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: DECEMBER 31, 1997
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: 0-17151
PAINE WEBBER/CMJ PROPERTIES LP
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(Exact name of registrant as specified in its charter)
Delaware 04-2780288
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(State of organization) (I.R.S. Employer
Identification No.)
265 Franklin Street, Boston Massachusetts 02110
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of class)
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 |_|
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|
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
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Prospectus of registrant dated Part IV
May 25, 1983, as supplemented
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
1997 FORM 10-K
TABLE OF CONTENTS
Part I Page
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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-4
Part II
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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-8
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-8
Part III
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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
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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-73
<PAGE>
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/CMJ Properties, LP (the "Partnership") is a limited
partnership formed in December 1982 under the Uniform Limited Partnership Act of
the State of Delaware for the purpose of investing in a portfolio of local
limited partnerships owning apartment projects which received governmental
assistance in the form of low interest rate mortgages and rent subsidies. The
Partnership sold $8,745,000 in Limited Partnership units (8,745 units at $1,000
per unit) from May 1983 to April 1984, pursuant to a Registration Statement
filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-81003).
In addition, the Initial Limited Partner contributed $1,000 for one unit (a
"Unit") of Limited Partnership Interest. Limited Partners will not be required
to make any additional capital contributions.
As of December 31, 1997, the Partnership owned, through local limited
partnerships, interests in six apartment properties as set forth in the
following table:
Percent
Name of Local Interest in
Limited Partnership Date of Local
Limited Name of Property Acquisition Partnership
Location Size of Interest (1) (2)
- -------------------------------- ---- ----------- -------
Fawcett's Pond
Apartments Company
Village at Fawcett's Pond 100 6/30/83 95%
Hyannis, Massachusetts units
Quaker Meadows
Apartments Company
Quaker Court and The Meadows 104 6/30/83 95%
Lynn, Massachusetts units
South Laurel Apartments
Limited Partnership
Villages at Montpelier 520 6/30/83 85%
Laurel, Maryland units
Marvin Gardens Associates
Marvin Gardens 37 7/29/83 95%
Cotati, California units
Colonial Farms Ltd.
Colonial Farms 100 7/29/83 95%
Modesto, California units
Holbrook Apartments Company
Ramblewood Apartments 170 8/30/83 85%
Holbrook, Massachusetts units
(1) The Partnership owns limited partnership interests in the local limited
partnerships owning the apartment properties and improvements.
(2) See Notes to the Financial Statements filed with this Annual Report for
current outstanding mortgage balances and a description of the long-term
mortgage indebtedness collateralized by the operating property investments
of the local limited partnerships and for a description of the local
limited partnership agreements through which the Partnership has acquired
these real estate investments.
The Partnership's original investment objectives were to invest the net
cash proceeds from the offering of limited partnership units in rental apartment
properties receiving various forms of federal, state or local assistance with
the goals of providing:
(1) tax losses from deductions generated by investments;
(2) capital preservation;
(3) potential capital appreciation; and
(4) potential future cash distributions from operations (on a limited basis),
or from the sale or refinancing of the projects owned by the local limited
partnerships, or from the sale of interests in the local limited
partnerships.
The Partnership has generated tax losses since inception. However, the
benefits of such losses to investors have been significantly reduced by changes
in federal income tax law subsequent to the organization of the Partnership. The
Partnership continues to retain an ownership interest in all six of its original
operating investment properties. As of December 31, 1997, all of the properties
are generating sufficient cash flow from operations to cover their operating
expenses and debt service payments, and the majority of the properties are
generating excess cash flow, a portion of which is being distributed to the
Partnership on an annual basis in accordance with the respective regulatory and
limited partnership agreements. Given the improvements in cash flow and the
strong operating performances of the investment properties in recent years,
management had instituted a program of regular quarterly distributions in 1994
at an annual rate of 2% on original invested capital. During 1996 distributions
to the Partnership from the local limited partnerships declined, causing
management to suspend distributions effective for the fourth quarter of 1996
until further notice. In the future, to the extent there is distributable cash
flow from the properties after the payment of Partnership management fees and
operating expenses, the Partnership plans to make an annual distribution
payment. Because of ongoing capital expenditure requirements at the properties,
which are expected to maintain and enhance their long-term values, the
Partnership did not make an annual distribution payment to the Limited Partners
in 1997. However, payment of an annual distribution of 1% in 1998 is likely,
provided current projections for cash distributions from the properties in 1998
are met.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final sales of its investments.
The amount of such proceeds will ultimately depend upon the value of the
underlying investment properties at the time of their final disposition, which
cannot presently be determined. Because of the government restrictions on rental
revenues and the related capital expenditure reserve requirements and cash flow
distribution limitations, there are a limited number of potential buyers in the
market for government subsidized, low-income housing properties such as the
Partnership has invested in. Furthermore, the current uncertainty regarding
potential future reductions in the level of federal government assistance for
these programs may further restrict the properties' marketability. Accordingly,
management does not expect the General Partners of the local limited
partnerships, which receive management fee revenues from the properties, to
attempt to sell any of the properties in the near term. As discussed further in
Item 7, as a limited partner in the local limited partnerships, the
Partnership's ability to influence major business decisions, including any
decision to sell the properties, is restricted under the terms of the
agreements.
All of the properties owned by the local limited partnerships in which the
Partnership invested are located in real estate markets in which they face
competition for the revenues they generate. The Partnership's apartment
complexes, all but one of which are government-assisted, low-income housing
facilities, compete with several projects of similar type generally on the basis
of price, location and amenities. The sixth property had been partially
subsidized until July 1997 when the subsidy agreement expired. This property is
currently transitioning to a 100% market rent facility which will compete with
other non-subsidized properties in its local sub-market. The tenants at the
Partnership's subsidized apartment properties are not as likely to be candidates
for single-family home ownership as tenants of non-subsidized properties would
be. Therefore, competition from the single family home market is not a
significant factor.
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 real estate investments located outside
the United States.
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 Managing General Partner of the Partnership is PW Shelter Fund, Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber.
Subject to the Managing General Partner's overall authority, the business of the
Partnership is managed by the Adviser. The associate general partner is
Properties Associates (the "Associate General Partner"), a Massachusetts general
partnership, certain general partners of which are also officers of the Adviser
and the Managing General Partner.
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
The Partnership has acquired interests in six operating properties through
investments in local limited partnerships. The local limited partnerships and
related properties are referred to under Item 1 above to which reference is made
for the description, name, location, and ownership interest in each property.
Occupancy figures for each quarter during 1997, along with an average for
the year, are presented below for each property:
Percent Occupied At
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1997
3/31/97 6/30/97 9/30/97 12/31/97 Average
------- ------- ------- -------- -------
Village at Fawcett's Pond
Apartments 100% 100% 99% 100% 100%
Quaker Court and The Meadows 99% 98% 98% 100% 99%
Villages at Montpelier Apartments 96% 94% 88% 90% 92%
Marvin Gardens Apartments 100% 97% 98% 100% 99%
Colonial Farms Apartments 100% 99% 99% 100% 100%
Ramblewood Apartments 99% 98% 99% 100% 99%
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied partnership investors. In March 1995, after the actions were
consolidated under the title In re PaineWebber Limited Partnership Litigation,
the plaintiffs amended their complaint to assert claims against a variety of
other defendants, including PaineWebber Shelter Fund, Inc. and Properties
Associates ("PA") which are the General Partners of the Partnership and
affiliates of PaineWebber. On May 30, 1995, the court certified class action
treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged
that, in connection with the sale of interests in PaineWebber/CMJ Properties,
LP, PaineWebber, PaineWebber Shelter Fund, Inc. and PA (1) failed to provide
adequate disclosure of the risks involved; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs, who purported to be suing on
behalf of all persons who invested PaineWebber/CMJ Properties, LP, also alleged
that following the sale of the partnership interests, PaineWebber, PaineWebber
Shelter Fund, Inc. and PA misrepresented financial information about the
Partnerships value and performance. The amended complaint alleged that
PaineWebber, PaineWebber Shelter Fund, Inc. and PA violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties agreed to settle the case. Pursuant to that memorandum of
understanding, PaineWebber irrevocably deposited $125 million into an escrow
fund under the supervision of the United States District Court for the Southern
District of New York to be used to resolve the litigation in accordance with a
definitive settlement agreement and plan of allocation. On July 17, 1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which provides for the complete resolution of the class action litigation,
including releases in favor of the Partnership and PaineWebber, and the
allocation of the $125 million settlement fund among investors in the various
partnerships and REITs at issue in the case. As part of the settlement,
PaineWebber also agreed to provide class members with certain financial
guarantees relating to some of the partnerships and REITs. The details of the
settlement are described in a notice mailed directly to class members at the
direction of the court. A final hearing on the fairness of the proposed
settlement was held in December 1996, and in March 1997 the court announced its
final approval of the settlement. The release of the $125 million of settlement
proceeds had been delayed pending the resolution of an appeal of the settlement
agreement by two of the plaintiff class members. In July 1997, the United States
Court of Appeals for the Second Circuit upheld the settlement over the
objections of the two class members. As part of the settlement agreement,
PaineWebber agreed not to seek indemnification from the related partnerships and
real estate investment trusts at issue in the litigation (including the
Partnership) for any amounts that it is required to pay under the settlement.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs' purchases of various limited partnership interests, including those
offered by the Partnership. The complaint alleged, among other things, that
PaineWebber and its related entities committed fraud and misrepresentation and
breached fiduciary duties allegedly owed to the plaintiffs by selling or
promoting limited partnership investments that were unsuitable for the
plaintiffs and by overstating the benefits, understating the risks and failing
to state material facts concerning the investments. The complaint sought
compensatory damages of $15 million plus punitive damages against PaineWebber.
In September 1996, the court dismissed many of the plaintiffs' claims in the
Abbate action as barred by applicable securities arbitration regulations.
Mediation with respect to the Abbate action was held in December 1996. As a
result of such mediation, a settlement between PaineWebber and the plaintiffs
was reached which provided for the complete resolution of the action. Final
releases and dismissals with regard to this action were received during 1997.
Based on the settlement agreements discussed above covering all of the
outstanding unitholder litigation, management believes that the resolution of
these matters will not have a material impact on the Partnership's financial
statements, taken as a whole.
The Partnership is not subject to any other material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Security Holder Matters
At December 31, 1997 there were 875 record holders of Units in the
Partnership. There is no public market for the Units, and it is not anticipated
that a public market for Units will develop. Upon request, the Managing General
Partner will endeavor to assist a Unitholder desiring to transfer his Units and
may utilize the services of PWI in this regard. The price to be paid for the
Units will be subject to negotiation by the Unitholder. The Managing General
Partner will not redeem or repurchase Units.
No cash distributions were made to the Limited Partners during 1997.
Item 6. Selected Financial Data
Paine Webber/CMJ Properties, LP
(In thousands, except per Unit data)
Years Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 147 $ 98 $ 244 $ 179 $ 293
Expenses $ 288 $ 280 $ 288 $ 268 $ 289
Partnership's share
of local limited
partnerships' income $ 184 $ 157 $ 174 $ 186 $ 203
Net income (loss) $ 43 $ (25) $ 130 $ 97 $ 207
Cash distributions per
Limited
Partnership Unit - $ 20.00 $20.00 $ 10.00 -
Net income (loss) per
Limited
Partnership Unit $ 4.85 $ (2.82) $14.75 $ 11.01 $ 23.45
Total assets $ 520 $ 415 $ 486 $ 525 $ 729
(a) The above selected financial data should be read in conjunction with
the financial statements and related notes appearing elsewhere in this
Annual Report.
(b) The above per Limited Partnership Unit information is based upon the
8,746 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 April 1984 pursuant to a Registration Statement filed under the
Securities Act of 1933. The Partnership received gross proceeds of $8,746,000,
and after deducting selling expenses and offering costs, the Partnership
invested approximately $6,960,000 in six local limited partnerships owning
housing projects that received various forms of federal, state or local
assistance and that could be classified as "low-income housing" under the
Internal Revenue Code. The Partnership does not have any commitments for
additional capital expenditures or investments. The Partnership continues to
retain an ownership interest in all six of its original operating investment
properties. As of December 31, 1997, all of the properties are generating
sufficient cash flow from operations to cover their operating expenses and debt
service payments, and the majority of the properties are generating excess cash
flow, a portion of which is being distributed to the Partnership on an annual
basis in accordance with the respective regulatory and limited partnership
agreements. Given the improvements in cash flow and the strong operating
performances of the investment properties in recent years, management had
instituted a program in 1994 which provided for the payment of regular quarterly
distributions at an annual rate of 2% on original invested capital. During 1996,
distributions to the Partnership from the local limited partnerships declined,
causing management to suspend distributions effective for the fourth quarter of
1996 until further notice. In the future, to the extent there is sufficient
distributable cash flow from the properties after the payment of Partnership
management fees and operating expenses, the Partnership plans to make an annual
distribution payment. As discussed further below, because of ongoing capital
expenditure requirements at the properties, which are expected to maintain and
enhance their long-term values, the Partnership did not make an annual
distribution payment to the Limited Partners in 1997.
During 1996, the Partnership received distributions totalling $310,000
from four of the six local limited partnership investments: Ramblewood, Quaker
Meadows, Colonial Farms and Fawcett's Pond. During 1997, the Partnership
received annual distributions totalling $366,000 from the same four local
limited partnership investments, plus a distribution of $4,000 from Marvin
Gardens. The amounts received in 1996 and 1997 represented the cash flow
available for distribution as of December 31, 1995 and 1996, respectively, as
determined by the general partners of the local limited partnerships in
accordance with the partnership, financing and regulatory agreements. Total
distributions from the Partnership's investments increased slightly in the
current year due to an increase in distributions from the Quaker Meadows and
Ramblewood partnerships and the distribution from the Marvin Gardens
partnership, but remain below the level of distributions received in 1994 and
1995. As previously reported, during the second quarter of 1997 management of
the Partnership completed a detailed review of each property with the affiliate
of the operating general partners which manages the day-to-day operations of the
investment properties. As a result of such review, management determined that
the Partnership should not make an annual distribution to the Limited Partners
for 1997. Based on the current environment of rising property operating expenses
and capital improvement costs, as well as the restrictions on distributable cash
flow from the properties, there was not sufficient cash flow to support the
payment of a distribution by the Partnership for 1997. Management believes the
next likely distribution would be a distribution to be made during 1998 at an
annualized rate of 1% on invested capital, provided that current projections for
cash distributions from the properties in 1998 are met. The annual cash
distributions from the local limited partnerships typically occur in the second
or third quarters.
As of December 31, 1997, five of the Partnership's six operating
investment properties were receiving rental subsidy payments from the federal
government under Section 8 of the National Housing Act. The subsidy agreement
covering The Villages at Montpelier Apartments expired in July 1997. The subsidy
agreements covering the other five operating investment properties do not expire
for another 4-to-6 years. Due to the limited availability of government
subsidized housing, these properties consistently achieve occupancy levels of
99% to 100%. Cash flow from these five properties is restricted by the
Department of Housing and Urban Development ("HUD") and other applicable state
housing agencies, which set rental rates for low-income units and require
significant cash reserves to be established for future capital improvements. In
addition, a substantial amount of the revenues generated by these properties
comes from the rental subsidy payments made by federal or state housing
agencies. These features, which are characteristic of all subsidized low-income
housing properties, significantly limit the pool of potential buyers for these
real estate assets. Furthermore, the current uncertainty regarding potential
future reductions in the level of federal government assistance for these
programs may further restrict the properties' marketability. Accordingly,
management does not expect the general partners of the local limited
partnerships, which receive management fee revenues from the properties through
an affiliated management company, to attempt to sell any of the properties in
the near term. As a limited partner of the local limited partnerships, the
Partnership does not control property disposition decisions. The partnership
agreements state that the limited partner may cause the sale of the assets of
the local limited partnerships subsequent to June 30, 1995, but not earlier than
one year after it has given written notice to the operating general partner of
its intent to cause such sale, and only if, during such one-year period, the
operating general partner does not cause the sale of such assets. If the
operating general partner has not caused the assets of the partnership to be
sold within such one-year period, the limited partner may cause such sale, but
only after it has offered to sell such assets to the operating general partner,
and either the operating general partner does not accept such offer within 90
days of receiving it, or the operating general partner does not complete the
sale in accordance with such offer after accepting the terms.
As previously reported, 80% of the apartments at The Villages at
Montpelier were rented at market rates while 20% received government subsidies
under the Section 8 rental assistance program. With the expiration of the
subsidy agreement in July 1997, the property management team began the process
of converting the former subsidized units at the property to market rent units
during the third quarter of 1997. As expected, the conversion resulted in a
decline in occupancy at the property as a number of subsidized tenants vacated
the property and their units were prepared to be re-leased. Subsequent to the
expiration of the Section 8 contract, the average occupancy level at the
property fell to 88% for the third quarter but rebounded to 90% for the fourth
quarter. As of December 31, 1997, the property was 93% leased. A majority of the
remaining vacancies at the property are in the larger 3 and 4 bedroom units. The
property's management and leasing team is offering rental concessions on these
units until a majority of them are leased. Based on existing market rental
rates, management believes that the rental revenues from The Villages at
Montpelier Apartments will be comparable to the prior subsidized levels once the
occupancy has stabilized. If the market for conventional multi-family apartment
properties remains strong in the near term, the expiration of the rental subsidy
agreement at The Villages at Montpelier Apartments could enhance the property's
marketability for a potential sale by increasing the pool of interested buyers.
However, there are no assurances that such market conditions will remain strong,
and the ability of the Partnership to cause a sale of the property will remain
restricted by the terms of the limited partnership agreement discussed further
above. If market conditions were to deteriorate, The Villages at Montpelier
Apartments could experience extended declines in occupancy and revenues as a
result of the expiration of the subsidy agreement.
