-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LaUYCyzTve9RFxE7c/aG3pOZbMWOvtxoLvXKFhXeLRa+3D8cuxWyDUYelh0ZVTfS 8qdfxh6PZu/BjeX3xRSekQ== 0000711393-97-000002.txt : 19970415 0000711393-97-000002.hdr.sgml : 19970415 ACCESSION NUMBER: 0000711393-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970414 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAINE WEBBER CMJ PROPERTIES LP CENTRAL INDEX KEY: 0000711393 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 042780288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17151 FILM NUMBER: 97579913 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15TH FL CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398118 10-K405 1 THIS IS A 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: DECEMBER 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number: 0-17151 PAINE WEBBER/CMJ PROPERTIES LP (Exact name of registrant as specified in its charter) Delaware 04-2780288 (State of organization) (I.R.S. Employer Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (617) 439-8118 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not applicable. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - --------- ------------------- Prospectus of registrant dated Part IV May 25, 1983, as supplemented PAINE WEBBER/CMJ PROPERTIES, LP 1996 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-4 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-6 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-6 Part III Item 10 Directors and Executive Officers of the Partnership III-1 Item 11 Executive Compensation III-3 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-75 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 receive 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, 1996, the Partnership owned, through local limited partnerships, interests in six apartment properties as set forth in the following table: Percent Name of Local Interest in Limited Partnership Date of Local Limited Name of Property Acquisition Partnership Location Size of Interest (1) (2) - ------------------------------ ---- ----------- ------------- Fawcett's Pond Apartments Company Village at Fawcett's Pond 100 6/30/83 95% Hyannis, Massachusetts units Quaker Meadows Apartments Company Quaker Court and The Meadows 104 6/30/83 95% Lynn, Massachusetts units South Laurel Apartments Limited Partnership Villages at Montpelier 520 6/30/83 85% Laurel, Maryland units Marvin Gardens Associates Marvin Gardens 37 7/29/83 95% Cotati, California units Colonial Farms Ltd. Colonial Farms 100 7/29/83 95% Modesto, California units Holbrook Apartments Company Ramblewood Apartments 170 8/30/83 85% Holbrook, Massachusetts units (1) The Partnership owns limited partnership interests in the local limited partnerships owning the apartment properties and improvements. (2) See Notes to the Financial Statements filed with this Annual Report for current outstanding mortgage balances and a description of the long-term mortgage indebtedness collateralized by the operating property investments of the local limited partnerships and for a description of the local limited partnership agreements through which the Partnership has acquired these real estate investments. The Partnership's original investment objectives were to invest the net cash proceeds from the offering of limited partnership units in rental apartment properties receiving various forms of federal, state or local assistance with the goals of providing: (1) tax losses from deductions generated by investments; (2) capital preservation; (3) potential capital appreciation; and (4) potential future cash distributions from operations (on a limited basis), or from the sale or refinancing of the projects owned by the local limited partnerships, or from the sale of interests in the local limited partnerships. The Partnership has generated tax losses since inception. However, the benefits of such losses to investors have been significantly reduced by changes in federal income tax law subsequent to the organization of the Partnership. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1996, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and the majority of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Given the improvements in cash flow and the strong operating performances of the investment properties in recent years, management had instituted a program of regular quarterly distributions in 1994 at an annual rate of 2% on original invested capital. As discussed further in Item 7, during 1996 distributions to the Partnership from the local limited partnerships declined, causing management to suspend distributions effective for the fourth quarter of 1996 until further notice. Distributions paid to the Limited and General Partners totalled $177,000 during 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 will make annual distribution payments each November. Given the current operating performance of the properties, it is likely that if a distribution is paid in November 1997, it would be made at an annual rate of 1% on invested capital. 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 is a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the General Partners of the local limited partnerships, which receive management fee revenues from the properties, to attempt to sell any of the properties in the near term. As discussed further in Item 7, as a limited partner in the local limited partnerships, the Partnership's ability to influence major business decisions, including any decision to sell the properties, is restricted under the terms of the agreements. All of the properties owned by the local limited partnerships in which the Partnership invested are located in real estate markets in which they face competition for the revenues they generate. The Partnership's apartment complexes, which are all government-assisted, low-income housing facilities, compete with several projects of similar type generally on the basis of price, location and amenities. The tenants at the Partnership's apartment properties are not as likely to be candidates for single-family home ownership as tenants of non-subsidized properties would be. Therefore, competition from the single family home market is not a significant factor. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable. The Partnership has no real estate investments located outside the United States. The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated (PWI), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"). The Managing General Partner of the Partnership is PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser. The associate general partner is Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. Item 2. Properties The Partnership has acquired interests in six operating properties through investments in local limited partnerships. The local limited partnerships and related properties are referred to under Item 1 above to which reference is made for the description, name, location, and ownership interest in each property. Occupancy figures for each quarter during 1996, along with an average for the year, are presented below for each property: Percent Occupied At ------------------------------------------- 1996 3/31/96 6/30/96 9/30/96 12/31/96 Average ------- ------- ------- -------- ------- Village at Fawcett's Pond Apartments 100% 99% 100% 100% 100% Quaker Court and The Meadows 99% 99% 99% 98% 99% Villages at Montpelier Apartments 94% 94% 95% 96% 95% Marvin Gardens Apartments 98% 100% 100% 100% 100% Colonial Farms Apartments 98% 99% 99% 100% 99% Ramblewood Apartments 100% 99% 100% 99% 100% Item 3. Legal Proceedings In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including PaineWebber Shelter Fund, Inc. and Properties Associates ("PA") which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation. The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in PaineWebber/CMJ Properties, LP, PaineWebber, Paine Webber Shelter Fund, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in PaineWebber/CMJ Properties, LP, also alleged that following the sale of the partnership interests, PaineWebber, Paine Webber Shelter Fund, Inc. and PA misrepresented financial information about the Partnerships value and performance. The amended complaint alleged that PaineWebber, Paine Webber Shelter Fund, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO. In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties have agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which provided for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement was held in December 1996, and in March 1997 the court issued a final approval of the settlement. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleged, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint sought compensatory damages of $15 million plus punitive damages against PaineWebber. Mediation with respect to the Abbate action was held in December 1996. As a result of such mediation, a settlement between PaineWebber and the plaintiffs was reached which provides for the complete resolution of such action. Final releases and dismissals with regard to this action are expected to be received in April 1997. Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for the amounts it is required to pay in connection with the settlement of the New York Limited Partnership Actions. At the present time, the General Partners cannot estimate the impact, if any, of any other potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements of the Partnership. The Partnership and the local limited partnerships are not subject to any other material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters At December 31, 1996 there were 901 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. The Managing General Partner will not redeem or repurchase Units. Reference is made to Item 6 below for a discussion of the amount of cash distributions made to the Limited Partners during 1996. Item 6. Selected Financial Data Paine Webber/CMJ Properties, LP (In thousands, except per Unit data) Years Ended December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues $ 98 $ 244 $ 179 $ 293 $ 208 Expenses $ 280 $ 288 $ 268 $ 289 $ 285 Partnership's share of local limited partnerships' income $ 157 $ 174 $ 186 $ 203 $ 162 Net income (loss) $ (25) $ 130 $ 97 $ 207 $ 85 Cash distributions per Limited Partnership Unit $ 20.00 $20.00 $10.00 - - Net income (loss) per Limited Partnership Unit $ (2.82) $14.75 $11.01 $23.45 $ 9.63 Total assets $ 415 $ 486 $ 525 $ 729 $ 519 (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 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 receive various forms of federal, state or local assistance and that may 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, 1996, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and the majority of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Given the improvements in cash flow and the strong operating performances of the investment properties in recent years, in 1994 management had instituted a program which provided for the payment of regular quarterly distributions at an annual rate of 2% on original invested capital. As discussed further below, during 1996 distributions to the Partnership from the local limited partnerships declined, causing management to suspend distributions effective for the fourth quarter of 1996 until further notice. In the future, to the extent there is distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership will make annual distribution payments each November. Management of the Partnership is currently in the process of reviewing the properties in detail with the affiliate of the operating general partners which manages the day-to-day operations of the investment properties to assess each property's potential operating performance over the next two years. Nonetheless, given the current environment of rising property operating and capital improvement costs, and the strict restrictions on available cash flow from the properties, it is likely that if a distribution is paid in November 1997, it would only be made at an annual rate of 1% on invested capital. The Partnership received distributions totalling $310,000 in 1996 from four of the six local limited partnership investments. In 1995, the Partnership had received distributions from all six investments which totalled $435,000. The distributions received in 1996 represented the available cash flow for distribution as of December 31, 1995, as determined by the general partners of the local limited partnerships in accordance with the partnership, financing and regulatory agreements. No distributions were received in 1996 from the Villages at Montpelier and Marvin Gardens limited partnerships. At the Villages at Montpelier limited partnership, which distributed $63,000 to the Partnership in 1995, the local general partner decided to withhold excess cash flow to pay clean-up costs resulting from a leak in the property's underground oil tanks. During the current year, the underground tanks were drained, cleaned and filled under the supervision of the Maryland Department of Environmental Protection which was satisfied with the remediation work. At the Marvin Gardens limited partnership, which distributed $27,000 to the Partnership in 1995, the local general partner decided to reserve additional funds for capital improvements in the current year. Distributions from the Quaker Meadows, Colonial Farms and Holbrook partnerships also declined slightly in the current year primarily due to increased expenditures in 1995 for repairs and maintenance and capital improvements. Average occupancy levels at all six properties in which the Partnership has invested remained in the mid-to-high 90% range for the year ended December 31, 1996. Cash flow from the properties in which the Partnership has invested 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 rental subsidy payments made by federal or state housing agencies. These features, which are characteristic of all subsidized low-income housing properties, significantly limit the pool of potential buyers for these real estate assets. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the general partners of the local limited partnerships, which receive management fee revenues from the properties, to attempt to sell any of the properties in the near term. As a limited partner of the local limited partnerships, the Partnership does not control property disposition decisions. The partnership agreements state that the limited partner may cause the sale of the assets of the local limited partnerships subsequent to June 30, 1995, but not earlier than one year after it has given written notice to the operating general partner of its intent to cause such sale, and only if, during such one year period, the operating general partner does not cause the sale of such assets. If the operating general partner has not caused the assets of the partnership to be sold within such one year period the limited partner may cause such sale, but only after it has offered to sell such assets to the operating general partner, and either the operating general partner does not accept such offer within 90 days of receiving it, or the operating general partner does not complete the sale in accordance with such offer after accepting the terms. All six of the Partnership's operating investment properties receive rental subsidy payments from the federal government under Section 8 of the National Housing Act. With the exception of The Villages at Montpelier Apartments, which has only 20% of its units restricted for low-income housing, the subsidy agreements covering the operating investment properties do not expire for another 4-to-6 years. The subsidy agreement covering the 20% portion of The Villages at Montpelier Apartments is scheduled to expire in July 1997. The agreement does not provide for any renewal options, and the general partner of the local limited partnership which owns The Villages at Montpelier Apartments does not have any current plans to apply for an extension of this subsidy agreement. Accordingly, during the second half of 1997 the subsidized units at the property are expected to be converted to market rent units. There is likely to be at least a temporary decline in occupancy as these units are re-leased. Based on current market conditions, management believes that the units currently designated as low-income units could be re-leased at market rates which would keep the total revenues of the local limited partnership relatively unchanged from the current subsidized level. In addition, if the market for conventional multi-family apartment properties remains strong in 1997, 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 over this period. If conditions were to deteriorate, The Villages at Montpelier Apartments could experience extended declines in occupancy and revenues upon the expiration of the subsidy agreement. For the five properties which contain 100% low-income housing units, the government subsidy payments range from 75% to 82% of the total revenues of the related local limited partnerships. At the present time, certain legislative initiatives and governmental budget negotiations could result in a reduction in funds available for the various HUD-administered housing programs and new limitations on subsidized rent levels. Such changes could adversely impact the net operating income generated by the local limited partnerships. In light of the uncertainty regarding the near term prospects for government assisted, low-income housing and the restrictions on the Partnership's ability to cause a sale of the operating properties, management does not have any plans, at the present time, to initiate the sale process under the terms of the agreements described above. A decision as to whether to take such actions to initiate the sale process with respect to any or all of the operating investment properties in the future will be based upon a number of factors including the availability of a pool of qualified buyers, an evaluation of the future of the relevant subsidy programs, the availability of financing and an assessment of local market conditions. If, as expected, the regulatory agreement on The Villages at Montpelier Apartments expires in 1997, the decision of whether to initiate a sale process for that property would be based on a more traditional analysis of existing market conditions and future appreciation potential. At December 31, 1996, the Partnership had available cash and cash equivalents of approximately $323,000, which it intends to use for its working capital requirements and for distributions to 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. Such sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis. Results of Operations - -------------------- 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 is 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. 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 the current year. 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 the current year, which partially offset the decline in income. Distributions from the Fawcett's Pond partnership were recorded as reductions to the investment carrying value to the extent of the current year income recognition 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 is attributable to a $137,000 decline in other income from local limited partnerships. As discussed further in Note 2 to the financial statements, distributions from the local limited partnerships are recorded as other income for those investments for which the Partnership's equity method carrying value has been reduced to zero. With the exception of Fawcett's Pond, distributions from which remained unchanged, distributions from the five local limited partnerships with carrying values of zero declined by varying amounts in 1996 generally due to rising operating expenses and increases in capital expenditures. In addition, as discussed further above, a portion of the distributions received from the Fawcett's Pond partnership in 1996 were recorded as reductions to the investment's carrying value. Also contributing to the decrease in total revenues was a $9,000 decline in interest income on invested cash reserves. The decline in general and administrative expenses was mainly due to decreases in certain required professional services. 1995 Compared to 1994 - --------------------- The Partnership recorded net income of $130,000 for the year ended December 31, 1995, as compared to net income of $97,000 for 1994. The increase in net income of $33,000 was mainly the result of an increase in other income from local limited partnerships of $64,000. As noted above, distributions from the local limited partnerships are recorded as income for those investments for which the Partnership's equity method carrying value has been reduced to zero. Distributions totalling $221,000 from five partnerships were recorded as other income in the year ended December 31, 1995, as compared to $157,000 from the same five partnerships for 1994. The favorable change in other income from local limited partnerships was partially offset by an increase of $20,000 in the Partnership's general and administrative expenses in 1995. In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. Five of the Partnership's six investments had an equity method basis of zero as of December 31, 1995 and 1994. Distributions from the Holbrook Apartments Company (Ramblewood Apartments), the only remaining investment which still has a positive equity method carrying value, are recorded as reductions of the investment carrying value and totalled $214,000 and $250,000 for 1995 and 1994, respectively. Distributions from the other five limited partnerships increased by $64,000 in 1995, as reflected in the change in other income. This increase resulted primarily from an increase of $47,000 in distributions from The Villages at Montpelier Apartments, which, as noted above, is the only one of the Partnership's properties which is not 100% low-income housing. The distributions received in 1995 reflected the available cash flow from 1994 operations. The Partnership's recorded share of local limited partnerships' income in 1995 consisted of income of $174,000 from the Ramblewood Apartments limited partnership, as compared to income of $186,000 from the same partnership in 1994. Net income was down slightly at Ramblewood, mainly due to increases in salaries expense and real estate taxes. Overall, an increase in combined property operating expenses of $282,000 for the six local limited partnerships exceeded the increase in combined revenues of $75,000. Occupancy levels remained high throughout 1995 with average occupancy above 95% at all properties. Revenues were up at all properties except at The Villages at Montpelier Apartments. At The Villages at Montpelier Apartments, revenues decreased slightly during 1995 due to a temporary decline in occupancy experienced in the third quarter. Occupancy at The Villages at Montpelier Apartments averaged 95% for 1995, but dropped to 91% in August 1995 as a result of management's efforts to increase rental rates for the market-rate units. Management stepped up its marketing efforts in conjunction with the rate increases. After the initial decline in occupancy, the marketing efforts generated positive results as the occupancy level recovered and the number of prospective tenants visiting the property increased. Expenses in general were up at all of the local limited partnerships with repairs and maintenance expenses running higher in 1995 at these properties due to a combination of their ages, applicable regulatory requirements and management's operating philosophy. Such expenses do, however, fluctuate from year to year. 1994 Compared to 1993 - --------------------- For the year ended December 31, 1994, the Partnership recorded net income of $97,000, as compared to net income of $207,000 for the prior year. The decrease in net income was the result of a decrease in other income from local limited partnerships and a decrease in the Partnership's share of local limited partnerships' income. These unfavorable changes in net income were offset, in part, by a decrease in general and administrative expenses of $21,000 for 1994. Five of the six investments had an equity method basis of zero as of December 31, 1994 and 1993. Other income from local limited partnerships reflects cash distributions received from investments which have an equity method basis of zero. Distributions from the Holbrook Apartments Company (Ramblewood Apartments), the only remaining investment which had a positive equity method carrying value, are recorded as reductions of the investment carrying value and totalled $250,000 and $204,000 for 1994 and 1993, respectively. Distributions from the other five limited partnerships declined by $123,000 in 1994, as reflected in the change in other income. This decrease resulted primarily from a decline in distributions from the Fawcett's Pond limited partnership of $54,000 and a drop in distributions from The Villages at Montpelier Apartments of $76,000. The distributions received in 1994 reflect the available cash flow from 1993 operations. The decline in distributions from these two properties primarily related to certain extraordinary maintenance projects completed in 1993. The Partnership's recorded share of local limited partnerships' income in 1994 consisted of income of $186,000 from the Ramblewood Apartments limited partnership. In the prior year, income of $206,000 from the operations of the Ramblewood Apartments was recorded in addition to a loss of $3,000 from the Colonial Farms limited partnership. The carrying value of the Partnership's investment in Colonial Farms was reduced to zero during 1993. The decrease in income from the Ramblewood Apartments in 1994 is mainly the result of higher management fees and real estate tax expenses. In the aggregate, rental revenues increased at five of the six investment properties during 1994. The combined total rental revenues increased by $218,000, with the largest increase occurring at The Villages at Montpelier Apartments. Occupancy levels remained stable throughout 1994 at the Fawcett's Pond, Marvin Gardens, Quaker Court and Meadows and Ramblewood properties. At Colonial Farms, revenues decreased slightly during 1994 due to a temporary decline in occupancy experienced in the second and third quarters. Occupancy at Colonial Farms averaged 99% for 1993. Average occupancy for 1994 declined to 96%, although the property had rebounded to 98% as of December 31, 1994. The increase in revenues at The Villages at Montpelier Apartments was primarily attributable to the increase in the average occupancy of the property, from 89% for 1993 to 93% for 1994. In addition, management was able to reduce the level of concessions used to attract tenants throughout 1994. In addition to the improvement in revenues, the combined total expenses of the six operating properties decreased by $201,000 in 1994, primarily due to a decrease in repairs and maintenance expenses at certain of the properties. Several non recurring maintenance projects were completed at the properties during 1993. Inflation - --------- The Partnership completed its thirteenth full year of operations in 1996. 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 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 37 8/22/96 Terrence E. Fancher Director 43 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 49 10/29/85 James A. Snyder Senior Vice President 51 7/6/92 David F. Brooks First Vice President and Assistant Treasurer 54 12/10/82 * Timothy J. Medlock Vice President and Treasurer 35 6/1/88 Thomas W. Boland Vice President 34 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. James A. Snyder is a Senior Vice President of the Managing General Partner and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously as an officer of PWPI from July 1980 to August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution Trust Corporation where he served as the Vice President of Asset Sales prior to re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am Investors, Inc., a real estate investment company. During the period August 1987 to February 1989, Mr. Snyder was Executive Vice President and Chief Financial Officer of Southeast Regional Management Inc., a real estate development company. David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services. Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985. Thomas W. Boland is a Vice President of the Managing General Partner and a Vice President and Manager of Financial Reporting 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, 1996, 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 August 15, 1994 for the quarter ended June 30, 1994 to November 15, 1996 for the quarter ended September 30, 1996. The Partnerships quarterly distributions were suspended effective for the quarter ended December 31, 1996 due to an unexpected decline in the cash flow distributions from the local limited partnerships in which the Partnership has invested. In addition, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) The Partnership is a limited partnership issuing Units of limited partnership interest, not voting securities. All the outstanding stock of the Managing General Partner, PW Shelter Fund, Inc. is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, general partners of which are also officers of the Adviser and the Managing General Partner. Properties Associates is also the Initial Limited Partner of the Partnership and owns one Unit of limited partnership interest. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. (b) Neither officers and directors of the Managing General Partner nor the general partners of the Associate General Partner, individually, own any Units of limited partnership interest of the Partnership. No officer or director of the Managing General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of limited partnership interest of the Partnership. (c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions The General Partners of the Partnership are PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. In addition, the Managing General Partner and the Adviser are reimbursed for their out-of-pocket expenses relating to the offering of Units, the administration of the Partnership and the acquisition and operation of the Partnership's real property investments. Distributable cash, as defined, if any, for each fiscal year shall be distributed annually in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds will be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities, to administer the day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee of .5% of invested assets for these services. Invested assets is the sum of the amount invested by the Partnership in each local limited partnership plus a proportionate interest in the mortgage debt initially incurred by the local limited partnerships. The Adviser earned management fees of $199,000 for the year ended December 31, 1996. Accounts payable - affiliates at December 31, 1996 consists of management fees of $132,000 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, 1996 is $32,000, 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, 1996. 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. 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 1996. (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. 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 Dated: April 11, 1997 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: April 11, 1997 ------------------- -------------- Bruce J. Rubin Director By: /s/ Terrence E. Fancher Date: April 11, 1997 ----------------------- -------------- Terrence E. Fancher Director ANNUAL REPORT ON FORM 10-K Item 14(a)(3) PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO EXHIBITS
Page Number in the Report Exhibit No. Description of Document Or Other Reference - ----------- ----------------------- --------------------------- (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 supplemented, with particular reference. reference to the Restated Certificate and Agreement of Limited Partnership (10) Material contracts previously Filed with the Commission pursuant to filed as exhibits to registration Section 13 or 15(d) of the Securities Act statements and amendments thereto of 1934 and incorporated herein by of the registrant together with all reference. 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, 1996 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.
