-----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, TXWpSNCWiVV47SeO+vuQZkZT2/3dNsNUucU6H5CtSvg8CssgOsXlb9PyVsjz3F9/ JTSRXx/tHrz/yAHzSGXBTQ== 0000711393-98-000001.txt : 19980331 0000711393-98-000001.hdr.sgml : 19980331 ACCESSION NUMBER: 0000711393-98-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-17151 FILM NUMBER: 98578207 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 FOR CMJ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: DECEMBER 31, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to _____. Commission File Number: 0-17151 PAINE WEBBER/CMJ PROPERTIES LP ------------------------------ (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 1997 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-8 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-8 Part III - -------- Item 10 Directors and Executive Officers of the Partnership III-1 Item 11 Executive Compensation III-2 Item 12 Security Ownership of Certain Beneficial Owners and Management III-3 Item 13 Certain Relationships and Related Transactions III-3 Part IV - -------- Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Signatures IV-2 Index to Exhibits IV-3 Financial Statements and Supplementary Data F-1 to F-73 This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Partnership's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in Item 7 in the section entitled "Certain Factors Affecting Future Operating Results" beginning on page II-6 of this Form 10-K. PART I Item 1. Business Paine Webber/CMJ Properties, LP (the "Partnership") is a limited partnership formed in December 1982 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a portfolio of local limited partnerships owning apartment projects which received governmental assistance in the form of low interest rate mortgages and rent subsidies. The Partnership sold $8,745,000 in Limited Partnership units (8,745 units at $1,000 per unit) from May 1983 to April 1984, pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-81003). In addition, the Initial Limited Partner contributed $1,000 for one unit (a "Unit") of Limited Partnership Interest. Limited Partners will not be required to make any additional capital contributions. As of December 31, 1997, the Partnership owned, through local limited partnerships, interests in six apartment properties as set forth in the following table: Percent Name of Local Interest in Limited Partnership Date of Local Limited Name of Property Acquisition Partnership Location Size of Interest (1) (2) - -------------------------------- ---- ----------- ------- Fawcett's Pond Apartments Company Village at Fawcett's Pond 100 6/30/83 95% Hyannis, Massachusetts units Quaker Meadows Apartments Company Quaker Court and The Meadows 104 6/30/83 95% Lynn, Massachusetts units South Laurel Apartments Limited Partnership Villages at Montpelier 520 6/30/83 85% Laurel, Maryland units Marvin Gardens Associates Marvin Gardens 37 7/29/83 95% Cotati, California units Colonial Farms Ltd. Colonial Farms 100 7/29/83 95% Modesto, California units Holbrook Apartments Company Ramblewood Apartments 170 8/30/83 85% Holbrook, Massachusetts units (1) The Partnership owns limited partnership interests in the local limited partnerships owning the apartment properties and improvements. (2) See Notes to the Financial Statements filed with this Annual Report for current outstanding mortgage balances and a description of the long-term mortgage indebtedness collateralized by the operating property investments of the local limited partnerships and for a description of the local limited partnership agreements through which the Partnership has acquired these real estate investments. The Partnership's original investment objectives were to invest the net cash proceeds from the offering of limited partnership units in rental apartment properties receiving various forms of federal, state or local assistance with the goals of providing: (1) tax losses from deductions generated by investments; (2) capital preservation; (3) potential capital appreciation; and (4) potential future cash distributions from operations (on a limited basis), or from the sale or refinancing of the projects owned by the local limited partnerships, or from the sale of interests in the local limited partnerships. The Partnership has generated tax losses since inception. However, the benefits of such losses to investors have been significantly reduced by changes in federal income tax law subsequent to the organization of the Partnership. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1997, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and the majority of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Given the improvements in cash flow and the strong operating performances of the investment properties in recent years, management had instituted a program of regular quarterly distributions in 1994 at an annual rate of 2% on original invested capital. During 1996 distributions to the Partnership from the local limited partnerships declined, causing management to suspend distributions effective for the fourth quarter of 1996 until further notice. In the future, to the extent there is distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership plans to make an annual distribution payment. Because of ongoing capital expenditure requirements at the properties, which are expected to maintain and enhance their long-term values, the Partnership did not make an annual distribution payment to the Limited Partners in 1997. However, payment of an annual distribution of 1% in 1998 is likely, provided current projections for cash distributions from the properties in 1998 are met. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final sales of its investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. Because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the General Partners of the local limited partnerships, which receive management fee revenues from the properties, to attempt to sell any of the properties in the near term. As discussed further in Item 7, as a limited partner in the local limited partnerships, the Partnership's ability to influence major business decisions, including any decision to sell the properties, is restricted under the terms of the agreements. All of the properties owned by the local limited partnerships in which the Partnership invested are located in real estate markets in which they face competition for the revenues they generate. The Partnership's apartment complexes, all but one of which are government-assisted, low-income housing facilities, compete with several projects of similar type generally on the basis of price, location and amenities. The sixth property had been partially subsidized until July 1997 when the subsidy agreement expired. This property is currently transitioning to a 100% market rent facility which will compete with other non-subsidized properties in its local sub-market. The tenants at the Partnership's subsidized apartment properties are not as likely to be candidates for single-family home ownership as tenants of non-subsidized properties would be. Therefore, competition from the single family home market is not a significant factor. