<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1997
Commission File Number 33-22857
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A California Limited Partnership)
I.R.S. Employer Identification No. 95-4166241
9090 WILSHIRE BLVD., SUITE 201
BEVERLY HILLS, CALIF. 90211
Registrant's Telephone Number,
Including Area Code (310) 278-2191
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve 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
---- ----
<PAGE> 2
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements and Notes to Financial Statements
Balance Sheets, September 30, 1997 and December 31, 1996 .................1
Statements of Operations,
Nine and Three Months Ended September 30, 1997 and 1996.............2
Statement of Partners' Capital (Deficiency)
Nine Months Ended September 30, 1997 ...............................3
Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996.......................4
Notes to Financial Statements ............................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................15
Item 6. Exhibits and Reports on Form 8-K.........................................17
Signatures ..........................................................................18
</TABLE>
<PAGE> 3
CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P.
(a California limited partnership)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Audited)
---------- ----------
<S> <C> <C>
RENTAL PROPERTY (Notes 1, 2 and 3) $34,189,715 $34,337,025
CASH AND CASH EQUIVALENTS (Note 1) 3,749,814 3,490,463
RESTRICTED CASH (Notes 1 and 5) 158,700 158,700
OTHER ASSETS (Note 5) 75,871 54,598
---------- ----------
$38,174,100 $38,040,786
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES (Note 4) $ 359,009 $ 413,457
PREPAID RENT 33,350 75,583
SECURITY DEPOSITS 302,682 315,244
---------- ----------
695,041 804,284
COMMITMENTS AND CONTINGENCIES (Note 5)
PARTNERS' CAPITAL (Note 1) 37,479,059 37,236,502
---------- ----------
$38,174,100 $38,040,786
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P.
(a California limited partnership)
STATEMENTS OF INCOME
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 199
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Rental income $4,364,707 $1,508,091 $3,966,912 $1,364,743
Interest and other income (Note 200,428 69,306 178,793 46,967
--------- --------- --------- ---------
4,565,135 1,577,397 4,145,705 1,411,710
--------- --------- --------- ---------
EXPENSES
Operating (Note 4) 909,943 202,535 859,409 333,754
Property taxes 270,128 134,551 312,340 178,818
Management fee - (Note 4) 130,169 59,805 150,550 71,038
General and administrative (Note 725,343 100,711 325,400 90,870
Depreciation 529,167 176,389 529,166 176,389
--------- ------- --------- -------
2,564,750 673,991 2,176,865 850,869
--------- ------- --------- -------
NET INCOME 2,000,385 $ 903,406 $1,968,840 $ 560,841
========= ========== ========== ==========
NET INCOME PER DEPOSITORY UNIT 0.28 $ 0.12 $ 0.27 $ 0.08
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statement
2
<PAGE> 5
CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P.
(a California limited partnership)
STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY)
NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
SPECIAL LIMITED
GENERAL LIMITED PARTNER
PARTNERS PARTNERS (NOTE 1) TOTAL
------------ ------------- ---------------- -----------
<S> <C> <C> <C> <C>
DEPOSITORY UNITS,
September 30, 1997 7,258,000
============
BALANCE, January 1, 1997 $ (278,165) $ 37,514,667 $ - $ 37,236,502
Distributions (17,578) (1,740,250) (1,757,828)
Net income for the nine months
ended September 30, 1997 20,004 1,980,381 - 2,000,385
----------- --------- ------- ---------
BALANCE, September 30, 19 $ (275,739) $ 37,754,798 $ - $ 37,479,059
=========== ============ ======= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P.
(a California limited partnership)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,000,385 $ 1,968,840
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 529,167 529,166
Increase in other assets (21,273) (77,410)
Decrease in accounts payable and accrued liabilities (54,448) 219,773
Decrease in due to general partner -- (150,000)
(Decrease) increase in security deposits (12,562) 18,427
(Decrease) increase in prepaid rent (42,233) 23,480
----------- -----------
Net cash provided by operating activities 2,399,036 2,532,276
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments receivable pursuant to the minimum distribution guarantee -- 175,000
Increase in rental property (381,857) (180,000)
----------- -----------
Net cash used in investing activities (381,857) (5,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (1,757,828) (1,668,326)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 259,351 858,950
CASH AND CASH EQUIVALENTS, beginning of period 3,490,463 2,738,045
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,749,814 $ 3,596,995
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statemen
4
<PAGE> 7
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
financial statements; accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements
and related notes thereto contained in the Annual Report for the year
ended December 31, 1996 prepared by Century HillCreste Apartment
Investors, L.P. (the "Partnership"). Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not
necessarily indicative of the results for the entire year.
