1,507 $ (3,305) ========= ======== (1)The carrying value of the Partnership's investments in joint ventures at both September 30, 1998 and 1997 is net of an allowance for possible investment loss of $300,000, which relates to the Amarillo Bell Associates joint venture. See discussion below for further details. Condensed Combined Summary of Operations For the years ended September 30, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ---- ---- ---- Revenues: Rental income and expense recoveries $ 12,057 $12,062 $11,646 Interest and other income 537 443 473 -------- ------- ------- 12,594 12,505 12,119 Expenses: Property operating expenses 5,371 5,055 5,602 Depreciation and amortization 2,616 2,805 2,647 Interest expense 4,434 4,503 4,955 -------- ------- ------- 12,421 12,363 13,204 -------- ------- ------- Operating income (loss) 173 142 (1,085) Gains on sale of operating investment properties 26,917 - - -------- ------- ------- Net income (loss) $ 27,090 $ 142 $(1,085) ======== ======= ======= Net income (loss): Partnership's share of combined income (loss) $ 23,068 $ 213 $ (691) Co-venturers' share of combined income (loss) 4,022 (71) (394) -------- ------- -------- $ 27,090 $ 142 $(1,085) ======== ======= ======= Reconciliation of Partnership's Share of Income (Loss) 1998 1997 1996 ---- ---- ---- Partnership's share of income (loss), as shown above $ 23,068 $ 213 $ (691) Transfer of ownership (1) (2,973) - - Additional contribution (1) (4,048) - - -------- ------ ------- Partnership's share of ventures' net income (loss) $ 16,047 $ 213 $ (691) ======== ====== ======= (1) As discussed further below, in June 1998, the Partnership received 80% of the partnership interest and 80% of the membership interest of one of its co-venture partners in the Randallstown Carriage Hill Associates and the Signature Partners, L.L.C. joint ventures, respectively, in exchange for cash in the amount of $4,048. At the time of the transaction, the co-venturer's partnership interest in the Randallstown Carriage Hill Associates joint venture had a historical cost basis of $(4,032) and its membership interest in the Signature Partners L.L.C. joint venture had a historical cost basis of $316. The Partnership's share of ventures' net income (loss) is presented as follows in the statements of operations (in thousands): 1998 1997 1996 ---- ---- ---- Partnership's share of ventures' income (loss) $ 529 $ 213 $ (691) Partnership's share of gains on sale of operating investment properties 15,518 - - -------- ------ ------- $ 16,047 $ 213 $ (691) ======== ====== ======= Investments in joint ventures, at equity, is the Partnership's net investment in the joint venture partnerships. These joint ventures are subject to partnership agreements which determine the distribution of available funds, the disposition of the venture's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the venture. Substantially all of the Partnership's investments in these joint ventures are restricted as to distributions. Investments in joint ventures, at equity, on the accompanying balance sheets at September 30, 1998 and 1997 is comprised of the following (in thousands): 1998 1997 ---- ---- Randallstown Carriage Hill Associates $ - $ (6,207) Signature Partners, L.L.C. - 246 Amarillo Bell Associates 1,518 1,578 Greenbrier Associates - 723 Seven Trails West Associates (11) 355 -------- --------- $ 1,507 $ (3,305) ======== ======== The Partnership received cash distributions from the ventures as set forth below (in thousands): 1998 1997 1996 ---- ---- ---- Amarillo Bell Associates $ 152 $ 198 $ - Greenbrier Associates 5,958 265 198 Randallstown Carriage Hill Associates 7,585 - 51 Signature Partners, L.L.C. 900 - - Seven Trails West Associates 485 70 - ------- -------- ------- $15,080 $ 533 $ 249 ======= ========= ======= A description of the ventures' properties and the terms of the joint venture agreements are summarized as follows: a) Randallstown Carriage Hill Associates ------------------------------------- On August 30, 1983, the Partnership acquired an interest in Randallstown Carriage Hill Associates, a Maryland general partnership organized to purchase and operate Carriage Hill Village Apartments, an 806-unit apartment complex in Randallstown, Maryland. The Partnership ("PWIP5") was a general partner in the joint venture. JBG Associates ("JBG") was the original co-venturer of the joint venture. The joint venture obtained necessary new capital by admitting Signature Development Corporation ("Signature") as a new partner in fiscal 1988. The amended partnership agreement provided for the admission of Signature as a 50% partner in the joint venture with JBG and PWIP5 (collectively "JBG/PW"). JBG and PWIP5's ownership percentages were adjusted, pro rata, to 10% and 40%, respectively. In return for its 50% interest, Signature committed to contribute up to $3,000,000 to the joint venture over the first three years, primarily to fund capital improvements, working capital needs and meet debt payments. The aggregate cash investment made by the Partnership for its initial interest was approximately $11,524,000 (including an acquisition fee of $1,150,000 paid to the Adviser). The apartment complex was acquired subject to four mortgages; two institutional nonrecourse first mortgages with balances totalling approximately $6,136,000 at the time of closing, and two second mortgage notes from the seller of the property with balances totalling $6,000,000 at the time of closing. On December 30, 1986, the Partnership refinanced the aforementioned debt by obtaining a $28,000,000 non-recourse mortgage loan. The Partnership received a distribution of approximately $9,926,000 in fiscal 1987, reflecting its share of the excess refinancing proceeds. In fiscal 1995, the venture's mortgage debt was refinanced again. The new mortgage loan, in the initial principal amount of approximately $27.9 million, had a fixed interest rate of 7.65% and a term of 35 years. The new loan also released from the collateral a 23-acre parcel of excess land. The venture distributed this land parcel, which had a carrying value of $563,000, to a new entity, Signature Partners, L.L.C., in conjunction with the refinancing transaction. Signature