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable. The Partnership has no real estate investments located outside the United States. The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated (PWI), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"). The Managing General Partner of the Partnership is PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser. The associate general partner is Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. Item 2. Properties The Partnership has acquired interests in six operating properties through investments in local limited partnerships. The local limited partnerships and related properties are referred to under Item 1 above to which reference is made for the description, name, location, and ownership interest in each property. Occupancy figures for each quarter during 1997, along with an average for the year, are presented below for each property: Percent Occupied At -------------------------------------------- 1997 3/31/97 6/30/97 9/30/97 12/31/97 Average ------- ------- ------- -------- ------- Village at Fawcett's Pond Apartments 100% 100% 99% 100% 100% Quaker Court and The Meadows 99% 98% 98% 100% 99% Villages at Montpelier Apartments 96% 94% 88% 90% 92% Marvin Gardens Apartments 100% 97% 98% 100% 99% Colonial Farms Apartments 100% 99% 99% 100% 100% Ramblewood Apartments 99% 98% 99% 100% 99% Item 3. Legal Proceedings In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including PaineWebber Shelter Fund, Inc. and Properties Associates ("PA") which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation. The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in PaineWebber/CMJ Properties, LP, PaineWebber, PaineWebber Shelter Fund, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested PaineWebber/CMJ Properties, LP, also alleged that following the sale of the partnership interests, PaineWebber, PaineWebber Shelter Fund, Inc. and PA misrepresented financial information about the Partnerships value and performance. The amended complaint alleged that PaineWebber, PaineWebber Shelter Fund, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO. In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and PaineWebber, and the allocation of the $125 million settlement fund among investors in the various partnerships and REITs at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships and REITs. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement was held in December 1996, and in March 1997 the court announced its final approval of the settlement. The release of the $125 million of settlement proceeds had been delayed pending the resolution of an appeal of the settlement agreement by two of the plaintiff class members. In July 1997, the United States Court of Appeals for the Second Circuit upheld the settlement over the objections of the two class members. As part of the settlement agreement, PaineWebber agreed not to seek indemnification from the related partnerships and real estate investment trusts at issue in the litigation (including the Partnership) for any amounts that it is required to pay under the settlement. In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleged, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint sought compensatory damages of $15 million plus punitive damages against PaineWebber. In September 1996, the court dismissed many of the plaintiffs' claims in the Abbate action as barred by applicable securities arbitration regulations. Mediation with respect to the Abbate action was held in December 1996. As a result of such mediation, a settlement between PaineWebber and the plaintiffs was reached which provided for the complete resolution of the action. Final releases and dismissals with regard to this action were received during 1997. Based on the settlement agreements discussed above covering all of the outstanding unitholder litigation, management believes that the resolution of these matters will not have a material impact on the Partnership's financial statements, taken as a whole. The Partnership is not subject to any other material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters At December 31, 1997 there were 875 record holders of Units in the Partnership. There is no public market for the Units, and it is not anticipated that a public market for Units will develop. Upon request, the Managing General Partner will endeavor to assist a Unitholder desiring to transfer his Units and may utilize the services of PWI in this regard. The price to be paid for the Units will be subject to negotiation by the Unitholder. The Managing General Partner will not redeem or repurchase Units. No cash distributions were made to the Limited Partners during 1997. Item 6. Selected Financial Data Paine Webber/CMJ Properties, LP (In thousands, except per Unit data) Years Ended December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Revenues $ 147 $ 98 $ 244 $ 179 $ 293 Expenses $ 288 $ 280 $ 288 $ 268 $ 289 Partnership's share of local limited partnerships' income $ 184 $ 157 $ 174 $ 186 $ 203 Net income (loss) $ 43 $ (25) $ 130 $ 97 $ 207 Cash distributions per Limited Partnership Unit - $ 20.00 $20.00 $ 10.00 - Net income (loss) per Limited Partnership Unit $ 4.85 $ (2.82) $14.75 $ 11.01 $ 23.45 Total assets $ 520 $ 415 $ 486 $ 525 $ 729 (a) The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. (b) The above per Limited Partnership Unit information is based upon the 8,746 Limited Partnership Units outstanding during each year. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information Relating to Forward-Looking Statements - -------------------------------------------------- The following discussion of financial condition includes forward-looking statements which reflect management's current views with respect to future events and financial performance of the Partnership. These forward-looking statements are subject to certain risks and uncertainties, including those identified below under the heading "Certain Factors Affecting Future Operating Results", which could cause actual results to differ materially from historical results or those anticipated. The words "believe", "expect", "anticipate," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which were made based on facts and conditions as they existed as of the date of this report. The Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Liquidity and Capital Resources - ------------------------------- The Partnership offered limited partnership interests to the public from May 1983 to April 1984 pursuant to a Registration Statement filed under the Securities Act of 1933. The Partnership received gross proceeds of $8,746,000, and after deducting selling expenses and offering costs, the Partnership invested approximately $6,960,000 in six local limited partnerships owning housing projects that received various forms of federal, state or local assistance and that could be classified as "low-income housing" under the Internal Revenue Code. The Partnership does not have any commitments for additional capital expenditures or investments. