UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to _______ .
Commission File Number: 0-17151
PAINEWEBBER/CMJ PROPERTIES LP
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(Exact name of registrant as specified in its charter)
Delaware 04-2780288
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
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(Address of principal executive offices) (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
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Prospectus of registrant dated Part IV
May 25, 1983, as supplemented
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
1998 FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of
Security Holders I-3
Part II
Item 5 Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-8
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-8
Part III
Item 10 Directors and Executive Officers of the
Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-3
Item 13 Certain Relationships and Related Transactions III-3
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K IV-1
Signatures IV-2
Index to Exhibits IV-3
Financial Statements and Supplementary Data F-1 to F-79
<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, 1998, 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.
<PAGE>
The Partnership has generated tax losses since inception. However, the
benefits of such losses to investors have been significantly reduced by change
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, 1998, all of the properties
are generating sufficient cash flow from operations to cover their operating
expenses and debt service payments, and all 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. Due to improvements in cash flow and the strong
operating performances of the investment properties, 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. 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, the Partnership did not make an annual distribution payment to the
Limited Partners in 1997. Based on improved cash flow from the properties in
1998, the Partnership made an annual distribution payment in November 1998 at an
annual rate of 2% on original invested capital. The ability to make future
distributions of operating cash flow will continue to be assessed on an annual
basis in the fourth quarter of each year.
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 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 currently 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 has transitioned to a 100% market rent facility and now competes 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.
<PAGE>
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 1998, along with an average for
the year, are presented below for each property:
Percent Occupied At
--------------------------------------------
1998
3/31/98 6/30/98 9/30/98 12/31/98 Average
------- ------- ------- -------- -------
Village at Fawcett's Pond
Apartments 100% 100% 100% 100% 100%
Quaker Court and The Meadows 100% 98% 100% 100% 99%
Villages at Montpelier Apartments 96% 94% 96% 92% 94%
Marvin Gardens Apartments 100% 97% 100% 100% 99%
Colonial Farms Apartments 100% 99% 100% 99% 99%
Ramblewood Apartments 100% 98% 100% 100% 99%
Item 3. Legal Proceedings
None.
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, 1998 there were 844 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.
See Item 6 below for the amount of cash distributions paid to the Limited
Partners during 1998.
Item 6. Selected Financial Data
Paine Webber/CMJ Properties, LP
(In thousands, except per Unit data)
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 294 $ 147 $ 98 $ 244 $ 179
Expenses $ 365 $ 288 $ 280 $ 288 $ 268
Partnership's share
of local limited
partnerships' income $ 209 $ 184 $ 157 $ 174 $ 186
Net income (loss) $ 138 $ 43 $ (25) $ 130 $ 97
Cash distributions per
Limited
Partnership Unit $ 20.00 - $ 20.00 $20.00 $10.00
Net income (loss) per
Limited
Partnership Unit $ 15.58 $ 4.85 $ (2.82) $14.75 $11.01
Total assets $ 383 $ 520 $ 415 $ 486 $ 525
(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, 1998, all of the properties are generating
sufficient cash flow from operations to cover their operating expenses and debt
service payments, and all 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.
Due to improvements in cash flow and the strong operating performances of the
investment properties, 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. 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. Because of ongoing capital
expenditure requirements at the properties, the Partnership did not make an
annual distribution payment to the Limited Partners in 1997. As discussed
further below, based on improved cash flow from the properties in 1998, the
Partnership made an annual distribution payment to the Limited Partners at a
rate of 2% on original invested capital in November 1998.
During 1998, the Partnership received distributions totalling $460,000
from all six local limited partnership investments. During 1997 the Partnership
received distributions totalling $370,000 from five of the six local limited
partnerships. The amounts received in 1997 and 1998 represent the cash flow
available for distribution as of December 31, 1996 and 1997, 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 in the current year
due to increases in distributions from three of the local limited partnership
investments and the receipt of $66,000 from The Villages at Montpelier
partnership in 1998. No distributions were received from this partnership in
1997. 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 existing 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. Based on
the amounts of the 1998 distribution payments from the local limited
partnerships, management believed that there was sufficient cash flow to make a
distribution for the current year. Accordingly, the Partnership made an annual
distribution to the Limited Partners on November 23, 1998 at a rate of 2% on
original invested capital. Such distribution totalled approximately $175,000, or
$20 per original $1,000 investment. The ability to make future distributions of
operating cash flow will continue to be assessed on an annual basis in the
fourth quarter of each year.
As of December 31, 1998, 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 for 100% of the rental
units. The government subsidy payments range from 65% to 81% of the total
revenues of the related local limited partnerships. As discussed previously, 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 3-to-5 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 uncertainty regarding potential
future reductions in the level of federal government assistance for these
programs may further restrict the properties' marketability. Accordingly, the
general partners of the local limited partnerships, which receive management fee
revenues from the properties through an affiliated management company, were not
expected to initiate efforts 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. In October 1998, the Partnership gave
the written notice described above to the operating general partner of all six
local limited partnerships after meeting with representatives of the operating
general partner to discuss the Partnership's desire to liquidate its investments
in the near term. The Partnership must now wait for the one-year notification
period to lapse or for the possible earlier receipt of an acceptable liquidation
proposal from the operating general partner. In light of the decision by the
Partnership to initiate this action under the terms of the limited partnership
agreements, it is currently contemplated that the disposition of the
Partnership's investments and a liquidation of the Partnership could be
completed by the end of calendar year 1999. 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.
The average occupancy level at The Villages at Montpelier Apartments was
94% for the year ended December 31, 1998, compared to 92% for the prior year. As
previously reported, prior to July 1997, 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 of 1997 but rebounded to 90% for the
fourth quarter of 1997 and stabilized by the first quarter of 1998. Cash flow
from operations at The Villages at Montpelier is comparable to the previously
subsidized level now that the occupancy rate at the property has been
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 remains
restricted by the terms of the limited partnership agreement discussed further
above.
At December 31, 1998, the Partnership had available cash and cash
equivalents of approximately $341,000, which it intends to use for its working
capital requirements and distribution to the partners. 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 or from the sale of the Partnership's
interests in 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.
As noted above, it is possible that the Partnership could be liquidated
prior to the end of calendar year 1999. Notwithstanding this, the Partnership
believes that it has made all necessary modifications to its existing systems to
make them year 2000 compliant and does not expect that additional costs
associated with year 2000 compliance, if any, will be material to the
Partnership's results of operations or financial position.
Results of Operations
1998 Compared to 1997
- ---------------------
For the year ended December 31, 1998, the Partnership reported net income
of $138,000, as compared to net income of $43,000 for 1997. This increase in the
Partnership's net income was mainly attributable to a $145,000 increase in other
income from local limited partnerships and a $25,000 increase in the
Partnership's share of local limited partnerships' income which were partially
offset by a $77,000 increase in general and administrative expenses. As
discussed in the notes to the financial statements, in accordance with the
equity method of accounting the Partnership records distributions received from
investments in limited partnerships with carrying values of zero as other income
from local limited partnerships. The increase in other income from local limited
partnerships is largely due to a $66,000 increase in distributions from The
Villages at Montpelier investment and an increase of $64,000 in the portion of
the distributions from the Holbrook investment being applied to other income
after that investment reached a zero carrying value in the current year.
Under the equity method of accounting for limited partnership interests,
losses in excess of the investment in individual local limited partnerships are
not recognized currently, but rather, are offset against future earnings from
such entities. As a result, the Partnership's share of local limited
partnerships' operations for both the current and prior years represent only the
allocable portions of the operations of the Ramblewood and Fawcett's Pond
partnerships. The Partnership's share of income from Fawcett's Pond increased by
$30,000 for 1998 primarily due to a reduction in mortgage interest expense and
property operating expenses. Mortgage interest expense decreased due to the
reduction in the mortgage principal balance resulting from scheduled principal
repayments. Property operating expenses decreased at Fawcett's Pond due to
additional repairs and maintenance expenditures incurred during 1997. The
Partnership's share of income from Ramblewood decreased by $5,000 for the
current year primarily due to an increase in real estate taxes which was
partially offset by a reduction in repairs and maintenance expenses. Overall,
the combined net operating results of the six local limited partnerships changed
from a net loss of $34,000 for 1997 to net income of $65,000 for the current
year. This favorable change of $99,000 resulted primarily from a $76,000
increase in rental revenues and a $36,000 decrease in combined interest and
mortgage insurance expense. Combined property rental revenues increased
primarily due to an increase in the rental rates and average occupancy level at
The Villages at Montpelier Apartments. Combined interest and mortgage insurance
expense decreased mainly due to the reduction in the outstanding principal
balances of the partnerships' mortgage loans resulting from the scheduled
monthly principal payments.
General and administrative expenses increased in 1998 mainly due to
additional professional fees incurred for an evaluation of potential disposition
strategies for the Partnership's investments and an independent third party
valuation of the local limited partnership interests performed during the
current year.
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 was attributable to a $41,000
decrease in the Partnership's operating loss and a $27,000 increase in the
Partnership's share of local limited partnerships' income. The decrease in the
Partnership's operating loss was 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 above, 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 1997 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 in 1997
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.
<PAGE>
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 for 1996 was
mainly due to decreases in certain required professional services.
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 salability, 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
increased significantly over the past two years. Existing apartment properties
in such markets could be expected to experience increased vacancy levels,
declines in effective rental rates and, in some cases, declines in estimated
market values as a result of the increased competition. 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.
<PAGE>
Inflation
- ---------
The Partnership completed its fifteenth full year of operations in 1998.
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 39 8/22/96
Terrence E. Fancher Director 45 10/10/96
Walter V. Arnold Senior Vice President
and Chief Financial Officer 51 10/29/85
David F. Brooks First Vice President and
Assistant Treasurer 56 12/10/82 *
Thomas W. Boland Vice President and Controller 36 12/1/91
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors
and 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.
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, 1998, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner
receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the
General Partners are entitled to receive a share of 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. Subsequent distributions, based on management's
assessment of distributable cash, are expected to be made on an annual basis. No
distributions were made during 1997, and an annual distribution at a rate of 2%
on original invested capital was made in 1998. 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, 1998.
Accounts payable - affiliates at December 31, 1998 consists of management fees
of $99,000 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, 1998 is $37,000, 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, 1998. 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 1998.
(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, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Partnership and
in the capacities and on the dates indicated.
By: /s/ Bruce J. Rubin Date: March 30, 1999
------------------- --------------
Bruce J. Rubin
Director
By: /s/ Terrence E. Fancher Date: March 30, 1999
----------------------- --------------
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 pursuant to
dated May 25, 1983, as Rule 424(c) and incorporated herein by
reference to the Restated supplemented, with particular reference.
Certificate and Agreement of
Limited Partnership.
(10) Material contracts previously Filed with the Commission pursuant to
filed as exhibits to registration Section13 or 15(d) of the Securities Act
statements and amendments thereto of 1934 and incorporated herein by reference.
of the registrant together with
all such contracts filed as
exhibits of previously filed Forms
8-K and Forms 10-K are hereby
incorporated herein by reference.