Partners, L.L.C. was owned by Signature, JBG and the Partnership with the same ownership interest percentages as in the Carriage Hill joint venture agreement. On June 23, 1998, the Partnership and its original co-venture partner purchased the 50% interest of its other co-venture partner, Signature, in the Joint Venture. The Partnership had held a 40% interest and the original co-venture partner had held a 10% interest in the Joint Venture prior to this transaction. After the purchase, the Partnership held an 80% interest and the original co-venture partner held a 20% interest. On March 19, 1998, the Partnership was notified by Signature that it would be exercising the "buy/sell" provision in the Joint Venture agreement. Under the terms of this provision, this co-venturer, which was admitted to the Joint Venture as part of a 1988 restructuring transaction, had to propose a price at which it would either purchase the other partners' interests in the Venture or agree to the sale of its interest in the Venture to the other partners. The Partnership and its original co-venture partner in the Carriage Hill Joint Venture had 45 days to decide whether to sell their interests to the exercising partner or acquire the interest of the exercising partner at the specified gross sale price for the Venture's assets of approximately $33.3 million. At an equivalent gross sale price of $33.3 million, the net proceeds to the Partnership for the sale of its interest would have been approximately $700,000 after repayment of the outstanding first mortgage debt of $27.4 million, the exercising partner's preferred investment return of approximately $5 million and the original co-venturer's share of the proceeds of $200,000. After a thorough review and analysis, the Partnership and the original co-venturer notified the exercising partner on May 1, 1998 of their decision to buy its interest for approximately $5 million in cash and put up a $300,000 deposit in connection with the pending transaction in accordance with the terms of the Joint Venture agreement. The Partnership obtained its 80% share of the needed $5 million by executing a $4 million demand note to PaineWebber Capital, Inc., an affiliate of the Managing General Partner of the Partnership. The note bore interest at a rate of 6.56% per annum. The loan proceeds were repaid on September 11, 1998 from a combination of cash reserves and the net proceeds from the sale of the Greenbrier Apartments on September 10, 1998. The Partnership contributed a total of $4,048,000 and JBG contributed $1,012,000 to complete the purchase of Signature's interest. On September 21, 1998, the joint venture and Signature Partners LLC sold the Carriage Hill Village Apartments and adjoining land to unrelated third parties for an aggregate sale price of $37,350,000. The Partnership received net proceeds of approximately $8,481,000 after the receipt of a credit of $1,168,000 for property adjustments and escrows held by the Department of Housing and Urban Development (HUD) for tenant security deposits, real estate taxes, property insurance and replacement reserves, and after deducting closing costs of approximately $757,000, the assumption of the existing first mortgage loan of $27,298,000 and a payment of approximately $1,982,000 to the Partnership's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. Of the total proceeds received by the Partnership of $8,481,000, as discussed further above, $4 million represented a reimbursement of funds originally advanced to buy out the selling co-venture partner's interest in the Carriage Hill joint venture on June 23, 1998. b) Amarillo Bell Associates ------------------------ On September 30, 1983, the Partnership acquired a 50% interest in Amarillo Bell Associates, an existing Texas general partnership which owns a 144,000 square foot shopping center in Amarillo, Texas. The Partnership is a general partner in the joint venture. The Partnership's co-venturer is an affiliate of The Boyer Company. The aggregate investment by the Partnership for its interest was approximately $2,222,000 (including an acquisition fee of $230,000 paid to the Adviser). On June 19, 1995, the Partnership completed the refinancing of the existing first mortgage loan secured by Bell Plaza, reducing the interest rate from 9.4% to 8.125%. The new loan, in the initial principal amount of $3,300,000, has a seven-year term and requires monthly principal and interest payments based upon a twenty-five year amortization schedule. The terms of the loan allow for a prepayment of the principal balance after the end of one year. At September 30, 1998, the balance of the mortgage loan, which matures on July 1, 2002, was approximately $3,153,000. Subsequent to the end of fiscal 1990, the Partnership had entered into negotiations with its co-venture partner to execute a purchase and sale agreement for the sale of the Partnership's interest in the joint venture. The proposed agreement would have given the co-venturer an option to purchase the Partnership's interest for $1,500,000. Because the option price was below the equity method carrying value of the Partnership's investment in Amarillo Bell Associates at September 30, 1990, the Partnership recognized a provision for possible investment loss of $300,000 in fiscal 1990 which reflected an estimate of the loss that would have been incurred if the option had been executed and exercised. The co-venturer was unable to obtain financing to complete this transaction and the option was never executed. The $300,000 allowance for possible investment loss remains on the Partnership's balance sheet at September 30, 1998 due to management's belief that it represents a permanent impairment to the carrying value of the investment in the Bell Plaza joint venture. The joint venture agreement provides that the Partnership will receive from cash flow an annual non-cumulative preferred return, payable monthly, of 50% of the distributable cash flow with a minimum of $164,000 from October 1, 1988 annually through September 30, 1990. For the period after September 30, 1990, the Partnership will receive an annual distribution paid on a monthly basis equal to 50% of distributable cash flow. The co-venturer