For the remaining five properties, which each contain 100% low-income
housing units, the government subsidy payments range from 75% to 82% of the
total revenues of the related local limited partnerships. At the present time,
certain legislative initiatives and governmental budget negotiations could
result in a reduction in funds available for the various HUD-administered
housing programs and new limitations on subsidized rent levels. Such changes
could adversely impact the net operating income generated by the local limited
partnerships. In light of the uncertainty regarding the near term prospects for
government assisted, low-income housing and the restrictions on the
Partnership's ability to cause a sale of the operating properties, management
does not have any immediate plans to initiate the sale process under the terms
of the agreements described above. Notwithstanding this, the Partnership is
currently in the process of developing potential disposition strategies for each
of the properties. A decision as to when actions will be taken to initiate the
sale process with respect to any or all of the operating investment properties
in the future will be based upon a number of factors including, the availability
of a pool of qualified buyers, an evaluation of the future of the relevant
subsidy programs, the availability of financing, an assessment of local market
conditions and future appreciation potential. Now that the regulatory agreement
on The Villages at Montpelier Apartments has expired, the decision of whether to
initiate a sale process for that property will be based on a more traditional
analysis of existing market conditions and future appreciation potential. It is
currently contemplated that dispositions of the Partnership's assets could be
completed within the next 2 to 3 years. The disposition of the remaining assets
would be followed by the formal liquidation of the Partnership. There are no
assurances, however, that the disposition of the remaining assets and a
liquidation of the Partnership will be completed within this time frame.
At December 31, 1997, the Partnership had available cash and cash
equivalents of approximately $493,000, which it intends to use for its working
capital requirements. The source of future liquidity and distributions to the
partners is expected to be from cash generated from the operations of the
Partnership's real estate investments and from the proceeds received from the
sale or refinancing of the properties owned by the local limited partnerships.
Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on both a short-term and long-term basis.
Results of Operations
1997 Compared to 1996
- ---------------------
For the year ended December 31, 1997, the Partnership reported net income
of $43,000, as compared to a net loss of $25,000 for 1996. This favorable change
in the Partnership's net operating results is attributable to a $41,000 increase
in the Partnership's operating income and a $27,000 increase in the
Partnership's share of local limited partnerships' income. The increase in the
Partnership's operating income is attributable to an increase in other income
from local limited partnerships of $37,000 and an increase in interest income of
$12,000. An increase in general and administrative expenses of $8,000 partially
offset these favorable changes in operating income.
As discussed further in Note 2 to the accompanying financial statements,
the Partnership accounts for its investments in local limited partnerships using
the equity method. In accordance with the equity method, the Partnership does
not record losses for those limited partnership investments whose equity method
basis has been reduced to zero and recognizes future income from these entities
only when it exceeds the previously unrecorded losses. Distributions received
from investments in limited partnerships whose basis has been reduced to zero
are recorded as other income from the local limited partnerships. Other income
from the local limited partnerships in 1997 represents distributions from Quaker
Meadows, Colonial Farms and Marvin Gardens while the 1996 amount represents
distributions from Quaker Meadows, Colonial Farms and Fawcett's Pond. Overall,
other income from local limited partnerships increased by $37,000 due to a
$41,000 increase in distributions from Quaker Meadows, a $4,000 distribution
from Marvin Gardens, which did not make a distribution in 1996, and an $8,000
reduction attributable to Fawcett's Pond. Although the distribution from the
Fawcett's Pond partnership remained unchanged from 1996 to 1997, other income
from local limited partnerships decreased because the entire distribution from
Fawcett's Pond was recorded as a reduction of the equity method carrying value
of the investment in 1997. The increase in interest income resulted from an
increase in invested cash reserves due to the suspension of the Partnership's
quarterly distributions during the fourth quarter of 1996 and an increase in
distributions from local limited partnerships in 1997. The increase in general
and administrative expenses was mainly due to increases in certain required
professional services during 1997.
At December 31, 1997, only two of the six local limited partnerships, The
Holbrook Apartments Company (Ramblewood Apartments) and the Fawcett's Pond
Apartment Company, had positive equity method carrying values. The Partnership's
share of income from the Ramblewood Apartments for 1997 and 1996 totalled
$154,000 and $141,000, respectively, while the Partnership's share of income
from the Fawcett's Pond Apartments for 1997 and 1996 totalled $30,000 and
$16,000, respectively. The favorable change in the Partnership's share of local
limited partnerships' income attributable to the Fawcett's Pond partnership
resulted from a portion of the income from Fawcett's Pond ($55,000) being
allocated to offset previously unrecorded losses in 1996. As a result, only
$16,000 of the $71,000 income allocable to the Partnership in that year was
recognized by the Partnership in its share of local limited partnerships'
income. In 1997, the entire $30,000 of Fawcett's Pond income allocable to the
Partnership was recognized in its share of local limited partnerships' income.
The favorable change in the Partnership's share of income from the Ramblewood
partnership resulted mainly from an increase in total revenues and decreases in
real estate taxes and interest expense which were partially offset by an
increase in incentive management fees and property operating expenses. In the
aggregate, total revenues increased or remained the same at five of the six
local limited partnerships due to stable occupancy levels which averaged in the
99% to 100% range during 1996 and 1997. The Villages at Montpelier Apartments
was the only local limited partnership to experience a notable decline in
occupancy which resulted in a 1% decline in rental revenues for 1997. Average
occupancy at The Villages at Montpelier Apartments declined from 95% in 1996 to
92% for the current year due to the expiration of the government subsidy
agreement in July 1997, as discussed further above. Despite the decline in
rental revenues, the net operating results of The Villages at Montpelier
partnership improved by $192,000 during 1997, mainly due to a $214,000 reduction
in property operating expenses, which was principally due to lower repairs and
maintenance costs. Total expenses at the other five local limited partnerships
increased mainly due to increases in repairs and maintenance expenses at
Colonial Farms, Fawcett's Pond, Quaker Meadows and Marvin Gardens, a
reimbursement of subsidy payments required at Colonial Farms and an increase in
incentive management fees at Ramblewood and Quaker Meadows.
1996 Compared to 1995
- ---------------------
For the year ended December 31, 1996, the Partnership reported a net loss
of $25,000, as compared to net income of $130,000 for 1995. This unfavorable
change in the Partnership's net operating results of $155,000 was attributable
to a $138,000 increase in the Partnership's operating loss and a $17,000 decline
in the Partnership's share of local limited partnerships' income.
As noted above, in accordance with the equity method of accounting for
limited partnership interests, the Partnership does not record losses from
investment properties when losses exceed the Partnership's equity method basis
in these properties, and future income is recognized only when it exceeds the
previously unrecorded losses. Five of the Partnership's six investments had an
equity method basis of zero as of December 31, 1996 and 1995. The Holbrook
Apartments Company (Ramblewood Apartments) was the only remaining investment
with a positive equity method carrying value as of December 31, 1996 and 1995.
The Partnership's share of income from the Ramblewood Apartments for 1996 and
1995 totalled $141,000 and $174,000, respectively. This unfavorable change in
the net operating results of the Ramblewood partnership resulted mainly from an
increase in property operating expenses. Property operating expenses increased
as a result of sidewalk repairs, exterior painting, and the replacement of
playground equipment, which occurred in 1996. During 1996, cumulative income
allocations to the Partnership from the Fawcett's Pond investment exceeded
previously unrecorded losses. As a result, the Partnership recognized a portion
of the 1996 income allocation from the Fawcett's Pond partnership ($16,000) in
its share of local limited partnerships' income in 1996, which partially offset
the decline in income from the Ramblewood partnership. Distributions from the
Fawcett's Pond partnership were recorded as reductions to the investment
carrying value to the extent of the income recognition in 1996 which reduced the
carrying value of the investment to zero as of December 31, 1996. Overall, the
combined net operating results of the six local limited partnerships improved
from a net loss of $6,000 in 1995 to net income of $17,000 in 1996. This
favorable change resulted from an increase in combined revenues of $67,000,
which exceeded the increase in combined expenses of $44,000.
The Partnership's operating loss increased due to a $146,000 decrease in
total revenues, which was partially offset by an $8,000 decrease in Partnership
general and administrative expenses. The major portion of the decrease in total
revenues was attributable to a $137,000 decline in other income from local
limited partnerships. As discussed further in Note 2 to the financial
statements, distributions from the local limited partnerships are recorded as
other income for those investments for which the Partnership's equity method
carrying value has been reduced to zero. With the exception of Fawcett's Pond,
distributions from which remained unchanged, distributions from the five local
limited partnerships with carrying values of zero declined by varying amounts in
1996 generally due to rising operating expenses and increases in capital
expenditures. In addition, as discussed further above, a portion of the
distributions received from the Fawcett's Pond partnership in 1996 were recorded
as reductions to the investment's carrying value. Also contributing to the
decrease in total revenues was a $9,000 decline in interest income on invested
cash reserves. The decline in general and administrative expenses was mainly due
to decreases in certain required professional services.
1995 Compared to 1994
- ---------------------
The Partnership recorded net income of $130,000 for the year ended
December 31, 1995, as compared to net income of $97,000 for 1994. The increase
in net income of $33,000 was mainly the result of an increase in other income
from local limited partnerships of $64,000. As noted above, distributions from
the local limited partnerships are recorded as income for those investments for
which the Partnership's equity method carrying value has been reduced to zero.
Distributions totalling $221,000 from five partnerships were recorded as other
income in the year ended December 31, 1995, as compared to $157,000 from the
same five partnerships for 1994. The favorable change in other income from local
limited partnerships was partially offset by an increase of $20,000 in the
Partnership's general and administrative expenses in 1995.
In accordance with the equity method of accounting for limited partnership
interests, the Partnership does not recognize losses from investment properties
when losses exceed the Partnership's equity method basis in these properties.
Five of the Partnership's six investments had an equity method basis of zero as
of December 31, 1995 and 1994. Distributions from the Holbrook Apartments
Company (Ramblewood Apartments), the only remaining investment which still had a
positive equity method carrying value at December 31, 1995 and 1994, were
recorded as reductions of the investment carrying value and totalled $214,000
and $250,000 for 1995 and 1994, respectively. Distributions from the other five
limited partnerships increased by $64,000 in 1995, as reflected in the change in
other income. This increase resulted primarily from an increase of $47,000 in
distributions from The Villages at Montpelier Apartments. The distributions
received in 1995 reflected the available cash flow from 1994 operations.
The Partnership's recorded share of local limited partnerships' income in
1995 consisted of income of $174,000 from the Ramblewood Apartments limited
partnership, as compared to income of $186,000 from the same partnership in
1994. Net income was down slightly at Ramblewood in 1995, mainly due to
increases in salaries expense and real estate taxes. Overall, an increase in
combined property operating expenses of $282,000 for the six local limited
partnerships exceeded the increase in combined revenues of $75,000. Occupancy
levels remained high throughout 1995 with average occupancy above 95% at all
properties. Revenues were up at all properties except at The Villages at
Montpelier Apartments. At The Villages at Montpelier Apartments, revenues
decreased slightly during 1995 due to a temporary decline in occupancy
experienced in the third quarter. Occupancy at The Villages at Montpelier
Apartments averaged 95% for 1995, but dropped to 91% in August 1995 as a result
of management's efforts to increase rental rates for the market-rate units.
Management stepped up its marketing efforts in conjunction with the rate
increases. After the initial decline in occupancy, the marketing efforts
generated positive results as the occupancy level recovered and the number of
prospective tenants visiting the property increased. Expenses in general were up
at all of the local limited partnerships with repairs and maintenance expenses
running higher in 1995 at these properties due to a combination of their ages,
applicable regulatory requirements and management's operating philosophy. Such
expenses do, however, fluctuate from year to year.
Certain Factors Affecting Future Operating Results
- --------------------------------------------------
The following factors could cause actual results to differ materially from
historical results or those anticipated:
Risks of Government-Assisted Housing Complexes. In certain respects
government-assisted housing complexes differ from conventional housing
complexes. These include (a) greater financing leverage than is usual in
conventional complexes, (b) review of compliance with construction and other
standards and (c) various contingency reserves required in connection with such
government assistance programs. Government-assisted housing is also subject to
special conditions and risks including, but not limited to, (a) general
surveillance by the appropriate governmental assistance agency, which may
include the application of rental and other guidelines affecting tenant
eligibility, operating costs and rental levels, (b) maintenance of a reserve
fund for replacements in an amount paid concurrently with amortization of the
mortgage and in addition to payments of principal and interest, restricted such
that withdrawals from the fund are subject to the prior approval of the
appropriate governmental assistance agency, (c) compliance with the United
States Department of Housing and Urban Development ("HUD") regulations regarding
management of the premises, (d) limitations on saleability, as contained in
regulatory agreements with the appropriate governmental assistance agency, (e)
limitations on rent increases, and (f) the uncertain effects of changes in
complex rules and regulations governing such government-assisted programs, or
changes in the manner in which those regulations are interpreted.
Government assistance payments may be reduced in the event that a project
rents less than 100% of its units eligible for rental subsidies to qualified low
income tenants. HUD generally elects to reduce subsidies only in the event that
occupancy levels for qualified tenants drop below 95% for a period of two years.
Finally, HUD commitments are subject to HUD's appropriation of federal funds
sufficient to meet its obligations in any given year. At the present time,
certain legislative initiatives and governmental budget negotiations could
result in a reduction of funds available for the various HUD-administered
housing programs and could also result in new limitations on subsidized rent
levels. This in turn could adversely impact the net operating income generated
by the Partnership's properties.
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 local limited partnerships carry
comprehensive liability, fire, flood, extended coverage and rental loss
insurance with respect to their 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 real estate
investments will be impacted by the competition from comparable properties in
their local market areas. Due to the limited availability of low-income housing
programs like the ones that cover five of the Partnership's six investment
properties, the competitive pressures faced by these properties are much less
than for non-subsidized, market rate facilities. Nonetheless, the occupancy
levels achievable at the properties and the rental rates at the non-subsidized
property are largely a function of supply and demand in the markets. In many
markets across the country, development of new multi-family properties has
surged in the past 12 months. Existing apartment properties in such markets have
generally experienced increased vacancy levels, declines in effective rental
rates and, in some cases, declines in estimated market values as a result of the
increased competition. There are no assurances that these competitive pressures
will not adversely affect the operations and/or market values of the
Partnership's investment properties in the future and, in particular, subsequent
to the expiration of the existing subsidy agreements.
Impact of Local Limited Partnership Structure. The ownership of the
Partnership's investments through local limited 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 general partners of the local limited partnerships could have
economic or business interests which are inconsistent with those of the
Partnership. Given the limited rights which the Partnership has under the terms
of the local limited partnership 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 fair market values of such
properties at the time of their final dispositions. Demand by buyers of
multi-family apartment properties is affected by many factors, including the
size, quality, age, condition and location of the subject property, potential
environmental liability concerns, the existing debt structure, the liquidity in
the debt and equity markets for asset acquisitions, the general level of market
interest rates and the general and local economic climates. In addition, because
of the government restrictions on rental revenues and the related capital
expenditure reserve requirements and cash flow distribution limitations, there
are a limited number of potential buyers in the market for government
subsidized, low-income housing properties such as the Partnership has invested
in. Furthermore, the current uncertainty regarding potential future reductions
in the level of federal government assistance for these programs may further
restrict the properties' marketability.
Inflation
- ---------
The Partnership completed its fourteenth full year of operations in 1997.
To date, the effects of inflation and changes in prices on the Partnership's
operating results have not been significant. In the future, with regard to the
local limited partnerships, contract rental rates under "Section 8" agreements
may be increased at the discretion of the Department of Housing and Urban
Development in response to inflationary pressures to cover increases in
operating expenses due to 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
<PAGE>
PART III
Item 10. Directors and Principal Executive Officers of the Partnership
The Managing General Partner of the Partnership is PW Shelter 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 38 8/22/96
Terrence E. Fancher Director 44 10/10/96
Walter V. Arnold Senior Vice President
and Chief Financial Officer 50 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 55 12/10/82 *
Timothy J. Medlock Vice President and Treasurer 36 6/1/88
Thomas W. Boland Vice President and Controller 35 12/1/91
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
and/or executive officers of the Managing General Partner of the Partnership.
All of the foregoing directors and executive officers have been elected to serve
until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which 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 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 her or his ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial holders are required by SEC regulations to furnish the Partnership
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended December 31, 1997, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the
General Partners are entitled to receive a share of cash distributions and a
share of profits or losses. These items are described under Item 13.
The Partnership paid distributions to the Unitholders on a quarterly basis
at a rate of 2% per annum on original invested capital from June 30, 1994 to
September 30, 1996. The Partnership's quarterly distributions were suspended
effective for the quarter ended December 31, 1996 due to an unexpected decline
in the cash flow distributions from the local limited partnerships in which the
Partnership has invested. In addition, 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, PW Shelter Fund, Inc., is owned by PaineWebber.
Properties Associates, the Associate General Partner, is a Massachusetts general
partnership, general partners of which are also officers of the Adviser and the
Managing General Partner. Properties Associates is also the Initial Limited
Partner of the Partnership and owns one Unit of limited partnership interest. No
limited partner is known by the Partnership to own beneficially more than 5% of
the outstanding interests of the Partnership.
(b) Neither officers and directors of the Managing General Partner nor the
general partners of the Associate General Partner, individually, own any Units
of limited partnership interest of the Partnership. No officer or director 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 PW Shelter 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 (the "Adviser"). Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by the
Adviser pursuant to an advisory contract. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber. The General Partners, the Adviser and PWI receive fees and
compensation, determined on an agreed-upon basis, in consideration of various
services performed in connection with the sale of the Units, the management of
the Partnership and the acquisition, management, financing and disposition of
Partnership investments. In addition, the Managing General Partner and the
Adviser are reimbursed for their out-of-pocket expenses relating to the offering
of Units, the administration of the Partnership and the acquisition and
operation of the Partnership's real property investments.