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1997, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and the majority of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Given the improvements in cash flow and the strong operating performances of the investment properties in recent years, management had instituted a program in 1994 which provided for the payment of regular quarterly distributions at an annual rate of 2% on original invested capital. During 1996, distributions to the Partnership from the local limited partnerships declined, causing management to suspend distributions effective for the fourth quarter of 1996 until further notice. In the future, to the extent there is sufficient distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership plans to make an annual distribution payment. As discussed further below, because of ongoing capital expenditure requirements at the properties, which are expected to maintain and enhance their long-term values, the Partnership did not make an annual distribution payment to the Limited Partners in 1997. During 1996, the Partnership received distributions totalling $310,000 from four of the six local limited partnership investments: Ramblewood, Quaker Meadows, Colonial Farms and Fawcett's Pond. During 1997, the Partnership received annual distributions totalling $366,000 from the same four local limited partnership investments, plus a distribution of $4,000 from Marvin Gardens. The amounts received in 1996 and 1997 represented the cash flow available for distribution as of December 31, 1995 and 1996, respectively, as determined by the general partners of the local limited partnerships in accordance with the partnership, financing and regulatory agreements. Total distributions from the Partnership's investments increased slightly in the current year due to an increase in distributions from the Quaker Meadows and Ramblewood partnerships and the distribution from the Marvin Gardens partnership, but remain below the level of distributions received in 1994 and 1995. As previously reported, during the second quarter of 1997 management of the Partnership completed a detailed review of each property with the affiliate of the operating general partners which manages the day-to-day operations of the investment properties. As a result of such review, management determined that the Partnership should not make an annual distribution to the Limited Partners for 1997. Based on the current environment of rising property operating expenses and capital improvement costs, as well as the restrictions on distributable cash flow from the properties, there was not sufficient cash flow to support the payment of a distribution by the Partnership for 1997. Management believes the next likely distribution would be a distribution to be made during 1998 at an annualized rate of 1% on invested capital, provided that current projections for cash distributions from the properties in 1998 are met. The annual cash distributions from the local limited partnerships typically occur in the second or third quarters. As of December 31, 1997, five of the Partnership's six operating investment properties were receiving rental subsidy payments from the federal government under Section 8 of the National Housing Act. The subsidy agreement covering The Villages at Montpelier Apartments expired in July 1997. The subsidy agreements covering the other five operating investment properties do not expire for another 4-to-6 years. Due to the limited availability of government subsidized housing, these properties consistently achieve occupancy levels of 99% to 100%. Cash flow from these five properties is restricted by the Department of Housing and Urban Development ("HUD") and other applicable state housing agencies, which set rental rates for low-income units and require significant cash reserves to be established for future capital improvements. In addition, a substantial amount of the revenues generated by these properties comes from the rental subsidy payments made by federal or state housing agencies. These features, which are characteristic of all subsidized low-income housing properties, significantly limit the pool of potential buyers for these real estate assets. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the general partners of the local limited partnerships, which receive management fee revenues from the properties through an affiliated management company, to attempt to sell any of the properties in the near term. As a limited partner of the local limited partnerships, the Partnership does not control property disposition decisions. The partnership agreements state that the limited partner may cause the sale of the assets of the local limited partnerships subsequent to June 30, 1995, but not earlier than one year after it has given written notice to the operating general partner of its intent to cause such sale, and only if, during such one-year period, the operating general partner does not cause the sale of such assets. If the operating general partner has not caused the assets of the partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell such assets to the operating general partner, and either the operating general partner does not accept such offer within 90 days of receiving it, or the operating general partner does not complete the sale in accordance with such offer after accepting the terms. As previously reported, 80% of the apartments at The Villages at Montpelier were rented at market rates while 20% received government subsidies under the Section 8 rental assistance program. With the expiration of the subsidy agreement in July 1997, the property management team began the process of converting the former subsidized units at the property to market rent units during the third quarter of 1997. As expected, the conversion resulted in a decline in occupancy at the property as a number of subsidized tenants vacated the property and their units were prepared to be re-leased. Subsequent to the expiration of the Section 8 contract, the average occupancy level at the property fell to 88% for the third quarter but rebounded to 90% for the fourth quarter. As of December 31, 1997, the property was 93% leased. A majority of the remaining vacancies at the property are in the larger 3 and 4 bedroom units. The property's management and leasing team is offering rental concessions on these units until a majority of them are leased. Based on existing market rental rates, management believes that the rental revenues from The Villages at Montpelier