(13) Annual Reports to Limited Partners. No Annual Report for the year ended
December 31, 1998 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
Paine Webber/CMJ Properties, LP Reference
---------
Independent Auditors' Report F-4
Balance sheets at December 31, 1998 and 1997 F-5
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-6
Statements of changes in partners' capital (deficit)
or the years ended December 31, 1998, 1997 and 1996 F-7
Statement of cash flows for the years ended December
31, 1998, 1997 and 1996 F-8
Notes to financial statements F-9
Fawcett's Pond Apartments Company
Independent Auditors' Report F-20
Balance sheets at December 31, 1998 and 1997 F-21
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-22
Statements of partners' deficit for the years ended
December 31, 1998, 1997 and 1996 F-23
Statements of cash flows for the years ended December
31, 1998, 1997 and 1996 F-24
Notes to financial statements F-26
Quaker Meadows Apartments Company
Independent Auditors' Report F-30
Balance sheets at December 31, 1998 and 1997 F-31
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-32
Statements of partners' deficit for the years ended
December 31, 1998, 1997 and 1996 F-33
Statements of cash flows for the years ended December
31, 1998, 1997 and 1996 F-34
Notes to financial statements F-36
South Laurel Apartments Limited Partnership
Independent Auditors' Report F-40
Balance sheets at December 31, 1998 and 1997 F-41
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-42
Statements of partners' deficit for the years ended
December 31, 1998, 1997 and 1996 F-43
Statements of cash flows for the years ended December
31, 1998, 1997 and 1996 F-44
Notes to financial statements F-46
<PAGE>
Marvin Gardens Associates
Independent Auditors' Report F-50
Balance sheets at December 31, 1998 and 1997 F-51
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-52
Statements of partners' deficit for the years ended
December 31, 1998, 1997 and 1996 F-53
Statements of cash flows for the years ended December
31, 1998, 1997 and 1996 F-54
Notes to financial statements F-56
Colonial Farms, Ltd.
Independent Auditors' Report F-60
Balance sheets at December 31, 1998 and 1997 F-61
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-62
Statements of partners' deficit for the years ended
December 31, 1998, 1997 and 1996 F-63
Statements of cash flows for the years ended December
31, 1998, 1997 and 1996 F-64
Notes to financial statements F-66
Holbrook Apartments Company
Independent Auditors' Report F-70
Balance sheets at December 31, 1998 and 1997 F-71
Statements of operations for the years ended December
31, 1998, 1997 and 1996 F-72
Statements of partners' deficit for the years ended
December 31, 1998, 1997 and 1996 F-73
Statements of cash flows for the years ended December
31, 1998, 1997 and 1996 F-74
Notes to financial statements F-76
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 Partnership) as of December 31, 1998 and 1997, and the
related statements of operations, changes in partners' capital (deficit), and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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, 1998 and 1997, 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, 1998 in conformity with generally accepted
accounting principles.
/s/ Reznick Fedder & Silverman
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 10, 1999
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except per Unit amounts)
ASSETS
1998 1997
---- ----
Investments in local limited
partnerships, at equity $ 42 $ 27
Cash and cash equivalents 341 493
------- -------
$ 383 $ 520
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Accrued expenses and accounts payable $ 18 $ 16
Accounts payable - affiliates 99 199
------- -------
117 215
Partners' capital:
General Partners:
Capital contributions 1 1
Cumulative net losses (68) (69)
Cumulative distributions (7) (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 (6,727) (6,864)
Cumulative distributions (612) (437)
------- -------
Total partners' capital 266 305
------- -------
$ 383 $ 520
======= =======
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, 1998, 1997 and 1996
(In thousands, except per Unit amounts)
1998 1997 1996
---- ---- -----
Revenues:
Interest income $ 28 $ 26 $ 14
Other income from local
limited partnerships 266 121 84
------- ------ ------
294 147 98
Expenses:
Management fees 199 199 199
General and administrative 166 89 81
------- ------ ------
365 288 280
------- ------ ------
Operating loss (71) (141) (182)
Partnership's share of local limited
partnerships' income 209 184 157
------- ------ ------
Net income (loss) $ 138 $ 43 $ (25)
======= ====== ======
Net income (loss) per Limited
Partnership Unit $ 15.58 $ 4.85 $(2.82)
======= ====== ======
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, 1998, 1997 and 1996
(In thousands)
General Limited
Partners Partners Totals
-------- -------- ------
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
Cash distributions (2) (175) (177)
Net income 1 137 138
------- -------- -------
Balance at December 31, 1998 $ (74) $ 340 $ 266
======= ======== =======
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, 1998, 1997 and 1996
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 138 $ 43 $ (25)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Other income from local limited partnerships (266) (121) (84)
Partnership's share of local limited
partnerships' income (209) (184) (157)
Changes in assets and liabilities:
Accrued expenses and accounts payable 2 (5) (1)
Accounts payable - affiliates (100) 67 132
------- ------- -------
Total adjustments (573) (243) (110)
------- ------- -------
Net cash used in operating activities (435) (200) (135)
------- ------- -------
Cash flows from investing activities:
Distributions from local limited
partnerships 460 370 310
------- ------- -------
Net cash provided by investing activities 460 370 310
------- ------- -------
Cash flows from financing activities:
Distributions to partners (177) - (177)
------- ------- -------
Net cash used in financing activities (177) - (177)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (152) 170 (2)
Cash and cash equivalents, beginning of year 493 323 325
------- ------- -------
Cash and cash equivalents, end of year $ 341 $ 493 $ 323
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAINE WEBBER/CMJ PROPERTIES, LP
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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, 1998, all of the properties
are generating sufficient cash flow from operations after covering their
operating expenses and debt service payments, and all 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. Due to improvements in cash flow and the strong
operating performances of the investment properties, 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. 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. An annual distribution
totalling approximately $175,000, or $20 per original $1,000 investment, was
made to the Limited Partners in 1998. No distributions were paid in 1997.
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 which includes
five of the six local limited partnerships that 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.
The Partnership is currently pursuing potential disposition strategies for
the six investments in its portfolio. As discussed further in Note 4, during
1998 the Partnership initiated the formal process prescribed in the local
limited partnership agreements for liquidating the Partnership's interests in
the local limited partnerships. Accordingly, it is currently contemplated that
the sales of the remaining assets and a liquidation of the Partnership could be
accomplished prior to the end of calendar year 1999. There are no assurances,
however, that the sale of the remaining assets and the liquidation of the
Partnership will be completed within this time frame.
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, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended December 31, 1998. 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, 1998. The carrying amount of cash and cash equivalents approximates
their fair value as of December 31, 1998 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 $18,660,000 as of December 31,
1998 due to the losses on investments recognized on the tax basis in excess of
the book basis.
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
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, 1998. Accounts payable - affiliates at December 31,
1998 and 1997 consist of management fees of $99,000 and $199,000, respectively,
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.
Included in general and administrative expenses for the years ended
December 31, 1998, 1997 and 1996 is $37,000, $35,000 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, 1998.
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, 1998 and 1997
(In thousands)
Assets
1998 1997
---- ----
Current assets $ 1,800 $ 1,779
Restricted deposits and funded reserves 2,127 2,001
Operating investment property, net 23,441 24,629
Other assets 963 1,004
-------- --------
$ 28,331 $ 29,413
======== ========
Liabilities and Capital
Current liabilities and tenant security deposits $ 1,280 $ 1,290
Due to general partner 2,509 2,508
Long-term mortgage debt, less current portion 31,663 32,279
Partnership's share of combined
partners' deficit accounts (3,919) (3,511)
Local partners' shares of combined
partners' deficit accounts (3,202) (3,153)
-------- --------
$ 28,331 $ 29,413
======== ========
Condensed Combined Summary of Operations
For the years ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
Rental revenues, including
government subsidies $ 10,039 $ 9,963 $ 9,949
Other income 114 130 112
-------- -------- --------
10,153 10,093 10,061
Property operating expenses 5,847 5,834 5,733
Interest expense and mortgage
insurance 2,868 2,904 2,964
Depreciation and amortization 1,373 1,389 1,347
-------- -------- --------
10,088 10,127 10,044
-------- -------- --------
Net income (loss) $ 65 $ (34) $ 17
======== ======== ========
Net income (loss):
Partnership's share of
operations $ 52 $ (37) $ 32
Local partners' share of
operations 13 3 (15)
-------- -------- --------
$ 65 $ (34) $ 17
======== ======== ========
<PAGE>
Reconciliation of Partnership's Share of Operations
(In thousands)
1998 1997 1996
---- ---- ----
Partnership's share of
operations, as shown above $ 52 $ (37) $ 32
Losses in excess of basis not
recognized by Partnership 157 221 278
Income offset with prior year
unrecognized losses - - (153)
-------- -------- --------
Partnership's share of local
limited partnerships' income $ 209 $ 184 $ 157
======== ======== ========
Reconciliation of Partnership's Investments
(In thousands)
1998 1997
---- ----
Partnership's share of combined partners'
deficit accounts, as shown above $ (3,919) $ (3,511)
Accumulated losses in excess of basis
not recognized by Partnership 2,481 2,324
Cumulative distributions in excess
of investment basis 1,465 1,199
Excess basis in local limited partnerships 15 15
-------- --------
Investments in local limited
partnerships, at equity $ 42 $ 27
======== ========
"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. In October 1998,
the Partnership gave the written notice described above to the operating general
partner of all six local limited partnerships after meeting with representatives
of the operating general partner to discuss the Partnership's desire to
liquidate its investments in the near term. The Partnership must now wait for
the one-year notification period to lapse or for the possible earlier receipt of
an acceptable liquidation proposal from the operating general partner. In light
of the decision by the Partnership to initiate this action under the terms of
the limited partnership agreements, it is currently contemplated that the
disposition of the Partnership's investments and a liquidation of the
Partnership could be completed by the end of calendar year 1999. 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
"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):
1998 1997
---- ----
Fawcett's Pond Apartments Company $ 42 $ 6
Quaker Meadows Apartments Company - -
South Laurel Apartments Limited Partnership - -
Marvin Gardens Associates - -
Colonial Farms Ltd. - -
Holbrook Apartments Company - 21
------- -------
Investments in local limited
partnerships, at equity $ 42 $ 27
======= =======
<PAGE>
The Partnership received cash distributions from the limited partnerships
as set forth below (in thousands):
1998 1997 1996
---- ---- ----
Fawcett's Pond Apartments Company $ 24 $ 24 $ 24
Quaker Meadows Apartments Company 99 90 50
South Laurel Apartments Limited
Partnership 66 - -
Marvin Gardens Associates 11 4 -
Colonial Farms Ltd. 26 27 27
Holbrook Apartments Company 234 225 209
------- ------- -------
$ 460 $ 370 $ 310
======= ======= =======
The investments in Quaker Meadows Apartments Company, South Laurel
Apartments Limited Partnership, Marvin Gardens Associates and Colonial Farms
Ltd. at December 31, 1998 do not reflect accumulated losses therefrom of
$1,288,000, $850,000, $188,000 and $155,000, 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 1998, 1997 and 1996 were $749,000, $752,000 and $756,000,
respectively. Such amounts comprised approximately 77%, 76% and 77%,
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, 1998 of approximately $4,179,000, 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 in the period ended December 31,
1998.