In the opinion of NAPICO, the accompanying unaudited financial
statements contain all adjustments (consisting primarily of normal
recurring accruals) necessary to present fairly the financial position
as of September 30, 1997, and the results of operations for the nine and
three months then ended and changes in cash flows for the nine months
then ended.
ORGANIZATION
The Partnership, a California limited partnership, was formed on June 6,
1988, with National Partnership Investments Corp. ("NAPICO" or the
"Managing General Partner"), and HillCreste Properties Inc. (the
"Non-Managing General Partner") as the general partners. On October 26,
1988, the Partnership issued to investors (the "Limited Partners")
7,258,000 depositary units (each depositary unit being entitled to the
beneficial interest of a limited partnership interest) for a total
amount raised of $72,580,000, through a public offering.
Concurrent with the issuance of the depositary units, the Partnership
purchased a 315-unit luxury apartment complex in the Century City area
of Los Angeles, California (the "Property") from Casden Properties (the
"Seller"). To complete the purchase of the Property, the Seller
purchased a 10 percent special limited partnership interest in the
Partnership for $6,855,000 and became the Special Limited Partner of the
Partnership.
Among other things, the Partnership Agreement provides that the 10
percent special limited partnership interest is subordinate to the other
Limited Partners' specified priority return in the case of distributions
of net cash flow from operations, plus the other Limited Partners'
return of capital in the case of net sales or refinancing distribution
proceeds.
Casden Investment Corporation, an affiliate of the Seller, owns 100
percent of the outstanding common stock of the Managing General Partner.
5
<PAGE> 8
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
MINIMUM DISTRIBUTION GUARANTEE
The minimum distribution guarantee payments from the seller have been
reflected as a reduction in the carrying amount of the Property. For its
contribution of $6,855,000, the Seller has rights to receive an
allocation of the Partnership's net cash from operations after the
Limited Partners receive a specified priority return.
DEPRECIATION
Depreciation is reported using the straight-line method over the
estimated useful lives of the buildings and equipment as follows:
<TABLE>
<S> <C>
Buildings 35 years
Furniture and equipment 5 years
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and bank certificates of
deposit with an original maturity of three months or less. The
Partnership has its cash and cash equivalents on deposit primarily with
one money market mutual fund. Such cash and cash equivalents are
uninsured.
RESTRICTED CASH
Restricted cash consists of bank certificates of deposits assigned to
the City of Los Angeles in lieu of purchasing a subdivision improvement
bond to effectuate the privatization of city streets located within the
Property's perimeter (see Note 5).
INCOME TAXES
No provision has been made for income taxes in the accompanying
financial statements as such taxes, if any, are the liability of the
individual partners.
6
<PAGE> 9
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER DEPOSITORY UNIT
Net income per depository unit was computed by dividing the limited
partners' share of net income (99 percent) by the number of depository
units outstanding during the year. The number of depository units was
7,258,000 for the periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership adopted Statement of Financial Accounting Standards No.
121, Accounting for the Improvement of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of as of January 1, 1996 without a
significant effect on its financial statements. The Partnership reviews
long-lived assets to determine if there has been any permanent
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of the
expected future cash flows is less than the carrying amount of the
assets, the Partnership recognizes an impairment loss.