will receive an annual non-cumulative base return payable quarterly equal to the available cash flow after the Partnership's return as set forth above. Taxable income before depreciation will be allocated to the Partnership and the co-venturer first in the same amount as cash is distributed, and any balance will be allocated 50% to the Partnership and 50% to the co-venturer. If no cash flow is available, then 100% is to be allocated to the Partnership. Depreciation will be allocated to the partners as it is attributable to their respective basis in the depreciable assets. Allocations of income and loss for financial accounting purposes have been made in accordance with the allocations of taxable income or tax loss. If additional cash is required for any reason in connection with the joint venture, it is to be provided in equal proportions by the Partnership and the co-venturer. Per the terms of the joint venture agreement, distributions from a sale of the operating investment property and/or refinancing proceeds will be as follows, after the payment of mortgage debts and to the extent not previously returned to each partner: 1) to the Partnership, an amount equal to the Partnership's gross investment, 2) to the co-venturer, $2,140,000, 3) payment of all unpaid accrued interest on all outstanding operating notes and then to the repayment of the principal of all outstanding operating notes, 4) payment of any accrued subordinated management fees, 5) any remaining balance thereof shall be distributed 50% to the Partnership and 50% to the co-venturer. The joint venture has entered into a property management contract with an affiliate of the co-venturer cancellable at the option of the Partnership upon the occurrence of certain events. The management fee is equal to 4% of gross rents. c) Greenbrier Associates --------------------- On June 29, 1984, the Partnership acquired an interest in Greenbrier Associates, an Indiana general partnership that owned and operated Greenbrier Apartments, a 324-unit apartment complex located in Indianapolis, Indiana. The Partnership was a general partner in the joint venture. The Partnership's co-venturer was an affiliate of the Paragon Group. The aggregate cash investment made by the Partnership for its interest was approximately $4,109,000 (including an acquisition fee of $432,000 paid to the Adviser). The apartment complex was encumbered by a first mortgage loan with a balance of $5,400,000 at September 30, 1997. In 1993, the joint venture exercised an option to extend the maturity date of the loan to June 29, 1998, at which time the entire principal and any unpaid accrued interest were due. On September 10, 1998, the joint venture sold the Greenbrier Apartments to an unrelated third party for $11,850,000. The Partnership received net proceeds of approximately $5,498,000 after deducting closing costs of approximately $119,000, closing proration adjustments of approximately $424,000, the repayment of the existing first mortgage loan of $5,400,000 and related accrued interest of approximately $26,000, and a payment of approximately $383,000 to the Partnership's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. Because the first mortgage loan secured by the Greenbrier Apartments was scheduled to mature on June 29, 1998, the Partnership and its joint venture partner had begun to review both refinancing and sale opportunities during the latter part of fiscal 1997. During the first quarter of fiscal 1998, the Partnership and the co-venturer agreed to initiate a marketing program for the possible sale of the property. During the second quarter, the Partnership and the co-venturer engaged a national real estate brokerage firm to market Greenbrier for sale. As part of the formal marketing campaign, which began in early March, the property was marketed extensively. Sales packages were distributed to national, regional, and local prospective purchasers. As a result of these sales efforts, several offers were received. Management then asked the prospective purchasers to submit best and final offers. Management subsequently received best and final offers from five of the prospective buyers. After completing an evaluation of the final offers and the relative strength of the prospective purchasers, the Partnership and its co-venture partner selected an offer and negotiated a purchase and sale agreement. As a result of the sale of Greenbrier Apartments, the Partnership made a special distribution of $100 per original $1,000 investment, or approximately $3,493,000, on October 1, 1998 to unitholders of record as of the September 10, 1998 sale date. The remaining net proceeds from the sale of Greenbrier of approximately $2,005,000, along with an amount of the Partnership's cash reserves, were used to help pay off a $4,000,000 demand loan that the Partnership had obtained from PaineWebber Capital, Inc., an affiliate of the Managing General Partner, during fiscal 1998 to finance the restructuring of the Carriage Hill joint venture discussed further above. d) Seven Trails West Associates ---------------------------- On September 13, 1984, the Partnership acquired an interest in Seven Trails West Associates, a Missouri general partnership that owns and operates Seven Trails West Apartments, a 532-unit apartment complex in Ballwin, Missouri. The Partnership is a general partner in the joint venture. The aggregate cash investment by the Partnership for its interest was approximately $10,011,000 (including an acquisition fee of $1,050,000 paid to the Adviser). On April 17, 1996, the Partnership successfully completed the refinancing of the existing first mortgage loan secured by the Seven Trails West Apartments, reducing the annual interest rate from 12% to 7.87%. The new loan, in the initial principal amount of $17,000,000, is for a term of ten years with monthly payments of principal and interest totalling $130,000. The proceeds of the new loan, together with a contribution of $159,000 from the joint venture, were used to pay off all obligations of the prior first mortgage loan as well as to fund all reserves and escrows required by the new lender. Because the prior mortgage loan was not repaid by February 1, 1996, the joint venture