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 1998, 1997 and 1996
were $1,310,000, $1,313,000 and $1,320,000, respectively. Such amounts comprised
approximately 81%, 81% 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
$1,358,925 (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, 1998 of approximately $4,975,000, 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.
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 $77,000, $69,000 and $29,000 were paid to an
affiliate of the local general partners for the years ended December 31, 1998,
1997 and 1996, 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 units previously designated as low-income units have been re-leased at
market rates which has kept the total revenues of the local limited partnership
relatively unchanged from the previously subsidized level. 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 and 1996
were $506,000 and $686,000, respectively. Such amounts comprised approximately
12% 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, 1998 of approximately $11,691,000, 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 $3,000 were paid to an affiliate of the local
general partners for 1998. 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 1998, 1997 and 1996 were $309,000, $329,000 and $324,000,
respectively. Such amounts comprised approximately 74%, 77% and 77%,
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, 1998 of approximately $1,560,000, 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 $1,000 were paid to an affiliate of the local general partners for the
year ended December 31, 1998. 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
1998, 1997 and 1996 were $531,000, $579,000 and $613,000, respectively. Such
amounts comprised approximately 65%, 71% and 76%, 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, 1998 of approximately $2,629,000, 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 were paid to an
affiliate of the local general partners for each of the three years in the
period ended December 31, 1998.
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 1998, 1997 and 1996 were $1,574,000, $1,565,000 and
$1,577,000, respectively. Such amounts comprised approximately 75%, 74% 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, 1998 of approximately $7,249,000, 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 $153,000, $146,000 and $134,000 were paid to an
affiliate of the local general partners for the years ended December 31, 1998,
1997 and 1996, respectively.
5. Year 2000 Issue
---------------
The Managing General Partner has assessed the Partnership's exposure to
date sensitive computer software programs that may not be operative subsequent
to 1999 and has implemented a requisite course of action to minimize year 2000
risk and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
<PAGE>
[REZNICK FEDDER & SILVERMAN]
[letterhead]
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, 1998 and 1997, and the related statements
of operations, partners' deficit and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards requires 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, 1998 and 1997, 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, 1998, in conformity with generally accepted
accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1999
<PAGE>
FAWCETT'S POND APARTMENTS COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 378,141 $ 353,884
Accounts receivable 2,647 2,011
Prepaid expenses 12,464 12,581
----------- -----------
Total current assets 393,252 368,476
----------- -----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenants' security deposits 20,583 21,461
Mortgage escrow deposits 53,570 67,627
Reserve for replacements 286,880 265,204
----------- -----------
361,033 354,292
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,344,695 and $2,192,094 3,298,592 3,378,778
DEFERRED FINANCING COSTS, net of accumulated
amortization of $130,269 and $122,110 206,486 214,645
----------- -----------
Total assets $ 4,259,363 $ 4,316,191
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 57,459 $ 53,320
Accounts payable and accrued expenses 11,851 54,347
Accrued interest payable 26,120 26,453
Rent deferred credits 2,966 488
----------- -----------
Total current liabilities 98,396 134,608
----------- -----------
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 4,121,716 4,179,174
Due to general partner 277,400 277,400
Tenants' security deposits 19,850 20,447
----------- -----------
Total liabilities 4,517,362 4,611,629
PARTNERS' DEFICIT (257,999) (295,438)
----------- -----------
Total liabilities and partners' deficit $ 4,259,363 $ 4,316,191
=========== ===========
See notes to financial statements
<PAGE>
FAWCETT'S POND APARTMENTS COMPANY
STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
Rental income, net $ 940,839 $ 941,478 $ 942,059
Financial revenue 17,448 25,534 19,420
Other income 16,596 16,701 16,066
---------- ---------- ----------
Total revenue 974,883 983,713 977,545
---------- ---------- ----------
Expenses
Operating expenses
Marketing 751 1,756 1,090
Administration 48,067 59,354 55,198
Utilities 27,464 30,591 33,018
Management fee 47,131 47,098 47,114
Maintenance and repairs 114,064 126,573 79,914
Salaries 92,736 76,232 85,196
Payroll taxes 8,111 7,648 7,252
Insurance 23,832 25,206 22,073
Real estate taxes 46,352 67,717 66,913
---------- ---------- ----------
Total operating expenses 408,508 442,175 397,768
---------- ---------- ----------
Nonoperating expenses
Interest 315,296 319,161 322,748
Mortgage insurance premium 21,018 21,275 21,515
Depreciation and amortization 160,760 162,549 153,348
Incentive management fee 6,303 6,303 6,303
Miscellaneous financial expenses 345 625 633
---------- ---------- ----------
Total nonoperating expenses 503,722 509,913 504,547
---------- ---------- ----------
Total expenses 912,230 952,088 902,315
---------- ---------- ----------
EXCESS OF REVENUE OVER EXPENSES $ 62,653 $ 31,625 $ 75,230
========== ========== ==========
See notes to financial statements
<PAGE>
FAWCETT'S POND APARTMENTS COMPANY
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1998, 1997 and 1996
General Limited
Partner Partner Total
------- ------- -----
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)
Distributions (1,261) (23,953) (25,214)
Excess of revenue over expenses 3,133 59,520 62,653
--------- ---------- ----------
Partners' deficit, December 31, 1998 $ (69,760) $ (188,239) $ (257,999)
========= ========== ==========
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, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Rental income received $ 942,681 $ 941,319 $ 942,011
Interest received 17,448 15,978 12,900
Other income received 16,596 16,600 15,939
Administrative expenses paid (96,205) (97,068) (88,517)
Management fees paid (47,131) (47,098) (47,114)
Utilities paid (30,782) (28,522) (32,268)
Maintenance and repairs expenses paid (164,733) (171,100) (133,004)
Real estate taxes paid (80,210) (33,859) (66,913)
Payroll taxes paid (8,111) (7,648) (7,252)
Property insurance paid (8,233) (8,275) (9,614)
Other taxes and insurance paid (15,571) (16,038) (12,074)
Interest paid on mortgage (315,629) (319,470) (323,035)
Mortgage insurance paid (20,929) (21,193) (21,440)
Miscellaneous financial expenses paid (345) (625) (633)
Mortgagor entity expenses paid (6,303) (6,303) (6,303)
(Increase) decrease in mortgage escrow
deposits 14,057 (31,945) (858)
Net security deposits received (paid) 281 3,745 (1,529)
---------- ---------- ----------
Net cash provided by operating
activities 196,881 188,498 220,296
---------- ---------- ----------
Cash flows from investing activities
Additions to property and equipment (72,415) (78,343) (43,567)
Deposits to reserve for replacements (22,092) (22,092) (21,948)
Withdrawals from reserve for
replacements 416 17,312 -
---------- ---------- ----------
Net cash used in investing
activities (94,091) (83,123) (65,515)
---------- ---------- ----------
Cash flows from financing activities
Repayment of mortgage payable (53,319) (49,479) (45,914)
Distributions (25,214) (25,214) (25,214)
---------- ---------- ----------
Net cash used in financing
activities (78,533) (74,693) (71,128)
---------- ---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 24,257 30,682 83,653
Cash and cash equivalents, beginning 353,884 323,202 239,549
---------- ---------- ----------
Cash and cash equivalents, ending $ 378,141 $ 353,884 $ 323,202
========== ========== ==========
See notes to financial statements
<PAGE>
FAWCETT'S POND APARTMENTS COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Reconciliation of excess of revenue
over expenses to net cash provided
by operating activities
Excess of revenue over expenses $ 62,653 $ 31,625 $ 75,230
Adjustments to reconcile excess of
revenue over expenses to net cash
provided by operating activities
Depreciation 152,601 154,387 145,186
Amortization 8,159 8,162 8,162
Interest earned on reserve for
replacements - (9,103) (6,520)
Changes in assets and liabilities
Increase in accounts receivable (636) (394) (399)
Decrease in prepaid expenses 117 975 460
(Decrease) increase in mortgage
escrow deposits 14,057 (31,945) (858)
Increase (decrease) in tenants'
security deposits - net 281 3,745 (1,529)
(Decrease) increase in accounts
payable and accrued expenses (42,496) 31,674 627
Decrease in accrued interest
payable (333) (309) (287)
Increase (decrease) in rent-deferred
credits 2,478 (319) 224
---------- ---------- ---------
Net cash provided by
operating activities $ 196,881 $ 188,498 $ 220,296
========== ========== =========
See notes to financial statements
<PAGE>
FAWCETT'S POND APARTMENTS COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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.
Annual cash distributions and incentive management fees are limited by
agreements between the Partnership and the Department of Housing and Urban
Development (HUD) to $31,517, which represents 6% of the initial equity
investment, 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
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 using the straight-line method.
As of December 31, 1998, management does not believe that these are any
current facts or circumstances that would indicate impairment of the rental
property in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method which approximates the effective interest 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.
Reclassifications
- -----------------
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentations.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1998 and 1997, the Partnership maintained tenant security
deposits of $20,583 and $21,461 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 mortgage escrow
deposits totaling $340,450 and $332,831 at December 31, 1998 and 1997,
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 - PROPERTY AND EQUIPMENT
- -------------------------------
Investment in property and equipment consisted of the following at
December 31, 1998 and 1997:
1998 1997
---- ----
Land $ 440,000 $ 440,000
Buildings and improvements 4,436,077 4,310,760
Furniture and equipment 767,210 160,152
----------- -----------
5,643,287 5,570,872
Less accumulated depreciation 2,344,695 2,192,094
----------- -----------
$ 3,298,592 $ 3,378,778
=========== ===========
NOTE D - 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%.
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, 1998, are as follows:
December 31,
------------
1999 $ 57,459
2000 $ 61,920
2001 $ 66,727
2002 $ 71,907
2003 $ 71,489
Management believes that the carrying amount of the mortgage payable
approximates fair value at December 31, 1998, as there is no significant
difference in the market rate of interest for similar debt between that date and
the date of the mortgage.
NOTE E - 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 1998, 1997 and 1996 were $749,294, $751,930, and $755,658, respectively.
NOTE F - RELATED PARTY TRANSACTIONS
- -----------------------------------
Due to General Partners
- -----------------------
At December 31, 1998 and 1997, 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 $47,131, $47,098 and $47,114 for the years ended December 31,
1998, 1997 and 1996, respectively. In addition, CMJ Management Company received
incentive management fees of $6,303 for the years ended December 31, 1998, 1997
and 1996.
