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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998 Commission File No. 0-1322
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KNICKERBOCKER VILLAGE, INC.
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(Exact name of Registrant as specified in its Charter)
NEW YORK 13-0924285
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State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
10 Monroe Street, New York, New York 10002
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(Address of principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code:
(212) 227-0955
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Limited Dividend Capital Stock, Par Value $2.15
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(Title of class)
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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-KSB or any amendment to this Form 10-KSB
_________.
Check 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 periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No ____
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State Registrant's revenues for its most recent fiscal year:
$10,169,000.00
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State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 28, 1999. Approximately $16,000 which is based
on par value of the voting stock. No active trading market exists for the
Registrant's Capital Stock.
Indicate the number of shares outstanding of each of the Issuer's classes
of Common Stock, as of February 28, 1999.
Capital Stock, $2.15 par value - 147,464 Shares
DOCUMENTS INCORPORATED BY REFERENCE - NONE
Transitional Small Business Disclosure Format:
Yes ____ No X
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KNICKERBOCKER VILLAGE, INC.
INDEX TO FORM 10-KSB - PARTS I - IV
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PAGE NO.
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PART I -
Item 1. DESCRIPTION OF BUSINESS.............................. 5-9
Item 2. DESCRIPTION OF PROPERTIES............................ 10-11
Item 3. LEGAL PROCEEDINGS.................................... 11
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 11
PART II -
Item 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................. 12
Item 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION........................ 12-16
Item 7. FINANCIAL STATEMENTS................................. 16
Item 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................. 16
PART III -
Item 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(a) OF
THE EXCHANGE ACT..................................... 17-18
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Page No.
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Item 10. EXECUTIVE COMPENSATION.............................. 18
Item 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT.......................................... 18-19
Item 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS................................ 19
PART IV -
Item 13. EXHIBITS AND REPORTS ON
FORM 8-K............................................ 20
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PART I
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ITEM 1 DESCRIPTION OF BUSINESS
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The Registrant is a "limited dividend housing corporation" created and formed
under the New York Private Housing Law on September 5, 1933. The Registrant
owns a housing development located at the corners of Monroe, Market, Catherine
and Cherry Streets in Manhattan, New York. The properties are managed by Cherry
Green Property Corp., the Managing Agent, and is subject to the supervision of
the New York State Division of Housing and Community Renewal ("DHCR"), which
must approve all management fees and rent increases and contracts in excess of
$30,000. (See "Item 12-Certain Relationships and Related Transactions").
Dividends to stockholders are limited by law to six percent (6.0%) of par value
on a cumulative basis. The Registrant has not paid any dividends since 1968.
As a result, the cumulative dividends unpaid through December 31, 1998, amounted
to approximately $571,000 or approximately $3.87 per share. (See Note 6 of
Notes to Financial Statements). No dividends were declared or paid during 1998
or 1997. In the event of liquidation, stockholders cannot receive more than the
cumulative unpaid dividends, plus the amount of their original investment. Any
surplus in excess of such amounts reverts to public authorities.
The Registrant's properties are managed by Cherry Green Property Corp., pursuant
to a Management Contract approved by the DHCR. Cherry Green Property Corp. is a
real estate management company, which manages and administers real estate.
Cherry Green Property Corp. is the record and beneficial owner of over ninety-
five percent (95.0%) of the Registrant's outstanding shares. During 1998, the
Registrant paid Cherry Green Property Corp. a management fee approved by the
DHCR in the amount of approximately $977,000 compared to approximately $945,000
paid in 1997. (See Exhibit 10.1 annexed hereto and Note 8 of Notes to Financial
Statements.) The Registrant employs fifty-four (54) persons, all of whom are
full-time employees.
In 1996, the Registrant received a two step rent increase. The first increase
of approximately 5.5% was effective June 1, 1996 and the second increase of
approximately 5.3% was effective June 1, 1997. Accordingly, net rental income
in 1998 increased by approximately $128,000 or approximately one percent (1%)
over 1997 amounts, primarily due to the two step rent increase referred to
above, partially offset by decreases in surcharges and commercial rental
income. Other income in 1998 increased by approximately $2,000 or approximately
seventeen percent (17%) from 1997 amounts primarily due to higher reserve fund
balances during 1998. Operating expenses for 1998 increased by approximately
$43,000 or approximately one percent (1%) due to increases in wages and related
costs, maintenance, repairs and decorating, management and administration fee
and miscellaneous operations and general expenses offset by decreases in
utilities, depreciation and amortization and mortgage and other interest
expense. Wages and related costs increased by approximately $74,000 or
approximately three percent (3%) in 1998 as compared to 1997. The increase was
attributable to an increase in wages and related payroll taxes of approximately
$69,000 primarily due to increases in union wage rates, and an increase in
employee benefits of approximately $5,000 primarily due to increases in related
payroll taxes.
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Maintenance, repairs and decorating increased by approximately $137,000 or
approximately twelve percent (12%). The increase was primarily attributable to
increases in repairs to the parapet walls of approximately $150,000 and
electrical and supplies expenses of approximately $72,000, offset primarily by a
decrease in painting expense of approximately $85,000, due to lower demands in
painting jobs compared to 1997. Management and administration fee increased by
approximately $32,000 or approximately three percent (3%) in 1998 compared to
1997, primarily due to increases in the management fee, which were approved by
the DHCR of 2.44% effective July 31, 1997 and 5.5% effective July 1, 1998. (See
Note 8 to the financial statements, Page F-11). Miscellaneous operating and
general expenses increased by approximately $112,000 or approximately eight
percent (8%), primarily due to increases in security costs of approximately
$76,000 and consulting fees of approximately $87,000 incurred pertaining to
rebates received from Con Edison for erroneous billings. These increases were
offset by decreases in professional fees of approximately $8,000 and insurance
expense of approximately $43,000. Utilities decreased by approximately $254,000
or approximately thirteen percent (13%) in 1998 as compared to 1997, primarily
due to a decrease in electricity expense of $103,000 attributable to rebates
from Con Edison, a decrease in oil expense of approximately $123,000 due to
lower oil prices and a milder winter and a decrease in water and sewer expense
compared to 1997 of approximately $31,000 due primarily to the switch from
standard billings to meter readings. This decrease was offset by an increase in
gas heating of approximately $3,000. Depreciation and amortization decreased by
approximately $20,000 or approximately four percent (4%) due to the use of
accelerated depreciation methods and the fact that the majority of the fixed
assets are in the latter part of their useful lives. Mortgage and other interest
decreased by approximately $11,000 or approximately two percent (2%), primarily
due to the refinancing of the Company's mortgage debt. (See Note 4 to the
financial statements Page F-9). The provision for doubtful accounts decreased
by approximately $30,000 or approximately fifty seven percent (57%) in 1998 as
compared to 1997, primarily due to improved collections on accounts receivable.
The provision for income taxes increased by approximately $134,000, primarily
due to an increase in income before taxes and changes in the Registrant's
valuation allowance (See Note 7 to the financial statements, Pages F-10 and F-
11).
In 1996, the Registrant received a two step rent increase. The first increase
of approximately 5.5% was effective June 1, 1996 and the second increase of
approximately 5.3% was effective June 1, 1997. Accordingly, net rental income
in 1997 increased by approximately $466,000 over 1996 amounts, primarily due to
the two step rent increase referred to above, partially offset by decreases in
retroactive surcharges, commercial rental income and other charges to tenants.