NOTE 2 - RENTAL PROPERTY
Rental property is carried at cost and consists of the following at
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 16,175,000 $ 16,175,000
Building 24,694,402 24,694,402
Furniture and equipment 3,870,000 3,870,000
Improvements 827,107 445,250
------------ ------------
45,566,509 45,184,652
Less accumulated depreciation (11,376,794) (10,847,627)
------------ ------------
$ 34,189,715 $ 34,337,025
============ ============
</TABLE>
In December 1996, Everest HillCreste Investors, LLC, an affiliate of
Everest Century Investors, LLC, ("Everest"), commenced a proxy
solicitation of the Limited Partners seeking to obtain sufficient votes
in order to (a) authorize Everest to notify the General Partners on
behalf of Limited Partners to call for a special meeting of the Limited
Partners, and (b) adopt a resolution at such meeting approving Everest's
proposal to purchase the Property for $40 million subject to certain
material conditions. On January 9, 1997, the Managing General Partner
advised the limited partners that the proposed purchase price was less
than the Property `s appraised value of $46.9 million as of February
1996, and that four other, non-binding purchase proposals had been
received for prices ranging from $40.2 million to $44.7 million, each
subject to various contingencies and conditions. The Managing General
Partner also informed the limited partners that Casden Properties, an
affiliate of the Managing General
7
<PAGE> 10
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 2 - RENTAL PROPERTY (CONTINUED)
Partner and the Special Limited Partner of the Partnership, has under
the terms of the Amended and Restated Agreement of limited partnership
(the "Partnership Agreement"), a right of first refusal to acquire the
Property for the proposed sales price and terms (the "Right of First
Refusal").
Subsequently, Everest has increased its offer by $7 million to $47
million (the "Everest Proposal"). Additionally, the Partnership has just
received (a) a report from an independent real estate appraisal firm
that the Property's current market value is approximately $47 million,
(b) a non-binding proposal from one of the four prior offerees proposing
to increase its offer to purchase the Property to $47.4 million, and (c)
a fifth non-binding purchase offer from an affiliate of the current
property manager for $48 million.
The Managing General Partner makes no recommendation as to the Everest
Proposal.
The Managing General Partner has been informed that its affiliate, the
Special Limited Partner, plans, subject to obtaining reasonable
financing, to exercise the aforementioned Right of First Refusal in the
event the Everest Proposal is approved.
NOTE 3 - MINIMUM DISTRIBUTION GUARANTEE RECEIVABLE FROM PARTNER
The Minimum Distribution Guarantee Agreement (the "Guarantee Agreement")
required the Seller, who is also the Special Limited Partner, to make
payments to the Partnership, if and when necessary, in an amount
sufficient to enable the Partnership to provide the Limited Partners
with distributions sufficient to achieve a minimum annual return upon
the Limited Partners' investment in the Partnership, through December
31, 1993, as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Annual Return on Investment
------------------------ ---------------------------
<S> <C> <C>
1988 8.0%
1989 8.0%
1990 8.5%
1991 9.0%
1992 9.0%
1993 9.0%
</TABLE>
Pursuant to a Memorandum of Understanding entered into on August 11,
1995, the Seller agreed to pay to the Partnership the sum of $350,000 in
two equal installments of $175,000 each; the first such $175,000 payment
was made in August 1995 and the second payment was made in May 1996.
These payments represent the amount of a real estate tax refund received
in 1994 for overpayment of prior year taxes which had previously been
offset against amounts receivable from the Seller under the Guarantee
Agreement. In addition, in August 1995, the Seller made an additional
payment of $135,000 pursuant to the Memorandum of Understanding
representing interest on late guarantee payments. This has been included
in interest income.
8
<PAGE> 11
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 3 - MINIMUM DISTRIBUTION GUARANTEE RECEIVABLE FROM PARTNER (CONTINUED)
Through December 31, 1996, the Seller has funded a total of $13,130,998
directly to the Partnership for distributions to the Limited Partners
pursuant to the Guarantee Agreement, which includes the $350,000,
referred to above. This amount has been reflected as a reduction in the
carrying amount of the property. The period covered by the Guarantee
Agreement expired on December 31, 1993. Except with respect to the
payments made in 1995 and 1996 pursuant to the Memorandum of
Understanding, commencing in 1994, distributions to the Partners have
been made from cash flow from operations.
NOTE 4 - FEES PAID TO GENERAL PARTNERS AND AFFILIATES
In accordance with the Partnership Agreement certain fees and
reimbursements are paid to the general partners and their affiliates as
follows:
(a) A Partnership management fee payable to the Managing General
Partner of $50,000 annually. The fee is included in general and
administrative expenses.