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 G - TAX BASIS INCOME (LOSS)
- --------------------------------
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:
1998 1997 1996
---- ---- ----
Excess of revenue over expenses
per statement of operations $ 62,653 $ 31,625 $ 75,230
GAAP to tax depreciation adjustment (137,101) (56,395) (65,916)
Deferred rental income adjustment 2,248 328 224
--------- -------- --------
Income (loss) for Federal income
tax purposes $(72,200) $(25,098) $ 9,538
======== ======== ========
NOTE H - 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, 1998.
NOTE I - YEAR 2000 ISSUE
- ------------------------
The general partner has assessed the Partnership's exposure to date
sensitive computer software programs that may not be operative subsequent to
1999 and has implemented a requisite course of action to minimize year 2000 risk
and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
NOTE J - CONTINUATION OF THE PARTNERSHIP
- ----------------------------------------
The Partnership agreement allows the limited partner to cause the sale of
the assets of the Partnership subsequent to June 30, 1995, but not earlier than
one year after it has given written notice of its desire to cause such sale to
the general partner, and only if, during such one-year period, the general
partner does not cause the sale of the Partnership's assets. If the 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 the assets to the general partner, and either the general
partner does not accept such offer within 90 days of receiving it, or the
general partner does not complete the sale in accordance with such offer after
accepting the terms. During October 1998, the limited partner gave the written
notice described above to the general partner of the Partnership. In light of
the decision by the limited partner to initiate this action under the terms of
the Partnership agreement, it is currently contemplated that the disposition of
the Partnership's assets and liquidation of the Partnership could be completed
by the end of calendar year 1999. There are no assurances, however, that the
disposition of the Partnership's assets and liquidation of the Partnership will
be completed within this time frame.
<PAGE>
[REZNICK FEDDER & SILVERMAN]
[letterhead]
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, 1998 and 1997, and the related statements
of operations, partners' deficit and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
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, 1998 and 1997, 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, 1998, in conformity with generally accepted
accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1999
<PAGE>
QUAKER MEADOWS APARTMENTS COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 189,109 $ 215,117
Accounts receivable 49,264 43,303
Other receivables 381 48,428
Prepaid expenses 1,068 8,483
---------- ----------
Total current assets 239,822 315,331
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenant security deposits 18,685 18,113
Mortgage escrow deposits 12,742 13,369
Reserve for replacements 254,514 210,559
---------- ----------
285,941 242,041
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,324,098 and $4,057,912 3,520,803 3,768,007
DEFERRED FINANCING COSTS, net of accumulated
amortization of $66,591 and $62,526 63,560 67,625
---------- ----------
Total assets $4,110,126 $4,393,004
========== ===========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 135,044 $ 119,880
Accounts payable and accrued expenses 46,245 40,379
Accrued interest payable 52,125 60,082
Rent deferred credits 3,658 4,013
---------- ----------
Total current liabilities 237,072 224,354
---------- ----------
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 4,839,950 4,974,964
Due to general partner 1,072,952 1,072,952
Tenants' security deposits 16,594 16,472
---------- ----------
Total liabilities 6,166,568 6,288,742
PARTNERS' DEFICIT (2,056,442) (1,895,738)
---------- ----------
Total liabilities and partners' deficit $4,110,126 $4,393,004
========== ==========
See notes to financial statements
<PAGE>
QUAKER MEADOWS APARTMENTS COMPANY
STATEMENT OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
Rental income $1,594,319 $1,600,492 $1,592,837
Vacancies - (1,774) (6,464)
Financial revenue 19,081 24,836 26,166
Other income 530 1,718 371
---------- ---------- ----------
Total revenue 1,613,930 1,625,272 1,612,910
---------- ---------- -----------
Expenses
Operating expenses
Administration 89,376 58,502 38,287
Management fees to affiliate 63,652 63,958 63,511
Utilities 130,386 136,254 125,632
Maintenance and repairs 167,879 220,781 162,266
Insurance 12,753 14,026 15,286
Real estate taxes 59,519 50,624 43,376
Salaries 130,272 125,272 158,372
---------- ---------- ----------
Total operating expenses 653,837 669,417 606,730
---------- ---------- ----------
Nonoperating expenses
Interest 634,112 641,632 660,698
Depreciation and amortization 270,251 274,586 265,184
Incentive management fee to
affiliate 76,627 68,655 29,375
Social services expenses 36,080 32,757 16,387
---------- ---------- ----------
Total nonoperating expenses 1,017,070 1,017,630 971,644
---------- ---------- ----------
Total expenses 1,670,907 1,687,047 1,578,374
---------- ---------- ----------
EXCESS (DEFICIENCY) OF
REVENUE OVER EXPENSES $ (56,977) $ (61,775) $ 34,536
========== ========== ==========
See notes to financial statements
<PAGE>
QUAKER MEADOWS APARTMENTS COMPANY
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1998, 1997 and 1996
General Limited
Partner Partner Total
------- ------- -----
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)
Distributions (5,186) (98,541) (103,727)
Excess of expenses over revenue (2,849) (54,128) (56,977)
--------- ----------- -----------
Partners' deficit, December 31, 1998 $(348,384) $(1,708,058) $(2,056,442)
========= =========== ===========
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, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Rental income received $1,588,003 $1,558,213 $1,591,659
Interest received 6,586 6,268 9,327
Other income received 530 16,194 -
Administrative expenses paid (89,376) (91,259) (54,674)
Management fees paid (63,652) (63,958) (68,922)
Utilities paid (130,386) (137,125) (123,121)
Maintenance and repair expenses paid (113,966) (202,054) (134,452)
Real estate taxes paid (59,519) (50,624) (43,376)
Property insurance paid (5,338) (12,724) (14,677)
Interest paid on mortgage (642,069) (641,632) (660,698)
Incentive fees paid (76,627) (68,655) (29,375)
(Increase) decrease in mortgage
escrow deposits 627 (595) 4,164
Net security deposits received (paid) (450) 529 1,947
Salaries and wages paid (130,272) (125,272) (158,372)
Social Services expenses paid (36,080) (32,757) (16,387)
---------- ---------- ----------
Net cash provided by operating
activities 248,011 154,549 303,043
---------- ---------- ----------
Cash flows from investing activities
Acquisition of land, building and
equipment (18,982) (59,313) (32,288)
Decrease (increase) in reserve for
replacements (31,460) 58,103 (14,208)
---------- ---------- ----------
Net cash used in investing
activities (50,442) (1,210) (46,496)
---------- ---------- ----------
Cash flows from financing activities
Repayment of mortgage payable (119,850) (106,769) (94,935)
Distributions (103,727) (95,090) (52,541)
---------- ---------- ----------
Net cash used in financing
activities (223,577) (201,859) (147,476)
---------- ---------- ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (26,008) (48,520) 109,071
Cash and cash equivalents, beginning 215,117 263,637 154,566
---------- ---------- ----------
Cash and cash equivalents, ending $ 189,109 $ 215,117 $ 263,637
========== ========== ==========
See notes to financial statements
<PAGE>
QUAKER MEADOWS APARTMENTS COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Reconciliation of excess (deficiency)
of revenue over expenses to net
cash provided by operating activities
Excess (deficiency) of revenue over
expenses $ (56,977) $ (61,775) $ 34,536
Adjustments to reconcile excess
(deficiency) of revenue over
expenses to net cash provided by
operating activities:
Depreciation and amortization 270,251 274,586 265,184
Interest earned on reserve for
replacement (12,495) (18,568) (18,345)
Changes in assets and liabilities
Decrease (increase) in accounts
receivable 42,086 (26,255) 1,222
Decrease (increase) in mortgage
escrow deposits 627 (595) 4,164
Decrease (increase) in tenants'
security deposits - net (450) 529 1,947
Decrease in prepaid expenses 7,415 1,302 609
(Decrease) increase in accounts
payable and accrued expenses (2,091) (14,901) 12,458
(Decrease) increase in rent
deferred credits (355) 226 1,268
---------- --------- ---------
Net cash provided by
operating activities $ 248,011 $ 154,549 $ 303,043
========== ========= =========
See notes to financial statements
<PAGE>
QUAKER MEADOWS APARTMENTS COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 rental 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. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives using the straight-line method.
As of December 31, 1998, management does not believe that there are any
current facts or circumstances that would indicate impairment of rental property
in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121.
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 1997 and 1996 financial statements have been
reclassified in order to be consistent with the 1998 financial statement
presentation.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1998 and 1997, the Partnership maintained tenant security
deposits of $18,685 and $18,113, 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 which approximates fair value.
<PAGE>
The Partnership also has a reserve for replacements and escrow funds
totaling $267,256 and $223,928 at December 31, 1998 and 1997, respectively, on
deposit with MHFA. These funds are held in interest bearing bank accounts which
are carried at cost which approximate fair value.
NOTE C - PROPERTY AND EQUIPMENT
- -------------------------------
Investment in property and equipment consisted of the following at
December 31, 1998 and 1997:
1998 1997
---- ----
Land $ 46,363 $ 46,363
Buildings and improvements 7,051,645 7,051,645
Furniture and equipment 746,893 727,911
----------- -----------
7,844,901 7,825,919
Less accumulated depreciation 4,324,098 4,057,912
----------- -----------
$ 3,520,803 $ 3,768,007
=========== ===========
NOTE D - 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, 1998, are as follows:
December 31,
------------
1999 $ 135,044
2000 $ 151,877
2001 $ 170,808
2002 $ 192,098
2003 $ 216,043
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 E - 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 1998, 1997 and 1996
were $1,310,382, $1,312,610 and $1,319,893, respectively.
NOTE F - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 1998 and 1997, 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 $63,652, $63,958 and $63,511 for the years ended
December 31, 1998, 1997 and 1996, respectively. In addition, CMJ Management
Company, Inc., received incentive management fees of $76,627, $68,655 and
$29,375 for the years ended December 31, 1998, 1997 and 1996 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 - 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:
1998 1997 1996
---- ---- ----
Excess (deficiency) of revenue
over expenses per statement
of operations $ (56,977) $ (61,775) $ 34,536
GAAP to tax depreciation adjustment (143,496) 26,048 22,002
Deferred rental income adjustment 3,659 226 1,268
---------- --------- ---------
(Loss) income for Federal income
tax purposes $ (196,814) $ (35,501) $ 57,806
========== ========= =========
NOTE H - 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, 1998.
NOTE I - YEAR 2000 ISSUE
- ------------------------
The general partner has assessed the Partnership's exposure to date
sensitive computer software programs that may not be operative subsequent to
1999 and has implemented a requisite course of action to minimize year 2000 risk
and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
NOTE J - CONTINUATION OF THE PARTNERSHIP
- ----------------------------------------
The Partnership agreement allows the limited partner to cause the sale of
the assets of the Partnership subsequent to June 30, 1995, but not earlier than
one year after it has given written notice of its desire to cause such sale to
the general partner, and only if, during such one-year period, the general
partner does not cause the sale of the Partnership's assets. If the 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 the assets to the general partner, and either the general
partner does not accept such offer within 90 days of receiving it, or the
general partner does not complete the sale in accordance with such offer after
accepting the terms. During October 1998, the limited partner gave the written
notice described above to the general partner of the Partnership. In light of
the decision by the limited partner to initiate this action under the terms of
the Partnership agreement, it is currently contemplated that the disposition of
the Partnership's assets and liquidation of the Partnership could be completed
by the end of calendar year 1999. There are no assurances, however, that the
disposition of the Partnership's assets and liquidation of the Partnership will
be completed within this time frame.