Distributable cash, as defined, if any, for each fiscal year shall be
distributed annually in the ratio of 99% to the Limited Partners and 1% to the
General Partners. All sale or refinancing proceeds will be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss of the Partnership will be allocated 99% to the Limited Partners and 1% to
the General Partners. Taxable income or tax loss arising from a sale or
refinancing of investment properties will be allocated to the Limited Partners
and the General 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 or tax loss from a
sale or refinancing will be allocated 99% to the Limited Partners and 1% to the
General Partners. Allocations of the Partnership's operations between the
General Partner and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities, to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser earns a basic management fee of .5% of invested
assets for these services. Invested assets is the sum of the amount invested by
the Partnership in each local limited partnership plus a proportionate interest
in the mortgage debt initially incurred by the local limited partnerships. The
Adviser earned management fees of $199,000 for the year ended December 31, 1997.
Accounts payable - affiliates at December 31, 1997 consists of management fees
of $199,000 payable to the Adviser.
In connection with the sale of each property, the Adviser may receive a
disposition fee in an amount equal to 1% based on the selling price of the
property, subordinated to the payment of certain amounts to the Limited
Partners.
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 December 31, 1997 is $35,000, representing reimbursements to this
affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $2,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during the year ended December 31, 1997. Fees charged
by Mitchell Hutchins are based on a percentage of invested cash reserves which
varies based on the total amount of invested cash which Mitchell Hutchins
manages on behalf of PWPI.
See Note 3 to the accompanying financial statements of the Partnership for
a further discussion of certain relationships and related party transactions.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements 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) No reports on Form 8-K were filed during the last quarter of 1997.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements at page F-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER/CMJ PROPERTIES, LP
LIMITED PARTNERSHIP
By: PW Shelter 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: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By: /s/ Bruce J. Rubin Date: March 30, 1998
------------------- --------------
Bruce J. Rubin
Director
By: /s/ Terrence E. Fancher Date: March 30, 1998
----------------------- --------------
Terrence E. Fancher
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a)(3)
PAINE WEBBER/CMJ PROPERTIES, LP
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
- ----------- ----------------------- -----------------------------
<S> <C> <C>
(3) and (4) Prospectus of the Partnership Filed with the Commission
dated May 25, 1983, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Restated
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13or 15(d)
statements and amendments thereto of the Securities Act of 1934
of the registrant together with all and incorporated herein by
previously filed Forms 8-K and Forms reference.
such contracts filed as exhibits of
10-K are hereby incorporated herein
by reference.
(13) Annual Reports to Limited Partners No Annual Report for the
year ended December 31,
1997 has been sent to the
Limited Partners. An
Annual Report will be sent
to the Limited Partners
subsequent to this filing.
(22) List of subsidiaries Included in Item 1 of Part
1 of this Report Page I-1,
to which reference is
hereby made.
(27) Financial Data Schedule Filed as the last page of
EDGAR submission following
the Financial Statements
required by Item 14.
</TABLE>
<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER/CMJ PROPERTIES, LP
INDEX TO FINANCIAL STATEMENTS
Reference
---------
Paine Webber/CMJ Properties, LP
Independent Auditors' Report F-4
Balance sheets at December 31, 1997 and 1996 F-5
Statements of operations for the years ended December 31, 1997,
1996 and 1995 F-6
Statements of changes in partners' capital (deficit) for the years
ended December 31, 1997, 1996 and 1995 F-7
Statement of cash flows for the years ended December 31, 1997, 1996
and 1995 F-8
Notes to financial statements F-9
Fawcett's Pond Apartments Company
Independent Auditors' Report F-20
Balance sheets at December 31, 1997 and 1996 F-21
Statements of operations for the years ended December 31, 1997,
1996 and 1995 F-22
Statements of partners' deficit for the years ended
December 31, 1997, 1996 and 1995 F-23
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-24
Notes to financial statements F-26
Quaker Meadows Apartments Company
Independent Auditors' Report F-29
Balance sheets at December 31, 1997 and 1996 F-30
Statements of operations for the years ended December 31, 1997,
1996 and 1995 F-31
Statements of partners' deficit for the years ended December 31,
1997, 1996 and 1995 F-32
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-33
Notes to financial statements F-35
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
INDEX TO FINANCIAL STATEMENTS - continued
Reference
---------
South Laurel Apartments Limited Partnership
Independent Auditors' Report F-38
Balance sheets at December 31, 1997 and 1996 F-39
Statements of operations for the years ended December 31, 1997,
1996 and 1995 F-40
Statements of partners' deficit for the years ended December 31,
1997, 1996 and 1995 F-41
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-42
Notes to financial statements F-44
Marvin Gardens Associates
Independent Auditors' Report F-47
Balance sheets at December 31, 1997 and 1996 F-48
Statements of operations for the years ended December 31, 1997,
1996 and 1995 F-49
Statements of partners' deficit for the years ended December 31,
1997, 1996 and 1995 F-50
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-51
Notes to financial statements F-53
Colonial Farms, Ltd.
Independent Auditors' Report F-56
Balance sheets at December 31, 1997 and 1996 F-57
Statements of operations for the years ended December 31, 1997,
1996 and 1995 F-58
Statements of partners' deficit for the years ended December
31, 1997, 1996 and 1995 F-59
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-60
Notes to financial statements F-62
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
INDEX TO FINANCIAL STATEMENTS - continued
Reference
---------
Holbrook Apartments Company
Independent Auditors' Report F-65
Balance sheets at December 31, 1997 and 1996 F-66
Statements of operations for the years ended December 31, 1997
1996 and 1995 F-67
Statements of partners' deficit for the years ended December
31, 1997, 1996 and 1995 F-68
Statements of cash flows for the years ended December 31, 1997,
1996 and 1995 F-69
Notes to financial statements F-71
All schedules have been omitted since the required information is not
applicable, or because the information required is included in the financial
statements, including the notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of
Paine Webber/CMJ Properties, LP
We have audited the accompanying balance sheets of Paine Webber/CMJ
Properties, LP (a Limited Partner-ship) as of December 31, 1997 and 1996, and
the related statements of operations, changes in partners' capital (deficit),
and cash flows for each of the three years in the period ended December 31,
1997. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paine Webber/CMJ Properties,
LP at December 31, 1997 and 1996, and the results of its operations, changes in
partners' capital (deficit), and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Reznick Fedder & Silverman
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
March 20, 1998
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
BALANCE SHEETS
December 31, 1997 and 1996
(In thousands, except per Unit amounts)
ASSETS
1997 1996
---- ----
Investments in local limited partnerships, at equity $ 27 $ 92
Cash and cash equivalents 493 323
-------- --------
$ 520 $ 415
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accrued expenses and accounts payable $ 16 $ 21
Accounts payable - affiliates 199 132
-------- --------
215 153
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net losses (69) (70)
Cumulative distributions (5) (5)
Limited Partners ($1,000 per Unit; 15,000 Units
authorized; 8,746 Units issued and outstanding):
Capital contributions, net of offering costs 7,679 7,679
Cumulative net losses (6,864) (6,906)
Cumulative distributions (437) (437)
-------- --------
Total partners' capital 305 262
-------- --------
$ 520 $ 415
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(In thousands, except per Unit amounts)
1997 1996 1995
---- ---- ----
Revenues:
Interest income $ 26 $ 14 $ 23
Other income from local limited
partnerships 121 84 221
------- ------- --------
147 98 244
Expenses:
Management fees 199 199 199
General and administrative 89 81 89
------- ------- --------
288 280 288
------- ------- --------
Operating loss (141) (182) (44)
Partnership's share of local limited
partnerships' income 184 157 174
------- ------- --------
Net income (loss) $ 43 $ (25) $ 130
======= ======= ========
Net income (loss) per Limited
Partnership Unit $ 4.85 $ (2.82) $ 14.75
======= ======== ========
Cash distributions per Limited
Partnership Unit $ - $ 20.00 $ 20.00
======= ======== ========
The above net income (loss) and cash distributions per Limited Partnership
Unit are based upon the 8,746 Limited Partnership Units outstanding during each
year.
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1997, 1996 and 1995
(In thousands)
General Limited
Partners Partners Totals
-------- -------- ------
Balance at December 31, 1994 $ (71) $ 582 $ 511
Cash distributions (2) (175) (177)
Net income 1 129 130
------- ------ ------
Balance at December 31, 1995 (72) 536 464
Cash distributions (2) (175) (177)
Net loss - (25) (25)
------- ------ ------
Balance at December 31, 1996 (74) 336 262
Net income 1 42 43
------- ------ ------
Balance at December 31, 1997 $ (73) $ 378 $ 305
======= ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 43 $ (25) $ 130
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Other income from local limited partnerships (121) (84) (221)
Partnership's share of local limited
partnerships' income (184) (157) (174)
Changes in assets and liabilities:
Accrued expenses and accounts payable (5) (1) 8
Accounts payable - affiliates 67 132 -
------ ------- --------
Total adjustments (243) (110) (387)
------ ------- --------
Net cash used in operating activities (200) (135) (257)
------ ------- --------
Cash flows from investing activities:
Distributions from local limited
partnerships 370 310 435
------ ------- --------
Net cash provided by investing activities 370 310 435
------ ------- --------
Cash flows from financing activities:
Distributions to partners - (177) (177)
------ ------- --------
Net cash used in financing activities - (177) (177)
------ ------- --------
Net increase (decrease) in cash and cash equivalents 170 (2) 1
Cash and cash equivalents, beginning of year 323 325 324
------ ------- --------
Cash and cash equivalents, end of year $ 493 $ 323 $ 325
====== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. Organization and Nature of Operations
-------------------------------------
Paine Webber/CMJ Properties, LP (the "Partnership") is a limited
partnership organized pursuant to the laws of the State of Delaware in December
1982 for the purpose of investing in a portfolio of interests in local limited
partnerships owning apartment projects which received governmental assistance in
the form of low rate mortgages and rent subsidies. All of the properties owned
by the local limited partnerships were developed by Corcoran, Mullins, Jennison,
Inc. ("CMJ") or its affiliates. The initial capital was $2,000, representing
capital contributions of $1,000 by the General Partners and $1,000 for one unit
(a "Unit") by the Initial Limited Partner. The Partnership authorized the
issuance of a maximum of 15,000 Partnership Units of which 8,745 were subscribed
and issued between May 25, 1983 and April 30, 1984.
The Partnership originally invested the net proceeds of the public
offering, through local limited partnerships, in six apartment projects which
receive governmental assistance in the form of low interest rate mortgages and
rent subsidies. The Partnership's original investment objectives were to invest
the net cash proceeds from the offering of limited partnership units in rental
apartment properties receiving various forms of federal, state or local
assistance with the goals of providing: (1) tax losses from deductions generated
by investments; (2) capital preservation; (3) potential capital appreciation;
and (4) potential future cash distributions from operations (on a limited
basis), or from the sale or refinancing of the projects owned by the local
limited partnerships, or from the sale of interests in the local limited
partnerships.
The Partnership has generated tax losses since inception. However, the
benefits of such losses to investors have been significantly reduced by changes
in federal income tax law subsequent to the organization of the Partnership. The
Partnership continues to retain an ownership interest in all six of its original
operating investment properties. As of December 31, 1997, all of the properties
are generating sufficient cash flow from operations to cover their operating
expenses and debt service payments, and the majority of the properties are
generating excess cash flow, a portion of which is being distributed to the
Partnership on an annual basis in accordance with the respective regulatory and
limited partnership agreements. Given the improvements in cash flow and the
strong operating performances of the investment properties in recent years,
management had instituted a program of regular quarterly distributions in 1994
at an annual rate of 2% on original invested capital. Effective for the fourth
quarter of 1996, due to an unexpected decline in the level of cash flow
distributions from the local limited partnerships, distributions to the partners
were suspended until further notice. In the future, to the extent there is
distributable cash flow from the properties after the payment of Partnership
management fees and operating expenses, the Partnership plans to make an annual
distribution payment.
The Partnership's success in meeting its capital appreciation objective
will depend upon the proceeds received from the final sales of its investments.
The amount of such proceeds will ultimately depend upon the value of the
underlying investment properties at the time of their final disposition, which
cannot presently be determined. Because of the government restrictions on rental
revenues and the related capital expenditure reserve requirements and cash flow
distribution limitations, there are a limited number of potential buyers in the
market for government subsidized, low-income housing properties such as the
Partnership has invested in. Furthermore, the current uncertainty regarding
potential future reductions in the level of federal government assistance for
these programs may further restrict the properties' marketability. Accordingly,
management does not expect the General Partners of the local limited
partnerships, which receive management fee revenues from the properties, to
attempt to sell any of the properties in the near term. As discussed further in
Note 4, as a limited partner in the local limited partnerships, the
Partnership's ability to influence major business decisions, including any
decision to sell the properties, is restricted under the terms of the
agreements.
2. Use of Estimates and Summary of Significant Accounting Policies
---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of December 31, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended December 31, 1997. Actual results
could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's
investments in six local limited partnerships which own operating properties.
The Partnership accounts for its investments in local limited partnerships using
the equity method. Under the equity method, the investment is carried at cost
adjusted for the Partnership's share of the local limited partnerships' earnings
and losses and distributions. In accordance with the equity method of accounting
for limited partnership interests, the Partnership does not record losses for
those limited partnership investments whose equity method basis has been reduced
to zero, recognizing future income from these entities only when it exceeds the
previously unrecorded losses. Distributions received from investments in limited
partnerships whose basis has been reduced to zero are recorded as other income
in the Partnership's statement of operations. See Note 4 for a description of
the local limited partnerships.
For purposes of reporting cash flows, cash and cash equivalents include
all highly liquid investments with original maturities of 90 days or less when
acquired. The Partnership's cash reserves are invested in financial instruments
which potentially subject the Partnership to concentrations of credit risk. The
Partnership currently invests primarily in investment-grade rated commercial
paper with overnight maturities. Management believes that no significant
concentration of credit risk exists with respect to these cash investments as of
December 31, 1997. The carrying amount of cash and cash equivalents approximates
their fair value as of December 31, 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 cumulative
difference between the book basis and tax basis of the Partnership's investment
in local limited partnerships is approximately $17,811,000 as of December 31,
1997 due to the losses on investments recognized on the tax basis in excess of
the book basis.
3. The Partnership Agreement and Related Party Transactions
--------------------------------------------------------
The General Partners of the Partnership are PW Shelter 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 (the "Adviser"). Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by the
Adviser pursuant to an advisory contract. The Adviser is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of
PaineWebber. The General Partners, the Adviser and PWI receive fees and
compensation, determined on an agreed-upon basis, in consideration of various
services performed in connection with the sale of the Units, the management of
the Partnership and the acquisition, management, financing and disposition of
Partnership investments.
Distributable cash, as defined, if any, for each fiscal year shall be
distributed annually in the ratio of 99% to the Limited Partners and 1% to the
General Partners. All sale or refinancing proceeds will be distributed in
varying proportions to the Limited and General Partners, as specified in the
Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax
loss of the Partnership will be allocated 99% to the Limited Partners and 1% to
the General Partners. Taxable income or tax loss arising from a sale or
refinancing of investment properties will be allocated to the Limited Partners
and the General 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 or tax loss from a
sale or refinancing will be allocated 99% to the Limited Partners and 1% to the
General Partners. Allocations of the Partnership's operations between the
General Partner and the Limited Partners for financial accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management
responsibilities, to administer the day-to-day operations of the Partnership and
to report periodically the performance of the Partnership to the Managing
General Partner. The Adviser earns a basic management fee of .5% of invested
assets for these services. Invested assets is the sum of the amount invested by
the Partnership in each local limited partnership plus a proportionate interest
in the mortgage debt initially incurred by the local limited partnerships. The
Adviser earned management fees of $199,000 for each of the three years in the
period ended December 31, 1997. Accounts payable affiliates at December 31, 1997
consists of management fees of $199,000 payable to the Adviser.
In connection with the sale of each property, the Adviser may receive a
disposition fee in an amount equal to 1% based on the selling price of the
property, subordinated to the payment of certain amounts to the Limited
Partners.
<PAGE>
Included in general and administrative expenses for the years ended
December 31, 1997, 1996 and 1995 is $35,000, $32,000 and $32,000, 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 fees of $2,000, (included in general
and administrative expenses) for managing the Partnership's cash assets during
each of the three years ended December 31, 1997.