Other income in 1997 decreased by approximately $5,000 from 1996 amounts
primarily due to lower reserve fund balances in 1997. Operating expenses for
1997 increased by approximately $234,000, or approximately two percent (2%), due
to increases in wages and related costs, real estate taxes, utilities,
maintenance, repairs and decorating, depreciation and amortization, management
and administration fee and miscellaneous operating and general expenses offset
by decreases in mortgage and other interest and the provision for doubtful
accounts. Wages and related costs increased by approximately $107,000 or
approximately five percent (5%) in 1997 as compared to 1996. This increase was
attributable to the hiring of an
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environmental coordinator at an annual salary of approximately $40,000,
increases in union wage rates and related increases in payroll taxes of
approximately $49,000 and an increase in employee benefits of approximately
$18,000. Real estate taxes increased by approximately $26,000 or approximately
three percent (3%) in 1997 as compared to 1996 due to increases in the
property's assessed valuation for the tax year ended June 30, 1998 and increases
in the New York City tax rates. Utilities increased by approximately $41,000 or
approximately two percent (2%) in 1997 primarily due to a rise in The City of
New York's frontage charges offset by reductions in fuel oil prices during 1997.
Depreciation and amortization increased in 1997 as compared to 1996 by
approximately $58,000 or approximately eleven percent (11%) primarily due to
additional depreciation expense incurred on the acquisition of fixed assets and
the write off of mortgage costs of approximately $21,000 related to the
Company's pre-existing mortgage debt. Mortgage and other interest decreased by
approximately $69,000 or approximately eleven percent (11%) in 1997 as compared
to 1996 primarily due to the extension and modification of the Registrant's
mortgage payable.(See Note 4 to the financial statements Page F-9). The
agreement reduced the interest rate on the related mortgage debt from 10% per
annum to 8.5% per annum. The management fee increased by approximately $22,000
or approximately two percent (2%) in 1997 as compared to 1996 primarily due to
increases in the management fee, which were approved by the DHCR of 2.75%
effective July 1, 1996, and 2.44% effective July 1, 1997. In addition, the
Registrant received a management agent financial award in 1997, which was
approved by the DHCR, that exceeded the amount received in 1996 by approximately
$2,000. The provision for doubtful accounts decreased by approximately $36,000
or approximately forty one percent (41%) in 1997 as compared to 1996, primarily
due to improved collections on accounts receivable. Miscellaneous operating and
general expenses increased by approximately $40,000 or approximately three
percent (3%) in 1997 as compared to 1996, primarily due to increases in social
services and security costs. The provision for income taxes decreased by
approximately $6,000 in 1997 compared to 1996, primarily due to the increases in
the 1997 deferred tax benefit due to changes in the Registrant's valuation
allowance. (See Note 7 to the financial statements, Pages F-10 and F-11).
RE-FINANCE OF MORTGAGE
----------------------
On January 30, 1997 (the "Closing Date"), Registrant entered into a
Consolidation, Modification and Extension Agreement, (the "Loan Agreement"), by
and among the Registrant, and The Greater New York Savings Bank now known as
Astoria Federal Savings Bank (the "Bank" or "Mortgage Lender") (capitalized
terms not otherwise defined herein are used herein as set forth in the Loan
Agreement) relating to a loan in the principal amount of $6,300,000 (the "Loan
Amount"), with a ten (10) year term, (with a five year option to extend the loan
as described below) with interest at eight and one-half percent (8 1/2%) per
annum. At the time of closing, the principal balance due on the existing
mortgage was $5,994,529.72. The mortgage increase of $305,470.28 was evidenced
by the "Gap" Mortgage and "Gap" Note. The current monthly principal and interest
under the Note is $50,729.32, with a monthly escrow for taxes of $103,090.68 and
the total monthly payment is $153,820.00. The Loan Agreement provides that the
Loan Amount will be repaid at the aforesaid interest rate in equal monthly
installments sufficient to repay the Loan Amount in twenty-five (25) years. The
Loan Agreement has been approved by the DHCR. Principal
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payments due on the Mortgage for the next two (2) years are approximately:
$89,000(1999); and $97,000 (2000). As a result of the refinancing, annual
payments of principal and interest due the Bank, will be reduced by
approximately $155,000 per annum. Prepayment may be made by the Registrant with
thirty (30) days prior written notice to the Bank with a prepayment penalty of:
5% of the outstanding principal balance if prepaid during the first, second or
third year of the initial term or the first year of any extended term; 4% of the
outstanding principal balance if prepaid during the fourth, fifth or sixth year
of the initial term or the second year of any extended term; 3% of the
outstanding principal balance if prepaid during the seventh or eighth year of
the initial term or the third year of any extended term; 2% of the outstanding
principal balance if prepaid during the ninth year of the initial term or the
fourth year of any extended term; 1% of the outstanding principal balance if
prepaid during the first six months of the tenth year of the initial term or the
first six months of the fifth year of any extended term; and there shall be no
prepayment penalty during the last six months of the tenth year of the initial
term or the last six months of the fifth year of any extended term.
At Registrant's option, Registrant may extend the Maturity Date to a date which
is five (5) years from the Maturity Date, subject to the following terms and
conditions:
(a) Registrant shall give the Mortgage Lender written notice not less
than sixty (60) days or greater than six (6) months prior to the
Maturity Date;
(b) Registrant shall not be in default in its obligations under any of
the documents evidencing the Mortgage on the date the Registrant
exercises its option to extend the Maturity Date and on the Maturity
Date;
(c) Registrant shall pay to the Mortgage Lender an "Extension Fee"
equal to one-half (1/2%) percent of the outstanding principal balance
of the Mortgage;
(d) During the extended term, Registrant shall repay the principal
balance of the Mortgage outstanding on the Maturity Date with interest
at the Extended Term Interest Rate (as hereinafter defined), in equal
monthly installments sufficient to repay such principal balance in
fifteen (15) years. The term "Extended Term Interest Rate" means a
rate that is one hundred seventy-five (175) basis points (1.75%) over
the average yield on actively traded United States Treasury securities
adjusted to a constant maturity of five (5) years. The Extended Term
Interest Rate shall be effective on the Maturity Date and determined
on a date which is three (3) days before the Maturity Date. In no
instance however, shall the Extended Term Interest Rate be less than
the Interest Rate.
(e) The outstanding principal amount of the Mortgage on the Maturity
Date shall not exceed seventy-five percent (75%) of the combined
appraised value of the subject Property as based on an appraisal of
such Property, which value will be determined by the Mortgage Lender
in its sole and absolute discretion and which appraisal shall be
prepared by the
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Mortgage Lender's appraisers at Registrant's sole cost and expense.
(f) The combined actual net operating income of the subject Property
shall exceed the debt service by 1.25 times as determined by the
Mortgage Lender in its sole and absolute discretion. Debt service
coverage shall be calculated for the twelve (12) calendar month period
ending immediately preceding the date the required extension notice is
delivered to the Mortgage Lender and shall be based on the outstanding
principal balance amount of the Loan on the Maturity Date and the
Extended Term Interest Rate.