<PAGE>
[REZNICK FEDDER & SILVERMAN]
[letterhead]
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, 1998 and 1997, and the related statements
of operations, partners' deficit and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
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, 1998 and 1997, 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, 1998, in conformity with generally
accepted accounting principles.
/s/ REZNICK FEDDER & SILVERMAN
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1999
<PAGE>
SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 322,501 $ 234,973
Accounts receivable 24,580 33,057
Other receivables - 11,258
Prepaid expenses 151,963 152,302
---------- ----------
Total current assets 499,044 431,590
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenants' security deposits 119,274 111,904
Mortgage escrow deposits 168,666 160,348
Reserve for replacement 143,468 115,619
---------- ----------
431,408 387,871
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $7,331,024 and $6,871,824 8,129,744 8,546,454
DEFERRED FINANCING COSTS, net of accumulated
amortization of $197,758 and $185,596 312,968 325,130
---------- ----------
Total assets $9,373,164 $9,691,045
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 165,533 $ 153,608
Accounts payable and accrued expenses 70,941 81,431
Accrued interest payable 73,068 74,028
Rent deferred credits 5,170 11,392
Deferred income - laundry 30,000 35,000
Due to affiliates 2,181 -
---------- ----------
Total current liabilities 346,893 355,459
---------- ----------
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 11,525,378 11,690,911
Due to general partner 645,989 645,989
Tenants' security deposits 122,670 111,904
---------- ----------
Total liabilities 12,640,930 12,804,263
PARTNERS' DEFICIT (3,267,766) (3,113,218)
---------- ----------
Total liabilities and partners' deficit $9,373,164 $9,691,045
========== ==========
See notes to financial statements
<PAGE>
South Laurel Apartments Limited Partnership
STATEMENT OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
Rental income $4,337,446 $4,298,989 $4,246,199
Vacancies (249,244) (306,701) (223,408)
Financial revenue 22,548 18,629 16,422
Other income 119,662 109,369 98,411
---------- ---------- ----------
Total revenue 4,230,412 4,120,286 4,137,624
---------- ---------- ----------
Expenses
Operating expenses
Administration 420,403 483,602 448,578
Management fee 218,093 214,497 213,145
Utilities 510,907 485,153 505,851
Maintenance and repairs 920,248 810,622 1,031,681
Salaries 529,704 519,252 524,535
Insurance 39,108 44,875 47,056
Real estate taxes 252,279 260,632 259,349
---------- ---------- ----------
Total operating expenses 2,890,742 2,818,633 3,030,195
---------- ---------- ----------
Nonoperating expenses
Interest 882,171 893,305 903,638
Mortgage insurance premium 58,812 59,553 60,243
Depreciation and amortization 471,362 479,869 467,072
Incentive management fee 2,985 - -
Miscellaneous financial expenses 1,424 3,750 3,710
---------- ---------- ----------
Total nonoperating expenses 1,416,754 1,436,477 1,434,663
---------- ---------- ----------
Total expenses 4,307,496 4,255,109 4,464,858
---------- ---------- ----------
EXCESS OF EXPENSES OVER REVENUE $ (77,084) $ (134,824) $ (327,234)
========== ========== ===========
See notes to financial statements
<PAGE>
<TABLE>
SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1998, 1997 and 1996
<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, 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)
Distributions (775) (3,099) (65,844) (7,746) (77,464)
Excess of expenses
over revenue (771) (3,083) (65,522) (7,708) (77,084)
--------- ----------- ----------- ----------- -----------
Partners' deficit,
December 31, 1998 $(109,675) $(1,289,835) $(1,300,636) $ (567,620) $(3,267,766)
========= =========== =========== =========== ===========
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, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Rental income received $4,090,458 $4,011,723 $4,023,207
Interest received 19,878 15,309 13,441
Other income received 124,158 102,435 94,716
Administrative expenses paid (427,196) (483,602) (441,876)
Utilities paid (514,815) (492,180) (516,504)
Management fees paid (218,093) (214,497) (213,145)
Maintenance and repairs expenses paid (916,171) (861,868) (1,032,327)
Salaries paid (487,275) (474,215) (479,525)
Real estate taxes paid (251,887) (260,467) (252,822)
Payroll taxes paid (42,429) (39,245) (45,010)
Property insurance paid (39,085) (44,875) (47,772)
Mortgage insurance paid (58,812) (59,158) (60,243)
Interest paid on mortgage (883,131) (894,196) (904,465)
Miscellaneous financial expenses paid (1,424) (3,750) (3,710)
Incentive management fees (2,985) - -
Net security deposits received 3,396 3,088 1,129
Decrease (increase) in mortgage
escrow deposits (8,318) 22,891 (24,153)
---------- ---------- ----------
Net cash provided by operating
activities 386,269 327,393 110,941
---------- ---------- ----------
Cash flows from investing activities
Additions to property and equipment (42,490) (137,952) (141,563)
Deposits to reserve for replacements (52,520) (52,520) (52,520)
Withdrawals from reserve for
replacements 27,341 85,111 88,357
---------- ---------- ----------
Net cash used in investing
activities (67,669) (105,361) (105,726)
---------- ---------- ----------
Cash flows from financing activities
Mortgage principal payments (153,608) (142,542) (132,273)
Distributions to partners (77,464) - -
---------- ---------- ----------
Net cash used in financing
activities (231,072) (142,542) (132,273)
---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 87,528 79,490 (127,058)
Cash and cash equivalents, beginning 234,973 155,483 282,541
---------- ---------- ----------
Cash and cash equivalents, ending $ 322,501 $ 234,973 $ 155,483
========== ========== ==========
See notes to financial statements
<PAGE>
SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Reconciliation of excess of expenses
over revenue to net cash provided
by operating activities
Excess of expenses over revenue $ (77,084) $(134,824) $(327,234)
Adjustments to reconcile excess
of expenses over revenue to net cash
provided by operating activities
Depreciation 459,200 467,707 454,910
Amortization 12,162 12,162 12,162
Interest earned on reserve for
replacements (2,670) (3,320) (2,981)
Changes in assets and liabilities
Decrease (increase) in tenant
accounts receivable 8,477 31,282 33,847
Decrease (increase) in accounts
receivable - other 11,258 (1,934) 1,305
Decrease in prepaid expenses 339 6,351 12,513
Decrease (increase) in mortgage
escrow deposits (8,318) 22,891 (24,153)
(Decrease) increase in accounts
payable and accrued expenses (10,490) (58,273) (11,299)
Decrease in accrued interest payable (960) (891) (827)
(Decrease) increase in rent - deferred
credits (6,222) (11,845) (33,431)
Decrease in deferred laundry income (5,000) (5,000) (5,000)
Increase in due to/from affiliates -
net 2,181 - -
Tenants' security deposits received -
net 3,396 3,087 1,129
--------- --------- ---------
Net cash provided by operating
activities $ 386,269 $ 327,393 $ 110,941
========= ========= =========
See notes to financial statements
<PAGE>
SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 using the straight-line method.
As of December 31, 1998, management does not believe that there are any
current facts or circumstances that would indicate impairment of rental property
in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method, which approximates the effective interest 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.
Reclassifications
- -----------------
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1998 and 1997, the Partnership maintained tenant security
deposits of $119,274 and $111,904 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 $312,134 and $275,967 at December 31, 1998 and 1997, 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 - PROPERTY AND EQUIPMENT
- -------------------------------
Investment in property and equipment consisted of the following at
December 31, 1998 and 1997:
1998 1997
---- ----
Land $ 140,756 $ 140,756
Buildings and improvements 15,149,544 15,107,054
Furniture and equipment 170,468 170,468
----------- -----------
15,460,768 15,418,278
Less accumulated depreciation 7,331,024 6,871,824
----------- -----------
$ 8,129,744 $ 8,546,454
============ ============
NOTE D - 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%.
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, 1998, are as follows:
December 31,
------------
1999 $ 165,533
2000 $ 178,384
2001 $ 192,232
2002 $ 207,155
2003 $ 223,237
Management believes that the carrying amounts of the Partnerships mortgage
approximates fair value at December 31, 1998, as there is no significant
difference in the market rate of interest between that date and the date of the
mortgage.
NOTE E - 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 and 1996 were $506,366 and $686,293, respectively.
NOTE F - RELATED PARTY TRANSACTIONS
- -----------------------------------
Due to General Partner
- ----------------------
At December 31, 1998 and 1997, 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
- ---------------
The project is managed by CMJ Management Company, Inc., an affiliate of
the general partner, under an agreement approved by HUD which provides for a
management fee of 5.25% of monthly rental collections. Further, CMJ Management
Company, Inc. is paid accounting and bookkeeping fees. Such fees amounted to
$218,093 and $45,492, respectively. In addition, CMJ Management Company, Inc.
received an incentive management fee of $2,985 for the year ended December 31,
1998.
<PAGE>
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 G - 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:
1998 1997 1996
---- ---- ----
Excess of revenue over expenses
per statement of operations $ (77,084) $(134,824) $(327,234)
Deferred rental income and laundry
income adjustment (11,213) (16,844) (38,431)
GAAP to tax depreciation adjustment (136,923) (166,665) (186,827)
--------- --------- ---------
Loss for Federal income tax purposes $(225,220) $(318,333) $(552,492)
========= ========= =========
NOTE H - 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 of
credit risk exists with respect to these cash balances as of December 31, 1998.
NOTE I - YEAR 2000 ISSUE
- ------------------------
The general partner has assessed the Partnership's exposure to date
sensitive computer software programs that may not be operative subsequent to
1999 and has implemented a requisite course of action to minimize year 2000 risk
and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
NOTE J - CONTINUATION OF THE PARTNERSHIP
- ----------------------------------------
The Partnership agreement allows the limited partner to cause the sale of
the assets of the Partnership subsequent to June 30, 1995, but not earlier than
one year after it has given written notice of its desire to cause such sale to
the general partner, and only if, during such one-year period, the general
partner does not cause the sale of the Partnership's assets. If the 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 the assets to the general partner, and either the general
partner does not accept such offer within 90 days of receiving it, or the
general partner does not complete the sale in accordance with such offer after
accepting the terms. During October 1998, the limited partner gave the written
notice described above to the general partner of the Partnership. In light of
the decision by the limited partner to initiate this action under the terms of
the Partnership agreement, it is currently contemplated that the disposition of
the Partnership's assets and liquidation of the Partnership could be completed
by the end of calendar year 1999. There are no assurances, however, that the
disposition of the Partnership's assets and liquidation of the Partnership will
be completed within this time frame.