4. Local Limited Partnerships
--------------------------
The Partnership has investments in six local limited partnerships. These
local limited partnerships are accounted for on the equity method in the
Partnership's financial statements. Condensed combined financial statements of
these local limited partnerships follow:
Condensed Combined Balance Sheets
December 31, 1997 and 1996
(In thousands)
Assets
1997 1996
---- ----
Current assets $ 1,964 $ 2,060
Restricted deposits and funded reserves 1,816 1,877
Operating investment property, net 24,629 25,621
Other assets 1,004 1,046
-------- --------
$ 29,413 $ 30,604
======== ========
Liabilities and Capital
Current liabilities and tenant security deposits $ 1,290 $ 1,461
Due to general partner 2,508 2,508
Long-term mortgage debt, less current portion 32,279 32,847
Partnership's share of combined
partners' deficit accounts (3,511) (3,104)
Local partners' shares of combined
partners' deficit accounts (3,153) (3,108)
-------- --------
$ 29,413 $ 30,604
======== ========
Condensed Combined Summary of Operations
For the years ended December 31, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
---- ---- ----
Rental revenues, including
government subsidies $ 9,963 $ 9,949 $ 9,864
Other income 130 112 130
-------- -------- -------
10,093 10,061 9,994
Property operating expenses 5,834 5,733 5,701
Interest expense and mortgage
insurance 2,904 2,964 3,005
Depreciation and amortization 1,389 1,347 1,294
-------- -------- -------
10,127 10,044 10,000
-------- -------- -------
Net income (loss) $ (34) $ 17 $ (6)
======== ======== ========
Net income (loss):
Partnership's share of
operations $ (37) $ 32 $ (15)
Local partners' share of
operations 3 (15) 9
-------- -------- -------
$ (34) $ 17 $ (6)
======== ======== =======
<PAGE>
Reconciliation of Partnership's Share of Operations
(In thousands)
1997 1996 1995
---- ---- ----
Partnership's share of
operations, as shown above $ (37) $ 32 $ (15)
Losses in excess of basis not
recognized by Partnership 221 278 234
Income offset with prior year
unrecognized losses - (153) (45)
------ ------ -------
Partnership's share of local
limited partnerships' income $ 184 $ 157 $ 174
====== ====== =======
Reconciliation of Partnership's Investments
(In thousands)
1997 1996
---- ----
Partnership's share of combined partners'
deficit accounts, as shown above $ (3,511) $ (3,104)
Accumulated losses in excess of basis
not recognized by Partnership 2,324 2,103
Cumulative distributions in excess
of investment basis 1,199 1,078
Excess basis in local limited partnerships 15 15
-------- --------
Investments in local limited
partnerships, at equity $ 27 $ 92
======== ========
"Investments in local limited partnerships, at equity" is the
Partnership's net investment in the local limited partnerships. These
local limited partnerships are subject to regulatory agreements and
partnership agreements which determine the distribution of available
funds, the disposition of the limited partnership's assets and the rights
of the partners, regardless of the Partnership's percentage ownership
interest in the local limited partnership. As a limited partner of the
local limited partnerships, the Partnership does not control property
disposition decisions. The partnership agreements state that the limited
partner may cause the sale of the assets of the local limited partnerships
subsequent to June 30, 1995, but not earlier than one year after it has
given written notice to the operating general partner of its intent to
cause such sale, and only if, during such one year period, the operating
general partner does not cause the sale of such assets. If the operating
general partner has not caused the assets of the partnership to be sold
within such one year period the limited partner may cause such sale, but
only after it has offered to sell such assets to the operating general
partner, and either the operating general partner does not accept such
offer within 90 days of receiving it, or the operating general partner
does not complete the sale in accordance with such offer after accepting
the terms.
"Investments in local limited partnerships, at equity" on the balance
sheets is comprised of the following local limited partnership
investments, at the balances indicated (in thousands):
1997 1996
---- ----
Fawcett's Pond Apartments Company $ 6 $ -
Quaker Meadows Apartments Company - -
South Laurel Apartments Limited Partnership - -
Marvin Gardens Associates - -
Colonial Farms Ltd. - -
Holbrook Apartments Company 21 92
------ ------
Investments in local limited partnerships,
at equity $ 27 $ 92
====== ======
The Partnership received cash distributions from the limited partnerships
as set forth below (in thousands):
1997 1996 1995
---- ---- ----
Fawcett's Pond Apartments Company $ 24 $ 24 $ 24
Quaker Meadows Apartments Company 90 50 66
South Laurel Apartments Limited
Partnership - - 63
Marvin Gardens Associates 4 - 27
Colonial Farms Ltd. 27 27 40
Holbrook Apartments Company 225 209 215
-------- ------ -------
$ 370 $ 310 $ 435
======== ====== =======
<PAGE>
The investments in Quaker Meadows Apartments Company, South Laurel
Apartments Limited Partnership, Marvin Gardens Associates and Colonial Farms
Ltd. at December 31, 1997 do not reflect accumulated losses therefrom of
$1,234,000, $785,000, $176,000 and $129,000, respectively, because the equity
method carrying values of such investments have been reduced to zero. Future
income from these entities will not be recorded until it exceeds the previously
unrecognized accumulated losses.
A description of the local limited partnership properties and the terms of
the local limited partnership agreements is summarized below:
a) Village at Fawcett's Pond - Hyannis, Massachusetts
--------------------------------------------------
On June 30, 1983, the Partnership acquired a 95% limited partnership
interest in Fawcett's Pond Apartments Company, an existing Massachusetts limited
partnership ("Fawcett's Pond"), that owns and operates a 100-unit housing
project in Hyannis, Massachusetts. The Federal Housing Administration (FHA)
contracted with the limited partnership under Section 8 of Title II of the
Housing and Community Development Act of 1974 to make housing assistance
payments to the limited partnership on behalf of qualified tenants. The
agreement expires August 19, 2002. Total rent subsidies received by the limited
partnership during 1997, 1996 and 1995 were $752,000, $756,000, and $768,000,
respectively. Such amounts comprised approximately 76%, 77% and 79%,
respectively, of the limited partnership's total revenues for such years.
The aggregate investment by the Partnership for the 95% interest was
$879,606, comprised of cash and notes payable to the seller (including an
acquisition fee of $63,025 payable to the Adviser of the Partnership). The
Partnership's interest is held subject to a permanent nonrecourse mortgage loan
due April 1, 2024 from the Government National Mortgage Association (GNMA) with
an outstanding balance at December 31, 1997 of approximately $4,232,000, payable
in monthly installments of $30,746 including principal and interest at 7.5%.
The partnership agreement generally provides that the Partnership will
receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions and incentive management fees are limited by agreements
between the limited partnership and HUD to 6% of the initial equity investment.
The agreement also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.
Generally, the first $1,105,725 of proceeds from the sale or refinancing
of the investment property will be distributed to the Partnership. The remaining
proceeds will be distributed to the local general partners and the Partnership
in accordance with the local limited partnership agreement.
The local limited partnership entered into a property management contract
with an affiliate of the local general partners. The management fee is 5% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the property's cash flow exceeds certain target amounts.
Incentive management fees of $6,000 were paid to an affiliate of the local
general partners for each of the three years ended December 31, 1997.
b) Quaker Court and The Meadows - Lynn, Massachusetts
--------------------------------------------------
On June 30, 1983, the Partnership acquired a 95% limited partnership
interest in Quaker Meadows Apartments Company, an existing Massachusetts limited
partnership ("Quaker Meadows"), that owns and operates two apartment complexes
in Lynn, Massachusetts. There are a total of 104 apartment units in the two
complexes. FHA contracted with the limited partnership under Section 8 of Title
II of the Housing and Community Development Act of 1974 to make housing
assistance payments to the limited partnership on behalf of qualified tenants.
The agreement expires in May 2002 and has two five-year renewal options. Total
rent subsidies received by the limited partnership during 1997, 1996 and 1995
were $1,313,000, $1,320,000 and $1,335,000, respectively. Such amounts comprised
approximately 81%, 82% and 82% of the limited partnership's total revenues in
each of such years.
The aggregate investment by the Partnership for the 95% interest was
$1,378,906 (including an acquisition fee of $104,525 paid to the Adviser of the
Partnership). The Partnership's interest is held subject to a permanent
nonrecourse mortgage loan payable to the Massachusetts Housing Finance Agency
(MHFA). The mortgage loan is due September 1, 2013 with an outstanding balance
at December 31, 1997 of approximately $5,095,000, payable in monthly
installments of $62,930 including principal and interest at 12.5%.
The restated partnership agreement generally provides that the Partnership
will receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions are limited by agreements between the limited partnership and
MHFA to the extent funds available for distribution as defined by MHFA.
<PAGE>
The agreement also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.
Generally, the first $1,739,424 of proceeds from the sale or refinancing
of the investment properties will be distributed to the Partnership. Remaining
proceeds will be distributed to the local venture partners and the Partnership
in accordance with the local limited partnership agreement.
The local limited partnership entered into a property management contract
with an affiliate of the local general partners. The management fee is 4% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the property's cash flow exceeds certain target amounts.
Incentive management fees of $69,000, $29,000 and $45,000 were paid to an
affiliate of the local general partners for the years ended December 31, 1997,
1996 and 1995, respectively.
c) Villages at Montpelier - Laurel, Maryland
-----------------------------------------
On June 30, 1983, the Partnership acquired an 85% limited partnership
interest in South Laurel Apartments Limited Partnership, an existing Maryland
limited partnership ("South Laurel"), that owns and operates a 520-unit housing
project in Laurel, Maryland. FHA contracted with the limited partnership under
Section 8 of Title II of the Housing and Community Development Act of 1974 to
make housing assistance payments to the limited partnership on behalf of
qualified tenants for 20% of the rental units. The subsidy agreement expired on
July 31, 1997, and management did not apply for an extension of the agreement.
The property is currently in the process of transitioning to a 100% market rent
facility. Based on the market conditions, management believes that the units
previously designated as low-income units will be re-leased at market rates
which would keep the total revenues of the local limited partnership relatively
unchanged from the previously subsidized level. In addition, if the market for
conventional multi-family apartment properties remains strong, the expiration of
the rental subsidy agreement at The Villages at Montpelier Apartments and the
conversion of the property to 100% market-rate apartments could enhance the
property's marketability for a potential sale by increasing the pool of
interested buyers. However, there are no assurances that such market conditions
will remain strong, and the ability of the Partnership to cause a sale of the
property will remain restricted by the terms of the limited partnership
agreement discussed further above. If conditions were to deteriorate, The
Villages at Montpelier Apartments could experience extended declines in
occupancy and revenues as a result of the expiration of the subsidy agreement.
Total rent subsidies received by the limited partnership during 1997, 1996 and
1995 were $506,000, $686,000 and $677,000, respectively. Such amounts comprised
approximately 12%, 17% and 17%, respectively, of the limited partnership's total
revenues for each of such years.
The aggregate investment by the Partnership for the 85% interest was
$2,446,135 (including an acquisition fee of $186,725 paid to the Adviser of the
Partnership). The Partnership's interest is held subject to a permanent
nonrecourse mortgage loan due December 1, 2023 with an outstanding balance at
December 31, 1997 of approximately $11,845,000, payable to GNMA in monthly
installments of $86,395 including principal and interest at 7.5%.
The restated partnership agreement generally provides that the Partnership
will receive 85% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 15% of annual distributable cash
flow. Cash distributions are limited by agreements between the limited
partnership and HUD to the extent of surplus cash, as defined by HUD.
The agreement also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is
distributable in that year.
Generally, the first $3,107,104 of proceeds from the sale or refinancing
of the investment property will be distributed to the Partnership. Remaining
proceeds will be distributed to the local venture partners and the Partnership
in accordance with the local limited partnership agreement.
The local limited partnership entered into a property management contract
with an affiliate of the local general partners. The management fee is 5.25% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the property's cash flow exceeds certain target amounts.
Incentive management fees of $1,000 were paid to an affiliate of the local
general partners for 1995. No incentive management fees were earned for the
years ended December 31, 1997 and 1996.
d) Marvin Gardens Apartments, Cotati, California
---------------------------------------------
On July 29, 1983, the Partnership acquired a 95% limited partnership
interest in Marvin Gardens Associates, an existing California limited
partnership that owns a 37-unit apartment complex project in Cotati, California.
The apartment complex operates under Section 8 of the National Housing Act and,
therefore, receives monthly rental subsidies from the Federal Department of
Housing and Urban Development (HUD). The agreement expires in July 2003 and has
two five-year renewal options. Total rent subsidies received by the limited
partnership during 1997, 1996 and 1995 were $329,000, $324,000 and $337,000,
respectively. Such amounts comprised approximately 77%, 77% and 81%,
respectively, of the limited partnership's total revenues for such years.
The aggregate investment by the Partnership for the 95% interest was
$379,581 (including an acquisition fee of $27,800 paid to the Adviser of the
Partnership). The Partnership's interest was acquired subject to a permanent
nonrecourse mortgage loan due June 1, 2013 with an outstanding balance at
December 31, 1997 of approximately $1,611,000, payable to the California Housing
Finance Agency (CHFA) in monthly installments of $15,310, including principal
and interest at 8.15%.
The restated partnership agreement generally provides that the Partnership
will receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions are limited by agreements between the limited partnership and
CHFA to $20,151 per year to the extent of surplus cash and stated equity, as
defined by CHFA. Undistributed amounts are cumulative and may be distributed in
subsequent years if future operations provide surplus cash in excess of current
requirements.
The agreement also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.
Generally, the first $462,336 of proceeds from the sale or refinancing of
the investment property will be distributed to the Partnership. Remaining
proceeds will be distributed to the local venture partners and the Partnership
in accordance with the local limited partnership agreement.
The local limited partnership entered into a property management contract
with an affiliate of the local general partners who in turn hired an
unaffiliated management agent to provide management services on their behalf. An
incentive management fee will also be paid on an annual basis in the event that
the property's cash flow exceeds certain target amounts. Incentive management
fees of $12,000 were paid to an affiliate of the local general partners for the
year ended December 31, 1995. No incentive management fees were earned for the
years ended December 31, 1997 and 1996.
e) Colonial Farms - Modesto, California
------------------------------------
On July 29, 1983, the Partnership acquired a 95% limited partnership
interest in Colonial Farms Ltd. an existing California limited partnership that
owns a 100-unit apartment project in Modesto, California. The apartment complex
operates under Section 8 of the National Housing Act and, therefore, receives
monthly rental subsidies from the Federal Department of Housing and Urban
Development (HUD). The agreement expires in July 2002 and has two five-year
renewal options. Total rent subsidies received by the limited partnership during
1997, 1996 and 1995 were $579,000, $613,000 and $586,000, respectively. Such
amounts comprised approximately 71%, 76% and 74%, respectively, of the limited
partnership's total revenues for such years.
The aggregate investment by the Partnership for the 95% interest was
$623,351 (including an acquisition fee of $48,125 paid to the Adviser to the
Partnership). The Partnership's interest is held subject to a permanent
nonrecourse mortgage loan due June 1, 2013 with an outstanding balance at
December 31, 1997 of approximately $2,713,000, payable to CHFA in monthly
installments of $27,411, including principal and interest at 9.15%
The restated partnership agreement generally provides that the Partnership
will receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions are limited by agreements between the limited partnership and
CHFA to $35,299 per year to the extent of surplus cash and stated equity, as
defined by CHFA. Undistributed amounts are cumulative and may be distributed in
subsequent years if future operations provide surplus cash in excess of current
requirements.
The agreement also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.
Generally, the first $800,928 of proceeds from the sale or refinancing of
the investment property will be distributed to the Partnership. Remaining
proceeds will be distributed to the local venture partners and the Partnership
in accordance with the local limited partnership agreement.
The local limited partnership entered into a property management contract
with an affiliate of the local general partners who in turn hired an
unaffiliated management agent to provide management services on their behalf. An
incentive management fee will also be paid to the affiliate of the local general
partners on an annual basis in the event that the property's cash flow exceeds
certain target amounts. Incentive management fees of $7,000, $7,000 and $16,000
were paid to an affiliate of the local general partners for the years ended
December 31, 1997, 1996 and 1995, respectively.
<PAGE>
f) Ramblewood Apartments - Holbrook, Massachusetts
-----------------------------------------------
On August 30, 1983, the Partnership acquired an 85% limited partnership
interest in Holbrook Apartments Company, an existing Massachusetts limited
partnership that owns and operates a 170-unit housing project in Holbrook,
Massachusetts. FHA contracted with the limited partnership under Section 8 of
Title II of the Housing and Community Development Act of 1974 to make housing
assistance payments to the limited partnership on behalf of qualified tenants.
The agreement expires July 1, 2001. Total rent subsidies received by the limited
partnership during 1997, 1996 and 1995 were $1,565,000, $1,577,000 and
$1,587,000, respectively. Such amounts comprised approximately 74%, 75% and 75%
respectively, of the limited partnership's total revenues for such years.
The aggregate investment by the Partnership for the 85% interest was
$1,250,583, (including an acquisition fee of $94,500 paid to the Adviser of the
Partnership). The Partnership's interest was acquired subject to a nonrecourse
first mortgage loan due February 1, 2023 with an outstanding balance at December
31, 1997 of approximately $7,352,000, payable to GNMA in monthly installments of
$54,207 including principal and interest at 7.5%.
The restated partnership agreement generally provides that the Partnership
will receive 85% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 15% of annual distributable cash
flow. Cash distributions are limited by agreements between the limited
partnership and HUD to the extent of surplus cash, as defined by HUD.
The agreement also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.
Generally, the first $1,571,956 of proceeds from the sale or refinancing
of the investment property will be distributed to the Partnership. Remaining
proceeds will be distributed to the local partners and the Partnership in
accordance with the local limited partnership agreement.
The local limited partnership entered into a property management contract
with an affiliate of the local general partners. The management fee is 4.75% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the property's cash flow exceeds certain target amounts.
Incentive management fees of $146,000, $134,000 and $138,000 were paid to an
affiliate of the local general partners for the years ended December 31, 1997,
1996 and 1995, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Fawcett's Pond Apartments Company
We have audited the accompanying balance sheets of Fawcett's Pond
Apartments Company as of December 31, 1997 and 1996, and the related statements
of operations, partners' deficit and cash flows for each of the three years in
the period ended December 31, 1997. 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.