ANNUAL REPORT ON FORM 10-K Item 14(a) (1) and (2) and 14(d) PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS Reference --------- Paine Webber/CMJ Properties, LP Independent Auditors' Report F-4 Balance sheets at December 31, 1996 and 1995 F-5 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-6 Statements of changes in partners' capital (deficit) for the years ended December 31, 1996, 1995 and 1994 F-7 Statement of cash flows for the years ended December 31, 1996, 1995 and 1994 F-8 Notes to financial statements F-9 Fawcett's Pond Apartments Company Independent Auditors' Report F-21 Balance sheets at December 31, 1996 and 1995 F-22 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-23 Statements of partners' deficit for the years ended December 31, 1996, 1995 and 1994 F-24 Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-25 Notes to financial statements F-27 Quaker Meadows Apartments Company Independent Auditors' Report F-30 Balance sheets at December 31, 1996 and 1995 F-31 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-32 Statements of partners' deficit for the years ended December 31, 1996, 1995 and 1994 F-33 Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-34 Notes to financial statements F-36 PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS - continued Reference --------- South Laurel Apartments Limited Partnership Independent Auditors' Report F-39 Balance sheets at December 31, 1996 and 1995 F-40 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-41 Statements of partners' deficit for the years ended December 31, 1996, 1995 and 1994 F-42 Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-43 Notes to financial statements F-45 Marvin Gardens Associates Independent Auditors' Report F-49 Balance sheets at December 31, 1996 and 1995 F-50 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-51 Statements of partners' deficit for the years ended December 31, 1996, 1995 and 1994 F-52 Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-53 Notes to financial statements F-55 Colonial Farms, Ltd. Independent Auditors' Report F-58 Balance sheets at December 31, 1996 and 1995 F-59 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-60 Statements of partners' deficit for the years ended December 31, 1996, 1995 and 1994 F-61 Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-62 Notes to financial statements F-64 PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS - continued Reference --------- Holbrook Apartments Company Independent Auditors' Report F-67 Balance sheets at December 31, 1996 and 1995 F-68 Statements of operations for the years ended December 31, 1996, 1995 and 1994 F-69 Statements of partners' deficit for the years ended December 31, 1996, 1995 and 1994 F-70 Statements of cash flows for the years ended December 31, 1996, 1995 and 1994 F-71 Notes to financial statements F-73 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. 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, 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, 1996 in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman REZNICK FEDDER & SILVERMAN Baltimore, Maryland March 20, 1997 PAINE WEBBER/CMJ PROPERTIES, LP BALANCE SHEETS December 31, 1996 and 1995 (In thousands, except per Unit amounts) ASSETS 1996 1995 ---- ---- Investments in local limited partnerships, at equity $ 92 $ 161 Cash and cash equivalents 323 325 -------- ------- $ 415 $ 486 ======== ======= LIABILITIES AND PARTNERS' CAPITAL Accrued expenses $ 21 $ 22 Accounts payable - affiliates 132 - -------- -------- 153 22 Partners' capital: General Partners: Capital contributions 1 1 Cumulative net losses (70) (70) Cumulative distributions (5) (3) 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 (6,906) (6,881) Cumulative distributions (437) (262) -------- ------- Total partners' capital 262 464 -------- ------- $ 415 $ 486 ======== ======= The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF OPERATIONS For the years ended December 31, 1996, 1995 and 1994 (In thousands, except per Unit amounts) 1996 1995 1994 ---- ---- ---- Revenues: Interest income $ 14 $ 23 $ 22 Other income from local limited partnerships 84 221 157 ------ ------ ------- 98 244 179 Expenses: Management fees 199 199 199 General and administrative 81 89 69 ------ ------ ------- 280 288 268 ------ ------ ------- Operating loss (182) (44) (89) Partnership's share of local limited partnerships' income 157 174 186 ------ ------ ------- Net income (loss) $ (25) $ 130 $ 97 ====== ====== ======= Net income (loss) per Limited Partnership Unit $(2.82) $14.75 $ 11.01 ====== ====== ======= Cash distributions per Limited Partnership Unit $20.00 $20.00 $ 10.00 ====== ====== ======= 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. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended December 31, 1996, 1995 and 1994 (In thousands) General Limited Partners Partners Totals -------- -------- ------ Balance at December 31, 1993 $ (71) $ 573 $ 502 Cash distributions (1) (87) (88) Net income 1 96 97 ------ ------ ------ Balance at December 31, 1994 (71) 582 511 Cash distributions (2) (175) (177) Net income 1 129 130 ------ ------ ------ Balance at December 31, 1995 (72) 536 464 Cash distributions (2) (175) (177) Net loss - (25) (25) ------ ------ ------ Balance at December 31, 1996 $ (74) $ 336 $ 262 ====== ====== ====== The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (25) $ 130 $ 97 Adjustments to reconcile net income (loss) to net cash used in operating activities: Other income from local limited partnerships (84) (221) (157) Partnership's share of local limited partnerships' income (157) (174) (186) Changes in assets and liabilities: Accrued expenses (1) 8 (8) Accounts payable - affiliates 132 - (204) ----- ----- ------ Total adjustments (110) (387) (555) ----- ----- ------ Net cash used in operating activities (135) (257) (458) ----- ----- ------ Cash flows from investing activities: Distributions from local limited partnerships 310 435 407 ----- ----- ------ Net cash provided by investing activities 310 435 407 ----- ----- ------ Cash flows from financing activities: Distributions to partners (177) (177) (88) ------ ----- ------ Net cash used in financing activities (177) (177) (88) ----- ----- ------ Net (decrease) increase in cash and cash equivalents (2) 1 (139) Cash and cash equivalents, beginning of year 325 324 463 ------ ----- ------ Cash and cash equivalents, end of year $ 323 $ 325 $ 324 ====== ===== ====== The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP NOTES TO FINANCIAL STATEMENTS December 31, 1996 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 receive 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, 1996, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and the majority of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Given the improvements in cash flow and the strong operating performances of the investment properties in recent years, management had instituted a program of regular quarterly distributions in 1994 at an annual rate of 2% on original invested capital. Effective for the fourth quarter of 1996, due to an unexpected decline in the level of cash flow distributions from the local limited partnerships, distributions to the partners were suspended until further notice. In the future, to the extent there is distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership will make annual distribution payments each November. 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 is a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the General Partners of the local limited partnerships, which receive management fee revenues from the properties, to attempt to sell any of the properties in the near term. As discussed further in Note 4, as a limited partner in the local limited partnerships, the Partnership's ability to influence major business decisions, including any decision to sell the properties, is restricted under the terms of the agreements. 2. Use of Estimates and Summary of Significant Accounting Policies The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of December 31, 1996 and 1995 and revenues and expenses for each of the three years in the period ended December 31, 1996. 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, 1996. The carrying amount of cash and cash equivalents approximates their fair value as of December 31, 1996 due to the short-term maturities of these instruments. No provision for income taxes has been made, as the liability for such taxes is that of the partners rather than the Partnership. The cumulative difference between the book basis and tax basis of the Partnership's investment in local limited partnerships is approximately $17,374,000 due to the losses on investments recognized on the tax basis in excess of the book basis. 3. The Partnership Agreement and Related Party Transactions The General Partners of the Partnership are PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. Distributable cash, as defined, if any, for each fiscal year shall be distributed annually in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds will be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities, to administer the day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee of .5% of invested assets for these services. Invested assets is the sum of the amount invested by the Partnership in each local limited partnership plus a proportionate interest in the mortgage debt initially incurred by the local limited partnerships. The Adviser earned management fees of $199,000 for each of the three years in the period ended December 31, 1996. Accounts payable - affiliates at December 31, 1996 consists of management fees of $132,000 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. Included in general and administrative expenses for the years ended December 31, 1996, 1995 and 1994 is $32,000, $32,000 and $38,000, 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, $2,000 and $1,000 (included in general and administrative expenses) for managing the Partnership's cash assets during 1996, 1995 and 1994, respectively. 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, 1996 and 1995 (In thousands) Assets 1996 1995 ---- ---- Current assets $ 1,877 $ 1,685 Restricted deposits and funded reserves 2,060 1,965 Operating investment property, net 25,621 26,565 Other assets 1,046 1,088 --------- -------- $ 30,604 $31,303 ======== ======= Liabilities and Capital Current liabilities and tenant security deposits $ 1,461 $ 1,303 Due to general partner 2,508 2,509 Long-term mortgage debt, less current portion 32,847 33,368 Partnership's share of combined partners' deficit accounts (3,104) (2,826) Local partners' shares of combined partners' deficit accounts (3,108) (3,051) -------- ------- $ 30,604 $31,303 ======== ======= Condensed Combined Summary of Operations For the years ended December 31, 1996, 1995 and 1994 (In thousands) 1996 1995 1994 ---- ---- ---- Rental revenues, including government subsidies $ 9,975 $ 9,891 $ 9,851 Other income 86 103 68 -------- ------- ------- 10,061 9,994 9,919 Property operating expenses 5,733 5,701 5,419 Interest expense and mortgage insurance 2,964 3,005 3,042 Depreciation and amortization 1,347 1,294 1,246 --------- ------- -------- 10,044 10,000 9,707 -------- ------- -------- Net income (loss) $ 17 $ (6) $ 212 ======== ======= ======== Net income (loss): Partnership's share of operations $ 32 $ (15) $ 183 Local partners' share of operations (15) 9 29 -------- ------- -------- $ 17 $ (6) $ 212 ======== ======= ======== Reconciliation of Partnership's share of operations (In thousands) 1996 1995 1994 ---- ---- ---- Partnership's share of operations, as shown above $ 32 $ (15) $ 183 Losses in excess of basis not recognized by Partnership 278 234 108 Income offset with prior year unrecognized losses (153) (45) (105) ------- ------ ------- Partnership's share of local limited partnerships' income $ 157 $ 174 $ 186 ======= ====== ======= Reconciliation of Partnership's Investments (In thousands) 1996 1995 ---- ---- Partnership's share of combined partners' deficit accounts, as shown above $(3,104) $(2,826) Accumulated losses in excess of basis not recognized by Partnership 2,103 1,978 Cumulative distributions in excess of investment basis 1,078 994 Excess basis in local limited partnerships 15 15 ------- ------- Investments in local limited partnerships, at equity $ 92 $ 161 ======= ======= "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 partnership agreements which determine the distribution of available funds, the disposition of the limited partnership's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the local limited partnership. As a limited partner of the local limited partnerships, the Partnership does not control property disposition decisions. The partnership agreements state that the limited partner may cause the sale of the assets of the local limited partnerships subsequent to June 30, 1995, but not earlier than one year after it has given written notice to the operating general partner of its intent to cause such sale, and only if, during such one year period, the operating general partner does not cause the sale of such assets. If the operating general partner has not caused the assets of the partnership to be sold within such one year period the limited partner may cause such sale, but only after it has offered to sell such assets to the operating general partner, and either the operating general partner does not accept such offer within 90 days of receiving it, or the operating general partner does not complete the sale in accordance with such offer after accepting the terms. "Investments in local limited partnerships, at equity" on the balance sheets is comprised of the following local limited partnership investments, at the balances indicated (in thousands): 1996 1995 ---- ---- Fawcett's Pond Apartments Company $ - $ - Quaker Meadows Apartments Company - - South Laurel Apartments Limited Partnership - - Marvin Gardens Associates - - Colonial Farms Ltd. - - Holbrook Apartments Company 92 161 ------ ------ Investments in local limited partnerships, at equity $ 92 $ 161 ====== ====== The Partnership received cash distributions from the limited partnerships as set forth below (in thousands): 1996 1995 1994 ---- ---- ---- Fawcett's Pond Apartments Company $ 24 $ 24 $ 24 Quaker Meadows Apartments Company 50 66 59 South Laurel Apartments Limited Partnership - 63 16 Marvin Gardens Associates - 27 12 Colonial Farms Ltd. 27 40 46 Holbrook Apartments Company 209 215 250 ----- ----- ------ $ 310 $ 435 $ 407 ===== ===== ====== The investments in Quaker Meadows Apartments Company, South Laurel Apartments Limited Partnership, Marvin Gardens Associates and Colonial Farms Ltd. at December 31, 1996 do not reflect accumulated losses therefrom of $1,175,000, $670,000, $157,000 and $101,000, 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 1996, 1995 and 1994 were $756,000, $768,000 and $769,000, respectively. Such amounts comprised approximately 77%, 79% and 81%, 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, 1996 of approximately $4,282,000, 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 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 $1,105,725 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, 1996. 