<PAGE>
[REZNICK FEDDER & SILVERMAN]
[letterhead]
INDEPENDENT AUDITORS' REPORT
To the Partners
Marvin Gardens Associates
We have audited the accompanying balance sheets of Marvin Gardens
Associates as of December 31, 1998 and 1997, and the related statements of
operations, partners' deficit and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
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, 1998 and 1997, 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, 1998, in conformity with generally accepted accounting
principles.
/s/ REZNICK FEDDER & SILVERMAN
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1999
<PAGE>
MARVIN GARDENS ASSOCIATES
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
CURRENT ASSETS
Cash $ 37,207 $ 30,259
Accounts receivable 1,694 3,024
Accounts receivable - tenant subsidy 2,723 1,441
Prepaid expenses 3,741 4,022
---------- ----------
Total current assets 45,365 38,746
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Tenant security deposits 10,677 9,989
Real estate tax impound fund 5,822 7,190
Replacement reserve fund 121,104 118,306
Insurance impound fund 4,146 10,794
Interest income receivable - impounds 1,480 1,665
---------- ----------
143,229 147,944
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,187,715 and $1,112,978 1,233,596 1,308,333
DEFERRED FINANCING COSTS, net of accumulated
amortization of $22,318 and $20,945 24,051 25,424
---------- ----------
Total assets $1,446,241 $1,520,447
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Current maturities of mortgage payable $ 59,171 $ 54,555
Accounts payable and accrued expenses 20,236 20,136
Deferred rental income 156 366
----------- ----------
Total current liabilities 79,563 75,057
----------- ----------
Mortgage payable, less current maturities 1,500,449 1,556,072
Due to general partner 194,019 194,019
Tenants' security deposits 7,869 7,217
----------- ----------
Total liabilities 1,781,900 1,832,365
PARTNERS' DEFICIT (335,659) (311,918)
----------- ----------
Total liabilities and partners' deficit $ 1,446,241 $1,520,447
=========== ==========
See notes to financial statements
<PAGE>
MARVIN GARDENS ASSOCIATES
STATEMENT OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
Rental income $406,235 $ 410,401 $410,364
Vacancies (3,603) (1,496) (1,639)
Financial revenue 6,798 7,742 6,815
Other income 4,887 8,405 4,321
-------- --------- --------
Total revenue 414,317 425,052 419,861
-------- --------- --------
Expenses
Operating expenses
Administration 18,488 25,512 17,356
Utilities 27,546 29,201 23,833
Management fee 17,782 17,738 17,533
Maintenance and repairs 66,813 75,504 51,999
Salaries 58,611 56,766 59,441
Insurance 7,906 8,102 8,378
Real estate taxes 23,015 22,556 22,271
-------- --------- --------
Total operating expenses 220,161 235,379 200,811
-------- --------- --------
Nonoperating expenses
Interest 129,258 133,514 137,438
Depreciation and amortization 76,110 76,109 75,338
Incentive management fee 918 - -
-------- --------- --------
Total nonoperating expenses 206,349 209,623 212,776
-------- --------- --------
Total expenses 426,510 445,002 413,587
-------- --------- --------
EXCESS (DEFICIENCY) OF
REVENUE OVER EXPENSES $(12,193) $ (19,950) $ 6,274
======== ========= ========
See notes to financial statements
<PAGE>
MARVIN GARDENS ASSOCIATES
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Special
General Limited Limited
Partners Partners Partner Total
-------- -------- ------- -----
<S> <C> <C> <C> <C>
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)
Distributions (116) (462) (10,970) (11,548)
Excess of expenses over revenue (122) (488) (11,583) (12,193)
--------- -------- --------- ---------
Balance, December 31, 1998 $ (9,281) $(71,249) $(255,129) $(335,659)
========= ======== ========= =========
Profit and loss sharing percentage 1% 4% 95% 100%
= = == ===
</TABLE>
See notes to financial statements
<PAGE>
MARVIN GARDENS ASSOCIATES
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Rental income received $402,470 $405,562 $409,972
Interest received 203 1,256 1,011
Other income received 4,887 8,405 4,321
Administrative expenses paid (26,330) (25,512) (17,356)
Management fees paid (17,782) (17,738) (17,533)
Utilities paid (27,546) (28,085) (23,833)
Salaries and wages paid (45,857) (52,567) (46,384)
Maintenance and repairs expenses paid (66,713) (75,937) (51,326)
Real estate taxes paid (23,015) (22,556) (22,271)
Payroll taxes paid (4,912) (4,199) (13,057)
Property and other insurance paid (7,625) (5,592) (8,267)
Interest paid on mortgage (129,258) (133,514) (137,438)
Incentive management fee paid (981) - -
Decrease (increase) in insurance
impound fund 6,648 (5,023) (1,581)
Decrease (increase) in real estate
tax impound fund 1,368 (900) (162)
Net security deposits paid (36) (195) (296)
-------- -------- --------
Net cash provided by operating
activities 65,521 43,405 75,800
-------- -------- --------
Cash flows from investing activities
Additions to property and equipment - (6,170) (7,425)
Deposits to reserve for replacements (13,440) (16,128) (16,128)
Withdrawals from reserve for
replacements 17,422 42,312 -
-------- -------- --------
Net cash provided by (used in)
investing activities 3,982 20,014 (23,553)
-------- -------- --------
Cash flows from financing activities
Repayment of mortgage payable (51,007) (50,300) (46,375)
Distributions (11,548) (4,033) -
-------- -------- --------
Net cash used in financing
activities (62,555) (54,333) (46,375)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 6,948 9,086 5,872
Cash and cash equivalents, beginning 30,259 21,173 15,301
-------- -------- --------
Cash and cash equivalents, ending $ 37,207 $ 30,259 $ 21,173
======== ======== ========
See notes to financial statements
<PAGE>
MARVIN GARDENS ASSOCIATES
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Reconciliation of excess (deficiency)
of revenue over expenses to net
cash provided by operating activities
Excess (deficiency) of revenue
over expenses $ (12,193) $ (19,950) $ 6,274
Adjustments to reconcile excess
(deficiency) of revenue over
expenses to net cash provided
by operating activities
Depreciation 74,737 74,736 73,965
Amortization of deferred financing
costs 1,373 1,373 1,373
Interest earned on reserve for
replacements (6,780) (6,027) (5,796)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable - tenant subsidy (1,282) (1,441) 3,221
Decrease (increase) in accounts
receivable 1,515 (2,004) (183)
Increase in interest income
receivable - impounds - (459) (8)
Decrease in prepaid expenses 281 2,510 111
Decrease (increase) in real estate
tax impound fund 1,368 (900) (162)
Decrease (increase) in insurance
impound fund 6,648 (5,023) (1,581)
Increase in accounts payable and
accrued expenses 100 683 673
(Increase) decrease in deferred
rent credits (210) 102 (1,791)
Net security deposits paid (36) (195) (296)
---------- --------- --------
Net cash provided by operating
activities $ 65,521 $ 43,405 $ 75,800
========== ========= ========
See notes to financial statements
<PAGE>
MARVIN GARDENS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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) 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 in July 2003, and has
two five-year renewal options. For the years ended December 31, 1998, 1997 and
1996, rental subsidies for the Project totaled $308,541, $328,830 and $324,129,
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. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives using the straight-line method.
As of December 31, 1998, management does not believe that there are any
current facts or circumstances that would indicate impairment of rental property
in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method which approximates the effective interest 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.
Reclassifications
- -----------------
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1998 and 1997, the Partnership maintained tenant security
deposits of $10,677 and $9,989, 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 $132,552 and $137,955 at December 31, 1998 and 1997, 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 - PROPERTY AND EQUIPMENT
- -------------------------------
Investment in property and equipment consisted of the following at December
31, 1998 and 1997:
1998 1997
---- ----
Land $ 294,320 $ 294,320
Buildings and improvements 2,126,991 2,126,991
----------- -----------
2,421,311 2,421,311
Less accumulated depreciation 1,187,715 1,112,978
----------- -----------
$ 1,233,596 $ 1,308,333
=========== ===========
NOTE D - 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
mortgage is payable in monthly installments of principal and interest at the
rate of 8.15%, totalling $15,310. 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, 1998, are as follows:
December 31,
------------
1999 $ 59,171
2000 $ 64,178
2001 $ 69,908
2002 $ 75,498
2003 $ 81,887
Management believes that the carrying amount of the mortgage payable
approximates fair value at December 31, 1998, as there is no significant
difference in the market rate of interest for similar debt between that rate and
the rate of the mortgage.
NOTE E - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 1998 and 1997, 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, 1998, 1997 and
1996 were $17,782, $17,738 and $17,533, respectively. Effective September 1994,
CMJ Management Company, Inc. receives 30% of the monthly fee which totaled
$5,335, $5,321 and $5,112 for the years ended December 31, 1998, 1997 and 1996,
respectively. For the year ended December 31, 1998, incentive management fee
charged for the project totalled $981.
NOTE F - 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, 1998, 1997 and
1996, are as follows:
1998 1997 1996
---- ---- ----
Excess (deficiency) of revenue
over expenses per statements
of operations $ (12,193) $ (19,950) $ 6,274
GAAP to tax depreciation adjustment (30,842) (11,448) (13,924)
Deferred rental income adjustments (202) 102 (1,790)
---------- --------- ---------
Loss for Federal income tax purposes $ (43,237) $ (31,296) $ (9,440)
========== ========== =========
<PAGE>
NOTE G - 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, 1998.
NOTE H - YEAR 2000 ISSUE
- ------------------------
The general partner has assessed the Partnership's exposure to date
sensitive computer software programs that may not be operative subsequent to
1999 and has implemented a requisite course of action to minimize year 2000 risk
and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be year 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
NOTE I - CONTINUATION OF THE PARTNERSHIP
- ----------------------------------------
The Partnership agreement allows the limited partner to cause the sale of
the assets of the Partnership subsequent to June 30, 1995, but not earlier than
one year after it has given written notice of its desire to cause such sale to
the general partner, and only if, during such one-year period, the general
partner does not cause the sale of the Partnership's assets. If the 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 the assets to the general partner, and either the general
partner does not accept such offer within 90 days of receiving it, or the
general partner does not complete the sale in accordance with such offer after
accepting the terms. During October 1998, the limited partner gave the written
notice described above to the general partner of the Partnership. In light of
the decision by the limited partner to initiate this action under the terms of
the Partnership agreement, it is currently contemplated that the disposition of
the Partnership's assets and liquidation of the Partnership could be completed
by the end of calendar year 1999. There are no assurances, however, that the
disposition of the Partnership's assets and liquidation of the Partnership will
be completed within this time frame.
<PAGE>
[REZNICK FEDDER & SILVERMAN]
[letterhead]
INDEPENDENT AUDITORS' REPORT
To the Partners
Colonial Farms, Ltd.