(g) To the extent that the Registrant is prohibited from extending the
term of the Mortgage solely due to its failure to satisfy both
requirements (e) and (f) immediately above, the Registrant may repay
principal to the Mortgage Lender in a sufficient amount, as determined
by the Mortgage Lender, so as to enable Registrant to satisfy
requirements (e) and (f) above based on the reduced principal amount
outstanding after such payments are made.
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ITEM 2 DESCRIPTION OF PROPERTIES
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The Registrant's property consists of twelve (12) apartment buildings, eleven
(11) of which are twelve (12) stories high and one which is ten (10) stories
high, constructed in 1934 at Monroe and Catherine Streets in New York City and
consisting of approximately 6,000 rooms in approximately 1,600 apartments with
commercial stores on the ground floor of some of the buildings. The Registrant
believes that such premises are in satisfactory condition and are suitable for
use as residential dwellings and commercial units, as applicable. The
buildings, land and boiler are subject to a mortgage in the principal amount of
approximately $6,155,000 owing at December 31, 1998. (See Item 1 above and Note
4 to Financial Statements.)
Management believes that the Registrant's properties are adequately covered by
insurance.
The Registrant's residential properties have an occupancy rate of approximately
ninety-nine (99%) percent. No tenant occupies ten (10%) percent or more of the
rentable square footage of the properties. The Registrant's properties are
principally used for rental of residential apartments for low to middle income
families. The Registrant has approximately $792,000 in monthly revenue from
residential space, with an average effective annual rental per room of
approximately $131.00 for the year ended December 31, 1998. The average
apartment is three and one-half (3 1/2) rooms. Annual revenues from residential
leases was approximately $9,503,000 for the year ended December 31, 1998.
Residential leases of which there are approximately sixteen hundred (1600), are
generally renewed, subject to the terms of the applicable leases and compliance
by the tenants with same. The total annual rental income on fifteen (15)
commercial leases for the year ended December 31, 1998, was approximately
$276,000. Accordingly, gross annual revenue for 1998 from residential leases was
ninety three percent (93%) compared to three percent (3%) of gross annual
revenue from commercial leases.
Real estate taxes on the Registrant's properties were approximately $820,000,
for the year ended December 31, 1998. The tax rate for the 1998 tax year was
approximately eleven percent (11%).
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The Registrant's estimated replacement, repairs and renovation budget and status
of projects for January 1, 1999 to December 31, 1999 ("1999 Projects") and
January 1, 2000 to December 31, 2000 ("2000 Projects") are as follows:
1999 PROJECTS APPROXIMATE COST
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Terrace/Waterproofing $300,000.00
Asbestos Abatement 300,000.00
Plumbing-Phase 1 75,000.00
Appliances 50,000.00
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TOTAL: $925,000.00
2000 PROJECTS APPROXIMATE COST
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Window Bars Replacement 100,000.00
Terrace Replacement/
Waterproofing 250,000.00
Oil Tank Replacement 150,000.00
Elevators 75,000.00
Plumbing 300,000.00
Appliances 50,000.00
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TOTAL: $925,000.00
The above estimates are for informational purposes only, and the actual costs of
such projects may differ. The cost of these projects are funded from
operations, and the money is deposited in an escrow account which is supposed to
be funded monthly in an amount of approximately $69,000. However, the
Registrant was in arrears in its monthly funding in an amount of approximately
$180,000 for the year ended December 31, 1998. (See Notes 3 and 10 to Financial
Statements.)
Pursuant to the Registrant's Loan Agreement, the Registrant in 1997, agreed to
expend at least $425,000 for lead paint remediation work and asbestos abatement
work. Remaining costs of approximately $383,000 for asbestos abatement or lead
paint remediation have been accrued by the Registrant. The costs of additional
asbestos abatement or lead paint remediation, if necessary, at the Registrant's
properties in excess of the amounts accrued at December 31, 1998, can not be
determined at this time.
ITEM 3 LEGAL PROCEEDINGS
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None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
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None.
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PART II
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON
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EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Limited Dividend Capital Stock, par value $2.15 ("Capital Stock"),
is traded over-the-counter. No established trading market exists with respect
to such stock since approximately 140,242 shares (approximately 95%) of the
147,464 shares outstanding are owned by Cherry Green Property Corp. Since 1971,
no bid and asked prices have been reported by the National Quotation Bureau,
Inc.
No dividends have been paid since 1968. The holders of Capital Stock cannot, at
any time, receive repayment of their investment in excess of the par value of
the stock, together with cumulative unpaid dividends at the rate of 6.0% of par
value ($2.15 per share) per annum (without interest). Dividends amounting to
$19,023 were declared during 1979, but were not paid as of December 31, 1998.
No dividends were declared or paid in 1998 or 1997. Cumulative dividends unpaid
as of December 31, 1998 and December 31, 1997 amounted to approximately $571,000
and $552,000 (approximately $3.87 and $3.74 per share), respectively. (See Note
6 of Notes to Financial Statements.)
There are approximately 340 holders of record of the Registrant's Capital Stock
as of March 1, 1999.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
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OR PLAN OF OPERATIONS
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a).Liquidity - As of December 31, 1998, the Registrant had a working capital
deficiency of approximately $282,000. At December 31, 1997, the Registrant had
a working capital deficiency of approximately $301,000. As of December 31,
1998, the Registrant was in arrears on its required contributions to its special
fund for replacements, painting and decoration in the amount of approximately
$180,000. (See Note 10 to the financial statements, page F-12). During
December 1998, the Company received a two step rent increase, which was approved
by the DHCR. The first increase of approximately 3.3% will become effective
February 1, 1999. The second increase of approximately 3.2% will become
effective on February 1, 2000. During April 1996, the Registrant received a two
step rent increase, which was approved by the DHCR. The first increase of
approximately 5.5% was effective June 1, 1996. The second increase of
approximately 5.3% was effective June 1, 1997. (See Note 11 to the financial
statements, Page F-12). On January 30, 1997 the Registrant entered into an
extension and modification agreement with Astoria Federal Savings Bank (formerly
known as The Greater New York Savings Bank) (the "Bank"), which increased the
principal amount of the Registrant's mortgage payable to $6,300,000. (See Note
4 to the financial statements, Page F-9). The annual payments of principal and
interest due to the Bank have been reduced by approximately $155,000 per annum.
Subject to unforeseen circumstances, the two step rent increase effective
February 1, 1999 and February 1, 2000, the two step rent increase effective June
1, 1996 and June 1, 1997, and the extension and modification of the Registrant's
mortgage payable, will increase the future liquidity of the Registrant.
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b). Capital Resources - The Registrant has set aside funds for capital
improvements and repairs amounting to approximately $157,000 and $174,000 as of
December 31, 1998 and 1997. (See Note 3 to the financial statements, Page F-9).
c). Results of Operations - In 1996, the Registrant received a two step rent
increase. The first increase of approximately 5.5% was effective June 1, 1996
and the second increase of approximately 5.3% was effective June 1, 1997.