forfeited a $147,000 fee which had been paid to the prior lender in connection with a fiscal 1994 extension agreement and was to be refundable under certain conditions. The joint venture agreement provides that the Partnership will receive from available cash flow an annual cumulative preferred base return, payable monthly, of $875,000. The Partnership's preference return was cumulative on a year to year basis through September 30, 1987 and is cumulative monthly but not annually thereafter. The cumulative preference return of the Partnership in arrears at September 30, 1998 for unpaid preference returns through September 30, 1987 is approximately $1,691,000. As such amount is payable only from future available sale or refinancing proceeds, as set forth below, it is not accrued in the joint venture's financial statements. After the Partnership has received its preferred return, the co-venturer is then entitled to receive an annual noncumulative, subordinated base return, payable quarterly, of $50,000. Any cash flow not previously distributed at the end of each fiscal year will be applied as follows: to the payment of all unpaid accrued interest on all outstanding operating notes; $250,000 of cash flow in any year will be distributed 90% to the Partnership and 10% to the co-venturer; the next $300,000 of annual cash flow will be distributed 80% to the Partnership and 20% to the co-venturer; thereafter, any excess cash flow will be distributed 70% to the Partnership and 30% to the co-venturer. Taxable income or tax loss from operations will be allocated in the same proportions as cash distributions, but in no event less than 10% to the co-venturer. Additionally, the co-venturer shall not be allocated net profits in excess of net cash flow distributed to it during the fiscal year. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. If additional cash is required for any reason in connection with the joint venture, the joint venture agreement calls for such funds to be provided by the Partnership and the co-venturer as loans to the joint venture. Such loans would be provided 90% by the Partnership and 10% by the co-venturer. Through September 30, 1998, operating notes have been provided by the Partnership and co-venturer in the amounts of $836,000 and $11,000, respectively. The notes bear interest at the prime interest rate of a local bank. The Partnership advanced 100% of the funds required to close a loan modification and extension agreement in fiscal 1994. The portion of such operating notes representing the co-venture partner's 10% share of the required funds bears interest at twice the rate of the regular operating notes and the accrued interest on such notes is payable as the first priority from net cash flow, as defined. Any proceeds arising from a refinancing, sale or exchange or other disposition of property will be distributed first to the payment of unpaid principal and accrued interest on any outstanding notes. Any remaining proceeds will be distributed in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes to the Partnership and the co-venturer; and any remaining balance distributed 90% to the Partnership and 10% to the co-venturer. The joint venture originally entered into a property management contract with an affiliate of the co-venturer, cancellable at the option of the Partnership upon the occurrence of certain events. On April 1, 1997, management of the operating property was transferred to an unrelated third party. The management fee to the prior affiliated manager was equal to 5% of the gross receipts collected from the property. 5. Subsequent event ---------------- On October 1, 1998, the Partnership made a special distribution of approximately $3,493,000 to the Limited Partners of the net proceeds from the sale of the Greenbrier Apartments. REPORT OF INDEPENDENT AUDITORS The Partners of Paine Webber Income Properties Five Limited Partnership: We have audited the accompanying combined balance sheets of the Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership as of September 30, 1998 and 1997, and the related combined statements of operations and changes in venturers' capital (deficit), and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Randallstown Carriage Hill Associates (a joint venture in which the Partnership has an 80% and 40% interest as of September 30, 1998 and 1997, respectively) as of September 30, 1998 and 1997 and for the years then ended. Those statements reflect total assets of $16,861,000 as of September 30, 1997, total revenues of $5,621,000 and $5,529,000 for the years ended September 30, 1998 and 1997, respectively, and a gain on the sale of operating investment property of $20,644,000 for the year ended September 30, 1998. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Randallstown Carriage Hill Associates as of September 30, 1998 and 1997 and for the years then ended, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership at September 30, 1998 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the report of other auditors, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP Boston, Massachusetts November 23, 1998 Reznick Fedder & Silverman Certified Public Accountants 217 East Redwood Street, Suite 1900 Baltimore, MD 21202 INDEPENDENT AUDITORS' REPORT The Partners Randallstown Carriage Hill Associates: We have audited the accompanying balance sheets of Randallstown Carriage Hill Associates as of September 30, 1998 and 1997 and the related statements of operations, changes in partners' equity and cash flows for the years then ended. These financial statements are the responsibility of partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Randallstown Carriage Hill Associates as of September 30, 1998 and 1997 and the results of its operations, the changes in partners' equity and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/Reznick Fedder & Silverman ----------------------------- Reznick Fedder & Silverman Baltimore, Maryland November 10, 1998 COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP COMBINED BALANCE SHEETS September 30, 1998 and 1997 (In thousands) Assets 1998 1997 ---- ---- Current assets: Cash and cash equivalents $ 1,020 $ 833 Escrow deposits 823 