(b) Partnership expense reimbursements, payable to the Non-Managing
General Partner, not to exceed $50,000 annually. The Non-Managing
General Partner expense reimbursements for 1990 through 1996 in
the amount of $350,000, which were previously disputed, were paid
in the nine months ended September 30, 1997. Of this amount,
$50,000 was expensed in 1990 and was included in accounts payable
and accrued liabilities at December 31, 1996. The balance of
$300,000 was expensed and included in general and administrative
expenses for 1997. In addition, $37,500 has been accrued for the
nine months ended September 30, 1997.
(c) The Partnership is obligated to pay fees to the Managing General
Partner or its affiliates upon sale of the Property. The payment
of such fees are subordinated to certain preferred returns to the
Limited Partners.
(d) The Managing General Partner is entitled to receive 1 percent of
distributions (as defined in the Partnership Agreement). This is
paid quarterly by the Partnership to the Managing General
Partner.
(e) At December 31, 1995, $150,000 was estimated as due to the
Non-Managing General Partner for reimbursement of professional
fees paid on behalf of the Partnership in connection with issues
raised in the Memorandum of Understanding. The actual amount paid
in 1996 was $90,000, with the balance reversed against expenses.
9
<PAGE> 12
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES
(a) Construction Contracts
Approvals from the City of Los Angeles were obtained to
"privatize" the streets and alleys providing access to the
Property and to construct wrought iron security fencing with
controlled entrances into the Property. As a condition to its
approval of the proposed "privatization", the City of Los Angeles
required the construction of a storm drain and related
improvements, for which an improvement agreement and guarantee in
the amount $158,700 has been filed with the City of Los Angeles.
The Partnership has pledged a Certificate of Deposit in such
amount to the City to secure the improvement guarantee.
Contracts in the amount of $767,000 and $60,685 were awarded to
construct the wrought iron security fencing and to construct a
storm drain and related improvements, respectively, for which
construction work commenced in September 1996 and was to be
completed in October, 1997. As of September 30, 1997, $827,107
has been paid to the contractor.
(b) Litigation
The Managing General Partner of the Partnership is a plaintiff in
various lawsuits and has also been named as a defendant in other
lawsuits arising from transactions in the ordinary course of
business. In the opinion the Managing General Partner, the claims
are not expected to result in any material liability to the
Partnership. In addition, the Partnership is involved in the
actions described below:
(c) J/B Lawsuit
On February 13, 1997, J/B Investment Partners ("J/B") filed an
action in the Los Angeles Superior Court (the "J/B Lawsuit"),
against the Managing General Partner and its directors, and
Casden Properties and certain of its affiliates (collectively,
the "Defendants").
The J/B Lawsuit is styled as a class action brought against the
Defendants on behalf of all limited partners of the Partnership,
and commenced a proxy solicitation of the Limited Partners
seeking to obtain sufficient votes in order to (a) authorize
Everest to notify the General Partners on behalf of Limited
Partners to call for a special meeting of the Limited Partners,
and (b) adopt a resolution at such meeting approving Everest's
proposal to purchase the Property for $40 million subject to
certain material conditions. The J/B Lawsuit is styled as a class
action brought against the Defendants on behalf of all limited
partners of the Partnership and a derivative action brought on
behalf of the Partnership itself. The Partnership is named as a
"nominal defendant." The complaint in the J/B Lawsuit contains
four causes of action: (a) breach of fiduciary duty; (b) breach
of contract; (c) unjust enrichment; and (d) equitable relief.
10
<PAGE> 13
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The alleged wrongdoing of the Defendants as set forth in the J/B Lawsuit
relates to the following issues:
1. J/B alleges misappropriation and misuse of Partnership funds
which were the subject of a previous lawsuit (the "Prior
Lawsuit") filed in the Los Angeles Superior Court in June 1995 by
HillCreste Properties, Inc., the non-managing general partner of
the Partnership (the "Non-Managing General Partner"). The
Managing General Partner vigorously denied these allegations, and
without admission of any wrongdoing the Prior Lawsuit was settled
by a Memorandum of Understanding executed in August 1995, with
final settlement documentation executed in April 1996, at which
time the Prior Lawsuit was dismissed with prejudice as to all
defendants. Additionally, J/B alleges that the Defendants have
wrongfully caused the Partnership to pay legal fees on behalf of
the Managing General Partner or certain of its affiliates
relating to a regulatory investigation discussed above.