Accordingly, net rental income in 1998 increased by approximately $128,000 or
approximately one percent (1%) over 1997 amounts, primarily due to the two step
rent increase referred to above, partially offset by decreases in surcharges
and commercial rental income. Other income in 1998 increased by approximately
$2,000 or approximately seventeen percent (17%) from 1997 amounts primarily due
to higher reserve fund balances during 1998. Operating expenses for 1998
increased by approximately $43,000 or approximately one percent (1%) due to
increases in wages and related costs, maintenance, repairs and decorating,
management and administration fee and miscellaneous operations and general
expenses offset by decreases in utilities, depreciation and amortization and
mortgage and other interest expense. Wages and related costs increased by
approximately $74,000 or approximately three percent (3%) in 1998 as compared to
1997. The increase was attributable to an increase in wages and related payroll
taxes of approximately $69,000 primarily due to increases in union wage rates,
and an increase in employee benefits of approximately $5,000 primarily due to
increases in related payroll taxes. Maintenance, repairs and decorating
increased by approximately $137,000 or approximately twelve percent (12%). The
increase was primarily attributable to increases in repairs to the parapet walls
of approximately $150,000 and electrical and supplies expenses of approximately
$72,000, offset primarily by a decrease in painting expense of approximately
$85,000, due to lower demands in painting jobs compared to 1997. Management and
administration fee increased by approximately $32,000 or approximately three
percent (3%) in 1998 compared to 1997, primarily due to increases in the
management fee, which were approved by the DHCR of 2.44% effective July 31, 1997
and 5.5% effective July 1, 1998. (See Note 8 to the financial statements, Page
F-11). Miscellaneous operating and general expenses increased by approximately
$112,000 or approximately eight percent (8%), primarily due to increases in
security costs of approximately $76,000 and consulting fees of approximately
$87,000 incurred pertaining to rebates received from Con Edison for erroneous
billings. These increases were offset by decreases in professional fees of
approximately $8,000 and insurance expense of approximately $43,000. Utilities
decreased by approximately $254,000 or approximately thirteen percent (13%) in
1998 as compared to 1997, primarily due to a decrease in electricity expense of
$103,000 attributable to rebates from Con Edison, a decrease in oil expense of
approximately $123,000 due to lower oil prices and a milder winter and a
decrease in water and sewer expense compared to 1997 of approximately $31,000
due primarily to the switch from standard billings to meter readings. This
decrease was offset by an increase in gas heating of approximately $3,000.
Depreciation and amortization decreased by approximately $20,000 or
approximately four percent (4%) due to the use of accelerated depreciation
methods and the fact that the majority of the fixed assets are in the latter
part of their useful lives. Mortgage and other interest decreased by
approximately $11,000 or approximately two percent (2%), primarily due to the
refinancing of the Company's mortgage debt. (See Note 4 to the
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financial statements Page F-9). The provision for doubtful accounts decreased
by approximately $30,000 or approximately fifty seven percent (57%) in 1998 as
compared to 1997, primarily due to improved collections on accounts receivable.
The provision for income taxes increased by approximately $134,000, primarily
due to an increase in income before taxes and changes in the Registrant's
valuation allowance (See Note 7 to the financial statements, Pages F-10 and
F-11).
In 1996, the Registrant received a two step rent increase. The first increase
of approximately 5.5% was effective June 1, 1996 and the second increase of
approximately 5.3% was effective June 1, 1997. Accordingly, net rental income
in 1997 increased by approximately $466,000 over 1996 amounts, primarily due to
the two step rent increase referred to above, partially offset by decreases in
retroactive surcharges, commercial rental income and other charges to tenants.
Other income in 1997 decreased by approximately $5,000 from 1996 amounts
primarily due to lower reserve fund balances in 1997. Operating expenses for
1997 increased by approximately $234,000, or approximately two percent (2%), due
to increases in wages and related costs, real estate taxes, utilities,
maintenance, repairs and decorating, depreciation and amortization, management
and administration fee and miscellaneous operating and general expenses offset
by decreases in mortgage and other interest and the provision for doubtful
accounts. Wages and related costs increased by approximately $107,000 or
approximately five percent (5%) in 1997 as compared to 1996. This increase was
attributable to the hiring of an environmental coordinator at an annual salary
of approximately $40,000, increases in union wage rates and related increases in
payroll taxes of approximately $49,000 and an increase in employee benefits of
approximately $18,000. Real estate taxes increased by approximately $26,000 or
approximately three percent (3%) in 1997 as compared to 1996 due to increases in
the property's assessed valuation for the tax year ended June 30, 1998 and
increases in the New York City tax rates. Utilities increased by approximately
$41,000 or approximately two percent (2%) in 1997 primarily due to a rise in The
City of New York's frontage charges offset by reductions in fuel oil prices
during 1997. Depreciation and amortization increased in 1997 as compared to
1996 by approximately $58,000 or approximately eleven percent (11%) primarily
due to additional depreciation expense incurred on the acquisition of fixed
assets and the write off of mortgage costs of approximately $21,000 related to
the Company's pre-existing mortgage debt. Mortgage and other interest decreased
by approximately $69,000 or approximately eleven percent (11%) in 1997 as
compared to 1996 primarily due to the extension and modification of the
Registrant's mortgage payable.(See Note 4 to the financial statements Page F-9).
The agreement reduced the interest rate on the related mortgage debt from 10%
per annum to 8.5% per annum. The management fee increased by approximately
$22,000 or approximately two percent (2%) in 1997 as compared to 1996 primarily
due to increases in the management fee, which were approved by the DHCR of 2.75%
effective July 1, 1996, and 2.44% effective July 1, 1997. In addition, the
Registrant received a management agent financial award in 1997, which was
approved by the DHCR, that exceeded the amount received in 1996 by approximately
$2,000. The provision for doubtful accounts decreased by approximately $36,000
or approximately forty one percent (41%) in 1997 as compared to 1996, primarily
due to improved collections on accounts receivable. Miscellaneous operating and
general expenses increased by approximately $40,000 or approximately three
percent (3%)
14
<PAGE>
in 1997 as compared to 1996, primarily due to increases in social services and
security costs. The provision for income taxes decreased by approximately
$6,000 in 1997 compared to 1996, primarily due to the increases in the 1997
deferred tax benefit due to changes in the Registrant's valuation allowance.
(See Note 7 to the financial statements, Pages F-10 and F-11).
Year 2000
The Year 2000 problem is the inability of a significant amount of the
world's computers, software applications and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. As a result of this
problem, systems could fail to operate or fail to produce correct results at the
start of the 21st century.
Assessment
The Year 2000 problem affects computers, software, and other equipment
used, operated, or maintained by the Company and others. Accordingly, the
Company is currently assessing the potential impact of, and the costs of
remediating, the Year 2000 problem for its internal systems and on facilities
systems and equipment.
The Company is in the process of identifying the computers, software
applications, and related equipment used in connection with its operations that
must be modified, upgraded, or replaced to minimize the possibility of a
material disruption of its business. The Company has commenced the process of
modifying, upgrading, and replacing systems which have already been assessed as
adversely affected by the Year 2000 problem, and expects to have all other major
systems assessed, and if need be, modified, before the occurrence of any
material disruption of its business. The Company expects to complete this
process by the middle of 1999.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, copiers, telephone switches,
security systems and other common devices may be affected by the Year 2000
problem. The Company is currently assessing the potential effect of, and costs
of remediating, the Year 2000 problem on its office and facilities systems and
equipment.