1,103 Accounts receivable 93 129 Prepaid expenses 78 577 ---------- -------- Total current assets 2,014 2,642 Operating investment properties: Land 3,229 5,250 Buildings, improvements and equipment 33,181 70,929 ---------- -------- 36,410 76,179 Less accumulated depreciation (15,371) (33,289) ---------- -------- Net operating investment properties 21,039 42,890 Reserve for capital expenditures - 764 Deferred expenses, net of accumulated amortization of $338 ($334 in 1997) 413 1,295 Other assets, net - 141 ---------- -------- $ 23,466 $ 47,732 ========== ======== Liabilities and Venturers' Capital (Deficit) Current liabilities: Current portion of long-term debt $ 328 $ 5,898 Accounts payable 45 104 Accounts payable - affiliates - 51 Accrued real estate taxes 303 526 Accrued interest 489 643 Tenant security deposits 122 395 Distributions payable to venturers 538 61 Other current liabilities 52 101 ---------- -------- Total current liabilities 1,877 7,779 Notes payable to venturers 847 847 Other liabilities 31 31 Long-term debt 19,266 46,893 Venturers' capital (deficit) 1,445 (7,818) ---------- -------- $ 23,466 $ 47,732 ========== ======== See accompanying notes. COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT) For the years ended September 30, 1998, 1997 and 1996 (In thousands) 1998 1997 1996 ---- ---- ---- Revenues: Rental income and expense recoveries $12,057 $12,062 $11,646 Interest and other income 537 443 473 ------- ------- ------- 12,594 12,505 12,119 Expenses: Interest expense 4,434 4,503 4,955 Depreciation expense 2,556 2,745 2,616 Real estate taxes 1,005 1,025 958 Repairs and maintenance 880 816 920 Salaries and related expenses 1,456 1,333 1,454 Utilities 690 710 958 General and administrative 545 449 577 Management fees 491 591 573 Insurance 140 131 137 Bad debt expense 164 - 25 Amortization expense 60 60 31 ------- ------- ------- 12,421 12,363 13,204 ------- ------- ------- Operating income (loss) 173 142 (1,085) Gains on sale of operating investment properties 26,917 - - ------- ------- ------- Net income (loss) 27,090 142 (1,085) Contributions from venturers 237 - - Distributions to venturers (18,064) (710) (444) Venturers' deficit, beginning of year (7,818) (7,250) (5,721) ------- ------- ------- Venturers' capital (deficit), end of year $ 1,445 $(7,818) $(7,250) ======= ======= ======= See accompanying notes. COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS For the years ended September 30, 1998, 1997 and 1996 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 27,090 $ 142 $ (1,085) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sales of operating investment properties (26,917) - - Depreciation and amortization 2,616 2,805 2,647 Amortization of deferred financing costs 47 47 70 Changes in assets and liabilities: Escrow deposits 280 (18) (55) Accounts receivable 36 (46) 47 Prepaid expenses 499 (4) 91 Deferred expenses - (22) (86) Other assets 141 - - Accounts payable (59) (101) 88 Accounts payable - affiliates - (69) 90 Accrued real estate taxes (223) 15 (37) Accrued interest (154) (5) 63 Tenant security deposits (273) 45 (14) Other current liabilities (49) (1) (19) Deferred interest - - (1,657) Other liabilities - - 17 ------- ---------- --------- Total adjustments (24,056) 2,646 1,245 ------- ---------- --------- Net cash provided by operating activities 3,034 2,788 160 ------- ---------- --------- Cash flows from investment activities: Proceeds from sales of operating investment properties 48,079 - - Additions to operating investment properties (1,092) (782) (1,903) Decrease (increase) in reserve for capital expenditures 764 (400) 325 ------- ---------- --------- Net cash provided by (used in) investing activities 47,751 (1,182) (1,578) ------- ---------- --------- Cash flows from financing activities: Proceeds from long-term debt - - 17,000 Payment of deferred financing costs - - (243) Contributions by venturers 186 - - Distributions to venturers (17,587) (781) (312) Repayment of long-term debt 33,197) (461) (14,984) Repayment of notes to partners - - (119) ------- ---------- --------- Net cash (used in) provided by financing activities (50,598) (1,242) 1,342 ------- ---------- --------- Net increase (decrease) in cash and cash equivalents 187 364 (76) Cash and cash equivalents, beginning of year 833 469 545 ------- ---------- --------- Cash and cash equivalents, end of year $ 1,020 $ 833 $ 469 ======= ========== =========== Cash paid during the year for interest $ 4,541 $ 4,461 $ 6,479 ======= ========== ==========
See accompanying notes. COMBINED JOINT VENTURES of PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP Notes to Combined Financial Statements 1. Organization and Nature of Operations ------------------------------------- The accompanying financial statements of the Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership (Combined Joint Ventures) include the accounts of Randallstown Carriage Hill Associates, a Maryland general partnership; Signature Partners, L.L.C., a Maryland limited liability company; Amarillo Bell Associates, a Texas general partnership; Greenbrier Associates, an Indiana general partnership; and Seven Trails West Associates a Missouri general partnership. The financial statements of the Combined Joint Ventures are presented in combined form due to the nature of the relationship between the co-venturers and Paine Webber Income Properties Five Limited Partnership (PWIP5), which owns a majority financial interest but does not have voting control in each joint venture. The dates of PWIP5's acquisition of interests in the joint ventures are as follows: Date of Acquisition Joint Venture of Interest ------------------------------------- ------------------- Randallstown Carriage Hill Associates 8/30/83 Signature Partners L.L.C. 6/1/95 Amarillo Bell Associates 9/30/83 Greenbrier Associates 6/29/84 Seven Trails West Associates 9/13/84 During fiscal 1998 Randallstown Carriage Hill Associates sold the Carriage Hill Village Apartments to an unrelated third party. Signature Partners L.L.C. sold its land to the same unrelated third party. In addition, during fiscal 1998 Greenbrier Associates sold the Greenbrier Apartments to an unrelated third party. See Note 3 for a further discussion of these transactions. 