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 1996, 1995 and 1994 were $1,320,000, $1,335,000 and $1,321,000, respectively. Such amounts comprised approximately 82% of the limited partnership's total revenues in each of such years. The aggregate investment by the Partnership for the 95% interest was $1,378,906 (including an acquisition fee of $104,525 paid to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan payable to the Massachusetts Housing Finance Agency (MHFA). The mortgage loan is due September 1, 2013 with an outstanding balance at December 31, 1996 of approximately $5,202,000, 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, HUD and MHFA to the extent of surplus cash, as defined. 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 $29,000, $45,000 and $38,000 were paid to an affiliate of the local general partners for the years ended December 31, 1996, 1995 and 1994, 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 agreement expires July 31, 1997, and the general partner of the local limited partnership does not have any current plans to apply for an extension of this subsidy agreement. Based on current market conditions, management believes that the units currently designated as low-income units could be re-leased at market rates which would keep the total revenues of the local limited partnership relatively unchanged from the current subsidized level. In addition, if the market for conventional multi-family apartment properties remains strong in 1997, 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 over this period. If conditions were to deteriorate, The Villages at Montpelier Apartments could experience extended declines in occupancy and revenues upon the expiration of the subsidy agreement. Total rent subsidies received by the limited partnership during 1996, 1995 and 1994 were $686,000, $677,000 and $694,000, respectively. Such amounts comprised approximately 17% 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, 1996 of approximately $11,987,000, payable to GNMA in monthly installments of $86,395 including principal and interest at 7.5%. The restated partnership agreement generally provides that the Partnership will receive 85% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 15% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and HUD to the extent of surplus cash, as defined by HUD. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributable in that year. Generally, the first $3,107,104 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 5.25% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $1,000 were paid to an affiliate of the local general partners for 1995. No incentive management fees were earned for the year ended December 31, 1996 and 1994. 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 1996, 1995 and 1994 were $324,000, $337,000 and $332,000, respectively. Such amounts comprise approximately 77%, 81% and 82%, 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, 1996 of approximately $1,661,000, payable to the California Housing Finance Agency (CHFA) in monthly installments of $15,138, including principal and interest at 8.15%. The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and CHFA to $20,151 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $462,336 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners who in turn hired an unaffiliated management agent to provide management services on their behalf. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $12,000 and $2,000 were paid to an affiliate of the local general partners for the years ended December 31, 1995 and 1994, respectively. No incentive management fees were earned for the year ended December 31, 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 1996, 1995 and 1994 were $613,000, $586,000 and $556,000, respectively. Such amounts comprised approximately 76%, 74% and 72%, 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, 1996 of approximately $2,790,000, 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, $16,000 and $20,000 were paid to an affiliate of the local general partners for the years ended December 31, 1996, 1995 and 1994, respectively. 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 1996, 1995 and 1994 were $1,577,000, $1,587,000 and $1,577,000, respectively. Such amounts comprised approximately 75%, 75% and 76% 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, 1996 of approximately $7,447,000, 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 $134,000, $138,000 and $166,000 were paid to an affiliate of the local general partners for the years ended December 31, 1996, 1995 and 1994, respectively. 5. Legal Proceedings ----------------- In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including PaineWebber Shelter Fund, Inc. and Properties Associates ("PA") which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation. The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in PaineWebber/CMJ Properties, LP, PaineWebber, Paine Webber Shelter Fund, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in PaineWebber/CMJ Properties, LP, also alleged that following the sale of the partnership interests, PaineWebber, Paine Webber Shelter Fund, Inc. and PA misrepresented financial information about the Partnerships value and performance. The amended complaint alleged that PaineWebber, Paine Webber Shelter Fund, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO. In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties have agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which provided for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement was held in December 1996, and in March 1997 the court issued a final approval of the settlement. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleged, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint sought compensatory damages of $15 million plus punitive damages against PaineWebber. Mediation with respect to the Abbate action was held in December 1996. As a result of such mediation, a settlement between PaineWebber and the plaintiffs was reached which provides for the complete resolution of such action. Final releases and dismissals with regard to this action are expected to be received in April 1997. Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for the amounts it is required to pay in connection with the settlement of the New York Limited Partnership Actions. At the present time, the General Partners cannot estimate the impact, if any, of any other potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. 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, 1996 and 1995, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fawcett's Pond Apartments Company as of December 31, 1996 and 1995, and the results of its operations, changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ REZNICK, FEDDER & SILVERMAN ------------------------------- REZNICK, FEDDER & SILVERMAN Baltimore, Maryland January 24, 1997 Fawcett's Pond Apartments Company BALANCE SHEETS December 31, 1996 and 1995 ASSETS 1996 1995 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 323,202 $ 239,549 Accounts receivable 1,617 1,218 Prepaid expenses 13,556 14,016 ----------- ----------- Total current assets 338,375 254,783 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 25,439 24,400 Mortgage escrow deposits 35,682 34,824 Reserve for replacements 251,321 222,853 ----------- ----------- 312,442 282,077 PROPERTY AND EQUIPMENT, less accumulated depreciation of $2,037,707 and $1,892,521 3,454,822 3,556,441 DEFERRED FINANCING COSTS, net of accumulated amortization of $113,948 and $105,784 222,807 230,969 ----------- ----------- Total assets $ 4,328,446 $ 4,324,270 =========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 49,479 $ 45,914 Accounts payable and accrued expenses 22,673 22,046 Accrued interest payable 26,762 27,049 Rent deferred credits 807 583 ----------- ----------- Total current liabilities 99,721 95,592 LONG-TERM LIABILITIES Mortgage payable, less current maturities 4,232,494 4,281,973 Due to general partner 277,400 277,400 Tenants' security deposits 20,680 21,170 ----------- ----------- Total liabilities 4,630,295 4,676,135 PARTNERS' DEFICIT (301,849) (351,865) ----------- ----------- Total liabilities and partners' deficit $ 4,328,446 $ 4,324,270 =========== =========== See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Revenue Rental income $942,059 $940,355 $935,002 Vacancies - - (1,128) Financial revenue 19,420 16,052 6,579 Other income 16,066 16,371 15,236 -------- -------- -------- Total revenue 977,545 972,778 955,689 Expenses Operating expenses Marketing 1,090 804 801 Administration 55,198 53,043 52,130 Utilities 33,018 35,578 27,940 Management fee 47,114 46,933 46,686 Maintenance and repairs 79,914 129,259 90,131 Salaries 85,196 73,337 72,087 Payroll taxes 7,252 - - Insurance 22,073 21,667 21,674 Real estate taxes 66,913 65,567 61,375 -------- ---------- -------- Total operating expenses 397,768 426,188 372,824 Nonoperating expenses Interest 322,748 326,076 329,165 Mortgage insurance premium 21,515 21,737 21,943 Depreciation and amortization 153,348 144,403 142,344 Incentive management fee 6,303 6,303 6,303 Miscellaneous financial expenses 633 632 615 -------- ---------- -------- Total nonoperating expenses 504,547 499,151 500,370 -------- ---------- -------- Total expenses 902,315 925,339 873,194 -------- ---------- -------- EXCESS OF REVENUE OVER EXPENSES $ 75,230 $ 47,439 $ 82,495 ======== ========== ======== See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1996, 1995 and 1994 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1993 $(78,428) $(352,943) $(431,371) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 4,125 78,370 82,495 -------- --------- --------- Partners' deficit, December 31, 1994 (75,564) (298,526) (374,090) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 2,372 45,067 47,439 -------- --------- --------- Partners' deficit, December 31, 1995 (74,453) (277,412) (351,865) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 3,762 71,468 75,230 -------- --------- --------- Partners' deficit, December 31, 1996 $(71,952) $(229,897) $(301,849) ======== ========= ========= Profit and loss sharing percentage 5% 95% 100% = == === See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Rental income received $ 942,011 $ 938,666 $ 933,799 Interest received 12,900 9,468 2,599 Other income received 15,939 15,625 15,089 Administrative expenses paid (88,517) (83,865) (46,686) Management fees paid (47,114) (46,933) (83,189) Utilities paid (32,268) (35,266) (27,959) Maintenance and repairs expenses paid (133,004) (160,520) (123,364) Real estate taxes paid (66,913) (65,567) (61,375) Payroll taxes paid (7,252) (7,107) (7,812) Property insurance paid (9,614) (10,191) (9,909) Other taxes and insurance paid (12,074) (11,664) (11,161) Interest paid on mortgage (323,035) (326,342) (329,413) Mortgage insurance paid (21,440) (21,667) (21,877) Miscellaneous financial expenses paid (633) (632) (615) Increase (decrease) in mortgage escrow deposits (858) 378 (3,704) Mortgagor entity expenses paid (6,303) (6,303) (6,303) Net security deposits paid (1,529) (138) (899) --------- --------- --------- Net cash provided by operating activities 220,296 187,942 217,221 Cash flows from investing activities Additions to property and equipment (43,567) (41,945) (101,603) Deposits to reserve for replacements (21,948) (21,948) (22,440) --------- --------- --------- Net cash used in investing activities (65,515) (63,893) (124,043) Cash flows from financing activities Repayment of mortgage payable (45,914) (42,607) (39,538) Distributions (25,214) (25,214) (25,214) --------- --------- --------- Net cash used in financing activities (71,128) (67,821) (64,752) --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 83,653 56,228 28,426 Cash and cash equivalents, beginning 239,549 183,321 154,895 --------- --------- --------- Cash and cash equivalents, ending $ 323,202 $ 239,549 $ 183,321 ========= ========= ========= See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of excess of revenue over expenses to net cash provided by operating activities Excess of revenue over expenses $75,230 $47,439 $ 82,495 Adjustments to reconcile excess of revenue over expenses to net cash provided by operating activities Depreciation 145,186 136,241 134,182 Amortization 8,162 8,162 8,162 Interest earned on reserve for replacements (6,520) (6,584) (3,980) Changes in assets and liabilities Increase in accounts receivable (399) (746) (76) (Increase) decrease in mortgage escrow deposits (858) 378 (3,704) Increase in tenants' security deposits - net (1,529) (138) (899) Decrease (increase) in prepaid expenses 460 (118) 670 Increase in accounts payable and accrued expenses 627 5,263 758 Decrease in accrued interest payable (287) (266) (248) Decrease (increase) in rent-deferred credits 224 (1,689) (139) -------- ------- -------- Net cash provided by operating activities $220,296 $187,942 $ 217,221 ======== ======== ========= See notes to financial statements Fawcett's Pond Apartments Company NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Partnership was formed as a limited partnership under the laws of the State of Massachusetts on June 30, 1983, for the purpose of constructing and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 100 units located in Hyannis, Massachusetts and is currently operating under the name of Fawcett's Pond Apartments. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions 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 market. Property and Equipment ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. Deferred Financing Costs ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method. Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - CASH HELD IN ESCROW FOR TENANT SECURITY DEPOSITS At December 31, 1996 and 1995, the Partnership maintained tenant security deposits of $7,822 and $4,843, respectively, in an interest-bearing escrow bank account. At December 31, 1996, tenant security deposits included $17,617 in a U.S. Treasury Bill at a 5.275% interest rate which matures May 31, 1997. At December 31, 1995, tenant security deposits included $19,557 in a U.S. Treasury Bill at a 5.483% interest rate which matured on June 1, 1995. The investment in a U.S. Treasury Bill is held to maturity and is carried at cost which approximates market. NOTE C - MORTGAGE PAYABLE The mortgage payable represents a permanent mortgage from the Government National Mortgage Association (GNMA) which is insured by the Federal Housing Administration (FHA) and is collateralized by a deed of trust on the rental property. The mortgage, which is due April 1, 2024, is payable in equal monthly installments of principal and interest totalling $30,746 and bears interest at a rate of 7.5%. Interest incurred during December 31, 1996, 1995 and 1994 amounted to $322,748, $326,076 and $329,165, respectively. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1996 are as follows: December 31 ----------- 1997 $49,479 1998 $53,320 1999 $57,459 2000 $61,920 2001 $66,727 NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants for all units. The agreement expires August 19, 2002. Total housing assistance payments received during 1996, 1995 and 1994 were $755,658, $768,409 and $769,446, respectively. NOTE E - RELATED PARTY TRANSACTIONS Due to General Partners ----------------------- At December 31, 1996 and 1995, 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 $47,114, $46,933 and $46,686 for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, CMJ Management Company received incentive management fees of $6,303 for each of the years ended December 31, 1996, 1995 and 1994. Reimbursed Costs ---------------- CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting services, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE F - TAX BASIS INCOME The reconciliation of the excess of revenue over expenses reported in the accompanying statements of operations with the income (loss) reported on the Federal income tax basis follows: 1996 1995 1994 ---- ---- ---- Excess of revenue over expenses per statements of operations $75,230 $ 47,439 $82,495 Additional depreciation and amortization on tax basis (65,916) (75,550) (63,352) Increase (decrease) in deferred rental income 224 (1,689) (139) ------- -------- ------- Income (loss) for Federal income tax purposes $ 9,538 $(29,800) $19,004 ======= ======== ======= NOTE G - CONCENTRATION OF CREDIT RISK The Partnership maintains its cash balances in one bank, which consists of an operating account and security deposits held in trust. The operating account is comprised of an overnight repurchase agreement backed by government securities and a checking account. The security deposits held in trust are comprised of a United States Treasury Bill and a savings account. Account balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by the bank. The Partnership also has a reserve for replacements and escrow funds totalling $287,003 at December 31, 1996, on deposit with Reilly Mortgage Group, Inc. 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, 1996 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations, changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ REZNICK, FEDDER & SILVERMAN ------------------------------- REZNICK, FEDDER & SILVERMAN Baltimore, Maryland January 24, 1997 Quaker Meadows Apartments Company BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 263,637 $ 154,566 Accounts receivable 2,572 2,772 Other receivables 15,092 16,114 Prepaid expenses 9,785 10,394 ----------- ----------- Total current assets 291,086 183,846 RESTRICTED DEPOSITS AND FUNDED RESERVES Mortgage escrow deposits 12,774 16,938 Reserve for replacements 297,906 265,353 Tenants' security deposits 18,787 20,009 ----------- ----------- 329,467 302,300 PROPERTY AND EQUIPMENT, less accumulated depreciation of $3,787,391 and $3,526,272 3,979,215 4,208,046 DEFERRED FINANCING COSTS, net of accumulated amortization of $58,461 and $54,396 71,690 75,755 ----------- ----------- Total assets $ 4,671,458 $ 4,769,947 =========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 106,768 $ 94,935 Accounts payable and accrued expenses 55,280 42,822 Accrued interest payable 60,082 60,082 Rent deferred credits 3,787 2,519 ----------- ----------- Total current liabilities 225,917 200,358 LONG-TERM LIABILITIES Mortgage payable, less current maturities 5,094,845 5,201,613 Due to general partner 1,072,952 1,072,952 Tenants' security deposits 16,617 15,892 ----------- ----------- Total liabilities 6,410,331 6,490,815 PARTNERS' DEFICIT (1,738,873) (1,720,868) ----------- ----------- Total liabilities and partners' deficit $ 4,671,458 $ 4,769,947 =========== =========== See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Revenue Rental income $1,592,837 $1,596,066 $1,589,728 Vacancies (6,464) (5,331) (350) Other income 26,537 27,834 13,819 ----------- ---------- ---------- Total revenue 1,612,910 1,618,569 1,603,197 Expenses Operating expenses Administration 106,695 122,910 128,528 Management fees to affiliate 63,511 63,546 63,567 Utilities 125,632 125,584 122,063 Maintenance and repairs 252,230 310,136 282,689 Insurance 15,286 15,416 16,208 Real estate taxes 43,376 65,161 65,218 ----------- ---------- ---------- Total operating expenses 606,730 702,753 678,273 Nonoperating expenses Interest 660,698 671,237 680,607 Depreciation and amortization 265,184 261,148 258,164 Incentive management fee to affiliate 29,375 45,390 38,239 Social services expenses 16,387 23,062 20,081 Total nonoperating expenses 971,644 1,000,837 997,091 ----------- ---------- ---------- Total expenses 1,578,374 1,703,590 1,675,364 ----------- ---------- ---------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $ 34,536 $ (85,021) $ (72,167) =========== ========== ========== See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1996, 1995 and 1994 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1993 $(317,147) $(1,114,500) $(1,431,647) Distributions (3,107) (59,036) (62,143) Excess of expenses over revenue (3,608) (68,559) (72,167) --------- ----------- ----------- Partners' deficit, December 31, 1994 (323,862) (1,242,095) (1,565,957) Distributions (3,494) (66,396) (69,890) Excess of expenses over revenue (4,251) (80,770) (85,021) --------- ----------- ----------- Partners' deficit, December 31, 1995 (331,607) (1,389,261) (1,720,868) Distributions (2,627) (49,914) (52,541) Excess of revenue over expenses 1,727 32,809 34,536 --------- ----------- ----------- Partners' deficit, December 31, 1996 $(332,507) $(1,406,366) $(1,738,873) ========= =========== =========== Profit and loss sharing percentage 5% 95% 100% = == === See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Rental income received $1,591,659 $1,572,590 $1,588,714 Interest received 27,672 22,043 13,212 Other income received - 10,547 2,233 Administrative expenses paid (123,082) (122,910) (137,263) Management fees paid (68,922) (63,546) (63,567) Utilities paid (123,121) (119,506) (122,063) Maintenance and repair expenses paid (240,803) (315,873) (312,077) Real estate taxes paid (43,376) (65,161) (65,218) Property insurance paid (14,677) (16,081) (15,834) Interest paid on mortgage (660,698) (670,747) (680,102) Incentive fees paid (29,375) (68,452) (58,320) Decrease in mortgage escrow deposits 4,164 (547) (5,463) Net security deposits received (paid) 1,947 (1,148) (863) ---------- ---------- ---------- Net cash provided by operating activities 321,388 161,209 143,389 Cash flows from investing activities Acquisition of land, building and equipment (32,288) (23,969) (13,751) Increase in reserve for replacements (32,553) (26,193) (26,565) ---------- ---------- ---------- Net cash used in investing activities (64,841) (50,162) (40,316) Cash flows from financing activities Repayment of mortgage payable (94,935) (84,413) (75,058) Distributions (52,541) (69,890) (62,143) ---------- ---------- ---------- Net cash used in financing activities (147,476) (154,303) (137,201) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 109,071 (43,256) (34,128) Cash and cash equivalents, beginning 154,566 197,822 231,950 ---------- ---------- ----------- Cash and cash equivalents, ending $ 263,637 $ 154,566 $ 197,822 ========== ========== =========== See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ 34,536 $(85,021) $(72,167) Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation and amortization 265,184 261,148 258,164 Changes in assets and liabilities (Decrease) increase in accounts receivable 1,222 (10,806) 1,073 Decrease (increase) in mortgage escrow deposits 4,164 (547) (5,463) Decrease (increase) in tenants' security deposits - net 1,947 (1,148) (864) Decrease (increase) in prepaid expenses 609 (175) 879 Increase (decrease) in accounts payable and accrued expenses 12,458 341 (38,122) Increase (decrease) in rent deferred credits 1,268 (2,583) (111) -------- --------- --------- Net cash provided by operating activities $321,388 $161,209 $143,389 ======== ======== ======== See notes to financial statements QUAKER MEADOWS APARTMENTS COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Partnership was formed as a limited partnership under the laws of the State of Massachusetts on February 1, 1982, for the purpose of constructing and operating a rental housing project under Massachusetts Housing Finance Agency's (MHFA) housing program. The project consists of 104 units located in Lynn, Massachusetts and is currently operating under the name of Quaker Meadows Apartments. All leases between the Partnership and tenants of the property are operating leases. 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 all highly liquid debt instruments with maturities of three months or less when acquired, stated at cost which approximates fair value. Property and Equipment ---------------------- Property and equipment are carried at cost. The Partnership provides for depreciation by use of the straight-line method over estimated useful lives of the assets as follows: buildings, 30 years, and equipment, 3-8 years. Deferred Financing Costs ------------------------ Deferred financing costs, which consist principally of financing fees are amortized by the straight-line method over the life of the related debt. Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - CASH HELD IN ESCROW FOR TENANTS' SECURITY DEPOSITS At December 31, 1996 and 1995, the Partnership maintained tenants' security deposits of $18,787 and $20,009, respectively, in an interest-bearing escrow bank account and U.S. Treasury bills, with a maturity of six months or less when acquired, stated at cost, which approximates market. NOTE C - MORTGAGE PAYABLE The mortgage payable represents a permanent mortgage from the Massachusetts Housing Finance Agency (MHFA), due September 1, 2013 and payable in equal monthly installments of $62,930 (principal and interest) at an interest rate of 12.5%. The terms of the permanent mortgage also require monthly escrow deposits for real estate taxes and a replacement reserve. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1996 are as follows: December 31, ------------ 1997 $106,768 1998 $119,880 1999 $135,044 2000 $151,877 2001 $170,808 NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT The Federal Housing Administration (FHA) has contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants. The agreement expires May 2002 and has two five-year renewal options. Total housing assistance payments received during 1996, 1995 and 1994 were $1,319,893, $1,335,437 and $1,321,357, respectively. NOTE E - RECONCILIATION OF FINANCIAL STATEMENT INCOME (LOSS) TO TAX BASIS INCOME (LOSS) The reconciliation of the income (loss) reported in the accompanying statement of operations with the income (loss) reported on the Federal income tax basis follows: 1996 1995 1994 ---- ---- ---- Net income (loss) per statement of operations $34,536 $(85,021) $(72,167) Decrease (increase) in depreciation 22,002 8,071 (18,503) Increase (decrease) in deferred rental income 1,268 (2,583) (111) ------- -------- -------- Income (loss) for Federal income tax purposes $57,806 $(79,533) $(90,781) ======= ======== ======== NOTE F - RELATED PARTY TRANSACTIONS At December 31, 1996 and 1995, 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 $63,511, $63,546 and $63,567 for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $29,375, $45,390 and $38,239 for the years ended December 31, 1996, 1995 and 1994 respectively. CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE G - CONCENTRATION OF CREDIT RISK The Partnership maintains its cash balances with one bank, which consists of an overnight repurchase agreement backed by government securities and an operating checking account. Account balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by the bank. The Partnership also has a reserve for replacements and escrow funds totaling $310,680 on deposit with the Massachusetts Housing Finance Agency. 