2. J/B alleges that the Defendants have failed to explore
transactions that would maximize the value of the limited
partners' investment in the Partnership, including the four
unsolicited offers to purchase the Property, implementation of an
auction process regarding the potential sale of the Property and
obtaining financing with respect to the Property.
3. J/B alleges that the January 1997 letter from the Managing
General Partner to the Limited Partners contained misleading
statements about the original Everest proxy solicitation and
about the Special Limited Partner's Right of First Refusal.
Specifically, J/B contends that the January letter failed to
disclose the Managing General Partner's advice and opinions
regarding the response of the Limited Partners to the original
Everest offer and contained misstatements about certain
provisions of the Partnership Agreement pertaining to actions
permitted or required to be taken by the Limited Partners of the
Partnership. J/B states that the Limited Partners are not
authorized, by vote of a majority-in-interest or otherwise, to
bind, compel, or require the Partnership to enter into any
contract for the sale of the Property, including the proposed
sales contract with Everest. In other words, J/B asserts that the
Everest Proposal cannot be implemented as proposed because it is
beyond the Limited Partners' authority under the Partnership
Agreement. Consequently, J/B claims that the conditions to the
Special Limited Partner's Right of First Refusal to purchase the
Property for a price and on terms equal to those contained in the
Everest Proposal cannot under the Partnership Agreement be
fulfilled, and, therefore, no such Right of First Refusal could
be exercised.
J/B seeks damages in the J/B Lawsuit in a unspecified amount and
equitable relief, including, among other things, a declaration
judgment as to whether or not there exists a Right of First
Refusal.
11
<PAGE> 14
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Managing General Partner strenuously disputes all of the
accusations of wrongdoing against it and its affiliates
alleged in the J/B Lawsuit, and defends the existence and
integrity of the Right of First Refusal, which was an
integral and material part of the financial structure of the
Partnership and was disclosed to the Limited Partners, in
the prospectus at the time of the original sale of units in
the Partnership. The Managing General Partner further
intends to vigorously defend the settlement of the Prior
Lawsuit.
It appears that J/B purchased or was assigned certain rights
with respect to 200 units in the Partnership in or about
1995.
The Special Limited Partnership has advised the Managing
General Partner and the Non-Managing General Partner that
the Right of First Refusal was a material inducement to the
Special Limited Partner's sale of the Property to the
Partnership, its purchase of a subordinated special limited
partnership interest in the Partnership for $6,855,000, and
its agreement to provide the Partnership with a Minimum
Distribution Guarantee pursuant to which the Special Limited
Partner paid a total of approximately $13,130,000 to the
Partnership to support distributions to the Limited
Partners. If, as a result of the J/B Lawsuit or otherwise,
the Special Limited Partner is not entitled to exercise the
Right of First Refusal with respect to the Everest Proposal
or in response to other similar situations, the Special
Limited Partner believes that it would be entitled to return
of its investment and all sums paid under the Minimum
Distribution Guarantee, together with interest thereon.
Moreover, the settlement of the Prior Lawsuit was reached
after extensive negotiations with the Non-Managing General
Partner which negotiated on behalf of the Partnership a
binding and conclusive settlement. If, as a result of the
J/B Lawsuit or otherwise, the settlement of the Prior
Lawsuit is set aside, the Managing General Partner and its
affiliates would seek a return of all funds paid to the
Partnership as a result of such settlement.
On April 1, 1997, Defendants filed pleadings with the Court
in which they challenged J/B's standing to pursue the J/B
Lawsuit as well as the legal sufficiency of the complaint in
the J/B Lawsuit. Prior to the hearing on those pleadings,
J/B filed an amended complaint. In the amended complaint,
J/B dismissed the J/B Lawsuit against six of the nine
defendants, but asserted claims against the Managing General
Partner, Casden Properties and an individual.
12
<PAGE> 15
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 27, 1997, the remaining Defendants again filed
pleadings in which they challenged J/B's standing to pursue
the J/B Lawsuit as well as the legal sufficiency of the
amended complaint in the J/B Lawsuit. On August 7, 1997, the
Court conducted a hearing on, among other things,
Defendants' assertion that J/B lacks standing to pursue the
J/B Lawsuit. The Court recognized that it appeared that
under California law, a limited partner but not a unitholder
has standing to pursue a class and derivative action, and
that J/B had not clearly alleged whether it was a limited
partner or a unitholder. The Court ordered J/B to file a
second amended complaint in which it alleges whether it is a
substitute limited partner or a unitholder, as those terms
are defined in the partnership agreement and under
California law. The Managing General Partner does not
believe that J/B has been admitted as a substitute limited
partner. J/B has until October 6, 1997 to file a second
amended complaint.