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 Fawcett's Pond Apartments
Company as of December 31, 1997 and 1996, and the results of its operations, the
changes in partners' deficit and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Reznick Fedder & Silverman
--------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 22, 1998
<PAGE>
Fawcett's Pond Apartments Company
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 353,884 $ 323,202
Accounts receivable 2,011 1,617
Prepaid expenses 12,581 13,556
---------- ----------
Total current assets 368,476 338,375
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenants' security deposits 21,461 25,439
Mortgage escrow deposits 67,627 35,682
Reserve for replacements 265,204 251,321
---------- ----------
354,292 312,442
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,192,094 and $2,037,707 3,378,778 3,454,822
DEFERRED FINANCING COSTS, net of accumulated
amortization of $122,110 and $113,948 214,645 222,807
---------- ----------
Total assets $4,316,191 $4,328,446
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 53,320 $ 49,479
Accounts payable and accrued expenses 54,347 22,673
Accrued interest payable 26,453 26,762
Rent deferred credits 488 807
---------- ----------
Total current liabilities 134,608 99,721
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 4,179,174 4,232,494
Due to general partner 277,400 277,400
Tenants' security deposits 20,447 20,680
---------- ----------
Total liabilities 4,611,629 4,630,295
PARTNERS' DEFICIT (295,438) (301,849)
---------- ----------
Total liabilities and partners' deficit $4,316,191 $4,328,446
========== ==========
See notes to financial statements
<PAGE>
Fawcett's Pond Apartments Company
STATEMENTS OF OPERATIONS
December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenue
Rental income, net $ 941,478 $ 942,059 $ 940,355
Financial revenue 25,534 19,420 16,052
Other income 16,701 16,066 16,371
---------- ---------- ----------
Total revenue 983,713 977,545 972,778
Expenses
Operating expenses
Marketing 1,756 1,090 804
Administration 59,354 55,198 53,043
Utilities 30,591 33,018 35,578
Management fee 47,098 47,114 46,933
Maintenance and repairs 126,573 79,914 129,259
Salaries 76,232 85,196 73,337
Payroll taxes 7,648 7,252 -
Insurance 25,206 22,073 21,667
Real estate taxes 67,717 66,913 65,567
---------- ---------- ----------
Total operating expenses 442,175 397,768 426,188
Nonoperating expenses
Interest 319,161 322,748 326,076
Mortgage insurance premium 21,275 21,515 21,737
Depreciation and amortization 162,549 153,348 144,403
Incentive management fee 6,303 6,303 6,303
Miscellaneous financial expenses 625 633 632
---------- ---------- ----------
Total nonoperating expenses 509,913 504,547 499,151
---------- ---------- ----------
Total expenses 952,088 902,315 925,339
---------- ---------- ----------
EXCESS OF REVENUE OVER EXPENSES $ 31,625 $ 75,230 $ 47,439
========== ========== ==========
See notes to financial statements
<PAGE>
Fawcett's Pond Apartments Company
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1997, 1996 and 1995
General Limited
Partner Partner Total
------- ------- -----
Partners' deficit, December 31, 1994 $(75,564) $(298,526) $(374,090)
Distributions (1,261) (23,953) (25,214)
Excess of revenue over expenses 2,372 45,067 47,439
-------- --------- ---------
Partners' deficit, December 31, 1995 (74,453) (277,412) (351,865)
Distributions (1,261) (23,953) (25,214)
Excess of revenue over expenses 3,762 71,468 75,230
-------- --------- ---------
Partners' deficit, December 31, 1996 (71,952) (229,897) (301,849)
Distributions (1,261) (23,953) (25,214)
Excess of revenue over expenses 1,581 30,044 31,625
-------- --------- ---------
Partners' deficit, December 31, 1997 $(71,632) $(223,806) $(295,438)
======== ========= =========
Profit and loss sharing percentage 5% 95% 100%
= == ===
See notes to financial statements
<PAGE>
Fawcett's Pond Apartments Company
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Rental income received $ 941,319 $ 942,011 $ 938,666
Interest received 15,978 12,900 9,468
Other income received 16,600 15,939 15,625
Administrative expenses paid (97,068) (88,517) (83,865)
Management fees paid (47,098) (47,114) (46,933)
Utilities paid (28,522) (32,268) (35,266)
Maintenance and repairs expenses paid (171,100) (133,004) (160,520)
Real estate taxes paid (33,859) (66,913) (65,567)
Payroll taxes paid (7,648) (7,252) (7,107)
Property insurance paid (8,275) (9,614) (10,191)
Other taxes and insurance paid (16,038) (12,074) (11,664)
Interest paid on mortgage (319,470) (323,035) (326,342)
Mortgage insurance paid (21,193) (21,440) (21,667)
Miscellaneous financial expenses paid (625) (633) (632)
(Increase) decrease in mortgage escrow
deposits (31,945) (858) 378
Mortgagor entity expenses paid (6,303) (6,303) (6,303)
Net security deposits received (paid) 3,745 (1,529) (138)
---------- ---------- ----------
Net cash provided by operating
activities 188,498 220,296 187,942
---------- ---------- ----------
Cash flows from investing activities
Additions to property and equipment (78,343) (43,567) (41,945)
Deposits to reserve for replacements (22,092) (21,948) (21,948)
Withdrawals from reserve for
replacements 17,312 - -
---------- ---------- ----------
Net cash used in investing
activities (83,123) (65,515) (63,893)
---------- ---------- ----------
Cash flows from financing activities
Repayment of mortgage payable (49,479) (45,914) (42,607)
Distributions (25,214) (25,214) (25,214)
---------- ---------- ----------
Net cash used in financing
activities (74,693) (71,128) (67,821)
---------- ---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 30,682 83,653 56,228
Cash and cash equivalents, beginning 323,202 239,549 183,321
---------- ---------- ----------
Cash and cash equivalents, ending $ 353,884 $ 323,202 $ 239,549
========== ========== ==========
See notes to financial statements
<PAGE>
Fawcett's Pond Apartments Company
STATEMENTS OF CASH FLOWS (CONTINUED)
December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Reconciliation of excess of revenue over
expenses to net cash provided by
operating activities
Excess of revenue over expenses $ 31,625 $ 75,230 $ 47,439
Adjustments to reconcile excess of
revenue over expenses to net cash
provided by operating activities
Depreciation 154,387 145,186 136,241
Amortization 8,162 8,162 8,162
Interest earned on reserve for
replacements (9,103) (6,520) (6,584)
Changes in assets and liabilities
Increase in accounts receivable (394) (399) (746)
Decrease (increase) in prepaid expenses 975 460 (118)
(Increase) decrease in mortgage escrow
deposits (31,945) (858) 378
Increase (decrease) in tenants'
security deposits - net 3,745 (1,529) (138)
Increase in accounts payable and
accrued expenses 31,674 627 5,263
Decrease in accrued interest payable (309) (287) (266)
(Decrease) increase in rent-deferred
credits (319) 224 (1,689)
-------- -------- --------
Net cash provided by operating
activities $188,498 $220,296 $ 187,942
======== ======== =========
See notes to financial statements
<PAGE>
Fawcett's Pond Apartments Company
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Fawcett's Pond Apartments Company (the Partnership) was formed as a
limited partnership under the laws of the State of Massachusetts on June 30,
1983, for the purpose of constructing and operating a rental housing project
under Section 221(d)(4) of the National Housing Act. The project consists of 100
units located in Hyannis, Massachusetts, and is currently operating under the
name of Fawcett's Pond Apartments. All leases between the Partnership and the
tenants of the property are operating leases.
Cash distributions and incentive management fees are limited by agreements
between the Partnership and HUD to 6% of the initial equity investment.
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash and repurchase agreements with
maturities of three months or less when acquired, stated at cost which
approximate fair value.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives by use of the straight-line method for
financial reporting purposes. For income tax purposes, accelerated lives and
methods are used.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method.
Rental Income
- -------------
Rental income is recognized as rentals become due. Rental payments
received in advance are deferred until earned.
Income Taxes
- ------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1997 and 1996, the Partnership maintained tenant security
deposits of $21,460 and $25,439 in interest-bearing escrow bank accounts and
U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held to maturity
and is carried at cost which approximates fair value.
The Partnership also has a reserve for replacements and escrow funds
totaling $332,831 and $287,003 at December 31, 1997 and 1996, respectively, on
deposit with Reilly Mortgage Group, Inc. These funds are held in
interest-bearing bank accounts and U.S. Treasury Bills, which are carried at
cost and approximate fair value.
NOTE C - MORTGAGE PAYABLE
- -------------------------
The mortgage payable represents a permanent mortgage from the Government
National Mortgage Association (GNMA) which is insured by the Federal Housing
Administration (FHA) and is collateralized by a deed of trust on the rental
property. The mortgage, which is due April 1, 2024, is payable in equal monthly
installments of principal and interest totaling $30,746 and bears interest at a
rate of 7.5%. Interest incurred during December 31, 1997, 1996 and 1995 amounted
to $319,161, $322,748 and $326,076, respectively.
Under agreements with the mortgage lender and FHA, the Partnership is
required to make monthly escrow deposits for taxes, insurance and replacement of
project assets, and is subject to restrictions as to operating policies, rental
charges, operating expenditures and distributions to partners.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Aggregate maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:
December 31,
------------
1998 $ 53,320
1999 $ 57,459
2000 $ 61,920
2001 $ 66,727
2002 $ 71,907
Management believes it is not practical to estimate the fair value of the
mortgage payable insured by HUD because programs with similar characteristics
are not currently available to the Partnership.
NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
- ---------------------------------------------
The FHA contracted with the Partnership under Section 8 of Title II of the
Housing and Community Development Act of 1974, to make housing assistance
payments to the Partnership on behalf of qualified tenants for all units. The
agreement expires August 19, 2002. Total housing assistance payments received
during 1997, 1996 and 1995 were $751,930, $755,658 and $768,409, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
- -----------------------------------
Due to General Partners
- -----------------------
At December 31, 1997 and 1996, due to general partner consisted of unpaid
developer advances of $277,400. These advances are non-interest bearing and
payable from proceeds upon sale or refinancing of the project after certain
priority payments, as defined in the Partnership agreement.
Management Fees
- ---------------
Management fees of 5% of gross receipts are paid to CMJ Management
Company, Inc., an affiliate of the general partner, for its services as managing
agent to the project pursuant to a management agreement approved by HUD. Such
fees amounted to $47,098, $47,114, and $46,933 for the years ended December 31,
1997, 1996 and 1995, respectively. In addition, CMJ Management Company received
incentive management fees of $6,303 for each of the three years ended December
31, 1997.
Reimbursed Costs
- ----------------
CMJ Management Company, Inc., an affiliate of the general partner, makes
monthly expenditures (primarily payroll, central office accounting services,
direct marketing and insurance costs) on behalf of the Partnership, which are
reimbursed the following month.
NOTE F - TAX BASIS INCOME
- -------------------------
The reconciliation of the excess of revenue over expenses reported in the
accompanying statements of operations with the income (loss) reported on the
Federal income tax basis follows:
1997 1996 1995
---- ---- ----
Excess of revenue over expenses per
statements of operations $ 31,625 $ 75,230 $ 47,439
Additional depreciation and amortization
on tax basis (56,395) (65,916) (75,550)
(Decrease) increase in deferred rental
income (328) 224 (1,689)
--------- -------- ---------
(Loss) income for Federal income tax
purposes $ (25,098) $ 9,538 $ (29,800)
========= ======== =========
<PAGE>
NOTE G - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Partnership maintains operating cash balances, including repurchase
agreements and security deposits held in trust with major financial institutions
and its funded reserves with the mortgage lender. The Partnership has not
experienced any losses with respect to bank balances in excess of government
provided insurance. Management believes that no significant concentration to
credit risks exists with respect to these cash balances as of December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Quaker Meadows Apartments Company
We have audited the accompanying balance sheets of Quaker Meadows
Apartments Company as of December 31, 1997 and 1996, and the related statements
of operations, partners' deficit and cash flows for each of the three years in
the period ended December 31, 1997. 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.
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 Quaker Meadows Apartments
Company as of December 31, 1997 and 1996, and the results of its operations, the
changes in partners' deficit and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Reznick Fedder & Silverman
--------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 27, 1998
<PAGE>
Quaker Meadows Apartments Company
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 215,117 $ 263,637
Accounts receivable 43,303 2,572
Other receivables 48,428 15,092
Prepaid expenses 8,483 9,785
---------- ----------
Total current assets 315,331 291,086
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenant security deposits 18,113 18,787
Mortgage escrow deposits 13,369 12,774
Reserve for replacements 210,559 297,906
---------- ----------
242,041 329,467
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,057,912 and $3,787,391 3,768,007 3,979,215
DEFERRED FINANCING COSTS, net of accumulated
amortization of $62,526 and $58,461 67,625 71,690
---------- ----------
Total assets $4,393,004 $4,671,458
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 119,880 $ 106,768
Accounts payable and accrued expenses 40,379 55,280
Accrued interest payable 60,082 60,082
Rent deferred credits 4,013 3,787
---------- ----------
Total current liabilities 224,354 225,917
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 4,974,964 5,094,845
Due to general partner 1,072,952 1,072,952
Tenants' security deposits 16,472 16,617
---------- ----------
Total liabilities 6,288,742 6,410,331
PARTNERS' DEFICIT (1,895,738) (1,738,873)
---------- ----------
Total liabilities and partners' deficit $4,393,004 $4,671,458
========== ==========
See notes to financial statements
<PAGE>
Quaker Meadows Apartments Company
STATEMENT OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenue
Rental income $1,600,492 $1,592,837 $1,596,066
Vacancies (1,774) (6,464) (5,331)
Financial revenue 24,836 26,166 26,799
Other income 1,718 371 1,035
---------- ---------- ----------
Total revenue 1,625,272 1,612,910 1,618,569
Expenses
Operating expenses
Administration 116,675 106,695 122,910
Management fees to affiliate 63,958 63,511 63,546
Utilities 136,254 125,632 125,584
Maintenance and repairs 287,880 252,230 310,136
Insurance 14,026 15,286 15,416
Real estate taxes 50,624 43,376 65,161
---------- ---------- ----------
Total operating expenses 669,417 606,730 702,753
Nonoperating expenses
Interest 641,632 660,698 671,237
Depreciation and amortization 274,586 265,184 261,148
Incentive management fee to affiliate 68,655 29,375 45,390
Social services expenses 32,757 16,387 23,062
---------- ---------- ----------
Total nonoperating expenses 1,017,630 971,644 1,000,837
---------- ---------- ----------
Total expenses 1,687,047 1,578,374 1,703,590
---------- ---------- ----------
EXCESS (DEFICIENCY) OF
REVENUE OVER EXPENSES $ (61,775) $ 34,536 $ (85,021)
========== ========== ==========
See notes to financial statements
<PAGE>
Quaker Meadows Apartments Company
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1997, 1996 and 1995
General Limited
Partner Partner Total
------- ------- -----
Partners' deficit, December 31, 1994 $(323,862) $(1,242,095) $(1,565,957)
Distributions (3,494) (66,396) (69,890)
Excess of expenses over revenue (4,251) (80,770) (85,021)
--------- ----------- -----------
Partners' deficit, December 31, 1995 (331,607) (1,389,261) (1,720,868)
Distributions (2,627) (49,914) (52,541)
Excess of revenue over expenses 1,727 32,809 34,536
--------- ----------- -----------
Partners' deficit, December 31, 1996 (332,507) (1,406,366) (1,738,873)
Distributions (4,753) (90,337) (95,090)
Excess of expenses over revenue (3,089) (58,686) (61,775)
--------- ----------- -----------
Partners' deficit, December 31, 1997 $(340,349) $(1,555,389 $(1,895,738)
========= =========== ===========
Profit and loss sharing percentage 5% 95% 100%
= == ===
See notes to financial statements
<PAGE>
Quaker Meadows Apartments Company
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Rental income received $1,558,213 $1,591,659 $1,572,590
Interest received 6,268 9,327 3,163
Other income received 16,194 - 10,547
Administrative expenses paid (149,432) (123,082) (122,910)
Management fees paid (63,958) (68,922) (63,546)
Utilities paid (137,125) (123,121) (119,506)
Maintenance and repair expenses paid (301,910) (240,803) (315,873)
Real estate taxes paid (50,624) (43,376) (65,161)
Property insurance paid (12,724) (14,677) (16,081)
Interest paid on mortgage (641,632) (660,698) (670,747)
Incentive fees paid (68,655) (29,375) (68,452)
(Increase) decrease in mortgage escrow
deposits (595) 4,164 (547)
Net security deposits received (paid) 529 1,947 (1,148)
--------- ---------- ----------
Net cash provided by operating
activities 154,549 303,043 142,329
---------- ---------- ----------
Cash flows from investing activities
Acquisition of land, building and
equipment (59,313) (32,288) (23,969)
Decrease (increase) in reserve for
replacements 58,103 (14,208) (7,313)
---------- ---------- ----------
Net cash used in investing
activities (1,210) (46,496) (31,282)
---------- ---------- -----------
Cash flows from financing activities
Repayment of mortgage payable (106,769) (94,935) (84,413)
Distributions (95,090) (52,541) (69,890)
---------- ---------- ----------
Net cash used in financing
activities (201,859) (147,476) (154,303)
---------- ---------- ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (48,520) 109,071 (43,256)
Cash and cash equivalents, beginning 263,637 154,566 197,822
---------- ---------- ----------
Cash and cash equivalents, ending $ 215,117 $ 263,637 $ 154,566
========== ========== ==========
See notes to financial statements
<PAGE>
Quaker Meadows Apartments Company
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Reconciliation of excess (deficiency)
of revenue over expenses to net cash
provided by operating activities
Excess (deficiency) of revenue over expenses $ (61,775) $ 34,536 $ (85,021)
Adjustments to reconcile excess
(deficiency) of revenue over expenses
to net cash provided by operating activities
Depreciation and amortization 274,586 265,184 261,148
Interest earned on reserve for
replacement (18,568) (18,345) (18,880)
Changes in assets and liabilities
(Increase) decrease in accounts
receivable (26,255) 1,222 (10,806)
(Increase) decrease in mortgage escrow
deposits (595) 4,164 (547)
Decrease (increase) in tenants' security
deposits - net 529 1,947 (1,148)
Decrease (increase) in prepaid expenses 1,302 609 (175)
(Decrease) increase in accounts payable
and accrued expenses (14,901) 12,458 341
Increase (decrease) in rent deferred
credits 226 1,268 (2,583)
-------- -------- ---------
Net cash provided by operating
activities $ 154,549 $303,043 $ 142,329
========= ======== =========
See notes to financial statements
<PAGE>
Quaker Meadows Apartments Company
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Quaker Meadows Apartments Company (the Partnership) was formed as a
limited partnership under the laws of the State of Massachusetts on February 1,
1982, for the purpose of constructing and operating a rental housing project
under Massachusetts Housing Finance Agency's (MHFA) housing program. The project
consists of 104 units located in Lynn, Massachusetts, and is currently operating
under the name of Quaker Meadows Apartments. All leases between the Partnership
and tenants of the property are operating leases.