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, 1996 and 1995, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations, changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ REZNICK, FEDDER & SILVERMAN ------------------------------- REZNICK, FEDDER & SILVERMAN Baltimore, Maryland January 24, 1997 South Laurel Apartments Limited Partnership BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 155,483 $ 282,541 Accounts receivable 64,339 98,186 Other receivables 9,324 63,452 Prepaid expenses 158,653 171,166 ---------- ---------- Total current assets 387,799 615,345 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 107,903 110,774 Mortgage escrow deposits 183,239 159,086 Reserve for replacement 144,890 124,923 ---------- ---------- 436,032 394,783 PROPERTY AND EQUIPMENT, less accumulated depreciation of $6,404,117 and $5,949,207 8,876,209 9,189,556 DEFERRED FINANCING COSTS, net of accumulated amortization of $173,434 and $161,272 337,292 349,454 ---------- ----------- Total assets $10,037,332 $10,549,138 =========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 142,542 $ 132,273 Accounts payable and accrued expenses 139,704 151,002 Accrued interest payable 74,919 75,746 Rent deferred credits 23,237 56,668 Deferred income - laundry 40,000 45,000 ----------- ---------- Total current liabilities 420,402 460,689 LONG-TERM LIABILITIES Mortgage payable, less current maturities 11,844,519 11,987,062 Due to general partner 645,989 645,989 Tenants' security deposits 104,816 106,558 ----------- ---------- Total liabilities 13,015,726 13,200,298 PARTNERS' DEFICIT (2,978,394) (2,651,160) ----------- ---------- Total liabilities and partners' deficit $10,037,332 $10,549,138 =========== =========== See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Revenue Rental income $4,246,199 $4,188,172 $4,230,214 Vacancies (223,408) (210,793) (233,900) Financial revenue 16,422 27,955 15,885 Other income 98,411 87,625 81,660 ---------- ---------- ---------- Total revenue 4,137,624 4,092,959 4,093,859 Expenses Operating expenses Marketing 73,482 118,426 99,484 Administration 433,194 368,243 434,060 Utilities 505,851 556,935 553,622 Management fee 213,145 215,298 211,572 Maintenance and repairs 764,198 647,209 588,592 Salaries 691,124 545,833 498,319 Insurance 89,852 68,236 85,604 Real estate taxes 259,349 264,590 257,736 ---------- ---------- ---------- Total operating expenses 3,030,195 2,784,770 2,728,989 Nonoperating expenses Interest 903,638 913,226 922,124 Mortgage insurance premium 60,243 60,882 61,475 Depreciation and amortization 467,072 445,511 413,901 Incentive management fee - 806 - Miscellaneous financial expenses 3,710 4,142 3,801 ---------- ---------- ---------- Total nonoperating expenses 1,434,663 1,424,567 1,401,301 ---------- ---------- ---------- Total expenses 4,464,858 4,209,337 4,130,290 ---------- ---------- ---------- EXCESS OF EXPENSES OVER REVENUE $ (327,234) $ (116,378) $ (36,431) ========== ========== ========== See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1996, 1995 and 1994
Special Class A Class B General Limited Limited Limited Partners Partners Partner Partners Total -------- -------- ------- -------- ----- Partners' deficit, December 31, 1993 $(101,051) $(1,255,340) $ (567,607) $ (481,383) $ (2,405,381) Distributions (188) (751) (15,960) (1,877) (18,776) Excess of expenses over revenue (364) (1,457) (30,967) (3,643) (36,431) -------- ----------- ---------- ------------ ------------ Partners' deficit, December 31, 1994 (101,603) (1,257,548) (614,534) (486,903) (2,460,588) Distributions (742) (2,967) (63,065) (7,420) (74,194) Excess of expenses over revenue (1,164) (4,655) (98,921) (11,638) (116,378) --------- ----------- ----------- ------------ ------------- Partners' deficit, December 31, 1995 (103,509) (1,265,170) (776,520) (505,961) (2,651,160) Excess of expenses over revenue (3,272) (13,089) (278,150) (32,723) (327,234) ---------- ----------- ----------- ------------ ------------- Partners' deficit, December 31, 1996 $(106,781) $(1,278,259) $ (1,054,670) $ (538,684) $ (2,978,394) ========= =========== ============ ============= ============== Profit and loss sharing percentage 1% 4% 85% 10% 100% = = == == ===
See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Rental income received $4,023,207 $3,970,997 $3,985,744 Interest received 13,441 21,737 15,694 Other income received 94,716 82,130 82,103 Administrative expenses paid (624,524) (616,037) (642,875) Management fees paid (213,145) (215,298) (224,966) Utilities paid (516,504) (543,544) (583,140) Maintenance and repairs expenses paid (1,286,408) (1,026,412) (893,727) Real estate taxes paid (252,822) (265,876) (253,363) Payroll taxes paid (45,010) (45,663) (50,570) Property insurance paid (47,772) (46,696) (24,158) Other taxes and insurance paid (42,796) (36,565) (55,401) Mortgage insurance paid (60,243) (1,465) (60,682) Interest paid on mortgage (904,465) (913,993) (922,836) Miscellaneous financial expenses paid (3,710) (4,142) (3,801) Decrease (increase) in mortgage escrow deposits (24,153) 11,980 (59,029) Mortgagor entity expenses paid - (806) - Net security deposits received 1,129 10,659 52,083 ---------- ---------- ---------- Net cash provided by operating activities 110,941 381,006 361,076 Cash flows from investing activities Additions to property and equipment (141,563) (270,501) (155,382) Deposits to reserve for replacements (52,520) (52,520) (120,744) Withdrawals from reserve for replacements 88,357 91,859 153,186 ---------- ---------- ---------- Net cash used in investing activities (105,726) (231,162) (122,940) Cash flows from financing activities Mortgage principal payments (132,273) (122,744) (113,902) Distributions to partners - (74,194) (18,776) ---------- ---------- ---------- Net cash used in financing activities (132,273) (196,938) (132,678) ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (127,058) (47,094) 105,458 Cash and cash equivalents, beginning 282,541 329,635 224,177 ---------- ---------- ---------- Cash and cash equivalents, ending $ 155,483 $ 282,541 $ 329,635 ========== ========== ========== See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of excess of expenses over revenue to net cash provided by operating activities Excess of expenses over revenue $(327,234) $(116,378) $(36,431) Adjustments to reconcile excess of expenses over revenue to net cash provided by operating activities Depreciation 454,910 433,349 401,739 Amortization 12,162 12,162 12,162 Interest earned on reserve for replacements (2,981) (6,218) (191) Changes in assets and liabilities Decrease (increase) in tenant accounts receivable 33,847 (30,976) 17,829 Decrease (increase) in accounts receivable - other 1,305 (495) 5,443 Decrease in prepaid expenses 12,513 43,106 7,129 (Increase) decrease in mortgage escrow deposits (24,153) 10,659 (59,029) (Decrease) increase in accounts payable and accrued expenses (11,299) 4,990 (5,547) Decrease in accrued interest payable (827) (767) (712) Tenants' security deposits received (paid) - net 1,129 11,980 52,083 (Decrease) increase in rent - deferred credits (33,431) 24,594 (28,399) Decrease in deferred laundry income (5,000) (5,000) (5,000) --------- --------- -------- Net cash provided by operating activities $ 110,941 $ 381,006 $361,076 ========= ========= ======== See notes to financial statements South Laurel Apartments Limited Partnership NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 a bank with maturities of three months or less when acquired, stated at cost, which approximates market. Property and Equipment ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. Deferred Financing Costs ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method. Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - CASH HELD IN ESCROW FOR TENANTS' SECURITY DEPOSITS At December 31, 1996 and 1995, the Partnership maintained tenant security deposits of $8,901 and $11,906, respectively, in an interest-bearing escrow bank account. At December 31, 1996, tenant security deposits included $99,002 in a U.S. Treasury Bill at a 4.605% interest rate which matures March 21, 1996. At December 31, 1995, tenant security deposits included $98,868 in a U.S. Treasury Bill at a 5.5% interest rate which matured on March 21, 1996. The investments in U.S. Treasury Bills are held to maturity and are carried at cost which approximates market. NOTE C - MORTGAGE PAYABLE The mortgage is insured by the Federal Housing Administration (FHA) and collateralized by a deed of trust on the rental property. The mortgage, which is due December 1, 2023, is payable in equal monthly installments of principal and interest totalling $86,395 and bears interest at a rate of 7.5%. Interest incurred during 1996, 1995 and 1994 amounted to $903,638, $913,226 and $922,124, respectively. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of partnership assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1996 are as follows: December 31, ------------ 1997 $142,542 1998 $153,608 1999 $165,533 2000 $178,384 2001 $192,232 NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants for 20% of the rental units. The agreement expires July 31, 1997. Total housing assistance payments received during 1996, 1995 and 1994 were $686,293, $677,108 and $694,002, respectively. NOTE E - RELATED PARTY TRANSACTIONS Due to General Partner ---------------------- At December 31, 1996 and 1995, due to general partner consists of unpaid development advances of $645,989. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the project after certain priority payments as defined in the Partnership agreement. Management Fees --------------- Management fees of 5.25% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the project pursuant to a management agreement approved by HUD. Such fees amounted to $213,145, $215,298, and $211,572 for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $-0-, $808 and $ - 0 - for the years ended December 31, 1996, 1995 and 1994, respectively. Reimbursed Costs ---------------- CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE F - TAX BASIS LOSS The reconciliation of the excess of expenses over revenue reported in the accompanying statement of operations with the loss reported on a Federal income tax basis follows: 1996 1995 1994 ---- ---- ---- Excess of expenses over revenue per statements of operations $ (327,234) $ (116,378) $ (36,431) (Decrease) increase in deferred rental income and laundry income (138,431) 19,593 (33,399) Additional depreciation and amortization (186,827) (181,224) (172,836) ----------- ---------- ---------- Loss for Federal income tax purposes $ (652,492) $ (278,009) $(242,666) =========== ========== ========= NOTE G - CONCENTRATION OF CREDIT RISK The Partnership maintains its cash balances in two banks. The operating account consists of an overnight repurchase agreement backed by government securities and a checking account. The tenant security deposit accounts are held in trust and consist of a checking account and a United States Treasury Bill. The balances are insured up to $100,000 by each bank. The Partnership also has $328,129 of money market funds held in escrow by Reilly Mortgage Group, Inc., carried at cost, which approximates fair value. INDEPENDENT AUDITORS' REPORT To the Partners Marvin Gardens Associates We have audited the accompanying balance sheets of Marvin Gardens Associates as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations, changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ REZNICK, FEDDER & SILVERMAN ------------------------------- REZNICK, FEDDER & SILVERMAN Baltimore, Maryland January 24, 1997 Marvin Gardens Associates BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash $ 21,173 $ 15,301 Accounts receivable 1,020 837 Accounts receivable - tenant subsidy - 3,221 Prepaid expenses 6,532 6,643 ----------- ---------- Total current assets 28,725 26,002 RESTRICTED FUNDS Tenants' security deposits 9,682 9,241 Real estate tax impound fund 6,290 6,128 Replacement reserve fund 138,463 116,539 Insurance impound fund 5,771 4,190 Interest income receivable - impounds 1,206 1,198 ----------- ---------- 161,412 137,296 PROPERTY AND EQUIPMENT, less accumulated depreciation of $1,038,242 and $964,277 1,376,899 1,443,439 DEFERRED FINANCING COSTS, net of accumulated amortization of $19,572 and $18,199 26,797 28,170 ----------- ---------- Total assets $ 1,593,833 $1,634,907 =========== ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Current maturities of mortgage payable $ 50,299 $ 46,375 Accounts payable 15,506 14,539 Accrued expenses 3,947 4,241 Deferred rental income 264 2,055 ----------- ---------- Total current liabilities 70,016 67,210 Mortgage payable, less current maturities 1,610,628 1,660,927 Due to general partner 194,019 194,019 Tenants' security deposits 7,105 6,960 ----------- ---------- Total liabilities 1,881,768 1,929,116 PARTNERS' DEFICIT (287,935) (294,209) ----------- ----------- Total liabilities and partners' deficit $ 1,593,833 $1,634,907 =========== ========== See notes to financial statements Marvin Gardens Associates STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Revenue Rental income $410,364 $409,395 $399,915 Vacancies (1,639) (1,533) (2,258) Financial revenue 6,815 7,817 5,989 Other income 4,321 3,174 3,430 -------- -------- -------- Total revenue 419,861 418,853 407,076 Expenses Operating expenses Administration 17,356 15,866 17,876 Utilities 23,833 27,992 22,262 Management fee 17,533 17,052 15,852 Maintenance and repairs 51,999 73,953 58,546 Salaries 59,441 57,141 55,854 Insurance 8,378 7,839 7,361 Real estate taxes 22,271 21,824 21,152 -------- -------- -------- Total operating expenses 200,811 221,667 198,903 Nonoperating expenses Interest 137,438 141,056 144,392 Depreciation and amortization 75,338 74,377 70,272 Incentive management fee - 12,090 1,970 -------- -------- -------- Total nonoperating expenses 212,776 227,523 216,634 -------- -------- -------- Total expenses 413,587 449,190 415,537 -------- -------- -------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $ 6,274 $(30,337) $ (8,461) ======== ======== ======== See notes to financial statements Marvin Gardens Associates STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1996, 1995 and 1994