J/B failed to file a second amended complaint. Accordingly,
the remaining defendants have filed a motion to dismiss the
case which is set for hearing on November 25, 1997.
The J/B Lawsuit could result in delaying, complicating, or
preventing any significant transactions with respect to the
sale of the Property, and diminishing future distributions
to the Limited Partners until such case is resolved. In
addition, the Partnership is expected to incur significant
legal fees and expense to the extent of its responsibilities
to indemnify and hold the Defendants harmless under certain
provisions in the Partnership Agreement.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments. The carrying amount of assets
and liabilities reported on the balance sheets that require such
disclosure approximates fair value due to their short-term maturity.
13
<PAGE> 16
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Partnership raised proceeds of $72,580,000 from the sale of depository
units, pursuant to a public offering and received additional capital
contributions from the General Partners of $1,050 and from the special
limited partner of $6,855,000. Currently, the only sources of Partnership
income consist of income from rental operations at the Property and
interest earned on Partnership reserves.
In conjunction with the acquisition of the Property, the Partnership
received a Guarantee from the Special Limited Partner, (now an affiliate
of the Managing General Partner), which guarantee agreement (the
"Guarantee Agreement") required the Special Limited Partner to make
payments as provided in the Guarantee Agreement if and when necessary, in
an amount sufficient to enable the Partnership to provide the Limited
Partners with minimum distributions through December 1993.
Pursuant to the Memorandum of Understanding entered into on August 11,
1995, the Special Limited Partner agreed to pay to the Partnership the sum
of $350,000 in two equal installments of $175,000 each; the first such
$175,000 payment was made in August 1995 and the second payment was made
in May 1996. These payments represent the amount of a real estate tax
refund received in 1994 for overpayment of prior year taxes which had
previously been offset against amounts receivable from the Special Limited
Partner under the Guarantee Agreement.
Through September 30, 1997, the Special Limited Partner has funded
$13,130,998 directly to the Partnership for distributions to the Limited
Partners pursuant to the Guarantee Agreement, which includes the $350,000
referred to above. In addition, during 1995 the Partnership made a special
distribution to the Limited Partners in the amount of $135,000
representing interest on late guarantee payments. Commencing in 1994,
except with respect to the $350,000 and $135,000 described above,
contributions to the partners have been made from cash flow from
operations.
Approvals from the City of Los Angeles were obtained to "privatize" the
streets and alleys providing access to the Property and to construct
wrought iron security fencing with controlled entrances into the Property.
As a condition to its approval of the proposed "privatization", the City
of Los Angeles required the construction of a storm drain and related
improvements, for which an improvement agreement and guarantee in the
amount $158,000 has been filed with the City of Los Angeles. The
Partnership has pledged a Certificate of Deposit in such amount to the
City to secure the improvement guarantee. The construction of the wrought
iron security fencing, storm drain and related improvements commenced in
September 1996 and completed in October, 1997. The City of Los Angeles
will release the Certificate of Deposit after completion of inspection.
Occupancy averaged 97 percent and 95 percent for the nine months ended
September 30, 1997 and 1996, respectively, which explains the increase in
rental income in 1997. Expenses in 1997 increased primarily due to an
increase in bad debt and commission expense of $51,000, which is included
in operating expenses, and expense reimbursements of $387,500 to the
Non-Managing General partner, which is included in general and
administrative expenses.