Impact of Year 2000 Problems
Because the Company's assessment is not complete, the Company has not yet
estimated the total cost to the Company of completing any required
modifications, upgrades, or replacements of either the operational systems, or
facilities systems and equipment.
The Company expects to identify and resolve all Year 2000 problems that
could materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 problems affecting the Company or its customers and suppliers have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, no
one can accurately predict how many Year 2000 problem-related failures will
occur or the severity, duration, or financial consequences of these perhaps
inevitable failures.
15
<PAGE>
Contingency Plans
The Company will develop contingency plans, if necessary, to be implemented
if its efforts to identify and correct Year 2000 problems affecting its
operational systems and facilities systems and equipment are not effective. The
Company expects to complete its contingency plans by the middle of 1999.
Depending on the systems affected, any contingency plans developed by the
Company, if implemented, should not have a material adverse effect on the
Company's financial condition and results of operations.
Disclaimer
The discussion of the Company's efforts, and management's expectations
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
ITEM 7 FINANCIAL STATEMENTS
- ------ --------------------
Information required by this Item is attached to this Report as pages
F-1 through F-12 following Part IV, Item 13.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------ ---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
None.
16
<PAGE>
PART III
--------
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
--------------------------------------------
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
----------------------------------------------
OF THE EXCHANGE ACT
-------------------
Position with Held Principal
Name Age Registrant Since Occupation
- ---- --- ------------- ----- ----------
Irene Pletka (1)(2) 57 President and 1977 Commercial Photographer
Director
Peter Pletka (1)(2) 61 Vice 1992 Physician
President
Howard Kestenberg 42 Director 1992 Real Estate Entrepreneur
(3)
Robert Gershon 62 Director, Vice 1977 Principal in the firm
(2) (4) President and of Carl Gershon & Co.,
Treasurer a Real Estate Brokerage.
Melvin Gershon 56 Director and 1977 Principal in the firm
(2) (4) Secretary of Carl Gershon & Co.
Loretta Jefferson 56 Director 1997 Housing Management
Representative, New York
State Division of Housing
and Community Renewal.
__________________________________________________
(1) Dr. Peter Pletka and Mrs. Irene Pletka are husband and wife.
(2) Irene Pletka, Dr. Peter Pletka, Robert Gershon and Melvin Gershon are all
shareholders, officers and directors of Cherry Green Property Corp. (See
Item 11-Security Ownership of Certain Beneficial Owners and Management and
Item 12-Certain Relationships and Related Transaction).
(3) Mr. Kestenberg is a shareholder of Cherry Green Property Corp. (See Item
11-Security Ownership of Certain Beneficial Owners and Management and Item
12-Certain Relationships and Related Transaction).
(4) Mr. Melvin Gershon and Mr. Robert Gershon are brothers.
The respective terms of the officers and directors of the Registrant will
continue until the next Annual Meeting of Shareholders or until their
successors have been elected and qualified in accordance with the
Registrant's By-laws.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
--------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors and executive officers, and
persons who own more than ten percent (10%) of a registered class of
the Company's equity securities, to file with the Securities and
Exchange Commission ("SEC") and the American Stock Exchange, initial
reports of ownership and reports of changes in ownership of common
stock and other equity securities
17
<PAGE>
of the Company. Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Management believes that Cherry Green Property Corp. has made all
requisite filings of Form 3, 4 and 5 required to be filed under 16(a)
of the Exchange Act relating to the Registrant during the two (2)
fiscal years ended December 31, 1998 and 1997, respectively.
ITEM 10 EXECUTIVE COMPENSATION
- ------- ----------------------
During the year ended December 31, 1998, no officer or director of the
Registrant received any compensation from the Registrant for his or
her services. The Registrant did not grant or award stock options,
stock appreciation rights or long-term incentive plans to any of its
executive officers in the last fiscal year. The Registrant does not
presently maintain a pension plan or other retirement plan for its
named executive officers.
The housing complex owned by the Registrant is managed by Cherry Green
Property Corp., pursuant to a management contract approved by the
DHCR. Cherry Green was granted increases in its management fee of
2.4% and 5.5%, effective July 1, 1997 and July 1, 1998, respectively,
pursuant to a Contract for Managing Agents Extension Agreement,
approved by the DHCR on November 13, 1998. (See Exhibit 10.1 annexed
hereto.) Such fee is reviewed and adjusted annually effective July 1
of each year, by the DHCR. Cherry Green Property Corp. owns over
95.0% of the Registrant's Capital Stock. Several officers and
directors of Cherry Green Property Corp. are officers and directors of
the Registrant. (See Item 9 herein). During 1998, the Registrant paid
Cherry Green Property Corp. a management and administrative fee of
approximately $977,000. Such fee was approved by the DHCR. (See Items
1, 9, 11 and 12 and Note 8 of Notes to Financial Statements.)
ITEM 11 SECURITY OWNERSHIP OF CERTAIN
- ------- -----------------------------
BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------
(a) Security Ownership of Certain Beneficial Owners. Following is a
list of those persons known by the Registrant to be the
beneficial owners of more than 5% of the outstanding Capital
Stock of the Registrant as of December 31, 1998:
Name and Address Amount and Nature Percent of
Title of Class of Beneficial Owner of Beneficial Ownership Class
- ------------------ ------------------- ----------------------- ----------
Limited Dividend Cherry Green 140,242 Shares of 95%
Capital Stock, Property Corp. Record and Beneficial
(par value $2.15) 11 Monroe Street Ownership
New York, NY
18
<PAGE>
(b) Security Ownership of Management
As of December 31, 1998, no Directors or Officers owned any
shares of the Registrant's Limited Dividend Capital Stock, $2.15
par value. However, the following Officers and Directors of the
Registrant own of record and beneficially that percentage of
Common Stock of Cherry Green Property Corp. as set forth below:
Percent Owned of Cherry
Name Position with Registrant Green Property Corp.
- ---- ------------------------ -----------------------
Irene Pletka (1) Director and President 53.3
Peter Pletka (1) Vice President 53.3
Howard Kestenberg Director 18.3
Robert Gershon (2) Director, Vice President 9.6
and Treasurer
Melvin Gershon (2) Director and Secretary 6.3
- ----------------------------------------------
(1) Such shares of Cherry Green Property Corp. are owned collectively
by Dr. and Mrs. Pletka.
(2) Robert Gershon and Melvin Gershon are brothers.
(c) Change in control.
There are no known arrangements, the application of which may at
a subsequent date result in a change in control of the
Registrant.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Registrant is managed by Cherry Green Property Corp., the owner of
over 95% of the Registrant's outstanding Capital Stock. Several
officers and directors of the Registrant are shareholders, officers
and directors of Cherry Green Property Corp. (See Items 1, 9, 10 and
11 herein). During 1998, the Registrant paid Cherry Green Property
Corp. a management and administrative fee of approximately $977,000.
Such fee was approved by the DHCR pursuant to a contract, with
increases effective July 1, 1997 and July 1, 1998. (See Exhibit 10.1
annexed hereto) (See Note 8 of Notes to Financial Statements).