Special General Limited Limited Partner Partner Partner Total ------- ------- ------- ----- Balance, December 31, 1993 $(8,067) $(66,389) $(139,712) $(214,168) Distributions (130) (521) (12,379) (13,030) Excess of expenses over revenue (85) (338) (8,038) (8,461) -------- -------- --------- --------- Balance, December 31, 1994 (8,282) (67,248) (160,129) (235,659) Distributions (282) (1,129) (26,802) (28,213) Excess of expenses over revenue (303) (1,214) (28,820) (30,337) --------- -------- --------- --------- Balance, December 31, 1995 (8,867) (69,591) (215,751) (294,209) Excess of revenue over expenses 63 251 5,960 6,274 --------- --------- --------- --------- Balance, December 31, 1996 $ (8,804) $ (69,340) $(209,791) $(287,935) ======== ========= ========= ========= Profit and loss sharing percentage 1% 4% 95% 100% = = == ===
See notes to financial statements Marvin Gardens Associates STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Rental income received $409,972 $409,707 $393,918 Interest received 1,011 1,797 1,884 Other income received 4,321 3,074 3,430 Administrative expenses paid (17,356) (15,866) (17,876) Management fees paid (17,533) (16,952) (15,852) Utilities paid (23,833) (26,892) (22,262) Salaries and wages paid (46,384) (43,690) (42,383) Maintenance and repairs expenses paid (51,326) (74,165) (71,309) Real estate taxes paid (22,271) (21,824) (21,152) Payroll taxes paid (13,057) (13,281) (13,471) Property and other insurance paid (8,267) (8,436) (7,433) Interest paid on mortgage (137,438) (141,056) (144,392) (Increase) decrease in real estate tax impound fund (162) 191 (35) Incentive management fee paid - (12,090) (1,970) Increase in insurance impound fund (1,581) (288) (196) Net security deposits paid (296) (189) (1) -------- -------- -------- Net cash provided by operating activities 75,800 40,040 40,900 Cash flows from investing activities Additions to property and equipment (7,425) (32,836) (9,776) Deposits to reserve for replacements (16,128) (16,064) (15,700) Withdrawals from reserve for replacements - 29,398 37,473 --------- -------- -------- Net cash (used in) provided by investing activities (23,553) (19,502) 11,997 Cash flows from financing activities Repayment of mortgage payable (46,375) (42,757) (39,422) Distributions - (28,213) (13,030) ---------- --------- -------- Net cash used in financing activities (46,375) (70,970) (52,452) ---------- --------- -------- NET INCREASE (DECREASE) IN CASH 5,872 (50,432) 445 Cash and cash equivalents, beginning 15,301 65,733 65,288 ---------- ---------- -------- Cash and cash equivalents, ending $ 21,173 $ 15,301 $ 65,733 ========== ========= ======== See notes to financial statements Marvin Gardens Associates STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of excess (deficiency of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ 6,274 $(30,337) $ (8,461) Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation 73,965 73,037 68,932 Amortization of deferred financing costs 1,373 1,340 1,340 Interest earned on reserve for replacements (5,796) (6,020) (5,457) Changes in assets and liabilities Decrease (increase) in accounts receivable - tenant subsidy 3,221 (185) (3,036) Increase in accounts receivable (183) (25) (676) (Increase) decrease in interest income receivable -impounds (8) (100) 1,352 Decrease (increase) in prepaid expenses 111 (597) (72) (Increase) decrease in real estate tax impound fund (162) 191 (35) Increase in insurance impound fund (1,581) (288) (196) Increase (decrease) in accounts payable - trade 967 803 (12,793) (Decrease) increase in accrued expenses (294) 355 30 (Increase) decrease in deferred rent credits (1,791) 2,055 (27) Net security deposits paid (296) (189) (1) -------- -------- -------- Net cash provided by operating activities $ 75,800 $ 40,040 $ 40,900 ======= ======== ======== See notes to financial statements Marvin Gardens Associates NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Marvin Gardens Associates (the Partnership) is a California Limited Partnership which commenced operations in February 1983. The Partnership owns and operates a 37-unit rental housing project (the Project). The Project operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the U.S. Department of Housing and Urban Development (HUD). The agreement expires in July 2003 and has two five year renewal options. For the years ended December 31, 1996, 1995 and 1994, rental subsidies for the Project totaled $324,129, $337,072 and $332,339, respectively. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and the California Housing Finance Agency (CHFA) to $20,151 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment ---------------------- Property and equipment are carried at cost. The Partnership provides for depreciation by use of the straight-line method over estimated useful lives as follows: buildings, 30 years and equipment, 3-8 years. Deferred Financing Costs ------------------------ Deferred financing costs are amortized by the straight-line method over the life of the related debt. Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - CASH HELD IN TENANTS' SECURITY DEPOSIT FUND At December 31, 1996 and 1995, the Partnership maintained tenants' security deposit fund balances of $9,682 and $9,241, respectively, in an interest bearing bank account and a certificate of deposit. NOTE C - MORTGAGE PAYABLE The mortgage payable represents a mortgage from the CHFA which is due on June 1, 2013 and is collateralized by a deed of trust on the rental property and the CHFA has been granted a security interest in rental subsidies. The terms of the mortgage require monthly principal and interest payments of $15,138 and bear interest at the rate of 8.15%. Interest charged to operations during 1996, 1995 and 1994 amounted to $137,438, $141,056 and $144,392, respectively. Terms of the mortgage agreement also require monthly escrow deposits to be made to fund real estate tax, insurance, and a replacement reserve account. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1996 are as follows: December 31, ------------ 1997 $50,299 1998 $54,555 1999 $59,171 2000 $64,178 2001 $69,908 NOTE D - RECONCILIATION OF FINANCIAL STATEMENT INCOME TO TAX BASIS INCOME 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, 1996, 1995 and 1994 follows: 1996 1995 1994 ---- ---- ---- Excess (deficiency) of revenue over expenses per statements of operations $ 6,274 $ (30,337) $ (8,461) Additional depreciation for tax purposes (13,924) (12,556) (12,630) Deferred rental income adjustments (1,790) 2,055 (27) --------- --------- --------- Loss for Federal income tax purposes $ (9,440) $ (40,838) $ (21,118) ======== ========= ========= NOTE E - RELATED PARTY TRANSACTIONS At December 31, 1996 and 1995, 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, 1996, 1995 and 1994 were $17,533, $17,052 and $15,852, respectively. Effective September 1994, CMJ Management Company, Inc. receives 30% of the monthly fee which totaled $5,112 for the year ended December 31, 1996. In addition, for the year ended December 31, 1995, incentive fees paid to CMJ Management Company, Inc. totalled $12,090, based on the prior years surplus cash, as defined. During 1996, no incentive fees were paid. NOTE F - CONCENTRATION OF CREDIT RISK The Partnership's real estate tax impound fund, replacement reserve fund, and insurance impound fund totalling $150,524 as of December 31, 1996 are on deposit with CHFA. INDEPENDENT AUDITORS' REPORT To the Partners Colonial Farms, Ltd. We have audited the accompanying balance sheets of Colonial Farms, Ltd. as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations, changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ REZNICK, FEDDER & SILVERMAN ------------------------------- REZNICK, FEDDER & SILVERMAN Baltimore, Maryland January 24, 1997 Colonial Farms, Ltd. BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 136,724 $ 60,141 Rents receivable 4,624 5,961 Prepaid expenses 9,446 8,789 ---------- --------- Total current assets 150,794 74,891 RESTRICTED FUNDS Tenants' security deposits 22,193 22,533 Real estate tax impound fund 12,435 14,518 Replacement reserve fund 227,316 232,164 Insurance impound fund 9,510 7,023 Reserve fund for operations 41,139 40,781 Interest income receivable - impounds 2,349 2,431 ---------- --------- 314,942 319,450 PROPERTY AND EQUIPMENT, less accumulated depreciation of $1,812,966 and $1,690,985 2,269,317 2,365,370 DEFERRED FINANCING COSTS, net of accumulated amortization of $33,586 and $31,309 42,181 44,458 ---------- --------- Total assets $2,777,234 $2,804,169 ========== ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Current maturities of mortgage payable $ 76,827 $ 70,134 Accounts payable 31,634 22,109 Accrued expenses 33,494 33,736 Deferred rental income 372 369 ---------- ---------- Total current liabilities 142,327 126,348 Mortgage payable, less current maturities 2,713,101 2,789,928 Due to general partner 318,115 318,115 Tenants' security deposits 17,238 17,337 ---------- --------- Total liabilities 3,190,781 3,251,728 PARTNERS' DEFICIT (413,547) (447,559) ---------- --------- Total liabilities and partners' deficit $2,777,234 $2,804,169 ========== ========== See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Revenue Rental income $ 786,180 $ 785,378 $ 776,784 Vacancies (9,462) (24,535) (26,649) Financial revenue 15,910 16,256 12,817 Other income 19,315 10,237 7,132 --------- --------- --------- Total revenue 811,943 787,336 770,084 Expenses Operating expenses Administration 29,578 22,779 19,504 Utilities 32,942 31,659 30,713 Management fee 38,060 39,600 38,435 Maintenance and repairs 129,475 144,185 139,278 Salaries 73,791 65,249 55,219 Insurance 12,794 12,074 12,067 Real estate taxes 40,322 39,762 39,272 --------- --------- --------- Total operating expenses 356,962 355,308 334,488 Nonoperating expenses Interest 258,803 264,913 270,491 Depreciation and amortization 124,258 119,893 117,523 Incentive management fee 7,060 16,435 20,109 Earned surplus reimbursement 2,610 63,571 - --------- --------- --------- Total nonoperating expenses 392,731 464,812 408,123 Total expenses 749,693 820,120 742,611 --------- --------- --------- EXCESS (DEFICIENCY) OF REVENUE OVER (EXPENSES) OVER EXPENSES $ 62,250 $(32,784) $ 27,473 ========= ======== ========== See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1996, 1995 and 1994
Special General Limited Limited Partner Partner Partner Total ------- ------- ------- ----- Balance, December 31, 1993 $ (21,805) $ (92,332) $(237,997) $(352,134) Distributions (956) (1,435) (45,422) (47,813) Excess of revenue over expenses 550 824 26,099 27,473 --------- --------- --------- --------- Balance, December 31, 1994 (22,211) (92,943) (257,320) (372,474) Distributions (846) (1,269) (40,186) (42,301) Excess of expenses over revenue (656) (983) (31,145) (32,784) --------- --------- --------- --------- Balance, December 31, 1995 (23,713) (95,195) (328,651) (447,559) Distributions (565) (846) (26,827) (28,238) Excess of revenue over expenses 1,245 1,868 59,137 62,250 --------- --------- --------- --------- Balance, December 31, 1996 $ (23,033) $ (94,173) $(296,341) $(413,547) ========= ========= ========= ========= Profit and loss sharing percentage 2% 3% 95% 100% == == === ====
See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Rental income received $778,056 $751,795 $750,466 Interest received 5,311 5,901 5,528 Other income received 19,315 10,237 7,132 Residual receipts reimbursement paid (2,610) (63,571) - Administrative expenses paid (29,578) (22,779) (19,504) Management fees paid (38,060) (39,500) (38,435) Utilities paid (32,942) (33,372) (30,713) Salaries and wages paid (64,278) (56,258) (47,327) Maintenance and repairs expenses paid (120,190) (141,608) (155,907) Real estate taxes paid (40,322) (39,762) (39,272) Payroll taxes paid (9,513) (8,116) (7,892) Property and other insurance paid (13,451) (12,658) (11,971) Interest paid on mortgage (258,803) (264,913) (270,491) Incentive management fee paid (7,060) (16,435) (20,109) (Increase) decrease in reserve fund for operations (358) 2,697 (1,816) (Decrease) increase in real estate tax impound fund 2,083 (1,007) (1,289) (Increase) in insurance impound fund (2,487) (1,852) (26) Net security deposits received (paid) 241 (407) 107 -------- -------- -------- Net cash provided by operating activities 185,354 68,392 118,481 Cash flows from investing activities Purchases of equipment (25,928) (37,922) - Deposits to reserve for replacements (22,404) (22,384) (22,139) Withdrawals from reserve for replacements 37,933 13,139 46,506 --------- --------- -------- Net cash (used in) provided by investing activities (10,399) (47,167) 24,367 Cash flows from financing activities Repayment of mortgage payable (70,134) (64,024) (58,446) Distributions (28,238) (42,301) (47,813) --------- --------- -------- Net cash used in financing activities (98,372) (106,325) (106,259) --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 76,583 (85,100) 36,589 Cash and cash equivalents, beginning 60,141 145,241 108,652 ---------- --------- --------- Cash and cash equivalents, ending $ 136,724 $ 60,141 $ 145,241 ========== ========== ========= See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $62,250 $(32,784) $27,473 Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation 121,981 117,616 115,246 Amortization of deferred financial costs 2,277 2,277 2,277 Interest earned on reserve for replacements (10,681) (10,189) (9,847) Changes in assets and liabilities Decrease (increase) in tenant accounts receivable 1,337 (2,275) 504 (Increase) decrease in prepaid expenses (657) (584) 96 Decrease (increase) in interest income receivable - impounds 82 (166) 2,558 Net tenants' security deposits received (paid) 241 (407) 107 Increase in real estate tax impound fund 2,083 (1,007) (1,289) (Increase) in insurance impound fund (2,487) (1,852) (26) (Decrease) increase in reserve fund for operations (358) 2,697 (1,816) Increase in accounts payable 9,525 (5,615) (16,712) (Decrease) increase in accrued expenses (242) 406 83 Increase (decrease) in rent deferred credits 3 275 (173) ------- ------- ------- Net cash provided by operating activities $185,354 $ 68,392 $118,481 ======== ========= ======== See notes to financial statements Colonial Farms, Ltd. NOTES TO FINANCIAL STATEMENTS Years ended December 31, 1996, 1995 and 1994 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, 1996, 1995 and 1994, rental subsidies for the project totaled $613,093, $586,267 and $555,597, 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 approximates market. Property and Equipment ---------------------- Property and equipment are carried at cost. The Partnership provides for depreciation by using the straight-line method over estimated useful lives as follows: buildings, 30 years and equipment, 8 years. Deferred Financing Costs ------------------------ Deferred financing costs are amortized by the straight-line method over the life of the related debt. Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - CASH HELD IN TENANTS' SECURITY DEPOSIT FUND At December 31, 1996 and 1995, the Partnership maintained tenants' security deposit fund balances of $22,193 and $22,533, respectively, in an interest bearing bank account and a certificate of deposit. NOTE C - MORTGAGE PAYABLE The mortgage payable represents a permanent mortgage from the CHFA which is due on June 1, 2013 and is collateralized by a deed of trust on the rental property and the CHFA has been granted a security interest in rental subsidies. The terms of the mortgage require annual interest of 9.15% and monthly principal and interest payments of $27,411. Interest charged to operations during 1996, 1995 and 1994 amounted to $258,803, $264,913 and $270,491, respectively. Terms of the loan agreement require that monthly escrow deposits be made to fund real estate tax, insurance, and replacement reserve escrow accounts. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1996 are as follows: December 31, ------------ 1997 $ 76,827 1998 $ 84,159 1999 $ 92,191 2000 $ 110,990 2001 $ 110,637 NOTE D - RECONCILIATION OF FINANCIAL STATEMENT INCOME (LOSS) TO TAX BASIS INCOME (LOSS) The reconciliation of the excess (deficiency) of revenue over expenses reported in the statements of operations with the income (loss) reported on a Federal income tax return for the years ended December 31, 1996, 1995, and 1994 follows: 1996 1995 1994 ---- ---- ---- Excess (deficiency) of revenue over expenses $ 62,250 $ (32,784) $ 27,473 Additional depreciation for tax purposes (20,336) (17,603) (18,120) Deferred rental income adjustments 3 275 (173) --------- ---------- -------- Income (loss) for Federal income tax purposes $ 41,917 $ (50,112) $ 9,180 ========= ========= ========= NOTE E - RELATED PARTY TRANSACTIONS At December 31, 1996 and 1995, 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, 1996, 1995 and 1994 were $38,060, $39,600, and $38,435, respectively. CMJ Management Company, Inc. also is entitled to receive an incentive management fee. For the years ended December 31, 1996, 1995 and 1994, incentive fees charged for the project totaled $7,060, $16,435 and $20,109, respectively, in accordance with the terms of the supplemental management agreement. NOTE F - CONCENTRATION OF CREDIT RISK The Partnership's real estate tax impound fund, replacement reserve fund, insurance impound fund, and reserve fund for operations totalling $290,400 as of December 31, 1996 are on deposit with CHFA. The Partnership maintains its cash balances in two banks. The operating account consists of one checking account and two money repurchase agreements backed by government securities. The security deposit accounts are held in trust and consist of a checking account and a certificate of deposit. The accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. As of December 31, 1996, the uninsured portion of the operating security deposit accounts amounted to $76,901. INDEPENDENT AUDITORS' REPORT To the Partners Holbrook Apartments Company We have audited the accompanying balance sheets of Holbrook Apartments Company as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Holbrook Apartments Company as of December 31, 1996 and 1995, and the results of its operations, changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ REZNICK, FEDDER & SILVERMAN ------------------------------- REZNICK, FEDDER & SILVERMAN Baltimore, Maryland January 24, 1997 Holbrook Apartments Company BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 631,608 $ 486,602 Accounts receivable 2,153 8,240 Other receivables 28,548 16,803 Prepaid expenses 17,641 18,427 Other current assets 475 475 ----------- ----------- Total current assets 680,425 30,547 RESTRICTED DEPOSITS AND FUNDED RESERVES Mortgage escrow deposits 61,069 42,895 Reserve for replacements 444,420 486,650 ----------- ----------- 505,489 529,545 PROPERTY AND EQUIPMENT, less accumulated depreciation of $3,905,567 and $3,657,426 5,664,784 5,801,902 DEFERRED FINANCING COSTS, net of accumulated amortization of $208,617 and $195,076 345,334 358,875 ----------- ----------- Total assets $ 7,196,032 $ 7,220,869 =========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 95,185 $ 88,328 Accounts payable and accrued expenses 179,824 45,749 Accrued interest payable 46,543 47,095 Rent deferred credits 15,274 4,589 ----------- ----------- Total current liabilities 336,826 185,761 LONG-TERM LIABILITIES Mortgage payable, less current maturities 7,351,781 7,446,966 ----------- ----------- Total liabilities 7,688,607 7,632,727 PARTNERS' DEFICIT (492,575) (411,858) ----------- ----------- Total liabilities and partners' deficit $ 7,196,032 $ 7,220,869 =========== =========== See notes to financial statements Holbrook Apartments Company STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Revenue Rental income $2,068,855 $2,062,798 $2,060,656 Vacancies (1,985) (486) (3,458) Financial revenue 27,267 34,734 26,487 Other income 7,176 6,381 5,588 ---------- ---------- ---------- Total revenue 2,101,313 2,103,427 2,089,273 Expenses Operating expenses Marketing 366 208 329 Administration 126,269 120,673 123,390 Utilities 85,403 77,662 111,338 Management fee 99,025 98,221 97,710 Maintenance and repairs 200,197 195,276 192,998 Salaries 182,294 170,174 142,105 Insurance 49,036 40,196 41,951 Real estate taxes 198,470 197,441 139,335 ---------- ---------- ---------- Total operating expenses 941,060 899,851 849,156 Nonoperating expenses Interest 561,600 568,003 573,944 Mortgage insurance premium 37,438 37,865 38,261 Depreciation and amortization 261,682 248,580 243,525 Incentive management fee 133,795 137,695 165,684 ---------- ---------- ---------- Total nonoperating expenses 994,515 992,143 1,021,414 ---------- ---------- ---------- Total expenses 1,935,575 1,891,994 1,870,570 ---------- ---------- ---------- EXCESS OF REVENUE OVER EXPENSES $ 165,738 $ 211,433 $ 218,703 ========== ========== ========== See notes to financial statements Holbrook Apartments Company STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1996, 1995 and 1994 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1993 $(555,612) $260,182 $(295,430) Distributions (44,139) (250,120) (294,259) Excess of revenue over expenses 32,805 185,898 218,703 --------- -------- --------- Partners' deficit, December 31, 1994 (566,946) 195,960 (370,986) Distributions (37,846) (214,459) (252,305) Excess of revenue over expenses 31,715 179,718 211,433 --------- -------- --------- Partners' deficit, December 31, 1995 (573,077) 161,219 (411,858) Distributions (36,818) (209,637) (246,455) Excess of revenue over expenses 24,861 140,877 165,738 --------- -------- --------- Partners' deficit, December 31, 199 $(585,034) $ 92,459 $(492,575) ========= ========= ========= Profit and loss sharing percentage 15% 85% 100% == == === See notes to financial statements Holbrook Apartments Company STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Rental income received $2,083,642 $2,059,803 $2,051,763 Interest received 13,786 14,645 13,418 Other income received - 9,418 6,046 Administrative expenses paid (173,537) (166,891) (164,640) Management fees paid (99,025) (98,221) (97,710) Utilities paid (88,920) (88,787) (118,133) Maintenance and repairs expenses paid (197,997) (303,582) (275,034) Real estate taxes paid (182,616) (197,441) (139,335) Payroll taxes paid (15,854) (16,316) (16,269) Property insurance paid (26,982) (18,192) (17,799) Other taxes and insurance paid (21,339) (22,335) (23,077) Interest paid on mortgage (562,152) (568,516) (574,419) Mortgage insurance paid (37,367) (37,797) (38,199) Decrease (increase) in mortgage escrow deposits (18,174) 10,330 12,966 Mortgagor entity expenses paid (133,795) (137,695) (165,684) ---------- ----------- ---------- Net cash provided by operating activities 539,670 438,423 453,894 ---------- ----------- ---------- Cash flows from investing activities Additions to property and equipment (111,023) (86,045) (97,229) Deposits to reserve for replacements (40,720) (40,680) (40,776) Withdrawals from reserve for replacements 91,862 - - ---------- ---------- ---------- Net cash used in investing activities (59,881) (126,725) (138,005) ---------- ---------- ---------- Cash flows from financing activities Repayment of mortgage payable (88,328) (81,964) (76,060) Distributions paid to partners (246,455) (252,305) (294,259) ---------- ---------- ----------- Net cash used in financing activities (334,783) (334,269) (370,319) ---------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 145,006 (22,571) (54,430) Cash and cash equivalents, beginning 486,602 509,173 563,603 ----------- ---------- ---------- Cash and cash equivalents, ending $ 631,608 $ 486,602 $ 509,173 =========== ========== ========== See notes to financial statements Holbrook Apartments Company STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of excess of revenue over expenses to net cash provided by operating activities Excess of revenue over expenses $165,738 $211,433 $218,703 Adjustments to reconcile excess of revenue over expenses to net cash provided by operating activities Depreciation 248,141 235,039 229,984 Amortization of deferred financing costs 13,541 13,541 13,541 Interest earned on replacement reserves (8,912) (20,089) (11,805) Changes in assets and liabilities Decrease (increase) in tenant accounts receivable 6,087 (2,200) (194) Decrease in accounts receivable - HAP - 570 490 Increase in accounts receivable - other (11,745) (7,103) (806) Decrease (increase) in prepaid expenses 786 (263) 2,742 (Increase) decrease in mortgage escrow deposits (18,174) 10,330 12,966 Increase (decrease) in accounts payable and accrued expenses 134,075 (1,443) (5,521) Decrease in accrued interest payable (552) (513) (475) Decrease (increase) in rent-deferred credits 10,685 (879) (5,731) -------- -------- -------- Net cash provided by operating activities $539,670 438,423 $453,894 ======== ======== ======== See notes to financial statements Holbrook Apartments Company NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 a bank with maturities of three months or less when acquired, stated at cost, which approximates market. Reserve for Replacements ------------------------ Reserve for replacements includes investments in money market accounts which are held to maturity. The investments are carried at cost which approximates market value. Property and Equipment ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. Deferred Financing Costs ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method. Rental Income ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - 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 totalling $54,207 and bears interest at a rate of 7.5%. Interest incurred during December 31, 1996, 1995 and 1994, amounted to $561,600, $568,003 and $573,944, respectively. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate annual maturities of the mortgage payable for the five years following December 31, 1996 are as follows: December 31, ------------ 1997 $ 95,185 1998 $102,574 1999 $110,538 2000 $119,119 2001 $128,366 NOTE C - 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 1996, 1995 and 1994 were $1,577,392, $1,587,132 and $1,577,104, respectively. NOTE D - MANAGEMENT AGREEMENT Management fees of 4.75% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the Project pursuant to a management agreement approved by HUD. Such fees amounted to $99,025, $98,221, and $97,710 for the years ended 1996, 1995 and 1994, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $133,795, $137,695 and $165,684 for the years ended December 31, 1996, 1995 and 1994, respectively. CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE E - TAX BASIS INCOME The reconciliation of the excess of revenue and expenses in the accompanying statements of operations with the loss reported on a Federal income tax basis follows: 1996 1995 1994 ---- ---- ---- Excess of revenue over expenses per statement of operations $ 165,738 $ 211,433 $ 218,703 Additional amortization of deferred costs 8,393 8,393 8,393 Increase (decrease) in deferred rental income 10,688 (879) (5,731) Additional depreciation (32,751) (126,502) (139,140) ----------- --------- ---------- Income for Federal income tax purposes $ 152,068 $ 92,445 $ 82,225 =========== ========= ========== NOTE F - CONCENTRATION OF CREDIT RISK The Partnership maintains its cash balances in one bank, which consists of an overnight repurchase agreement backed by government securities and an operating checking account. Account balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by the bank. The Partnership also has a reserve for replacements and escrows totalling $505,489 at December 31, 1996, on deposit with WMF/Huntoon, Paige Associates Limited, including a money market account and U.S. Treasury Bill totalling $444,420. EX-27 2 ARTICLE 5 FDS FOR THE YEAR ENDED 12/31/96
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the twelve months ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1996 DEC-31-1996 323 0 0 0 0 323 92 0 415 153 0 0 0 0 262 415 0 255 0 280 0 0 0 (25) 0 (25) 0 0 0 (25) (2.82) (2.82)
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