14
<PAGE> 17
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1997
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 1997, NAPICO, the Managing General Partner, was a plaintiff
or defendant in several lawsuits, which are unrelated to the Partnership. In
addition, the Partnership is involved in the actions described below:
Securities and Exchange Commission
The Partnership, NAPICO, and several of NAPICO's officers, directors and
affiliates consented to the entry, on June 25, 1997, of an administrative cease
and desist order by the U.S. Securities and Exchange Commission, (the
"Commission"), without admitting or denying any of the findings made by the
Commission. The order concerns, in part, the treatment of Partnership funds
deposited between September 1991 and July 1993 in a master disbursement account
used by the Partnership's previous property management company. The Commission
found that those funds should have been recorded on the Partnership's books and
reported in its financial statements as related party accounts receivable rather
than as cash as done so by the Partnership's auditors. Although the Commission
found that this misclassification of current assets violated federal securities
laws, the Commission did not find that these violations were intentional nor did
the Commission find that limited partners had suffered any loss or damage as a
result of these violations. Moreover, the Commission's order does not impose any
cost, burden or penalty on the Partnership and does not impact NAPICO's ability
to serve as the Partnership's Managing General Partner.
The events that gave rise to the Commission's order occurred in or before 1993.
Subsequent corrective action by the Partnership and its general partners
precludes any recurrence of the cash management issues described in the
Commission's order.
J/B Lawsuit
On February 13, 1997, J/B Investment Partners ("J/B") filed an action in the Los
Angeles Superior Court (the "J/B Lawsuit"), against the Managing General Partner
and its directors, and Casden Properties and certain of its affiliates
(collectively, the "Defendants").
The J/B Lawsuit is styled as a class action brought against the Defendants on
behalf of all limited partners of the Partnership, and a derivative action
brought on behalf of the Partnership itself. The Partnership is named as a
"nominal defendant." The complaint in the J/B Lawsuit contains four causes of
action: (a) breach of fiduciary duty; (b) breach of contract; (c) unjust
enrichment; and (d) equitable relief.
The alleged wrongdoing of the Defendants as set forth in the J/B Lawsuit relates
to the following issues:
1. J/B alleges misappropriation and misuse of Partnership funds which were
the subject of a previous lawsuit (the "Prior Lawsuit") filed in the Los
Angeles Superior Court in June 1995 by HillCreste Properties, Inc., the
non-managing general partner of the Partnership (the "Non-Managing General
Partner"). The Managing General Partner vigorously denied these
allegations, and without admission of any wrongdoing the Prior Lawsuit was
settled by a Memorandum of Understanding executed in August 1995, with
final settlement documentation executed in April 1996, at which time the
Prior
15
<PAGE> 18
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1997
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
Lawsuit was dismissed with prejudice as to all defendants. Additionally,
J/B alleges that the Defendants have wrongfully caused the Partnership to
pay legal fees on behalf of the Managing General Partner or certain of its
affiliates relating to a regulatory investigation discussed above.
2. J/B alleges that the Defendants have failed to explore transactions that
would maximize the value of the limited partners' investment in the
Partnership, including the four unsolicited offers to purchase the
Property, implementation of an auction process regarding the potential
sale of the Property and obtaining financing with respect to the Property.
3. J/B alleges that the January 1997 letter from the Managing General Partner
to the Limited Partners contained misleading statements about the original
Everest proxy solicitation and about the Special Limited Partner's Right
of First Refusal. Specifically, J/B contends that the January letter
failed to disclose the Managing General Partner's advice and opinions
regarding the response of the Limited Partners to the original Everest
offer and contained misstatements about certain provisions of the
Partnership Agreement pertaining to actions permitted or required to be
taken by the Limited Partners of the Partnership. J/B states that the
Limited Partners are not authorized, by vote of a majority-in-interest or
otherwise, to bind, compel, or require the Partnership to enter into any
contract for the sale of the Property, including the proposed sales
contract with Everest. In other words, J/B asserts that the Everest
Proposal cannot be implemented as proposed because it is beyond the
Limited Partners' authority under the Partnership Agreement. Consequently,
J/B claims that the conditions to the Special Limited Partner's Right of
First Refusal to purchase the Property for a price and on terms equal to
those contained in the Everest Proposal cannot under the Partnership
Agreement be fulfilled, and, therefore, no such Right of First Refusal
could be exercised.
J/B seeks damages in the J/B Lawsuit in a unspecified amount and equitable
relief, including, among other things, a declaration judgment as to
whether or not there exists a Right of First Refusal.