2. Use of Estimates and Summary of Significant Accounting Policies --------------------------------------------------------------- The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of September 30, 1998 and 1997 and revenues and expenses for each of the three years in the period ended September 30, 1998. Actual results could differ from the estimates and assumptions used. Basis of presentation --------------------- Generally, the records of the combined joint ventures are maintained on the income tax basis of accounting and adjusted to generally accepted accounting principles for financial reporting purposes, principally for depreciation. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the current year presentation. Operating investment properties ------------------------------- The operating investment properties are carried at cost, reduced by accumulated depreciation, or an amount less than cost if indicators of impairment are present in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted in fiscal 1997. SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The Combined Joint Ventures generally assess indicators of impairment by a review of independent appraisal reports on each operating investment property. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the buildings, improvements and equipment, generally, five to forty years. Professional fees and other costs incurred in connection with the acquisition of the properties have been capitalized and are included in the cost of the land and buildings. Deferred expenses ----------------- Deferred expenses consist of leasing commissions and loan fees which are being amortized over the terms of the related leases and loans, respectively. Amortization of deferred loan fees, which is calculated using the effective interest method, is included in interest expense on the accompanying statements of operations. Revenue Recognition ------------------- The Combined Joint Ventures lease space at the operating investment properties under short-term and long-term operating leases. Rental revenues are recognized on a straight-line basis as earned pursuant to the terms of the leases. Income tax matters ------------------ The Combined Joint Ventures are comprised of entities which are not taxable and accordingly, the results of their operations are included on the tax returns of the various partners. Accordingly no income tax provision is reflected in the accompanying combined financial statements. Cash and cash equivalents ------------------------- For purposes of the statement of cash flows, the Partnerships consider all short-term investments with original maturity dates of 90 days or less to be cash equivalents. Fair Value of Financial Instruments ----------------------------------- The carrying amounts of cash and cash equivalents and escrow deposits approximate their fair values as of September 30, 1998 and 1997 due to the short-term maturities of these instruments. It is not practicable for management to estimate the fair value of the notes payable to venturers because the obligations were provided in non-arm's length transactions without regard to fixed maturities, collateral issues or other traditional conditions and covenants. Information regarding the fair value of long-term debt is provided in Note 5. The fair value of long-term debt is estimated using discounted cash flow analyses, based on the current market rates for similar types of borrowing arrangements. Escrow deposits --------------- Escrow deposits at September 30, 1998 and 1997 consist of tenant security deposits, amounts escrowed for the payment of insurance premiums, real estate taxes and repair and replacement funds. Reserve for Capital Expenditures -------------------------------- In connection with the mortgage loan of the Carriage Hill joint venture, an escrow reserve account was established for replacements stipulating that a portion of each month's mortgage payment is to be deposited in the reserve for replacement account. When repairs are made, the joint venture pays the vendor and then the lender reimburses the joint venture and reduces the escrow account by the amount of the expenditure. These funds can only be used for making necessary repairs as stipulated in the mortgage agreement. 3. Joint Ventures -------------- See Note 4 to the financial statements of PWIP5 in this Annual Report for a more detailed description of the joint venture partnerships. Descriptions of the ventures' properties are summarized below: a. Randallstown Carriage Hill Associates ------------------------------------- The joint venture owned and operated the Carriage Hill Village Apartments, an 806-unit apartment complex located in Randallstown, Maryland. b. Signature Partners, L.L.C. ------------------------- This limited liability company owned a 23-acre parcel of land located in Randallstown, Maryland. On June 23, 1998, PWIP 5 and its original co-venture partner purchased the 50% interest of its other co-venture partner, Signature Carriage Hill Village Apartments Limited Partnership ("Signature"), in the Randallstown Carriage Hill Associates Joint Venture. PWIP 5 had held a 40% interest and the original co-venture partner had held a 10% interest in the Joint Venture prior to this transaction. After the purchase, PWIP 5 held an 80% interest and the original co-venture partner held a 20% interest. On March 19, 1998, PWIP 5 was notified by Signature that it would be exercising the "buy/sell" provision in the Joint Venture agreement. Under the terms of this provision, this co-venturer, which was admitted to the Joint Venture as part of a 1988 restructuring transaction, had to propose a price at which it would either purchase the other partners' interests in the Venture or agree to the sale of its interest in the Venture to the other partners. PWIP 5 and its original co-venture partner in the Carriage Hill Joint Venture had 45 days to decide whether to sell their interests to the exercising partner or acquire the interest of the exercising partner at the specified gross sale price for the Venture's assets of approximately $33.3 million. At an equivalent gross sale price of $33.3 million, the net proceeds