We have audited the accompanying balance sheets of Colonial Farms, Ltd. as
of December 31, 1998 and 1997, and the related statements of operations,
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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, 1998 and 1997, 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, 1998, in conformity with generally accepted accounting
principles.
/s/ REZNICK FEDDER & SILVERMAN
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 4, 1999
<PAGE>
COLONIAL FARMS LTD.
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 69,430 $ 72,579
Rents receivable 1,100 12,634
Deposits 675 -
Prepaid expenses 4,808 3,021
---------- ----------
Total current assets 76,013 88,234
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Real estate tax impound fund 14,141 13,228
Replacement reserve fund 236,465 235,940
Insurance impound fund 8,961 16,164
Reserve fund for operations 43,101 41,172
Tenants' security deposits 25,281 23,520
Interest income receivable - impounds 3,370 3,631
---------- ----------
331,319 333,655
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,064,714 and $1,938,862 2,038,935 2,164,787
DEFERRED FINANCING COSTS, net of accumulated
amortization of $38,140 and $35,863 37,627 39,904
---------- ----------
Total assets $2,483,894 $2,626,580
========== ==========
LIABILITIES AND PARTNERS' DEFICITS
LIABILITIES
Current maturities of mortgage payable $ 92,191 $ 84,159
Accounts payable 22,286 21,127
Accrued expenses 20,046 27,789
Deferred rental income 2,868 464
---------- ----------
Total current liabilities 137,391 133,539
---------- ----------
Mortgage payable, less current maturities 2,536,750 2,628,942
Due to general partner 318,115 318,115
Tenants' security deposits 19,455 18,166
---------- ----------
Total liabilities 3,011,711 3,098,762
PARTNERS' DEFICIT (527,817) (472,182)
---------- ----------
Total liabilities and partners' deficit $2,483,894 $2,626,580
========== ==========
See notes to financial statements
<PAGE>
COLONIAL FARMS LTD.
STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
Rental income $ 786,081 $ 785,784 $ 786,180
Vacancies (23,294) (7,410) (9,462)
Financial revenue 16,527 17,490 15,910
Other income 32,685 23,694 19,315
--------- --------- ---------
Total revenue 811,999 819,558 811,943
--------- --------- ---------
Operating expenses
Administrative 68,108 34,428 29,578
Management fee 43,440 42,640 38,060
Utilities 31,434 34,619 32,942
Maintenance and repairs 167,816 155,984 129,475
Salaries 81,180 79,871 73,791
Insurance 13,372 12,135 12,794
Property taxes 42,663 41,368 40,322
--------- --------- ---------
Total operating expenses 448,013 401,045 356,962
--------- --------- ---------
Nonoperating expenses
Interest 244,135 244,011 258,803
Depreciation and amortization 128,129 128,173 124,258
Incentive management fee 7,060 7,060 7,060
Earned surplus reimbursement 12,058 69,666 2,610
--------- --------- ---------
Total nonoperating expenses 391,382 448,910 392,731
--------- --------- ---------
Total expenses 839,395 849,955 749,693
--------- --------- ---------
EXCESS (DEFICIENCY) OF
REVENUE OVER EXPENSES $ (27,396) $ (30,397) $ 62,250
========= ========= =========
See notes to financial statements
<PAGE>
COLONIAL FARMS LTD.
STATEMENTS OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
Special
General Limited Limited
Partners Partners Partner Total
-------- -------- ------- -----
<S> <C> <C> <C> <C>
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)
Distributions (565) (847) (26,827) (28,238)
Excess of expenses over revenue (548) (822) (26,026) (27,396)
--------- -------- --------- ---------
Balance, December 31, 1998 $(25,319) $(97,601) $(404,897) $(527,817)
======== ======== ========= =========
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, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Rental income received $776,725 $770,456 $778,056
Interest received 6,303 5,597 5,311
Other income received 32,685 23,694 19,315
Administrative expenses paid (68,108) (34,427) (29,578)
Management fees paid (43,440) (42,640) (38,060)
Utilities paid (31,434) (40,324) (32,942)
Salaries and wages paid (67,973) (67,643) (64,278)
Maintenance and repairs expenses paid (173,759) (166,198) (119,663)
Real estate taxes paid (42,663) (41,368) (40,322)
Payroll taxes paid (13,207) (12,228) (9,513)
Property and other insurance paid (15,834) (5,710) (13,451)
Interest paid on mortgage (244,776) (244,305) (259,330)
Incentive management fee paid (7,060) (7,060) (7,060)
Earned surplus reimbursement (12,058) (69,666) (2,610)
Increase in reserve fund for operations (1,929) (33) (358)
(Increase) decrease in real estate
tax impound fund (913) (793) 2,083
(Decrease) increase in insurance
impound fund 7,203 (6,654) (2,487)
Net security deposits (paid) received (472) (399) 241
-------- -------- --------
Net cash provided by operating
activities 99,290 60,299 185,354
-------- -------- --------
Cash flows from investing activities
Purchases of equipment - (21,366) (25,928)
Deposits to reserve for replacements (22,404) (22,404) (22,404)
Withdrawals from reserve for
replacements 32,364 24,391 37,933
-------- -------- --------
Net cash provided by (used in)
investing activities 9,960 (19,379) (10,399)
-------- -------- --------
Cash flows from financing activities
Repayment of mortgage payable (84,160) (76,827) (70,134)
Distributions (28,239) (28,238) (28,238)
-------- -------- --------
Net cash used in financing activities (112,399) (105,065) (98,372)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,149) (64,145) 76,583
Cash and cash equivalents, beginning 72,579 136,724 60,141
-------- -------- --------
Cash and cash equivalents, ending $ 69,430 $ 72,579 $136,724
======== ======== ========
See notes to financial statements
<PAGE>
COLONIAL FARMS LTD.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Reconciliation of excess (deficiency)
of revenue over expenses to net
cash provided by operating activities
Excess (deficiency) of revenue over
expenses $ (27,396) $(30,397) $ 62,250
Adjustments to reconcile excess
(deficiency) of revenue over
expenses to net cash provided by
operating activities
Depreciation 125,852 125,896 121,981
Amortization of deferred
financial costs 2,277 2,277 2,277
Interest earned on reserve for
replacements (10,485) (10,611) (10,681)
Changes in assets and liabilities
Decrease (increase) in tenant
accounts receivable 11,534 (8,010) 1,337
(Increase) decrease in prepaid
expenses (2,462) 6,425 (657)
Decrease (increase) in interest
income receivable - impounds 261 (1,282) 82
Net tenants' security deposits
(paid) received (472) (399) 241
(Increase) decrease in real estate
tax impound fund (913) (793) 2,083
Decrease (increase) in insurance
impound fund 7,203 (6,654) (2,487)
Increase in reserve fund for
operations (1,929) (33) (358)
(Decrease) increase in accounts
payable and accrued expenses (5,943) (10,507) 9,525
Decrease in accrued interest
payable (641) (5,705) (242)
Increase in rent deferred credits 2,404 92 3
--------- -------- --------
Net cash provided by
operating activities $ 99,290 $ 60,299 $185,354
========= ======== ========
See notes to financial statements
<PAGE>
COLONIAL FARMS, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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, 1998, 1997 and 1996, rental
subsidies for the Project totaled $531,063, $579,485, and $613,093,
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. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives using the straight-line method. As of
December 31, 1998, management does not believe that there are any current facts
or circumstanced that would indicate impairment of rental property in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized by the straight-line method over
the life of the related debt, which approximates the effective interest 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.
Reclassifications
- -----------------
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
At December 31, 1998 and 1997, the Partnership maintained tenant security
deposits of $25,281 and $23,520 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 $306,281 and $23,520 at December 31, 1998 and 1997, 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 - PROPERTY AND EQUIPMENT
- -------------------------------
Investment in property and equipment consisted of the following at
December 31, 1998 and 1997:
1998 1997
---- ----
Land $ 450,000 $ 450,000
Buildings and improvements 3,238,575 3,238,575
Furniture and equipment 415,074 415,074
----------- -----------
4,103,649 4,103,649
Less accumulated depreciation 2,064,714 1,938,862
----------- -----------
$ 2,038,935 $ 2,164,787
=========== ===========
NOTE D - 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 at the note of 9.15% and
monthly principal and interest payments of $27,411. 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, 1998, are as follows:
December 31,
-----------
1999 $ 92,191
2000 $ 110,990
2001 $ 110,637
2002 $ 121,186
2003 $ 132,751
Management believes that the carrying amount of the mortgage payable
approximates fair value at December 31, 1998, as there is no significant
difference in the market rate of interest for similar debt between that date and
the date of the mortgage.
NOTE E - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 1998 and 1997, 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, 1998, 1997, and 1996 were
$43,440, $42,640, and $38,060, respectively. CMJ Management Company, Inc. also
is entitled to receive an incentive management fee. For each of the years ended
December 31, 1998, 1997 and 1996, incentive fees charged for the project totaled
$7,060, in accordance with the terms of the supplemental management agreement.
<PAGE>
NOTE F - TAX BASIS (LOSS) INCOME
- --------------------------------
The reconciliation of the excess (deficiency) of revenue over expenses
reported in the statements of operations with the (loss) income reported on the
Federal income tax return for the years ended December 31, 1998, 1997, and 1996
follows:
1998 1997 1996
---- ---- ----
Excess (deficiency) of revenue
over expenses $ (27,396) $ (30,397) $ 62,250
GAAP to tax depreciation adjustment (53,713) (19,460) (20,336)
Deferred rental income adjustments 731 90 3
--------- --------- --------
(Loss) income for Federal income
tax purposes $ (80,378) $ (49,767) $ 41,917
========= ========= ========
NOTE G - 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 of credit risk exists with respect to these
cash balances as of December 31, 1998.
NOTE H - YEAR 2000 ISSUE
- ------------------------
The general partner has assessed the Partnership's exposure to date
sensitive computer software programs that may not be operative subsequent to
1999 and has implemented a requisite course of action to minimize year 2000 risk
and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be year 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
NOTE I - CONTINUATION OF THE PARTNERSHIP
- ----------------------------------------
The Partnership agreement allows the limited partner to cause the sale of
the assets of the Partnership subsequent to June 30, 1995, but not earlier than
one year after it has given written notice of its desire to cause such sale to
the general partner, and only if, during such one-year period, the general
partner does not cause the sale of the Partnership's assets. If the 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 the assets to the general partner, and either the general
partner does not accept such offer within 90 days of receiving it, or the
general partner does not complete the sale in accordance with such offer after
accepting the terms. During October 1998, the limited partner gave the written
notice described above to the general partner of the Partnership. In light of
the decision by the limited partner to initiate this action under the terms of
the Partnership agreement, it is currently contemplated that the disposition of
the Partnership's assets and liquidation of the Partnership could be completed
by the end of calendar year 1999. There are no assurances, however, that the
disposition of the Partnership's assets and liquidation of the Partnership will
be completed within this time frame.