19
<PAGE>
PART IV
-------
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The list of Financial Statements and Notes required by Item 7 and
by Item 13(a) are set forth on pages F-1 through F-12 attached
hereto.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
10.1 - Contract for Managing Agent Extension Agreement, dated as
of July 1, 1998, by and between Knickerbocker Village, Inc. and
Cherry Green Property Corp. and approved by the New York State
Division of Housing and Community Renewal on October 22, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
(Registrant): KNICKERBOCKER VILLAGE, INC.:
-----------------------------------------------------------------
By (Signature and Title) :S/ROBERT GERSHON
- ------------------------------------------------------------------
ROBERT GERSHON, Director and Treasurer
Dated: March 27, 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
Registrant and in the capacities and on the dates indicated.
(Signature and Title) :/s/IRENE PLETKA
- -------------------------------------------------------------------
IRENE PLETKA, Director and President
Dated: March 27, 1999
- ----------------------
(Signature and Title) :/s/PETER PLETKA
- -------------------------------------------------------------------
PETER PLETKA, Vice President
Dated: March 27, 1999
- -----------------------
(Signature and Title) :/s/MELVIN GERSHON
- -------------------------------------------------------------------
MELVIN GERSHON, Director and Secretary
Dated: March 27, 1999
- -----------------------
21
<PAGE>
KNICKERBOCKER VILLAGE, INC.
---------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Independent Auditors' Report F-2
Balance Sheets F-3 to F-4
Statements of Net Income, Comprehensive Income
and Retained Earnings, Years Ended December 31, 1998 and 1997 F-5
Statements of Cash Flows,
Years Ended December 31, 1998 and 1997 F-6
Notes to Financial Statements F-7 to F-12
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Knickerbocker Village, Inc.
10 Monroe Street
New York, New York 10002
We have audited the accompanying balance sheets of Knickerbocker Village, Inc.,
as of December 31, 1998 and 1997, and the related statements of net income,
comprehensive income and retained earnings and cash flows for each of the years
in the two-year period ended December 31, 1998. These financial statements are
the responsibility of the Company'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 Knickerbocker Village, Inc., as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
February 19, 1999 Held, Kranzler, McCosker & Pulice, LLP
F-2
<PAGE>
KNICKERBOCKER VILLAGE, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
Assets 1998 1997
------ ----------- -----------
Current Assets:
Cash and cash equivalents $ 92,956 $ 2,479
Accounts receivable (less allowance for
doubtful accounts of $ 301,000 in 1998
and $282,000 in 1997) 142,485 198,924
Interest and other receivables 164,051 34,601
Prepaid expenses and other current assets 1,676,790 1,378,917
Deferred tax asset, net 71,000 66,000
----------- -----------
Total Current Assets 2,147,282 1,680,921
----------- -----------
Special Funds And Deposits:
Funds for replacements, painting
and decorating 157,593 173,956
Tenants' security deposits - contra 671,366 658,307
----------- -----------
Total Special Funds and Deposits 828,959 832,263
----------- -----------
Fixed Assets, At Cost:
Land 3,273,281 3,273,281
Buildings and building equipment 16,289,745 15,748,935
----------- -----------
19,563,026 19,022,216
Less: Accumulated depreciation 11,964,330 11,431,398
----------- -----------
Net Fixed Assets 7,598,696 7,590,818
----------- -----------
Other Assets:
Deferred Tax Asset, Net 249,000 203,000
Other Assets 113,731 127,671
----------- -----------
362,731 330,671
----------- -----------
TOTAL ASSETS $10,937,668 $10,434,673
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
KNICKERBOCKER VILLAGE, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
Liabilities And Stockholders' Equity 1998 1997
------------------------------------ ----------- -----------
Current Liabilities
Cash overdraft $ 0 $ 33,180
Accounts payable and accrued expenses 2,269,509 1,770,709
Unearned rental income 27,497 25,122
Dividends payable 19,023 19,023
Income tax payable 15,576 44,123
Current portion of long-term debt 88,971 81,745
Current portion of capital lease obligation 8,406 8,406
----------- -----------
Total Current Liabilities 2,428,982 1,982,308
Tenants' Security Deposits - Contra 671,366 658,307
Other Liabilities 170,707 174,011
Long-Term Debt, less current portion 6,066,258 6,155,229
Capital Lease Obligation, less current portion 4,718 13,125
----------- -----------
Total Liabilities 9,342,031 8,982,980
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Limited dividend capital stock,
par value $2.15 per share,
Authorized - 348,837 shares;
issued and outstanding - 147,464 317,048 317,048
Retained earnings 1,278,589 1,134,645
----------- -----------
Total Stockholders' Equity 1,595,637 1,451,693
----------- -----------
Total Liabilities And Stockholders' Equity $10,937,668 $10,434,673
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
KNICKERBOCKER VILLAGE, INC.
STATEMENTS OF NET INCOME, COMPREHENSIVE INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Revenues:
Rentals $10,157,928 $10,030,039
Other income 11,206 9,555
----------- -----------
10,169,134 10,039,594
----------- -----------
Expenses:
Wages and related costs 2,424,172 2,350,485
Real estate taxes 820,053 816,819
Utilities 1,631,750 1,885,889
Maintenance, repairs and decorating 1,301,089 1,163,754
Depreciation and amortization 546,872 566,939
Mortgage and other interest 544,394 555,324
Management and administrative fee 977,223 945,491
Provision for doubtful accounts 22,140 52,043
Miscellaneous operating and general expenses 1,591,497 1,479,369
----------- -----------
9,859,190 9,816,113
----------- -----------
Income before income taxes 309,944 223,481
Provision for income taxes 166,000 32,000
----------- -----------
Net income and comprehensive income 143,944 191,481
----------- -----------
Retained earnings at beginning of the year 1,134,645 943,164
----------- -----------
Retained earnings at end of the year $ 1,278,589 $ 1,134,645
=========== ===========
Earnings per share $0.98 $1.30
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
KNICKERBOCKER VILLAGE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 143,944 $ 191,481
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 546,872 566,939
Provision for bad debts 22,140 52,043
Deferred income taxes (51,000) (143,000)
Changes in assets (increase) decrease:
Accounts receivable 34,299 (42,968)
Interest and other assets (129,450) (20,236)
Prepaid expenses (297,873) 141,701
Other assets 0 (124,374)
Changes in liabilities increase (decrease):
Accounts payable and accrued expenses 514,376 (79,676)
Unearned rental income 2,375 (57,851)
Other liabilities (80,607) (38,488)
--------- -----------
Net cash provided by operating activities 705,076 445,571
--------- -----------
Cash Flows From Investing Activities:
Interest earned on reserve fund investments (4,849) (2,976)
Capital expenditures (540,810) (636,906)
Contributions of cash from operations to replacement fund (740,000) (866,441)
Reimbursement of expenditures paid by housing company
from replacement fund 761,212 811,436
--------- -----------
Net cash used in investing activities (524,447) (694,887)
--------- -----------
Cash flows from financing activities:
Proceeds on refinanced mortgage 0 6,300,000
Payments on pre-existing mortgage debt 0 (6,008,130)
Payments on long-term debt (81,745) (63,026)
Payments on capital lease obligation (8,407) (10,645)
Proceeds from bank overdraft 0 33,181
--------- -----------
Net cash provided by (used in) financing activities (90,152) 251,380
--------- -----------
Net increase in cash 90,477 2,064
Cash at beginning of year 2,479 415
--------- -----------
Cash at end of year $ 92,956 $ 2,479
========= ===========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the years for:
Interest $ 544,000 $ 555,000
Income taxes 200,000 135,000
</TABLE>
Supplemental Schedule Of Noncash Investing and Financing Activities:
A capital lease obligation of $21,531 was incurred when the Company acquired
new equipment in 1997.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
KNICKERBOCKER VILLAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - CORPORATE ORGANIZATION
----------------------
Knickerbocker Village, Inc. (the "Company"), is a public, limited dividend
housing company formed pursuant to the Housing Laws of the State of New
York, on September 5, 1933. The Company is regulated by the Division of
Housing and Community Renewal ("DHCR"), a New York State regulatory agency.