Apartments will be comparable to the prior subsidized levels once the occupancy has stabilized. If the market for conventional multi-family apartment properties remains strong in the near term, the expiration of the rental subsidy agreement at The Villages at Montpelier Apartments could enhance the property's marketability for a potential sale by increasing the pool of interested buyers. However, there are no assurances that such market conditions will remain strong, and the ability of the Partnership to cause a sale of the property will remain restricted by the terms of the limited partnership agreement discussed further above. If market conditions were to deteriorate, The Villages at Montpelier Apartments could experience extended declines in occupancy and revenues as a result of the expiration of the subsidy agreement. For the remaining five properties, which each contain 100% low-income housing units, the government subsidy payments range from 75% to 82% of the total revenues of the related local limited partnerships. At the present time, certain legislative initiatives and governmental budget negotiations could result in a reduction in funds available for the various HUD-administered housing programs and new limitations on subsidized rent levels. Such changes could adversely impact the net operating income generated by the local limited partnerships. In light of the uncertainty regarding the near term prospects for government assisted, low-income housing and the restrictions on the Partnership's ability to cause a sale of the operating properties, management does not have any immediate plans to initiate the sale process under the terms of the agreements described above. Notwithstanding this, the Partnership is currently in the process of developing potential disposition strategies for each of the properties. A decision as to when actions will be taken to initiate the sale process with respect to any or all of the operating investment properties in the future will be based upon a number of factors including, the availability of a pool of qualified buyers, an evaluation of the future of the relevant subsidy programs, the availability of financing, an assessment of local market conditions and future appreciation potential. Now that the regulatory agreement on The Villages at Montpelier Apartments has expired, the decision of whether to initiate a sale process for that property will be based on a more traditional analysis of existing market conditions and future appreciation potential. It is currently contemplated that dispositions of the Partnership's assets could be completed within the next 2 to 3 years. The disposition of the remaining assets would be followed by the formal liquidation of the Partnership. There are no assurances, however, that the disposition of the remaining assets and a liquidation of the Partnership will be completed within this time frame. At December 31, 1997, the Partnership had available cash and cash equivalents of approximately $493,000, which it intends to use for its working capital requirements. The source of future liquidity and distributions to the partners is expected to be from cash generated from the operations of the Partnership's real estate investments and from the proceeds received from the sale or refinancing of the properties owned by the local limited partnerships. Such sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis. Results of Operations 1997 Compared to 1996 - --------------------- For the year ended December 31, 1997, the Partnership reported net income of $43,000, as compared to a net loss of $25,000 for 1996. This favorable change in the Partnership's net operating results is attributable to a $41,000 increase in the Partnership's operating income and a $27,000 increase in the Partnership's share of local limited partnerships' income. The increase in the Partnership's operating income is attributable to an increase in other income from local limited partnerships of $37,000 and an increase in interest income of $12,000. An increase in general and administrative expenses of $8,000 partially offset these favorable changes in operating income. As discussed further in Note 2 to the accompanying financial statements, the Partnership accounts for its investments in local limited partnerships using the equity method. In accordance with the equity method, the Partnership does not record losses for those limited partnership investments whose equity method basis has been reduced to zero and recognizes future income from these entities only when it exceeds the previously unrecorded losses. Distributions received from investments in limited partnerships whose basis has been reduced to zero are recorded as other income from the local limited partnerships. Other income from the local limited partnerships in 1997 represents distributions from Quaker Meadows, Colonial Farms and Marvin Gardens while the 1996 amount represents distributions from Quaker Meadows, Colonial Farms and Fawcett's Pond. Overall, other income from local limited partnerships increased by $37,000 due to a $41,000 increase in distributions from Quaker Meadows, a $4,000 distribution from Marvin Gardens, which did not make a distribution in 1996, and an $8,000 reduction attributable to Fawcett's Pond. Although the distribution from the Fawcett's Pond partnership remained unchanged from 1996 to 1997, other income from local limited partnerships decreased because the entire distribution from Fawcett's Pond was recorded as a reduction of the equity method carrying value of the investment in 1997. The increase in interest income resulted from an increase in invested cash reserves due to the suspension of the Partnership's quarterly distributions during the fourth quarter of 1996 and an increase in distributions from local limited partnerships in 1997. The increase in general and administrative expenses was mainly due to increases in certain required professional services during 1997. At December 31, 1997, only two of the six local limited partnerships, The Holbrook Apartments Company (Ramblewood Apartments) and the Fawcett's Pond Apartment Company, had positive equity method carrying values. The Partnership's share of income from the Ramblewood Apartments for 1997 and 1996 totalled $154,000 and $141,000, respectively, while the Partnership's share of income from the Fawcett's Pond Apartments for 1997 and 1996 totalled $30,000 and $16,000, respectively. The favorable change in the Partnership's share of local limited partnerships' income attributable to the Fawcett's Pond partnership resulted from a portion of the income from Fawcett's Pond ($55,000) being allocated to offset previously unrecorded losses in 1996. As a result, only $16,000 of the $71,000 income allocable to the Partnership in that year was recognized by the Partnership in its share of local limited partnerships' income. In 1997, the entire $30,000 of Fawcett's Pond income allocable