Under a regulatory agreement with MHFA, the project is regulated as to
cash distributions. Cash distributions, incentive management fees and resident
council fees are limited to funds available for distribution as defined by MHFA.
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash and repurchase agreements with
maturities of three months or less when acquired, stated at cost which
approximates fair value.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. The Partnership provides for
depreciation by use of the straight-line method over estimated useful lives of
the assets as follows: buildings, 30 years, and equipment, 3-8 years.
Deferred Financing Costs
- ------------------------
Deferred financing costs, which consist principally of financing fees are
amortized by the straight-line method over the life of the related debt.
Rental Income
- -------------
Rental income is recognized as rentals become due. Rental payments
received in advance are deferred until earned.
Income Taxes
- ------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
Reclassifications
- -----------------
Certain amounts in the 1996 financial statements have been reclassified in
order to remain consistent with the 1997 financial statement presentation.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1997 and 1996, the Partnership maintained tenant security
deposits of $18,113 and $18,787, respectively, in interest bearing escrow bank
accounts and U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held
to maturity and is carried at cost and approximates fair value.
The Partnership also has a reserve for replacements and escrow funds
totalling $223,928 and $310,680 at December 31, 1997 and 1996, respectively, on
deposit with MHFA. These funds are held in interest bearing bank accounts which
are carried at cost and approximate fair value.
<PAGE>
NOTE C - MORTGAGE PAYABLE
- -------------------------
The mortgage payable represents a permanent mortgage from the
Massachusetts Housing Finance Agency (MHFA), due September 1, 2013, and payable
in equal monthly installments of $62,930 (principal and interest) at an interest
rate of 12.5%. The terms of the permanent mortgage also require monthly escrow
deposits for real estate taxes and a replacement reserve.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Aggregate maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:
December 31
-----------
1998 $119,880
1999 $135,044
2000 $151,877
2001 $170,808
2002 $190,640
Management believes it is not practical to estimate the fair value of the
mortgage payable to MHFA because programs with similar characteristics are not
currently available to the Partnership.
NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
- ---------------------------------------------
The Federal Housing Administration (FHA) has contracted with the
Partnership under Section 8 of Title II of the Housing and Community Development
Act of 1974, to make housing assistance payments to the Partnership on behalf of
qualified tenants. The agreement expires May 2002, and has two five-year renewal
options. Total housing assistance payments received during 1997, 1996 and 1995
were $1,312,610, $1,319,893 and $1,335,437, respectively.
NOTE E - RECONCILIATION OF FINANCIAL STATEMENT EXCESS (DEFICIENCY) OF REVENUE
OVER EXPENSES TO TAX BASIS (LOSS) INCOME
- -------------------------------------------------------------------------------
The reconciliation of the excess (deficiency) of revenue over expenses
reported in the accompanying statement of operations with the (loss) income
reported on the Federal income tax basis follows:
1997 1996 1995
---- ---- ----
Excess (deficiency) of revenue
over expenses per statement
of operations $(61,775) $34,536 $(85,021)
Decrease in depreciation 26,048 22,002 8,071
Increase (decrease) in deferred
rental income 226 1,268 (2,583)
-------- ------- --------
(Loss) income for Federal income
tax purposes $(35,501) $57,806 $(79,533)
======== ======= ========
NOTE F - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 1997 and 1996, due to the general partner consists of
development advances totaling $1,072,952. These advances are non-interest
bearing and payable from proceeds upon the sale or refinancing of the project as
defined in the Partnership agreement.
Management fees of 4% of gross receipts are paid to CMJ Management
Company, Inc., an affiliate of the general partner, for its services as
management agent to the project, pursuant to a management agreement approved by
MHFA. Such fees amounted to $63,958, $63,511 and $63,546 for the years ended
December 31, 1997, 1996 and 1995, respectively. In addition, CMJ Management
Company, Inc., received incentive management fees of $68,655, $29,375 and
$45,390 for the years ended December 31, 1997, 1996 and 1995 respectively.
CMJ Management Company, Inc., an affiliate of the general partner, makes
monthly expenditures (primarily payroll, central office accounting, direct
marketing and insurance costs) on behalf of the Partnership which are reimbursed
the following month.
<PAGE>
NOTE G - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Partnership maintains operating cash balances, including repurchase
agreements and security deposits held in trust with major financial institutions
and its funded reserves with the mortgage lender. The Partnership has not
experienced any losses with respect to bank balances in excess of government
provided insurance. Management believes that no significant concentration to
credit risk exists with respect to these cash balances as of December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
South Laurel Apartments
Limited Partnership
We have audited the accompanying balance sheets of South Laurel Apartments
Limited Partnership as of December 31, 1997 and 1996, and the related statements
of operations, partners' deficit and cash flows for each of the three years in
the period ended December 31, 1997. 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.
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 South Laurel Apartments
Limited Partnership as of December 31, 1997 and 1996, and the results of its
operations, the changes in partners' deficit and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Reznick Fedder & Silverman
--------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 27, 1998
<PAGE>
South Laurel Apartments Limited Partnership
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 234,973 $ 155,483
Accounts receivable 33,057 64,339
Other receivables 11,258 9,324
Prepaid expenses 152,302 158,653
---------- -----------
Total current assets 431,590 387,799
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenants' security deposits 111,904 107,903
Mortgage escrow deposits 160,348 183,239
Reserve for replacement 115,619 144,890
---------- -----------
387,871 436,032
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $6,871,824 and $6,404,117 8,546,454 8,876,209
DEFERRED FINANCING COSTS, net of accumulated
amortization of $185,596 and $173,434 325,130 337,292
---------- -----------
Total assets $9,691,045 $10,037,332
========== ===========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 153,608 $ 142,542
Accounts payable and accrued expenses 81,431 139,704
Accrued interest payable 74,028 74,919
Rent deferred credits 11,392 23,237
Deferred income - laundry 35,000 40,000
---------- -----------
Total current liabilities 355,459 420,402
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 11,690,911 11,844,519
Due to general partner 645,989 645,989
Tenants' security deposits 111,904 104,816
---------- -----------
Total liabilities 12,804,263 13,015,726
PARTNERS' DEFICIT (3,113,218) (2,978,394)
---------- -----------
Total liabilities and partners' deficit $9,691,045 $10,037,332
========== ===========
See notes to financial statements
<PAGE>
South Laurel Apartments Limited Partnership
STATEMENT OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenue
Rental income $4,298,989 $4,246,199 $4,188,172
Vacancies (306,701) (223,408) (210,793)
Financial revenue 18,629 16,422 27,955
Other income 109,369 98,411 87,625
---------- ---------- ----------
Total revenue 4,120,286 4,137,624 4,092,959
Expenses
Operating expenses
Marketing 148,625 73,482 56,439
Administration 334,976 375,096 368,243
Utilities 485,153 505,851 556,935
Management fee 214,497 213,145 215,298
Maintenance and repairs 810,621 1,031,681 783,968
Salaries 484,608 481,739 471,061
Insurance 79,520 89,852 68,236
Real estate taxes 260,632 259,349 264,590
---------- ---------- ----------
Total operating expenses 2,818,632 3,030,195 2,784,770
Nonoperating expenses
Interest 893,305 903,638 913,226
Mortgage insurance premium 59,553 60,243 60,882
Depreciation and amortization 479,869 467,072 445,511
Incentive management fee - - 806
Miscellaneous financial expenses 3,750 3,710 4,142
---------- ---------- ----------
Total nonoperating expenses 1,436,477 1,434,663 1,424,567
---------- ---------- ----------
Total expenses 4,255,109 4,464,858 4,209,337
---------- ---------- ----------
EXCESS OF EXPENSES OVER REVENUE $ (134,823) $ (327,234) $ (116,378)
========== ========== ==========
See notes to financial statements
<PAGE>
South Laurel Apartments Limited Partnership
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Special Class A Class B
General Limited Limited Limited
Partners Partners Partner Partners Total
-------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Partners' deficit,
December 31, 1994 $(101,603) $(1,257,548) $ (614,534) $(486,903) $(2,460,588)
Distributions (742) (2,967) (63,065) (7,420) (74,194)
Excess of expenses over revenue (1,164) (4,655) (98,921) (11,638) (116,378)
--------- ----------- ----------- --------- -----------
Partners' deficit,
December 31, 1995 (103,509) (1,265,170) (776,520) (505,961) (2,651,160)
Excess of expenses over revenue (3,272) (13,089) (278,150) (32,723) (327,234)
--------- ----------- ----------- ---------- -----------
Partners' deficit,
December 31, 1996 (106,781) (1,278,259) (1,054,670) (538,684) (2,978,394)
Excess of expenses over revenue (1,348) (5,394) (114,600) (13,482) (134,824)
--------- ----------- ----------- ---------- -----------
Partners' deficit,
December 31, 1997 $(108,129) $(1,283,653) $(1,169,270) $ (552,166) $(3,113,218)
========= =========== =========== ========== ===========
Profit and loss sharing percentage 1% 4% 85% 10% 100%
= = == == ===
</TABLE>
See notes to financial statements
<PAGE>
South Laurel Apartments Limited Partnership
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Rental income received $4,011,723 $4,023,207 $3,970,997
Interest received 15,309 13,441 21,737
Other income received 102,435 94,716 82,130
Administrative expenses paid (671,622) (624,524) (616,037)
Management fees paid (214,497) (213,145) (215,298)
Utilities paid (492,180) (516,504) (543,544)
Maintenance and repairs expenses paid (1,113,418) (1,286,408) (1,026,412)
Real estate taxes paid (260,467) (252,822) (265,876)
Payroll taxes paid (39,245) (45,010) (45,663)
Property insurance paid (44,875) (47,772) (46,696)
Other taxes and insurance paid (34,645) (42,796) (36,565)
Mortgage insurance paid (59,158) (60,243) (1,465)
Interest paid on mortgage (894,196) (904,465) (913,993)
Miscellaneous financial expenses paid (3,750) (3,710) (4,142)
Decrease (increase) in mortgage escrow
deposits 22,891 (24,153) 11,980
Mortgagor entity expenses paid - - (806)
Net security deposits received 3,088 1,129 10,659
--------- ---------- ---------
Net cash provided by operating
activities 327,393 110,941 381,006
--------- ---------- ---------
Cash flows from investing activities
Additions to property and equipment (137,952) (141,563) (270,501)
Deposits to reserve for replacements (52,520) (52,520) (52,520)
Withdrawals from reserve for replacements 85,111 88,357 91,859
--------- ---------- ---------
Net cash used in investing activities (105,361) (105,726) (231,162)
--------- ---------- ---------
Cash flows from financing activities
Mortgage principal payments (142,542) (132,273) (122,744)
Distributions to partners - - (74,194)
--------- ---------- ---------
Net cash used in financing activities (142,542) (132,273) (196,938)
--------- ---------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 79,490 (127,058) (47,094)
Cash and cash equivalents, beginning 155,483 282,541 329,635
--------- ---------- ---------
Cash and cash equivalents, ending $ 234,973 $ 155,483 $ 282,541
========= ========== =========
See notes to financial statements
<PAGE>
South Laurel Apartments Limited Partnership
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Reconciliation of excess of expenses
over revenue to net cash provided
by operating activities
Excess of expenses over revenue $(134,824) $(327,234) $ (116,378)
Adjustments to reconcile excess of
expenses over revenue to net cash
provided by operating activities
Depreciation 467,707 454,910 433,349
Amortization 12,162 12,162 12,162
Interest earned on reserve for
replacements (3,320) (2,981) (6,218)
Changes in assets and liabilities
Decrease (increase) in tenant accounts
receivable 31,282 33,847 (30,976)
Decrease (increase) in accounts
receivable - other (1,934) 1,305 (495)
Decrease in prepaid expenses 6,351 12,513 43,106
Decrease (increase) in mortgage
escrow deposit 22,891 (24,153) 10,659
(Decrease) increase in accounts payable
and accrued expenses (58,273) (11,299) 4,990
Decrease in accrued interest payable (891) (827) (767)
Tenants' security deposits received -
net 3,087 1,129 11,980
(Decrease) increase in rent - deferred
credits (11,845) (33,431) 24,594
Decrease in deferred laundry income (5,000) (5,000) (5,000)
--------- --------- ----------
Net cash provided by operating
activities $ 327,393 $ 110,941 $ 381,006
========== ========= ==========
See notes to financial statements
<PAGE>
South Laurel Apartments Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
South Laurel Apartments Limited Partnership (the Partnership) was formed
as a limited partnership under the laws of the State of Maryland on June 30,
1983, for the purpose of constructing and operating a rental housing project
under Section 221(d)(4) of the National Housing Act. The project consists of 520
units located in Laurel, Maryland, and is currently operating under the name of
Villages at Montpelier. All leases between the Partnership and the tenants of
the property are operating leases.
Cash distributions are limited by agreements between the Partnership and
HUD to the extent of surplus cash as defined by HUD.
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash and repurchase agreements with
maturities of three months or less when acquired, stated at cost which
approximates fair value.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives by use of the straight-line method for
financial reporting purposes. For income tax purposes, accelerated lives and
methods are used.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method.
Rental Income
- -------------
Rental income is recognized as rentals become due. Rental payments
received in advance are deferred until earned.
Income Taxes
- ------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1997 and 1996, the Partnership maintained tenant security
deposits of $111,904 and $107,903 in interest-bearing escrow bank accounts which
are carried at cost and approximate fair value.
The Partnership also has a reserve for replacements and escrow funds
totaling $275,967 and $328,129 at December 31, 1997 and 1996, respectively, on
deposit with Reilly Mortgage Group, Inc. These funds are held in
interest-bearing bank accounts and a money market account which are carried at
cost and approximate fair value.
NOTE C - MORTGAGE PAYABLE
- -------------------------
The mortgage is insured by the Federal Housing Administration (FHA) and
collateralized by a deed of trust on the rental property. The mortgage, which is
due December 1, 2023, is payable in equal monthly installments of principal and
interest totaling $86,395 and bears interest at a rate of 7.5%. Interest
incurred during 1997, 1996 and 1995 amounted to $893,305, $903,638 and $913,226,
respectively.
Under agreements with the mortgage lender and FHA, the Partnership is
required to make monthly escrow deposits for taxes, insurance and replacement of
partnership assets, and is subject to restrictions as to operating policies,
rental charges, operating expenditures and distributions to partners.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Aggregate maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:
December 31,
------------
1998 $153,608
1999 $165,533
2000 $178,384
2001 $192,232
2002 $207,155
Management believes it is not practical to estimate the fair value of the
mortgage payable insured by HUD because programs with similar characteristics
are not currently available to the Partnership.
NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
- ---------------------------------------------
FHA contracted with the Partnership under Section 8 of Title II of the
Housing and Community Development Act of 1974, to make housing assistance
payments to the Partnership on behalf of qualified tenants for 20% of the rental
units. The agreement expired July 31, 1997, and management has not applied for
an extension of the agreement. Total housing assistance payments received during
1997, 1996 and 1995 were $506,366, $686,293 and $677,108, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
- -----------------------------------
Due to General Partner
- ----------------------
At December 31, 1997 and 1996, due to general partner consists of unpaid
development advances of $645,989. These advances are non-interest bearing and
payable from proceeds upon sale or refinancing of the project after certain
priority payments as defined in the Partnership agreement.
Management Fees
- ---------------
Management fees of 5.25% of gross receipts are paid to CMJ Management
Company, Inc., an affiliate of the general partner, for its services as
management agent to the project pursuant to a management agreement approved by
HUD. Such fees amounted to $214,497, $213,145 and $215,298 for the years ended
December 31, 1997, 1996 and 1995, respectively. In addition, CMJ Management
Company, Inc., received incentive management fees of $-0-, $-0- and $806 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Reimbursed Costs
- ----------------
CMJ Management Company, Inc., an affiliate of the general partner, makes
monthly expenditures (primarily payroll, central office accounting, direct
marketing and insurance costs) on behalf of the Partnership which are reimbursed
the following month.
NOTE F - TAX BASIS LOSS
- -----------------------
The reconciliation of the excess of expenses over revenue reported in the
accompanying statement of operations with the loss reported on a Federal income
tax basis follows:
1997 1996 1995
---- ---- ----
Excess of expenses over revenue
per statements of operations $(134,824) $(327,234) $(116,378)
(Decrease) increase in deferred
rental income and laundry
income (16,844) (138,431) 19,593
Additional depreciation and
amortization (166,665) (186,827) (181,224)
--------- --------- ---------
Loss for Federal income tax
purposes $(318,333) $(652,492) $(278,009)
========= ========= =========
NOTE G - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Partnership maintains operating cash balances, including repurchase
agreements and security deposits held in trust with major financial institutions
and its funded reserves with the mortgage lender. The Partnership has not
experienced any losses with respect to bank balances in excess of government
provided insurance. Management believes that no significant concentration to
credit risk exists with respect to these cash balances as of December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Marvin Gardens Associates
We have audited the accompanying balance sheets of Marvin Gardens
Associates as of December 31, 1997 and 1996, and the related statements of
operations, partners' deficit and cash flows for each of the three years in the
period ended December 31, 1997. 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.