The Company is located in lower Manhattan and operates approximately 1,600
rental units ranging in size from studios through three bedroom apartments.
The Company requires one (1) month's rent as a security deposit on all
apartments.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE RECOGNITION
-------------------
The Company recognizes revenue in the accounting period that corresponds to
the month for which rental income is billed. Rents received but not
recognized as revenue as of December 31, are recorded as unearned rental
income.
CASH AND CASH EQUIVALENTS
-------------------------
For the purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchases with a maturity of three months or
less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------
Bad debts are provided for on the allowance method based on historical
experience and management's evaluation of outstanding rents receivable.
FIXED ASSETS
------------
Fixed assets consists primarily of building improvements and equipment and
are recorded at cost. Depreciation is provided for financial statement
purposes on the straight-line method, over the estimated useful lives of
the fixed asset, which range from 5 to 30 years. For federal income tax
purposes, depreciation is provided for on the straight-line and accelerated
methods.
Expenditures for maintenance and repairs are charged to operations as
incurred. Upon sale or retirement of property, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss
is reflected in operations for the year. Depreciation expense was
approximately $533,000 for the years ended December 31, 1998 and 1997,
respectively.
F-7
<PAGE>
KNICKERBOCKER VILLAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
INCOME TAXES
------------
Deferred tax assets and liabilities reflect the tax consequences on future
years of differences between the tax bases of assets and liabilities, and
their financial reporting amounts, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company places its cash and investments for its Replacement Fund (See
Note 3) with a high quality credit institution. At times such investments
may be in excess of FDIC insured limits.
ESTIMATES
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
-----------------
Certain prior year balances have been reclassified to conform with current
year classifications.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
1. Cash and cash equivalents - The carrying amounts approximate fair value
because of the short maturity of these instruments.
2. Receivables - The carrying amount approximates fair value because of the
short maturity of these instruments.
3. Debt - The carrying amounts approximate fair value based on borrowing
rates currently available to the Company for bank loans with similar
terms.
F-8
<PAGE>
KNICKERBOCKER VILLAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In accordance with SFAS No. 121, "Accounting For the Impairment of Long-
Lived Assets and For Long-Lived Assets To Be Disposed Of", the Company
reviews it long-lived assets, including property and equipment, and
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
fully recoverable. To determine recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash
flows will be less than the carrying amount of the assets. Impairment
costs, if any, are measured by comparing the carrying amount of the related
assets to their fair value.
COMPREHENSIVE INCOME
--------------------
The company adopted SFAS No. 130, "Report Comprehensive Income" in 1998 for
the years ended December 31, 1998 and 1997. There are no items of other
comprehensive income as defined in the pronouncement.
NOTE 3 - REPLACEMENT, PAINTING AND DECORATING FUNDS
------------------------------------------
Maintenance of these funds is requested by the Commissioner of Housing and
Community Renewal of the State of New York. These funds were comprised of
the following at December 31, 1998:
1998 1997
-------- --------
Cash $157,593 $173,956
--------
$157,593 $173,956
======== ========
NOTE 4 - LONG-TERM DEBT
--------------
On January 31, 1997, the Company entered into an extension and modification
agreement with The Greater New York Savings Bank, now known as Astoria
Federal Savings Bank (the "Bank") for the principal amount of $6,300,000.
The mortgage is payable in monthly installments of $50,729, inclusive of
interest at the rate of 8 1/2% per annum, and is due on February 1, 2007.
On the maturity date, the Company may pay the remaining principal balance,
or extend the term of the mortgage for an additional five (5) years. The
mortgage is collateralized by land, buildings and boilers. The aggregate
maturities for long-term debt for the five years after December 31, 1998
are approximately $89,000, (1999); $97,000, (2000); $105,000, (2001);
$115,000 (2002); and $125,000,(2003); $5,624,000, (thereafter).
NOTE 5 - CAPITAL LEASE OBLIGATIONS
-------------------------
The Company leases certain equipment under long term leases and has the
option to purchase the equipment at a nominal cost at the termination of
the leases. Included in buildings and building equipment are the following
assets held under capital leases:
1997 1998
-------- --------
Building equipment $34,961
Less accumulated depreciation 4,618 4,368
------- --------
$30,343 $30,593
======= ========
F-9
<PAGE>
KNICKERBOCKER VILLAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Future minimum payments for assets under capital leases are as follows at
December 31, 1998
Year Ending December 31
-----------------------
1999 $ 10,774
2000 6,074
-------
Total minimum lease payments 16,848
Less amounts representing interest 3,724
-------
Present value of net minimum lease payments 13,124
Less current portion 8,406
-------
Long-term obligation $ 4,718
=======
NOTE 6 - DIVIDENDS PAYABLE AND CAPITAL STOCK
-----------------------------------
The holders of the Company's capital stock cannot at any time receive, in
repayment of their investment, any sums in excess of the par value of the
stock together with cumulative dividends at the rate of 6% of par value per
annum (without interest). Any surplus in excess of such amounts upon
dissolution reverts to the public authorities.
Cumulative dividends unpaid to December 31, 1998 amounted to $570,689 or
approximately $3.87 per share and unpaid to December 31, 1997 amounted to
$551,666 or approximately $3.74 per share. Dividends amounting to $19,023
were declared during 1979, but were not paid as of December 31, 1998. Such
dividends were approved by the DHCR. No dividends were declared or paid in
1998 or 1997.
NOTE 7 - INCOME TAXES
------------
The provision for income taxes for the years ended December 31, 1998 and
1997 consist of the following:
1998 1997
-------------- ----------
Current Taxes
-------------
Federal $169,000 $ 137,000
New York City 48,000 38,000
-------- ---------
Total $217,000 $ 175,000
-------- ---------
Deferred Taxes
--------------
Federal $(40,000) $(116,000)
New York City (11,000) (27,000)
-------- ---------
Total $(51,000) $(143,000)
-------- ---------
Provision For Income Taxes $166,000 $ 32,000
======== =========
F-10
<PAGE>
KNICKERBOCKER VILLAGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The provision for income taxes differs from amounts computed at statutory
rates as follows:
1998 1997
-------- ----------
Federal income taxes at statutory rate $105,000 $ 77,000
New York City corporation tax -
net of federal benefit 18,000 11,000
Other, net 43,000 (156,000)
-------- ---------
Total $166,000 $ 32,000
======== =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At
December 31, 1998, and 1997 the net deferred tax assets of $320,000 and
$269,000, respectively were included in the Company's balance sheets as
follows:
1998 1997
---------- ----------
Deferred tax asset, net - Current $ 71,000 $ 66,000
Deferred tax asset, net - Long term 249,000 203,000
---------- ---------
Deferred tax asset, net $ 320,000 $ 269,000
========== =========
Significant components of the Company's net deferred tax asset at December
31, 1998 and 1997 are as follows:
1998 1997
--------- ---------
Tax effects of:
Accounts receivable $ 129,000 $ 121,000
Unearned rental income 13,000 11,000
Buildings and building equipment 498,000 407,000
--------- ---------
Gross deferred tax asset 640,000 539,000
Valuation allowance (320,000) (270,000)
--------- ---------
Net deferred tax asset $ 320,000 $ 269,000
========= =========
Management believes that a valuation allowance is appropriate given the
current estimates of future taxable income, as well as consideration of
available tax planning strategies. If the Company is unable to generate
sufficient taxable income in the future through operating results,
increases in the valuation allowance will be required through a charge to
expense. However, if the Company achieves profitability to utilize a
greater portion of the deferred tax asset, the valuation allowance will be
reduced through a credit to income. The net change in valuation allowance
for the years ended December 31, 1998 and 1997 was a increase $50,000 and
a decrease of $110,000, respectively.