to the Partnership was recognized in its share of local limited partnerships' income. The favorable change in the Partnership's share of income from the Ramblewood partnership resulted mainly from an increase in total revenues and decreases in real estate taxes and interest expense which were partially offset by an increase in incentive management fees and property operating expenses. In the aggregate, total revenues increased or remained the same at five of the six local limited partnerships due to stable occupancy levels which averaged in the 99% to 100% range during 1996 and 1997. The Villages at Montpelier Apartments was the only local limited partnership to experience a notable decline in occupancy which resulted in a 1% decline in rental revenues for 1997. Average occupancy at The Villages at Montpelier Apartments declined from 95% in 1996 to 92% for the current year due to the expiration of the government subsidy agreement in July 1997, as discussed further above. Despite the decline in rental revenues, the net operating results of The Villages at Montpelier partnership improved by $192,000 during 1997, mainly due to a $214,000 reduction in property operating expenses, which was principally due to lower repairs and maintenance costs. Total expenses at the other five local limited partnerships increased mainly due to increases in repairs and maintenance expenses at Colonial Farms, Fawcett's Pond, Quaker Meadows and Marvin Gardens, a reimbursement of subsidy payments required at Colonial Farms and an increase in incentive management fees at Ramblewood and Quaker Meadows. 1996 Compared to 1995 - --------------------- For the year ended December 31, 1996, the Partnership reported a net loss of $25,000, as compared to net income of $130,000 for 1995. This unfavorable change in the Partnership's net operating results of $155,000 was attributable to a $138,000 increase in the Partnership's operating loss and a $17,000 decline in the Partnership's share of local limited partnerships' income. As noted above, in accordance with the equity method of accounting for limited partnership interests, the Partnership does not record losses from investment properties when losses exceed the Partnership's equity method basis in these properties, and future income is recognized only when it exceeds the previously unrecorded losses. Five of the Partnership's six investments had an equity method basis of zero as of December 31, 1996 and 1995. The Holbrook Apartments Company (Ramblewood Apartments) was the only remaining investment with a positive equity method carrying value as of December 31, 1996 and 1995. The Partnership's share of income from the Ramblewood Apartments for 1996 and 1995 totalled $141,000 and $174,000, respectively. This unfavorable change in the net operating results of the Ramblewood partnership resulted mainly from an increase in property operating expenses. Property operating expenses increased as a result of sidewalk repairs, exterior painting, and the replacement of playground equipment, which occurred in 1996. During 1996, cumulative income allocations to the Partnership from the Fawcett's Pond investment exceeded previously unrecorded losses. As a result, the Partnership recognized a portion of the 1996 income allocation from the Fawcett's Pond partnership ($16,000) in its share of local limited partnerships' income in 1996, which partially offset the decline in income from the Ramblewood partnership. Distributions from the Fawcett's Pond partnership were recorded as reductions to the investment carrying value to the extent of the income recognition in 1996 which reduced the carrying value of the investment to zero as of December 31, 1996. Overall, the combined net operating results of the six local limited partnerships improved from a net loss of $6,000 in 1995 to net income of $17,000 in 1996. This favorable change resulted from an increase in combined revenues of $67,000, which exceeded the increase in combined expenses of $44,000. The Partnership's operating loss increased due to a $146,000 decrease in total revenues, which was partially offset by an $8,000 decrease in Partnership general and administrative expenses. The major portion of the decrease in total revenues was attributable to a $137,000 decline in other income from local limited partnerships. As discussed further in Note 2 to the financial statements, distributions from the local limited partnerships are recorded as other income for those investments for which the Partnership's equity method carrying value has been reduced to zero. With the exception of Fawcett's Pond, distributions from which remained unchanged, distributions from the five local limited partnerships with carrying values of zero declined by varying amounts in 1996 generally due to rising operating expenses and increases in capital expenditures. In addition, as discussed further above, a portion of the distributions received from the Fawcett's Pond partnership in 1996 were recorded as reductions to the investment's carrying value. Also contributing to the decrease in total revenues was a $9,000 decline in interest income on invested cash reserves. The decline in general and administrative expenses was mainly due to decreases in certain required professional services. 1995 Compared to 1994 - --------------------- The Partnership recorded net income of $130,000 for the year ended December 31, 1995, as compared to net income of $97,000 for 1994. The increase in net income of $33,000 was mainly the result of an increase in other income from local limited partnerships of $64,000. As noted above, distributions from the local limited partnerships are recorded as income for those investments for which the Partnership's equity method carrying value has been reduced to zero. Distributions totalling $221,000 from five partnerships were recorded as other income in the year ended December 31, 1995, as compared to $157,000 from the same five partnerships for 1994. The favorable change in other income from local limited partnerships was partially offset by an increase of $20,000 in the Partnership's general and administrative expenses in 1995. In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. Five of the Partnership's six investments had an equity method basis of zero as of December 31, 1995 and 1994. Distributions from the Holbrook Apartments Company (Ramblewood Apartments), the only remaining investment which still had a positive equity method carrying value at December 31, 1995 and 1994, were recorded as reductions of the investment carrying value and totalled $214,000 and $250,000 for 1995 and 1994, respectively. Distributions from the other five limited partnerships increased by $64,000 in 1995, as reflected in the change in other income. This increase resulted primarily from an increase of $47,000 in distributions from The Villages at Montpelier Apartments. The distributions received in 1995 reflected the available