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 Marvin Gardens Associates as
of December 31, 1997 and 1996, and the results of its operations, the changes in
partners' deficit and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Reznick Fedder & Silverman
--------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 28, 1998
<PAGE>
Marvin Gardens Associates
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash $ 30,259 $ 21,173
Accounts receivable 3,024 1,020
Accounts receivable - tenant subsidy 1,441 -
Prepaid expenses 4,022 6,532
---------- ----------
Total current assets 38,746 28,725
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenant security deposits 9,989 9,682
Real estate tax impound fund 7,190 6,290
Replacement reserve fund 118,306 138,463
Insurance impound fund 10,794 5,771
Interest income receivable - impounds 1,665 1,206
---------- ----------
147,944 161,412
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,112,978 and $1,038,242 1,308,333 1,376,899
DEFERRED FINANCING COSTS, net of accumulated
amortization of $20,945 and $19,572 25,424 26,797
---------- ----------
Total assets $1,520,447 $1,593,833
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Current maturities of mortgage payable $ 54,555 $ 50,299
Accounts payable 15,073 15,506
Accrued expenses 5,063 3,947
Deferred rental income 366 264
---------- ----------
Total current liabilities 75,057 70,016
Mortgage payable, less current maturities 1,556,072 1,610,628
Due to general partner 194,019 194,019
Tenants' security deposits 7,217 7,105
---------- ----------
Total liabilities 1,832,365 1,881,768
PARTNERS' DEFICIT (311,918) (287,935)
---------- ----------
Total liabilities and partners' deficit $1,520,447 $1,593,833
========== ==========
See notes to financial statements
<PAGE>
Marvin Gardens Associates
STATEMENT OF OPERATIONS
December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenue
Rental income $410,401 $410,364 $409,395
Vacancies (1,496) (1,639) (1,533)
Financial revenue 7,742 6,815 7,817
Other income 8,405 4,321 3,174
-------- -------- --------
Total revenue 425,052 419,861 418,853
Expenses
Operating expenses
Administration 25,512 17,356 15,866
Utilities 29,201 23,833 27,992
Management fee 17,738 17,533 17,052
Maintenance and repairs 75,504 51,999 73,953
Salaries 56,766 59,441 57,141
Insurance 8,102 8,378 7,839
Real estate taxes 22,556 22,271 21,824
-------- -------- --------
Total operating expenses 235,379 200,811 221,667
Nonoperating expenses
Interest 133,514 137,438 141,056
Depreciation and amortization 76,109 75,338 74,377
Incentive management fee - - 12,090
-------- -------- --------
Total nonoperating expenses 209,623 212,776 227,523
-------- -------- --------
Total expenses 445,002 413,587 449,190
-------- -------- --------
EXCESS (DEFICIENCY) OF
REVENUE OVER EXPENSES $(19,950) $ 6,274 $(30,337)
======== ======== ========
See notes to financial statements
<PAGE>
Marvin Gardens Associates
STATEMENTS OF PARTNERS' DEFICIT
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Special
General Limited Limited
Partners Partners Partner Total
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $(8,282) $(67,248) $(160,129) $(235,659)
Distributions (282) (1,129) (26,802) (28,213)
Excess of expenses over revenue (303) (1,214) (28,820) (30,337)
------- -------- --------- ---------
Balance, December 31, 1995 (8,867) (69,591) (215,751) (294,209)
Excess of revenue over expenses 63 251 5,960 6,274
------- -------- --------- ---------
Balance, December 31, 1996 (8,804) (69,340) (209,791) (287,935)
Distributions (40) (161) (3,832) (4,033)
Excess of expenses over revenue (199) (798) (18,953) (19,950)
------- -------- --------- ---------
Balance, December 31, 1997 $(9,043) $(70,299) $(232,576) $(311,918)
======= ======== ========= =========
Profit and loss sharing percentage 1% 4% 95% 100%
= = == ===
</TABLE>
See notes to financial statements
<PAGE>
Marvin Gardens Associates
STATEMENTS OF CASH FLOWS
December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Rental income received $405,562 $409,972 $409,707
Interest received 1,256 1,011 1,797
Other income received 8,405 4,321 3,074
Administrative expenses paid (25,512) (17,356) (15,866)
Management fees paid (17,738) (17,533) (16,952)
Utilities paid (28,085) (23,833) (26,892)
Salaries and wages paid (52,567) (46,384) (43,690)
Maintenance and repairs expenses paid (75,937) (51,326) (74,165)
Real estate taxes paid (22,556) (22,271) (21,824)
Payroll taxes paid (4,199) (13,057) (13,281)
Property and other insurance paid (5,592) (8,267) (8,436)
Interest paid on mortgage (133,514) (137,438) (141,056)
(Increase) decrease in real estate tax
impound fund (900) (162) 191
Incentive management fee paid - - (12,090)
Increase in insurance impound fund (5,023) (1,581) (288)
Net security deposits paid (195) (296) (189)
-------- -------- --------
Net cash provided by operating
activities 43,405 75,800 40,040
-------- -------- --------
Cash flows from investing activities
Additions to property and equipment (6,170) (7,425) (32,836)
Deposits to reserve for replacements (16,128) (16,128) (16,064)
Withdrawals from reserve for
replacements 42,312 - 29,398
-------- -------- --------
Net cash provided by (used in)
investing activities 20,014 (23,553) (19,502)
-------- -------- --------
Cash flows from financing activities
Repayment of mortgage payable (50,300) (46,375) (42,757)
Distributions (4,033) - (28,213)
-------- -------- --------
Net cash used in financing activities (54,333) (46,375) (70,970)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 9,086 5,872 (50,432)
Cash and cash equivalents, beginning 21,173 15,301 65,733
-------- -------- --------
Cash and cash equivalents, ending $ 30,259 $ 21,173 $ 15,301
======== ======== ========
See notes to financial statements
<PAGE>
Marvin Gardens Associates
STATEMENTS OF CASH FLOWS (CONTINUED)
December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Reconciliation of excess (deficiency) of
revenue over expenses to net cash
provided by operating activities
Excess (deficiency) of revenue
over expenses $ (19,950) $ 6,274 $ (30,337)
Adjustments to reconcile excess
(deficiency) of revenue over
expenses to net cash provided
by operating activities
Depreciation 74,736 73,965 73,037
Amortization of deferred financing costs 1,373 1,373 1,340
Interest earned on reserve for
replacements (6,027) (5,796) (6,020)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable - tenant subsidy (1,441) 3,221 (185)
Increase in accounts receivable (2,004) (183) (25)
Increase in interest income
receivable -impounds (459) (8) (100)
Decrease (increase) in prepaid expenses 2,510 111 (597)
(Increase) decrease in real estate
tax impound fund (900) (162) 191
Increase in insurance impound fund (5,023) (1,581) (288)
(Decrease) increase in accounts
payable - trade (433) 967 803
Increase (decrease) in accrued expenses 1,116 (294) 355
Decrease (increase) in deferred rent
credits 102 (1,791) 2,055
Net security deposits paid (195) (296) (189)
--------- -------- ----------
Net cash provided by operating
activities $ 43,405 $ 75,800 $ 40,040
========= ======== ==========
See notes to financial statements
<PAGE>
Marvin Gardens Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Marvin Gardens Associates (the Partnership) is a California limited
partnership which commenced operations in February 1983. The Partnership owns
and operates a 37-unit rental housing project (the Project). The Project
operates under Section 8 of the National Housing Act and, therefore, receives
monthly rental subsidies from the U.S. Department of Housing and Urban
Development (HUD). The agreement expires in July 2003, and has two five year
renewal options. For the years ended December 31, 1997, 1996 and 1995, rental
subsidies for the Project totaled $328,830, $324,129, and $337,072,
respectively. All leases between the Partnership and the tenants of the property
are operating leases.
Cash distributions are limited by agreements between the Partnership and
the California Housing Finance Agency (CHFA) to $20,151 per year to the extent
of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are
cumulative and may be distributed in subsequent years if future operations
provide surplus cash in excess of current requirements.
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. The Partnership provides for
depreciation by use of the straight-line method over estimated useful lives as
follows: buildings, 30 years and equipment, 3-8 years.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized by the straight-line method over
the life of the related debt.
Rental Income
- -------------
Rental income is recognized as rentals become due. Rental payments
received in advance are deferred until earned.
Income Taxes
- ------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1997 and 1996, the Partnership maintained tenant security
deposits of $9,989 and $9,682, respectively, in an interest bearing escrow bank
account and a certificate of deposit which are carried at cost and approximate
fair value.
The Partnership also has a reserve for replacements and escrow funds
totalling $137,955 and $151,730 at December 31, 1997 and 1996, respectively, on
deposit with CHFA. These funds are held in interest bearing bank accounts which
are carried at cost and approximate fair value.
NOTE C - MORTGAGE PAYABLE
- -------------------------
The mortgage payable represents a mortgage from the CHFA which is due on
June 1, 2013, and is collateralized by a deed of trust on the rental property
and the CHFA has been granted a security interest in rental subsidies. The terms
of the mortgage require monthly principal and interest payments of $15,310 and
bear interest at the rate of 8.15%. Interest charged to operations during 1997,
1996 and 1995 amounted to $133,514, $137,438 and $141,056, respectively. Terms
of the mortgage agreement also require monthly escrow deposits to be made to
fund real estate tax, insurance, and a replacement reserve account.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Aggregate maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:
December 31,
------------
1998 $54,555
1999 $59,171
2000 $64,178
2001 $69,908
2002 $75,498
Management believes it is not practical to estimate the fair value of the
mortgage payable to CHFA because programs with similar characteristics are not
currently available to the Partnership.
NOTE D - RECONCILIATION OF FINANCIAL STATEMENT INCOME (LOSS) TO TAX BASIS LOSS
- ------------------------------------------------------------------------------
The reconciliation of the excess (deficiency) of revenue over expenses
reported in the accompanying statements of operations with the loss reportable
on a Federal income tax basis for the years ended December 31, 1997, 1996 and
1995, are as follows:
1997 1996 1995
---- ---- ----
Excess (deficiency) of revenue
over expenses per
statements of operations $ (19,950) $ 6,274 $ (30,337)
Additional depreciation for
tax purposes (11,448) (13,924) (12,556)
Deferred rental income adjustments 102 (1,790) 2,055
---------- --------- ---------
Loss for Federal income tax purposes $ (31,296) $ (9,440) $ (40,838)
========== ========= =========
NOTE E - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 1997 and 1996, due to developer/general partner consisted
of development advances of $194,019. These advances are non-interest bearing and
payable from proceeds upon sale or refinancing of the Project after certain
priority payments as defined in the Partnership agreement.
The Partnership has a contractual management agreement with CMJ Management
Company, Inc., an affiliate of the general partner, to provide property
management services for the Project. CMJ Management Company, Inc. has hired an
unaffiliated management agent to provide those services on its behalf. Total
management fees paid for each of the years ended December 31, 1997, 1996 and
1995 were $17,738, $17,533 and $17,052, respectively. Effective September 1994,
CMJ Management Company, Inc. receives 30% of the monthly fee which totaled
$5,321, $5,112 and $5,082 for the year ended December 31, 1997, 1996 and 1995,
respectively. In addition, CMJ Management Company, Inc. received incentive
management fees totalling $12,090 in 1995. No incentive management fees have
been incurred for 1997 and 1996.
NOTE F - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Partnership maintains operating cash balances and security deposits
held in trust with major financial institutions and its funded reserves with the
mortgage lender. The Partnership has not experienced any losses with respect to
bank balances in excess of government provided insurance. Management believes
that no significant concentration to credit risk exists with respect to these
cash balances as of December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Colonial Farms, Ltd.
We have audited the accompanying balance sheets of Colonial Farms, Ltd. as
of December 31, 1997 and 1996, and the related statements of operations,
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1997. 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.
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 Colonial Farms, Ltd. as of
December 31, 1997 and 1996, and the results of its operations, the changes in
partners' deficit and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Reznick Fedder & Silverman
--------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 6, 1998
<PAGE>
Colonial Farms Ltd.
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 72,579 $ 136,724
Rents receivable 12,634 4,624
Prepaid expenses 3,021 9,446
--------- ----------
Total current assets 88,234 150,794
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenants' security deposits 23,520 22,193
Real estate tax impound fund 13,228 12,435
Replacement reserve fund 235,940 227,316
Insurance impound fund 16,164 9,510
Reserve fund for operations 41,172 41,139
Interest income receivable - impounds 3,631 2,349
---------- ----------
333,655 314,942
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,938,862 and $1,812,966 2,164,787 2,269,317
DEFERRED FINANCING COSTS, net of accumulated
amortization of $35,863 and $33,586 39,904 42,181
---------- ----------
Total assets $2,626,580 $2,777,234
========== ==========
LIABILITIES AND PARTNERS' DEFICITS
LIABILITIES
Current maturities of mortgage payable $ 84,159 $ 76,827
Accounts payable 21,127 31,634
Accrued expenses 27,789 33,494
Deferred rental income 464 372
---------- ----------
Total current liabilities 133,539 142,327
Mortgage payable, less current maturities 2,628,942 2,713,101
Due to general partner 318,115 318,115
Tenants' security deposits 18,166 17,238
---------- ----------
Total liabilities 3,098,762 3,190,781
PARTNERS' DEFICIT (472,182) (413,547)
---------- ----------
Total liabilities and partners' deficit $2,626,580 $2,777,234
========== ==========
See notes to financial statements
<PAGE>
Colonial Farms, Ltd.
STATEMENT OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenue
Rental income $785,784 $786,180 $785,378
Vacancies (7,410) (9,462) (24,535)
Financial revenue 17,490 15,910 16,256
Other income 23,694 19,315 10,237
-------- -------- --------
Total revenue 819,558 811,943 787,336
Operating expenses
Administrative 34,428 29,578 22,779
Utilities 34,619 32,942 31,659
Management fee 42,640 38,060 39,600
Maintenance and repairs 155,984 129,475 144,185
Salaries 79,871 73,791 65,249
Insurance 12,135 12,794 12,074
Property taxes 41,368 40,322 39,762
-------- -------- --------
Total operating expenses 401,045 356,962 355,308
Nonoperating expenses
Interest 244,011 258,803 264,913
Depreciation and amortization 128,173 124,258 119,893
Incentive management fee 7,060 7,060 16,435
Earned surplus reimbursement 69,666 2,610 63,571
-------- -------- --------
Total nonoperating expenses 448,910 392,731 464,812
-------- -------- --------
Total expenses 849,955 749,693 820,120
-------- -------- --------
EXCESS (DEFICIENCY) OF
REVENUE OVER EXPENSES $(30,397) $ 62,250 $(32,784)
======== ========= ========
See notes to financial statements
<PAGE>
Colonial Farms, Ltd.
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Special
General Limited Limited
Partner Partner Partner Total
------- ------- ------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $(22,211) $(92,943) $(257,320) $(372,474)
Distributions (846) (1,269) (40,186) (42,301)
Excess of expenses over revenue (656) (983) (31,145) (32,784)
-------- -------- --------- ---------
Balance, December 31, 1995 (23,713) (95,195) (328,651) (447,559)
Distributions (565) (846) (26,827) (28,238)
Excess of revenue over expenses 1,245 1,868 59,137 62,250
-------- -------- --------- ---------
Balance, December 31, 1996 (23,033) (94,173) (296,341) (413,547)
Distributions (565) (847) (26,826) (28,238)
Excess of expenses over revenue (608) (912) (28,877) (30,397)
-------- -------- --------- ---------
Balance, December 31, 1997 $(24,206) $(95,932) $(352,044) $(472,182)
======== ======== ========= =========
Profit and loss sharing percentage 2% 3% 95% 100%
== == === ====
</TABLE>
See notes to financial statements
<PAGE>
Colonial Farms, Ltd.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Rental income received $770,456 $778,056 $751,795
Interest received 5,597 5,311 5,901
Other income received 23,694 19,315 10,237
Residual receipts reimbursement paid (69,666) (2,610) (63,571)
Administrative expenses paid (34,427) (29,578) (22,779)
Management fees paid (42,640) (38,060) (39,500)
Utilities paid (40,324) (32,942) (33,372)
Salaries and wages paid (67,643) (64,278) (56,258)
Maintenance and repairs expenses paid (166,492) (120,190) (141,608)
Real estate taxes paid (41,368) (40,322) (39,762)
Payroll taxes paid (12,228) (9,513) (8,116)
Property and other insurance paid (5,710) (13,451) (12,658)
Interest paid on mortgage (244,011) (258,803) (264,913)
Incentive management fee paid (7,060) (7,060) (16,435)
(Increase) decrease in reserve fund
for operations (33) (358) 2,697
(Increase) decrease in real estate tax
impound fund (793) 2,083 (1,007)
Increase in insurance impound fund (6,654) (2,487) (1,852)
Net security deposits (paid) received (399) 241 (407)
--------- -------- ---------
Net cash provided by operating
activities 60,299 185,354 68,392
--------- -------- ---------
Cash flows from investing activities
Purchases of equipment (21,366) (25,928) (37,922)
Deposits to reserve for replacements (22,404) (22,404) (22,384)
Withdrawals from reserve for
replacements 24,391 37,933 13,139
--------- -------- ---------
Net cash used in investing
activities (19,379) (10,399) (47,167)
--------- -------- ---------
Cash flows from financing activities
Repayment of mortgage payable (76,827) (70,134) (64,024)
Distributions (28,238) (28,238) (42,301)
--------- -------- ---------
Net cash used in financing activities (105,065) (98,372) (106,325)
--------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (64,145) 76,583 (85,100)
Cash and cash equivalents, beginning 136,724 60,141 145,241
--------- -------- ---------
Cash and cash equivalents, ending $ 72,579 $ 136,724 $ 60,141
========= ========= =========
See notes to financial statements
<PAGE>
Colonial Farms, Ltd.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of excess (deficiency) of revenue over
expenses to net cash provided by operating activities
Excess (deficiency) of revenue over expenses $ (30,397) $ 62,250 $ (32,784)
Adjustments to reconcile excess (deficiency) of
revenue over expenses to net cash provided by
operating activities
Depreciation 125,896 121,981 117,616
Amortization of deferred financial costs 2,277 2,277 2,277
Interest earned on reserve for replacements (10,611) (10,681) (10,189)
Changes in assets and liabilities
(Increase) decrease in tenant accounts receivable (8,010) 1,337 (2,275)
Decrease (increase) in prepaid expenses 6,425 (657) (584)
(Increase) decrease in interest income
receivable - impounds (1,282) 82 (166)
Net tenants' security deposits (paid) received (399) 241 (407)
(Increase) decrease in real estate tax impound fund (793) 2,083 (1,007)
Increase in insurance impound fund (6,654) (2,487) (1,852)
Increase in reserve fund for operations (33) (358) 2,697
(Decrease) increase in accounts payable (10,507) 9,525 (5,615)
(Decrease) increase in accrued expenses (5,705) (242) 406
Increase in rent deferred credits 92 3 275
---------- --------- -----------
Net cash provided by operating activities $ 60,299 $ 185,354 $ 68,392
========== ========= ===========
</TABLE>
See notes to financial statements
<PAGE>
Colonial Farms, Ltd.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Colonial Farms, Ltd. (the Partnership) is a California limited partnership
which commenced operations in February 1983. The Partnership owns and operates a
100-unit residential project (the Project) located in Modesto, California. The
Project operates under Section 8 of the National Housing Act and therefore,
receives monthly rental subsidies from the U.S. Department of Housing and Urban
Development (HUD). The agreement expires June 2002, and has two five-year
renewal options. For the years ended December 31, 1997, 1996 and 1995, rental
subsidies for the Project totaled $579,485, $613,093 and $586,267, respectively.