<PAGE>
[REZNICK FEDDER & SILVERMAN]
[letterhead]
INDEPENDENT AUDITORS' REPORT
To the Partners
Holbrook Apartments Company
We have audited the accompanying balance sheets of Holbrook Apartments
Company as of December 31, 1998 and 1997, and the related statements of
operations, partners' deficit and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
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, 1998 and 1997, 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, 1998, in conformity with generally accepted accounting
principles.
/s/ REZNICK FEDDER & SILVERMAN
------------------------------
REZNICK FEDDER & SILVERMAN
Baltimore, Maryland
February 6, 1999
<PAGE>
HOLBROOK APARTMENTS COMPANY
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 514,632 $ 507,878
Accounts receivable 1,998 3,296
Other receivables 14,182 9,640
Prepaid expenses 15,871 16,022
---------- ----------
Total current assets 546,683 536,836
---------- ----------
RESTRICTED DEPOSITS AND FUNDED RESERVES
Mortgage escrow deposits 77,606 76,359
Reserve for replacements 496,439 458,768
---------- ----------
574,045 535,127
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,412,465 and $4,160,211 5,219,391 5,462,169
DEFERRED FINANCING COSTS, net of accumulated
amortization of $235,877 and $222,158 318,074 331,793
---------- ----------
Total assets $6,658,193 $6,865,925
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Current maturities of mortgage payable $ 110,538 $ 102,574
Accounts payable and accrued expenses 38,017 33,168
Accrued interest payable 45,308 45,949
Rent deferred credits 1,054 11,559
Due to affiliates 1,067 -
---------- ----------
Total current liabilities 195,984 193,250
LONG-TERM LIABILITIES
Mortgage payable, less current maturities 7,138,669 7,249,207
---------- ----------
Total liabilities 7,334,653 7,442,457
PARTNERS' DEFICIT (676,460) (576,532)
---------- ----------
Total liabilities and partners' deficit $6,658,193 $6,865,925
========== ==========
See notes to financial statements
<PAGE>
HOLBROOK APARTMENTS COMPANY
STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
Rental income $2,074,864 $2,079,319 $2,068,855
Vacancies (7,275) (4,727) (1,985)
Financial revenue 31,766 35,842 27,267
Other income 8,345 8,608 7,176
---------- ---------- ----------
Total revenue 2,107,700 2,119,042 2,101,313
---------- ---------- ----------
Expenses
Operating expenses
Administration 123,690 134,493 126,635
Utilities 81,913 112,614 85,403
Management fee 98,128 98,776 99,025
Maintenance and repairs 201,428 173,586 200,197
Salaries 195,890 214,500 219,486
Insurance 14,776 16,350 27,698
Real estate taxes 213,250 181,311 182,616
---------- ---------- ----------
Total operating expenses 929,075 931,630 941,060
---------- ---------- ----------
Nonoperating expenses
Interest 547,260 554,700 561,600
Mortgage insurance premium 36,480 36,979 37,438
Depreciation and amortization 265,973 268,185 261,682
Incentive management fee 153,231 146,297 133,795
---------- ---------- ----------
Total nonoperating expenses 1,002,944 1,006,161 994,515
---------- ---------- ----------
Total expenses 1,932,019 1,937,791 1,935,575
---------- ---------- ----------
EXCESS OF REVENUE OVER
EXPENSES $ 175,681 $ 181,251 $ 165,738
========== ========== ==========
See notes to financial statements
<PAGE>
HOLBROOK APARTMENTS COMPANY
STATEMENTS OF PARTNERS' DEFICIT
Years ended December 31, 1998, 1997 and 1996
General Limited
Partner Partner Total
------- ------- -----
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)
Distributions (41,341) (234,268) (275,609)
Excess of revenue over expenses 26,352 149,329 175,681
--------- --------- ----------
Partners' deficit, December 31, 1998 $(612,766) $ (63,694) $ (676,460)
========= ========= ==========
Profit and loss sharing percentage 15% 85% 100%
== == ===
See notes to financial statements
<PAGE>
HOLBROOK APARTMENTS COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Rental income received $2,061,424 $2,069,734 $2,083,642
Interest received 19,587 15,185 13,786
Other income received 3,803 28,030 -
Administrative expenses paid (123,690) (135,301) (125,604)
Management fees paid (98,128) (98,776) (99,025)
Utilities paid (81,913) (119,299) (88,920)
Maintenance and repairs expenses paid (199,621) (312,749) (63,637)
Real estate taxes paid (213,250) (181,311) (182,616)
Salaries paid (160,249) (181,164) (182,293)
Payroll taxes paid (15,194) (14,705) (15,854)
Property insurance paid (14,625) (14,811) (26,982)
Other taxes and insurance paid (20,447) (18,631) (21,339)
Interest paid on mortgage (547,901) (555,294) (562,152)
Mortgage insurance paid (36,480) (36,899) (37,367)
Increase in mortgage escrow deposits (1,247) (15,290) (18,174)
Mortgagor entity expenses paid (153,231) (146,297) (133,795)
Due to affiliates - net 1,067 - -
---------- ---------- ----------
Net cash provided by operating
activities 419,905 282,422 539,670
---------- ---------- ----------
Cash flows from investing activities
Additions to property and equipment (9,476) (52,029) (111,023)
Deposits to reserve for replacements (40,920) (40,920) (40,720)
Withdrawals from reserve for
replacements 15,428 47,190 91,862
---------- ---------- ----------
Net cash used in investing
activities (34,968) (45,759) (59,881)
---------- ---------- ----------
Cash flows from financing activities
Repayment of mortgage payable (102,574) (95,185) (88,328)
Distributions paid to partners (275,609) (265,208) (246,455)
---------- ---------- ----------
Net cash used in financing activities (378,183) (360,393) (334,783)
---------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 6,754 (123,730) 145,006
Cash and cash equivalents, beginning 507,878 631,608 486,602
---------- ---------- ----------
Cash and cash equivalents, ending $ 514,632 $ 507,878 $ 631,608
========== ========== ==========
See notes to financial statements
<PAGE>
HOLBROOK APARTMENTS COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Reconciliation of excess of revenue over
expenses to net cash provided by
operating activities
Excess of revenue over expenses $ 175,681 $ 181,251 $ 165,738
Adjustments to reconcile excess
of revenue over expenses to net
cash provided by operating
activities
Depreciation 252,254 254,644 248,141
Amortization of deferred
financing costs 13,719 13,541 13,541
Interest earned on replacement
reserves (12,179) (20,618) (8,912)
Changes in assets and liabilities
Decrease (increase) in accounts
receivable - tenants 1,298 (1,143) 6,087
Decrease (increase) in accounts
receivable - other (4,542) 18,908 (11,745)
Decrease in prepaid expenses 151 1,619 786
Increase in mortgage escrow
deposits (1,247) (15,290) (18,174)
Decrease in other assets - 475 -
Increase (decrease) in accounts
payable and accrued expenses 4,849 (146,656) 134,075
Decrease in accrued interest
payable (641) (594) (552)
(Decrease) increase in rent -
deferred credits (10,505) (3,715) 10,685
Increase in due to affiliates -
net 1,067 - -
--------- --------- ---------
Net cash provided by
operating activities $ 419,905 $ 282,422 $ 539,670
========= ========== =========
See notes to financial statements
<PAGE>
HOLBROOK APARTMENTS COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 using the straight-line method.
As of December 31, 1998, management does not believe that there are any
current facts or circumstances that would indicate impairment of the rental
property in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121.
Deferred Financing Costs
- ------------------------
Deferred financing costs are amortized over the term of the mortgage using
the straight-line method which approximates the effective interest method.
Rental Income
- -------------
Rental income is recognized as a 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 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
- ------------------------------------------------
The Partnership has a reserve for replacements and mortgage escrow deposits
totaling $574,045 and $535,127 at December 31, 1998 and 1997, 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.
<PAGE>
NOTE C - PROPERTY AND EQUIPMENT
- -------------------------------
Investment in property and equipment consisted of the following at December
31, 1998 and 1997:
1998 1997
---- ----
Land $ 390,000 $ 390,000
Buildings and improvements 9,006,073 8,998,646
Furniture and equipment 235,783 233,734
----------- -----------
9,631,856 9,622,380
Less accumulated depreciation 4,412,465 4,160,211
----------- -----------
$ 5,219,391 $ 5,462,169
=========== ===========
NOTE D - 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%.
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, 1998, are as follows:
December 31,
-----------
1999 $ 110,538
2000 $ 119,119
2001 $ 128,366
2002 $ 138,331
2003 $ 149,070
Management believes that the carrying amount of the mortgage payable
approximates fair value at December 31, 1998, as there is no significant
difference in the market rate of interest for similar debt between that date and
the date of the mortgage.
NOTE E - 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 1998,
1997 and 1996 were $1,573,691, $1,565,374 and $1,577,392, respectively.
NOTE F - RELATED PARTY TRANSACTIONS
- -----------------------------------
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 $98,128, $98,776 and $99,025 for the years 1998, 1997
and 1996, respectively. In addition, CMJ Management Company, Inc., received
incentive management fees of $153,231, $146,297 and $133,795 for the years ended
December 31, 1998, 1997 and 1996, 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 - 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 as follows:
1998 1997 1996
---- ---- ----
Excess of revenue over expenses
per statement of operations $ 175,681 $ 181,251 $ 165,738
Additional amortization of
deferred costs 8,571 8,393 8,393
GAAP to tax depreciation adjustment (52,693) 140,373 (32,751)
Deferred rental income adjustment (10,504) (3,715) 10,688
--------- --------- ---------
Income for Federal income tax
purposes $ 121,055 $ 326,302 $ 152,068
========= ========= =========
NOTE H - 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, 1998.
NOTE I - YEAR 2000 ISSUE
- ------------------------
The general partner has assessed the Partnership's exposure to date
sensitive computer software programs that may not be operative subsequent to
1999 and has implemented a requisite course of action to minimize year 2000 risk
and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities affecting the Partnership's
operations will be year 2000 compliant, the Partnership remains susceptible to
consequences of the Year 2000 Issue.
NOTE J - CONTINUATION OF THE PARTNERSHIP
- ----------------------------------------
The Partnership agreement allows the limited partner to cause the sale of
the assets of the Partnership subsequent to June 30, 1995, but not earlier than
one year after it has given written notice of its desire to cause such sale to
the general partner, and only if, during such one-year period, the general
partner does not cause the sale of the Partnership's assets. If the 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 the assets to the general partner, and either the general
partner does not accept such offer within 90 days of receiving it, or the
general partner does not complete the sale in accordance with such offer after
accepting the terms. During October 1998, the limited partner gave the written
notice described above to the general partner of the Partnership. In light of
the decision by the limited partner to initiate this action under the terms of
the Partnership agreement, it is currently contemplated that the disposition of
the Partnership's assets and liquidation of the Partnership could be completed
by the end of calendar year 1999. There are no assurances, however, that the
disposition of the Partnership's assets and liquidation of the Partnership will
be completed within this time frame.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
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0
0
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</TABLE>