cash flow from 1994 operations. The Partnership's recorded share of local limited partnerships' income in 1995 consisted of income of $174,000 from the Ramblewood Apartments limited partnership, as compared to income of $186,000 from the same partnership in 1994. Net income was down slightly at Ramblewood in 1995, mainly due to increases in salaries expense and real estate taxes. Overall, an increase in combined property operating expenses of $282,000 for the six local limited partnerships exceeded the increase in combined revenues of $75,000. Occupancy levels remained high throughout 1995 with average occupancy above 95% at all properties. Revenues were up at all properties except at The Villages at Montpelier Apartments. At The Villages at Montpelier Apartments, revenues decreased slightly during 1995 due to a temporary decline in occupancy experienced in the third quarter. Occupancy at The Villages at Montpelier Apartments averaged 95% for 1995, but dropped to 91% in August 1995 as a result of management's efforts to increase rental rates for the market-rate units. Management stepped up its marketing efforts in conjunction with the rate increases. After the initial decline in occupancy, the marketing efforts generated positive results as the occupancy level recovered and the number of prospective tenants visiting the property increased. Expenses in general were up at all of the local limited partnerships with repairs and maintenance expenses running higher in 1995 at these properties due to a combination of their ages, applicable regulatory requirements and management's operating philosophy. Such expenses do, however, fluctuate from year to year. Certain Factors Affecting Future Operating Results - -------------------------------------------------- The following factors could cause actual results to differ materially from historical results or those anticipated: Risks of Government-Assisted Housing Complexes. In certain respects government-assisted housing complexes differ from conventional housing complexes. These include (a) greater financing leverage than is usual in conventional complexes, (b) review of compliance with construction and other standards and (c) various contingency reserves required in connection with such government assistance programs. Government-assisted housing is also subject to special conditions and risks including, but not limited to, (a) general surveillance by the appropriate governmental assistance agency, which may include the application of rental and other guidelines affecting tenant eligibility, operating costs and rental levels, (b) maintenance of a reserve fund for replacements in an amount paid concurrently with amortization of the mortgage and in addition to payments of principal and interest, restricted such that withdrawals from the fund are subject to the prior approval of the appropriate governmental assistance agency, (c) compliance with the United States Department of Housing and Urban Development ("HUD") regulations regarding management of the premises, (d) limitations on saleability, as contained in regulatory agreements with the appropriate governmental assistance agency, (e) limitations on rent increases, and (f) the uncertain effects of changes in complex rules and regulations governing such government-assisted programs, or changes in the manner in which those regulations are interpreted. Government assistance payments may be reduced in the event that a project rents less than 100% of its units eligible for rental subsidies to qualified low income tenants. HUD generally elects to reduce subsidies only in the event that occupancy levels for qualified tenants drop below 95% for a period of two years. Finally, HUD commitments are subject to HUD's appropriation of federal funds sufficient to meet its obligations in any given year. At the present time, certain legislative initiatives and governmental budget negotiations could result in a reduction of funds available for the various HUD-administered housing programs and could also result in new limitations on subsidized rent levels. This in turn could adversely impact the net operating income generated by the Partnership's properties. Real Estate Investment Risks. Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants of the attractiveness of the property; (ii) the ability to retain qualified individuals to provide adequate management and maintenance of the property; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing. Effect of Uninsured Loss. The local limited partnerships carry comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to their properties with insured limits and policy specifications that management believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature such as wars, floods or earthquakes) which may be either uninsurable, or, in management's judgment, not economically insurable. Should an uninsured loss occur, the Partnership could lose both its invested capital in and anticipated profits from the affected property. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The Partnership is not aware of any notification by any private party or governmental authority of any non-compliance, liability or other claim in connection with environmental conditions at any of its properties that it believes will involve any expenditure which would be material to the Partnership, nor is the Partnership aware of any environmental condition with respect to any of its properties that it believes will involve any such material expenditure. However, there can be no assurance that any non-compliance, liability, claim or expenditure will not arise in the future. Competition. The financial performance of the Partnership's real estate investments will be impacted by the competition from comparable properties in their local market areas. Due to the limited availability of low-income housing programs like the ones that cover five of the Partnership's six investment properties, the competitive pressures faced by these properties are much less than for non-subsidized, market rate facilities. Nonetheless, the occupancy levels achievable at the properties and the rental rates at the non-subsidized property are largely a function of supply and demand in the markets. In many markets across the country, development of new multi-family properties has surged in the past 12 months. Existing apartment properties in such markets have generally experienced increased vacancy levels, declines in effective rental rates and, in some cases, declines in estimated market values as a result of the increased competition. There are no assurances that these competitive pressures will not adversely affect the operations and/or market values of the Partnership's investment properties in the future and, in particular, subsequent to the expiration of the existing subsidy agreements. Impact of Local Limited Partnership Structure. The ownership of the Partnership's investments through local