NOTE 8 - MANAGEMENT FEE
--------------
The management fee, set by DHCR, was paid to Cherry Green Property Corp.,
(Cherry Green), the owner of approximately 95% of the outstanding shares of
the Company. Such fee is reviewed and may be adjusted annually, effective
July 1 of each year, by the DHCR.
F-11
<PAGE>
KNICKERBOCKER VILLAGE, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
On October 17, 1997 and October 21, 1998 the DHCR approved increases in the
management fee of 2.44% effective July 1, 1997 and 5.5% effective July 1,
1998, respectively.
NOTE 9- PENSION PLAN
------------
Certain employees of the Company are covered under a union sponsored,
multi-employer defined benefit pension plan. This plan is not administered
by the Company and contributions are determined by the union. The
Company's contributions for this plan were approximately $71,000 for the
years ended December 31, 1998 and 1997, respectively.
NOTE 10- COMMITMENTS AND CONTINGENCIES
-----------------------------
As of December 31, 1998, the Company was in arrears on its contributions as
requested by DHCR to its special fund for replacements, painting and
decorating in the amount of $180,000 (Note 3). The Company, in accordance
with the Modification Agreement with its bank dated January 31, 1997 (Note
4), has made a commitment to complete asbestos abatement work and lead
paint remediation work of approximately $425,000. Remaining costs of
approximately $383,000 have been accrued in the financial statements as of
December 31, 1998. The costs of any additional asbestos abatement or lead
paint remediation, if necessary, in excess of the amounts accrued at
December 31, 1998, can not be determined at this time.
NOTE 11- RENTAL INCOME
-------------
During December 1998, the Company received a two step rent increase, which
was approved by the DHCR. The first increase of approximately 3.3%
will become effective February 1, 1999. The second increase of
approximately 3.2% will become effective on February 1, 2000. During April
1996, the Company received a two step rent increase, which was approved by
the DHCR. The first increase of approximately 5.5% was effective June 1,
1996 and the second increase of approximately 5.3% was effective June 1,
1997.
NOTE 12- PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid expenses and other current assets in the accompanying balance
sheets at December 31, 1998 and 1997 are as follows:
1998 1997
---------- ----------
Escrow Account $ 589,395 $ 242,461
Prepaid:
Insurance 589,287 514,911
Water and Sewer 0 112,039
Real Estate Taxes 386,924 401,775
Supplies 95,011 90,571
Interest 16,173 15,228
Expenses - Other 0 1,932
---------- ----------
TOTAL $1,676,790 $1,378,917
========== ==========
F-12
<PAGE>
Exhibit 10.1
Extension of Contract for Managing Agent
Agreement made as of the first day of July 1998, by and between Knickerbocker
- -------------
Village, Inc., Owner, and Cherry Green Property Corp. Managing Agent for the
- ------- --- ------ ----- -------- ----
premises known as Knickerbocker Village 10 Monroe Street, N.Y.C. HCLD #9
-----------------------------------------------------------
(Address and Location) Project #
Whereas, the parties have previously entered into a Contract for Managing Agents
as of July 1, 1983 with subsequent extensions to June 30, 1998, and wish to
------ -- -
extend further the Contract, it is agreed that:
1. The Contract is extended for twelve (12) months, from July 1, 1998 to
-
June 30, 1999.
-
2. Article 5.1(a) of the Owner-Agent Agreement is amended as follows:
Managing Agent Fee - $74,142.00 per month. This amount represents
---------
the sum of:
$66,896.00 the Project's Base Rate; plus
---------
$ 7,246.00 the Project's Administrative Expense Fee.
---------
3. Article 5.1(c) of the Owner-Agent Agreement is amended as follows:
Site Manager Reimbursement for the year ending June 30, 1999 is
-
$59,759.58 per year payable in equal monthly installments, in accordance
---------
with the attached schedule of salary and fringe benefits.
4. The Management Plan [_] has [X] has not been amended. If amended, the
pages on which changes have been made are attached.
5. Unless thirty (30) days prior to the expiration of this contract, either
the owner or the agent gives thirty (30) days written notice to the other
party and DHCR of its intention not to renew, or DHCR gives such thirty
(30) days written notice to both parties, this contract shall be extended
on the same terms and conditions for an additional 12 months ending June
30, XX00. The monthly managing agent fee for the extended year shall be
----
the fee agreed to in Article 5.1(a) above, modified by any DHCR authorized
increments or by any lesser amount agreed to by the owner and the agent,
or by other adjustments provided for by DHCR.
6. Other (Use attachments if necessary). ____________________________________
________________________________________________________________________________
we hereby certify that the information listed below is true and correct.
a. There is a Fidelity Bond for at least 25% of the annual rent not insuring
both the Owner and the Managing Agent.
b. There is a current Broker's License in the name of the Managing Agent.
c. The Site Manager was hired on 1/87 and [X] is currently certified
----
by National Assn of Homebuilders or [_] is not certified.
-----------------------------
OWNER: Knickerbocker Village, Inc. AGENT: Cherry Green Property Corp.
------------------------------- -------------------------------
/s/ 10/21/98 /s/ 10/21/98
------------------------------- -------------------------------
Signature Date Signature Date
Treasurer Vice-President
------------------------------- -------------------------------
Name/Title (Please Type) Name/Title (Please Type)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KNICKERBOCKER VILLAGE INC. FORM 10KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 92,956
<SECURITIES> 0
<RECEIVABLES> 443,485
<ALLOWANCES> 301,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,147,282
<PP&E> 7,598,696
<DEPRECIATION> 532,932
<TOTAL-ASSETS> 10,937,668
<CURRENT-LIABILITIES> 2,428,982
<BONDS> 6,066,258
0
0
<COMMON> 317,048
<OTHER-SE> 1,278,589
<TOTAL-LIABILITY-AND-EQUITY> 10,937,668
<SALES> 10,157,928
<TOTAL-REVENUES> 10,169,134
<CGS> 0
<TOTAL-COSTS> 9,859,190
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 544,394
<INCOME-PRETAX> 309,944
<INCOME-TAX> 166,000
<INCOME-CONTINUING> 143,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,944
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0
</TABLE>