All leases between the Partnership and the tenants of the property are operating
leases.
Cash distributions are limited by agreements between the Partnership and
the California Housing Finance Agency (CHFA) to $35,299 per year to the extent
of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are
cumulative and may be distributed in subsequent years if future operations
provide surplus cash in excess of current requirements.
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash, money market accounts and U.S.
Treasury bills, with a maturity of three months or less when acquired, stated at
cost which approximate fair value.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. The Partnership provides for
depreciation by using the straight-line method over estimated useful lives.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized by the straight-line method over
the life of the related debt.
Rental Income
- -------------
Rental income is recognized as rentals become due. Rental payments
received in advance are deferred until earned.
Income Taxes
- ------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1997 and 1996, the Partnership maintained tenant security
deposits of $23,520 and $22,193 in an interest bearing escrow bank account and a
certificate of deposit which are carried at cost and approximate fair value.
The Partnership also has a reserve for replacements and escrow funds
totalling $310,135 and $292,749 at December 31, 1997 and 1996, respectively, on
deposit with CHFA. These funds are held in interest bearing bank accounts which
are carried at cost and approximate fair value.
NOTE C - MORTGAGE PAYABLE
- -------------------------
The mortgage payable represents a permanent mortgage from the CHFA which
is due on June 1, 2013, and is collateralized by a deed of trust on the rental
property and the CHFA has been granted a security interest in rental subsidies.
The terms of the mortgage require annual interest of 9.15% and monthly principal
and interest payments of $27,411. Interest charged to operations during 1997,
1996, and 1995 amounted to $244,011, $258,803, and $264,913, respectively. Terms
of the loan agreement require that monthly escrow deposits be made to fund real
estate tax, insurance and replacement reserve escrow accounts.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Aggregate maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:
December 31,
------------
1998 $ 84,159
1999 $ 92,191
2000 $ 110,990
2001 $ 110,637
2002 $ 121,186
Management believes it is not practical to estimate the fair value of the
mortgage payable to CHFA because programs with similar characteristics are not
currently available to the Partnership.
NOTE D - RECONCILIATION OF FINANCIAL STATEMENT OF EXCESS (DEFICIENCY) TO TAX
BASIS INCOME (LOSS)
- -------------------------------------------------------------------------------
The reconciliation of the excess (deficiency) of revenue over expenses
reported in the statements of operations with the (loss) income reported on a
Federal income tax return for the years ended December 31, 1997, 1996, and 1995
follows:
1997 1996 1995
---- ---- ----
(Deficiency) excess of revenue over
expenses $ (30,397) $62,250 $(32,784)
Additional depreciation for tax purposes (19,460) (20,336) (17,603)
Deferred rental income adjustments 90 3 275
--------- ------- --------
(Loss) income for Federal income
tax purposes $ (49,767) $41,917 $(50,112)
========= ======= ========
NOTE E - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 1997 and 1996, due to developer/general partner consisted
of development advances of $318,115. These advances are non-interest bearing and
payable from proceeds upon sale or refinancing of the Project after certain
priority payments as defined in the Partnership agreement.
The Partnership has a contractual management agreement with CMJ Management
Company, Inc., an affiliate of the general partner, to provide property
management services for the Project. CMJ Management Company, Inc. has hired an
unaffiliated management agent to provide these services on its behalf. Total
management fees for the years ended December 31, 1997, 1996, and 1995 were
$42,640, $38,060 and $39,600, respectively. CMJ Management Company, Inc. also is
entitled to receive an incentive management fee. For the years ended December
31, 1997, 1996 and 1995, incentive fees charged for the project totaled $7,060,
$7,060 and $16,435, respectively, in accordance with the terms of the
supplemental management agreement.
NOTE F - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Partnership maintains operating cash balances and security deposits
held in trust with major financial institutions and its funded reserves with the
mortgage lender. The Partnership has not experienced any losses with respect to
bank balances in excess of government provided insurance. Management believes
that no significant concentration to credit risk exists with respect to these
cash balances as of December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Holbrook Apartments Company
We have audited the accompanying balance sheets of Holbrook Apartments
Company as of December 31, 1997 and 1996, and the related statements of
operations, partners' deficit and cash flows for each of the three years in the
period ended December 31, 1997. 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.
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 Holbrook Apartments Company
as of December 31, 1997 and 1996, and the results of its operations, the changes
in partners' deficit and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Reznick Fedder & Silverman
--------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
January 23, 1998
<PAGE>
Holbrook Apartments Company
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 507,878 $ 631,608
Accounts receivable 3,296 2,153
Other receivables 9,640 28,548
Prepaid expenses 16,022 17,641
Other current assets - 475
----------- -----------
Total current assets 536,836 680,425
RESTRICTED DEPOSITS AND FUNDED RESERVES
Mortgage escrow deposits 76,359 61,069
Reserve for replacements 458,768 444,420
----------- -----------
535,127 505,489
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,160,211 and $3,905,567 5,462,169 5,664,784
DEFERRED FINANCING COSTS, net of accumulated
amortization of $222,158 and $208,617 331,793 345,334
----------- -----------
Total assets $ 6,865,925 $ 7,196,032
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 102,574 $ 95,185
Accounts payable and accrued expenses 33,168 179,824
Accrued interest payable 45,949 46,543
Rent deferred credits 11,559 15,274
----------- -----------
Total current liabilities 193,250 336,826
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 7,249,207 7,351,781
----------- -----------
Total liabilities 7,442,457 7,688,607
PARTNERS' DEFICIT (576,532) (492,575)
----------- -----------
Total liabilities and partners' deficit $ 6,865,925 $ 7,196,032
=========== ===========
See notes to financial statements
<PAGE>
Holbrook Apartments Company
STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenue
Rental income $2,079,319 $2,068,855 $2,062,798
Vacancies (4,727) (1,985) (486)
Financial revenue 35,842 27,267 34,734
Other income 8,608 7,176 6,381
---------- ---------- ----------
Total revenue 2,119,042 2,101,313 2,103,427
Expenses
Operating expenses
Marketing 1,789 366 208
Administration 132,704 126,269 120,673
Utilities 112,614 85,403 77,662
Management fee 98,776 99,025 98,221
Maintenance and repairs 173,586 200,197 195,276
Salaries 195,869 198,148 170,174
Insurance 34,981 49,036 40,196
Real estate taxes 181,311 182,616 197,441
---------- ---------- ----------
Total operating expenses 931,630 941,060 899,851
Nonoperating expenses
Interest 554,700 561,600 568,003
Mortgage insurance premium 36,979 37,438 37,865
Depreciation and amortization 268,185 261,682 248,580
Incentive management fee 146,297 133,795 137,695
---------- ---------- ----------
Total nonoperating expenses 1,006,161 994,515 992,143
---------- ---------- ----------
Total expenses 1,937,791 1,935,575 1,891,994
---------- ---------- ----------
EXCESS OF REVENUE OVER
EXPENSES $ 181,251 $ 165,738 $ 211,433
========== ========== ==========
See notes to financial statements
<PAGE>
Holbrook Apartments Company
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited
Partner Partner Total
------- ------- -----
<S> <C> <C> <C>
Partners' deficit, December 31, 1994 $ (566,946) $ 195,960 $ (370,986)
Distributions (37,846) (214,459) (252,305)
Excess of revenue over expenses 31,715 179,718 211,433
---------- ---------- -----------
Partners' deficit, December 31, 1995 (573,077) 161,219 (411,858)
Distributions (36,968) (209,487) (246,455)
Excess of revenue over expenses 24,861 140,877 165,738
---------- ---------- -----------
Partners' deficit, December 31, 1996 (585,184) 92,609 (492,575)
Distributions (39,781) (225,427) (265,208)
Excess of revenue over expenses 27,188 154,063 181,251
---------- ---------- -----------
Partners' deficit, December 31, 1997 $(597,777) $ 21,245 $ (576,532)
========= ========== ===========
Profit and loss sharing percentage 15% 85% 100%
== == ===
</TABLE>
See notes to financial statements
<PAGE>
Holbrook Apartments Company
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Rental income received $2,069,734 $2,083,642 $2,059,803
Interest received 15,185 13,786 14,645
Other income received 28,030 - 9,418
Administrative expenses paid (182,895) (173,537) (166,891)
Management fees paid (98,776) (99,025) (98,221)
Utilities paid (119,299) (88,920) (88,787)
Maintenance and repairs expenses paid (446,319) (197,997) (303,582)
Real estate taxes paid (181,311) (182,616) (197,441)
Payroll taxes paid (14,705) (15,854) (16,316)
Property insurance paid (14,811) (26,982) (18,192)
Other taxes and insurance paid (18,631) (21,339) (22,335)
Interest paid on mortgage (555,294) (562,152) (568,516)
Mortgage insurance paid (36,899) (37,367) (37,797)
(Increase) decrease in mortgage
escrow deposits (15,290 (18,174) 10,330
Mortgagor entity expenses paid (146,297) (133,795) (137,695)
------------ ---------- ----------
Net cash provided by operating
activities 282,422 539,670 438,423
------------ ---------- ----------
Cash flows from investing activities
Additions to property and equipment (52,029) (111,023) (86,045)
Deposits to reserve for replacements (40,920) (40,720) (40,680)
Withdrawals from reserve for
replacements 47,190 91,862 -
------------ ---------- ----------
Net cash used in investing
activities (45,759) (59,881) (126,725)
------------ ---------- ----------
Cash flows from financing activities
Repayment of mortgage payable (95,185) (88,328) (81,964)
Distributions paid to partners (265,208) (246,455) (252,305)
------------ ---------- ----------
Net cash used in financing activities (360,393) (334,783) (334,269)
------------ ---------- ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (123,730) 145,006 (22,571)
Cash and cash equivalents, beginning 631,608 486,602 509,173
------------ ---------- ----------
Cash and cash equivalents, ending $ 507,878 $ 631,608 $ 486,602
============ ========== ==========
See notes to financial statements
<PAGE>
Holbrook Apartments Company
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of excess of revenue over expenses to net
cash provided by operating activities
Excess of revenue over expenses $181,251 $165,738 $211,433
Adjustments to reconcile excess of revenue over
expenses to net cash provided by operating activities
Depreciation 254,644 248,141 235,039
Amortization of deferred financing costs 13,541 13,541 13,541
Interest earned on replacement reserves (20,618) (8,912) (20,089)
Changes in assets and liabilities
(Increase) Decrease in tenant accounts receivable (1,143) 6,087 (2,200)
Decrease in accounts receivable - HAP - - 570
Decrease (increase) in accounts receivable - other 18,908 (11,745) (7,103)
Decrease (increase) in prepaid expenses 1,619 786 (263)
(Increase) decrease in mortgage escrow deposits (15,290) (18,174) 10,330
Decrease in other assets 475 - -
(Decrease) increase in accounts payable and
accrued expenses (146,656) 134,075 (1,443)
Decrease in accrued interest payable (594) (552) (513)
(Decrease) increase in rent-deferred credits (3,715) 10,685 (879)
-------- -------- --------
Net cash provided by operating activities $282,422 $539,670 $438,423
======== ======== ========
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Holbrook Apartments Company
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Holbrook Apartments Company (the Partnership) was formed as a limited
partnership under the laws of the State of Massachusetts in July 1981, for the
purpose of constructing and operating a rental housing project under Section
221(d)(4) of the National Housing Act. The project consists of 170 units located
in Holbrook, Massachusetts, and is currently operating under the name of
Holbrook Apartments. All leases between the Partnership and the tenants of the
property are operating leases.
Cash distributions are limited by agreements between the Partnership and
HUD to the extent of surplus cash as defined by HUD.
Use of 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash and repurchase agreements with
maturities of three months or less when acquired, stated at cost, which
approximates fair value.
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives by use of the straight-line method for
financial reporting purposes. For income tax purposes, accelerated lives and
methods are used.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method.
Rental Income
- -------------
Rental income is recognized as rentals become due. Rental payments
received in advance are deferred until earned.
Income Taxes
- ------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
The Partnership has a reserve for replacements and mortgage escrow
deposits totaling $535,127 and $505,489 at December 31, 1997 and 1996,
respectively, on deposit with WMF/Huntoon, Paige Associates Limited. These funds
are held in interest-bearing money market accounts and are carried at cost,
which approximates fair value.
NOTE C - MORTGAGE PAYABLE
- -------------------------
The mortgage is insured by the Federal Housing Administration (FHA) and
collateralized by a deed of trust on the rental property. The mortgage, which is
due February 1, 2023, is payable in equal monthly installments of principal and
interest totaling $54,207 and bears interest at a rate of 7.5%. Interest
incurred during December 31, 1997, 1996 and 1995, amounted to $554,700, $561,600
and $568,003, respectively.
Under agreements with the mortgage lender and FHA, the Partnership is
required to make monthly escrow deposits for taxes, insurance and replacement of
project assets, and is subject to restrictions as to operating policies, rental
charges, operating expenditures and distributions to partners.
The liability of the Partnership under the mortgage is limited to the
underlying value of the real estate, plus other amounts deposited with the
lender.
Aggregate annual maturities of the mortgage payable for the five years
following December 31, 1997, are as follows:
December 31,
------------
1998 $102,574
1999 $110,538
2000 $119,119
2001 $128,366
2002 $138,331
Management believes it is not practical to estimate the fair value of the
mortgage payable insured by HUD because programs with similar characteristics
are not currently available to the Partnership.
NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
- ---------------------------------------------
FHA contracted with the Partnership under Section 8 of Title II of the
Housing and Community Development Act of 1974, to make housing assistance
payments to the Partnership on behalf of qualified tenants. The agreement
expires July 1, 2001. Total housing assistance payments received during 1997,
1996 and 1995 were $1,565,374, $1,577,392, and $1,587,132, respectively.
NOTE E - MANAGEMENT AGREEMENT
- -----------------------------
Management fees of 4.75% of gross receipts are paid to CMJ Management
Company, Inc., an affiliate of the general partner, for its services as
management agent to the Project pursuant to a management agreement approved by
HUD. Such fees amounted to $98,776, $99,025 and $98,221 for the years ended
1997, 1996 and 1995, respectively. In addition, CMJ Management Company, Inc.,
received incentive management fees of $146,297, $133,795 and $137,695 for the
years ended December 31, 1997, 1996 and 1995, respectively.
CMJ Management Company, Inc., an affiliate of the general partner, makes
monthly expenditures (primarily payroll, central office accounting, direct
marketing and insurance costs) on behalf of the Partnership which are reimbursed
the following month.
NOTE F - TAX BASIS INCOME
- -------------------------
The reconciliation of the excess of revenue over expenses in the
accompanying statements of operations with the income reported on a Federal
income tax basis follows:
1997 1996 1995
---- ---- ----
Excess of revenue over expenses
per statement of operations $ 181,251 $ 165,738 $ 211,433
Additional amortization of
deferred costs 8,393 8,393 8,393
Increase (decrease) in deferred
rental income (3,715) 10,688 (879)
Additional depreciation 138,197 (32,751) (126,502)
---------- ---------- ----------
Income for Federal income tax
purposes $ 324,126 $ 152,068 $ 92,445
========== ========== ==========
NOTE G - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Partnership maintains operating cash balances, including repurchase
agreements, with major financial institutions and its funded reserves with the
mortgage lender. The Partnership has not experienced any losses with respect to
bank balances in excess of government provided insurance. Management believes
that no significant concentration to credit risk exists with respect to these
cash balances as of December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the quarter ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 493
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 493
<PP&E> 27
<DEPRECIATION> 0
<TOTAL-ASSETS> 520
<CURRENT-LIABILITIES> 215
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 305
<TOTAL-LIABILITY-AND-EQUITY> 520
<SALES> 0
<TOTAL-REVENUES> 331
<CGS> 0
<TOTAL-COSTS> 288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 43
<INCOME-TAX> 0
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> 4.85
<EPS-DILUTED> 4.85
</TABLE>