to PWIP 5 for the sale of its interest would have been approximately $700,000 after repayment of the outstanding first mortgage debt of $27.4 million, the exercising partner's preferred investment return of approximately $5 million and the original co-venturer's share of the proceeds of $200,000. After a thorough review and analysis, PWIP 5 and the original co-venturer notified the exercising partner on May 1, 1998 of their decision to buy its interest for approximately $5 million in cash and put up a $300,000 deposit in connection with the pending transaction in accordance with the terms of the Joint Venture agreement. On September 21, 1998, Randallstown Carriage Hill Associates and Signature Partners LLC sold Carriage Hill Village Apartments and the adjoining land to unrelated third parties for an aggregate sale price of $37,350,000. PWIP 5 received net proceeds of approximately $8,481,000 after the receipt of a credit of $1,168,000 for property adjustments and escrows held by the Department of Housing and Urban Development (HUD) for tenant security deposits, real estate taxes, property insurance and replacement reserves, and after deducting closing costs of approximately $757,000, the assumption of the existing first mortgage loan of $27,298,000 and a payment of approximately $1,982,000 to PWIP 5's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. c. Amarillo Bell Associates ------------------------ The joint venture owns and operates the Bell Plaza Shopping Center, a 144,000 gross leasable square foot shopping center located in Amarillo, Texas. d. Greenbrier Associates --------------------- The joint venture owned and operated the Greenbrier Apartments, a 324-unit apartment complex located in Indianapolis, Indiana. On September 10, 1998, Greenbrier Associates, sold the Greenbrier Apartments to an unrelated third party for $11,850,000. PWIP 5 received net proceeds of approximately $5,498,000 after deducting closing costs of approximately $119,000, closing proration adjustments of approximately $424,000, the repayment of the existing first mortgage loan of $5,400,000 and related accrued interest of approximately $26,000, and a payment of approximately $383,000 to the PWIP 5's co-venture partner for its share of the sales proceeds in accordance with the joint venture agreement. Because the first mortgage loan secured by the Greenbrier Apartments was scheduled to mature on June 29, 1998, PWIP 5 and its joint venture partner had begun to review both refinancing and sale opportunities during the latter part of fiscal 1997. During the first quarter of fiscal 1998, PWIP 5 and the co-venturer agreed to initiate a marketing program for the possible sale of the property. During the second quarter, PWIP 5 and the co-venturer engaged a national real estate brokerage firm to market Greenbrier for sale. As part of the formal marketing campaign, which began in early March, the property was marketed extensively. Sales packages were distributed to national, regional, and local prospective purchasers. As a result of these sales efforts, several offers were received. Management then asked the prospective purchasers to submit best and final offers. Management subsequently received best and final offers from five of the prospective buyers. After completing an evaluation of the final offers and the relative strength of the prospective purchasers, PWIP 5 and its co-venture partner selected an offer and negotiated a purchase and sale agreement. e. Seven Trails West Associates ---------------------------- The joint venture owns and operates the Seven Trails West Apartments, a 532-unit apartment complex located in Ballwin, Missouri. The following description of the joint venture agreements provides certain general information. Allocations of net income and loss ---------------------------------- The agreements generally provide that taxable income and losses (other than those resulting from sales or other dispositions of the projects) will be allocated between PWIP5 and the co-venturers in the same proportions as cash flow distributed from operations, except for certain items which are specifically allocated to the partners, as set forth in the joint venture agreements. Gains or losses resulting from sales or other dispositions of the projects shall be allocated as specified in the joint venture agreements. Allocations of income and loss for financial accounting purposes have been made in accordance with the actual joint venture agreement. Distributions ------------- The joint venture agreements generally provide that distributions will be paid on an annual basis first to PWIP5, in specified amounts ranging from $283,500 to $875,000 as a preferred return. After payment of PWIP5's preference return, the agreements generally provide for certain preferred payments, up to specified amounts, to be paid to the co-venturers. Any remaining distributable cash will be paid in proportions ranging from 90% to 50% to PWIP5 and 10% to 50% to the co-venturers, as set forth in the joint venture agreements. Distributions of net proceeds upon the sale or refinancing of the projects shall be made in accordance with formulas provided in the joint venture agreements. 4. Related Party Transactions -------------------------- The Combined Joint Ventures originally entered into property management agreements with affiliates of the co-venturers, cancelable at the joint ventures' option upon the occurrence of certain events. These original management fees were equal to between 4% and 5% of gross receipts, as defined in the agreements. As of April 1, 1997, management of the Greenbrier and Seven Trails properties was transferred to unrelated third parties. Accounts payable - affiliates at September 30, 1998 and 1997 are principally management fees and reimbursements payable to property managers. Notes payable to venturers at September 30, 1998 and 1997 represent operating notes provided by PWIP5 and its co-venturer to Seven Trails West Associates in the amount of $847,000. Such loans generally bear interest at the prime rate and are payable only out of the respective venture's available net cash flow or sale or refinancing proceeds. 