The Managing General Partner strenuously disputes all of the accusations
of wrongdoing against it and its affiliates alleged in the J/B Lawsuit,
and defends the existence and integrity of the Right of First Refusal,
which was an integral and material part of the financial structure of the
Partnership and was disclosed to the Limited Partners, in the prospectus
at the time of the original sale of units in the Partnership. The Managing
General Partner further intends to vigorously defend the settlement of the
Prior Lawsuit.
It appears that J/B purchased or was assigned certain rights with respect
to 200 units in the Partnership in or about 1995.
The Special Limited Partnership has advised the Managing General Partner
and the Non-Managing General Partner that the Right of First Refusal was a
material inducement to the Special Limited Partner's sale of the Property
to the Partnership, its purchase of a subordinated special limited
partnership interest in the Partnership for $6,855,000, and its agreement
to provide the Partnership with a Minimum Distribution Guarantee pursuant
to which the Special Limited Partner paid a total of approximately
$13,130,000 to the Partnership to support distributions to the Limited
Partners. If, as a result of the J/B Lawsuit or otherwise, the Special
Limited Partner is not entitled to exercise the Right
16
<PAGE> 19
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1997
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
of First Refusal with respect to the Everest Proposal or in response to
other similar situations, the Special Limited Partner believes that it
would be entitled to return of its investment and all sums paid under the
Minimum Distribution Guarantee, together with interest thereon. Moreover,
the settlement of the Prior Lawsuit was reached after extensive
negotiations with the Non-Managing General Partner which negotiated on
behalf of the Partnership a binding and conclusive settlement. If, as a
result of the J/B Lawsuit or otherwise, the settlement of the Prior
Lawsuit is set aside, the Managing General Partner and its affiliates
would seek a return of all funds paid to the Partnership as a result of
such settlement.
On April 1, 1997, Defendants filed pleadings with the Court in which they
challenged J/B's standing to pursue the J/B Lawsuit as well as the legal
sufficiency of the complaint in the J/B Lawsuit. Prior to the hearing on
those pleadings, J/B filed an amended complaint. In the amended complaint,
J/B dismissed the J/B Lawsuit against six of the nine defendants, but
asserted claims against the Managing General Partner, Casden Properties
and an individual.
On June 27, 1997, the remaining Defendants again filed pleadings in which
they challenged J/B's standing to pursue the J/B Lawsuit as well as the
legal sufficiency of the amended complaint in the J/B Lawsuit. On August
7, 1997, the Court conducted a hearing on, among other things, Defendants'
assertion that J/B lacks standing to pursue the J/B Lawsuit. The Court
recognized that it appeared that under California law, a limited partner
but not a unitholder has standing to pursue a class and derivative action,
and that J/B had not clearly alleged whether it was a limited partner or a
unitholder. The Court ordered J/B to file a second amended complaint in
which it alleges whether it is a substitute limited partner or a
unitholder, as those terms are defined in the partnership agreement and
under California law. The Managing General Partner does not believe that
J/B has been admitted as a substitute limited partner. J/B has until
October 6, 1997 to file a second amended complaint.
J/B failed to file a second amended complaint. Accordingly, the remaining
defendants have filed a motion to dismiss the case which is set for
hearing on November 25, 1997.
The J/B Lawsuit could result in delaying, complicating, or preventing any
significant transactions with respect to the sale of the Property, and
diminishing future distributions to the Limited Partners until such case
is resolved. In addition, the Partnership is expected to incur significant
legal fees and expense to the extent of its responsibilities to indemnify
and hold the Defendants harmless under certain provisions in the
Partnership Agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports on Form 8-K were filed during the quarter ended September
30, 1997.
17
<PAGE> 20
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURY HILLCRESTE APARTMENT INVESTORS, L.P.
(a California limited partnership)
By: National Partnership Investments Corp.
Managing General Partner
----------------------------------
Bruce Nelson
President
Date:
---------------------------------
------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date:
---------------------------------
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PARTNERSHIP'S STATEMENT OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,908,514
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,984,385
<PP&E> 45,566,509
<DEPRECIATION> 11,376,794
<TOTAL-ASSETS> 38,174,100
<CURRENT-LIABILITIES> 359,009
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 37,479,059
<TOTAL-LIABILITY-AND-EQUITY> 38,174,100
<SALES> 0
<TOTAL-REVENUES> 4,565,135
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,564,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,000,385
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,000,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,000,385
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