5. Long-term Debt -------------- Long-term debt at September 30, 1998 and 1997 consists of the following (in thousands): 1998 1997 ---- ---- 7.65% mortgage note to a financial institution, due in 2030. Payments are made in monthly installments of $191, including principal and interest. The mortgage note is secured by the property owned by Randallstown Carriage Hill Associates and is subject to certain escrow deposit requirements. The mortgage note is co-insured by the Secretary of Housing and Urban Development (HUD) in accordance with the provisions of the National Housing Act and the laws of the State of Maryland. The fair value of this note payable approximated its carrying value as of September 30, 1997. $ - $ 27,494 8.125% nonrecourse mortgage note secured by land and building owned by Amarillo Bell Associates, guaranteed by the co-venturer. Payable in monthly installments of $26, including interest, with a final payment of approximately $2,943 due July 1, 2002. The fair value of this note payable approximated its carrying value as of September 30, 1998 and 1997. 3,153 3,204 Wrap-around mortgage note of $5,400 secured by the Greenbrier Associates property which bears interest at 10% payable monthly. The entire principal of $5,400 and any unpaid accrued interest was due June 29, 1998. The fair value of this note payable approximated its carrying value as of September 30, 1997. - 5,400 7.87% nonrecourse mortgage note secured by the Seven Trails West Associates operating investment property bearing interest at 7.87% per annum. The mortgage is payable in monthly installments, including principal and interest, of $130 through May 1, 2006, at which time the final principal installment of $13,724 plus any unpaid accrued interest is due. The fair value of this note payable approximated its carrying value as of September 30, 1998 and 1997. 16,441 16,693 --------- --------- 19,594 52,791 Less current portion (328) (5,898) --------- --------- $ 19,266 $ 46,893 ========= ========= Maturities of long-term debt, which is all non-recourse to the joint ventures and PWIP5, for each of the next five fiscal years and thereafter are as follows (in thousands): 1999 $ 328 2000 354 2001 383 2002 3,320 2003 373 Thereafter 14,836 ------- $19,594 ======= On April 17, 1996, the Seven Trails joint venture successfully completed the refinancing of the existing first mortgage loan secured by the Seven Trails West Apartments, reducing the annual interest rate from 12% to 7.87%. The new loan, in the initial principal amount of $17,000,000, is for a term of ten years. The proceeds of the new loan, together with a contribution of $159,000 from the joint venture, were used to pay off all obligations of the prior first mortgage loan as well as to fund all reserves and escrows required by the new lender. Because the prior mortgage loan was not repaid by February 1, 1996, the joint venture forfeited a $147,000 fee which had been paid to the prior lender in connection with a fiscal 1994 extension agreement and was to be refundable under certain conditions. As part of the new loan agreement, reserves for agreed upon repairs and future replacements aggregating approximately $209,000 were established in escrow accounts with the mortgage lender. 6. Leases ------ Minimum annual future lease revenues under noncancellable operating leases at the Bell Plaza Shopping Center (owned by Amarillo Bell Associates) as of September 30, 1998 are as follows (in thousands): 1999 $ 676 2000 489 2001 437 2002 428 2003 428 Thereafter 3,090 ------- $ 5,548 ======= Revenues from three major tenants of the Bell Plaza Shopping Center comprised approximately 33%, 15% and 11% of the total rental revenues of Amarillo Bell Associates for the year ended September 30, 1998. The duration of these leases extend between the years 1999 and 2014 and the tenants are subject to a base rent and a percentage rent which fluctuates with sales volume. Schedule III - Real Estate and Accumulated Depreciation COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION September 30, 1998 (In thousands)
Life on Which Initial Cost of Costs Gross Amount at Which Carried at Depreciation Partnership Capitalized Close of period in Latest Buildings (Removed) Buildings Income and Subsequent to and Accumulated Date of Date Statement Description Encumbrances Land Improvements Acquisition(1) Land Improvements Total Depreciation Construction Acquired is Computed - ----------- ------------ ---- ------------ -------------- ---- ------------ ----- ------------ ------------ -------- ----------- COMBINED JOINT VENTURES: Shopping Center $ 3,153 $1,519 $ 6,310 $ 1,167 $1,519 $ 7,477 $ 8,996 $ 3,314 1979-82 9/30/83 5-40 yrs. Amarillo, TX Apartment Complex Ballwin, MO 16,441 1,710 22,131 3,573 1,710 25,704 27,414 12,057 1968-74 9/13/84 5-30 yrs. ------- ------ ------- ------- ------ ------- ------- ------- Total $19,594 $3,229 $28,441 $ 4,740 $3,229 $33,181 $36,410 $15,371 ======= ====== ======= ======= ====== ======= ======= ======= Notes (A) The aggregate cost of real estate owned at September 30, 1998 for Federal income tax purposes is approximately $34,410. (B) See Note 5 to Combined Financial Statements for a description of the terms of the debt encumbering the properties. (C) Reconciliation of real estate owned: 1998 1997 1996 ---- ---- ---- Balance at beginning of period $ 76,179 $ 75,397 $ 73,494 Acquisitions and improvements 1,092 782 1,903 Dispositions (40,861) - - -------- -------- -------- Balance at end of period $ 36,410 $ 76,179 $ 75,397 ======== ======== ======== (D) Reconciliation of accumulated depreciation: Balance at beginning of period $ 33,289 $ 30,544 $ 27,928 Depreciation expense 2,556 2,745 2,616 Dispositions (20,474) - - -------- -------- -------- Balance at end of period $ 15,371 $ 33,289 $ 30,544 ======== ======== =========
EX-27 2 ARTICLE 5 FDS FOR THE YEAR ENDED 9/30/98
5 This schedule contains summary financial information extracted from the Partnership's unaudited financial statements for the year ended September 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS Sep-30-1998 Sep-30-1998 13,867 0 345 0 0 14,212 0 0 15,719 950 0 0 0 0 14,769 15,719 0 16,278 0 259 0 0 63 15,956 0 15,956 0 0 0 15,956 452.25 452.25
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