limited partnerships could adversely impact the timing of the Partnership's planned dispositions of its remaining assets and the amount of proceeds received from such dispositions. It is possible that the general partners of the local limited partnerships could have economic or business interests which are inconsistent with those of the Partnership. Given the limited rights which the Partnership has under the terms of the local limited partnership agreements, any conflict between the partners could result in delays in completing a sale of the related operating property and could lead to an impairment in the marketability of the property to third parties for purposes of achieving the highest possible sale price. Availability of a Pool of Qualified Buyers. The availability of a pool of qualified and interested buyers for the Partnership's remaining assets is critical to the Partnership's ability to realize the fair market values of such properties at the time of their final dispositions. Demand by buyers of multi-family apartment properties is affected by many factors, including the size, quality, age, condition and location of the subject property, potential environmental liability concerns, the existing debt structure, the liquidity in the debt and equity markets for asset acquisitions, the general level of market interest rates and the general and local economic climates. In addition, because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Inflation - --------- The Partnership completed its fourteenth full year of operations in 1997. To date, the effects of inflation and changes in prices on the Partnership's operating results have not been significant. In the future, with regard to the local limited partnerships, contract rental rates under "Section 8" agreements may be increased at the discretion of the Department of Housing and Urban Development in response to inflationary pressures to cover increases in operating expenses due to inflation. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are included under Item 14 of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Principal Executive Officers of the Partnership The Managing General Partner of the Partnership is PW Shelter Fund, Inc., a Delaware corporation which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operation, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract. (a) and (b) The names and ages of the directors and principal executive officers of the Managing General Partner of the Partnership are as follows: Date Elected Name Office Age to Office ---- ------ --- --------- Bruce J. Rubin President and Director 38 8/22/96 Terrence E. Fancher Director 44 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 50 10/29/85 David F. Brooks First Vice President and Assistant Treasurer 55 12/10/82 * Timothy J. Medlock Vice President and Treasurer 36 6/1/88 Thomas W. Boland Vice President and Controller 35 12/1/91 * The date of incorporation of the Managing General Partner (c) There are no other significant employees in addition to the directors and executive officers mentioned above. (d) There is no family relationship among any of the foregoing directors and/or executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner. (e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which PaineWebber Properties Incorporated serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows: Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School. Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College. Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of Texas. David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services. Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985. Thomas W. Boland is a Vice President and Controller of the Managing General Partner and a Vice President and Controller of the Adviser which he joined in 1988. From 1984 to 1987 Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University. (f) None of the directors and officers were involved in legal proceedings which are material to an evaluation of her or his ability or integrity as a director or officer. (g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended December 31, 1997, all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with. Item 11. Executive Compensation The directors and officers of the Partnership's Managing General Partner receive no current or proposed remuneration from the Partnership. The Partnership is required to pay certain fees to the Adviser, and the General Partners are entitled to receive a share of cash distributions and a share of profits or losses. These items are described under Item 13. The Partnership paid distributions to the Unitholders on a quarterly basis at a rate of 2% per annum on original invested capital from June 30, 1994 to September 30, 1996. The Partnership's quarterly distributions were suspended effective for the quarter ended December 31, 1996 due to an unexpected decline in the cash flow distributions from the local limited partnerships in which the Partnership has invested. In addition, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) The Partnership is a limited partnership issuing Units of limited partnership interest, not voting securities. All the outstanding stock of the Managing General Partner, PW Shelter Fund, Inc., is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, general partners of which are also officers of the Adviser and the Managing General Partner. Properties Associates is also the Initial Limited Partner of the Partnership and owns one Unit of limited partnership interest. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. (b) Neither officers and directors of the Managing General Partner nor the general partners of the Associate General Partner, individually, own any Units of limited partnership interest of the Partnership. No officer or director of the Managing General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of limited partnership interest of the Partnership. (c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions The General Partners of the Partnership are PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. In addition, the Managing General Partner and the Adviser are reimbursed for their out-of-pocket expenses relating to the offering of Units, the administration of the Partnership and the acquisition and operation of the Partnership's real property investments. Distributable cash, as defined, if any, for each fiscal year shall be distributed annually in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds will be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities, to administer the day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee of .5% of invested assets for these services. Invested assets is the sum of the amount invested by the Partnership in each local limited partnership plus a proportionate interest in the mortgage debt initially incurred by the local limited partnerships. The Adviser earned management fees of $199,000 for the year ended December 31, 1997. Accounts payable - affiliates at December 31, 1997 consists of management fees of $199,000 payable to the Adviser. In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to 1% based on the selling price of the property, subordinated to the payment of certain amounts to the Limited Partners. An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services are allocated among several entities including the Partnership. Included in general and administrative expenses for the year ended December 31, 1997 is $35,000, representing reimbursements to this affiliate for providing such services to the Partnership. The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $2,000 (included in general and administrative expenses) for managing the Partnership's cash assets during the year ended December 31, 1997. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI. See Note 3 to the accompanying financial statements of the Partnership for a further discussion of certain relationships and related party transactions. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: (1) and (2) Financial Statements and Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page F-1. (3) Exhibits: The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this report. (b) No reports on Form 8-K were filed during the last quarter of 1997. (c) Exhibits See (a) (3) above. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAINE WEBBER/CMJ PROPERTIES, LP LIMITED PARTNERSHIP By: PW Shelter Fund, Inc. --------------------- Managing General Partner By: /s/ Bruce J. Rubin ------------------ Bruce J. Rubin President and Chief Executive Officer By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer By: /s/ Thomas W. Boland --------------------- Thomas W. Boland Vice President and Controller Dated: March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership and in the capacities and on the dates indicated. By: /s/ Bruce J. Rubin Date: March 30, 1998 ------------------- -------------- Bruce J. Rubin Director By: /s/ Terrence E. Fancher Date: March 30, 1998 ----------------------- -------------- Terrence E. Fancher Director 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 dated May 25, 1983, as pursuant to Rule 424(c) and supplemented, with particular incorporated herein by reference. reference to the Restated Certificate and Agreement of Limited Partnership (10) Material contracts previously Filed with the Commission filed as exhibits to registration pursuant to Section 13or 15(d) statements and amendments thereto of the Securities Act of 1934 of the registrant together with all and incorporated herein by previously filed Forms 8-K and Forms reference. such contracts filed as exhibits of 10-K are hereby incorporated herein by reference. (13) Annual Reports to Limited Partners No Annual Report for the year ended December 31, 1997 has been sent to the Limited Partners. An Annual Report will be sent to the Limited Partners subsequent to this filing. (22) List of subsidiaries Included in Item 1 of Part 1 of this Report Page I-1, to which reference is hereby made. (27) Financial Data Schedule Filed as the last page of EDGAR submission following the Financial Statements required by Item 14.
ANNUAL REPORT ON FORM 10-K Item 14(a) (1) and (2) and 14(d) PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS Reference --------- Paine Webber/CMJ Properties, LP Independent Auditors' Report F-4 Balance sheets at December 31, 1997 and 1996 F-5 Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-6 Statements of changes in partners' capital (deficit) for the years ended December 31, 1997, 1996 and 1995 F-7 Statement of cash flows for the years ended December 31, 1997, 1996 and 1995 F-8 Notes to financial statements F-9 Fawcett's Pond Apartments Company Independent Auditors' Report F-20 Balance sheets at December 31, 1997 and 1996 F-21 Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-22 Statements of partners' deficit for the years ended December 31, 1997, 1996 and 1995 F-23 Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-24 Notes to financial statements F-26 Quaker Meadows Apartments Company Independent Auditors' Report F-29 Balance sheets at December 31, 1997 and 1996 F-30 Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-31 Statements of partners' deficit for the years ended December 31, 1997, 1996 and 1995 F-32 Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-33 Notes to financial statements F-35 PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS - continued Reference --------- South Laurel Apartments Limited Partnership Independent Auditors' Report F-38 Balance sheets at December 31, 1997 and 1996 F-39 Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-40 Statements of partners' deficit for the years ended December 31, 1997, 1996 and 1995 F-41 Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-42 Notes to financial statements F-44 Marvin Gardens Associates Independent Auditors' Report F-47 Balance sheets at December 31, 1997 and 1996 F-48 Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-49 Statements of partners' deficit for the years ended December 31, 1997, 1996 and 1995 F-50 Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-51 Notes to financial statements F-53 Colonial Farms, Ltd. Independent Auditors' Report F-56 Balance sheets at December 31, 1997 and 1996 F-57 Statements of operations for the years ended December 31, 1997, 1996 and 1995 F-58 Statements of partners' deficit for the years ended December 31, 1997, 1996 and 1995 F-59 Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-60 Notes to financial statements F-62 PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS - continued Reference --------- Holbrook Apartments Company Independent Auditors' Report F-65 Balance sheets at December 31, 1997 and 1996 F-66 Statements of operations for the years ended December 31, 1997 1996 and 1995 F-67 Statements of partners' deficit for the years ended December 31, 1997, 1996 and 1995 F-68 Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-69 Notes to financial statements F-71 All schedules have been omitted since the required information is not applicable, or because the information required is included in the financial statements, including the notes thereto. INDEPENDENT AUDITORS' REPORT The Partners of Paine Webber/CMJ Properties, LP We have audited the accompanying balance sheets of Paine Webber/CMJ Properties, LP (a Limited Partner-ship) as of December 31, 1997 and 1996, and the related statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paine Webber/CMJ Properties, LP at December 31, 1997 and 1996, and the results of its operations, changes in partners' capital (deficit), and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland March 20, 1998 PAINE WEBBER/CMJ PROPERTIES, LP BALANCE SHEETS December 31, 1997 and 1996 (In thousands, except per Unit amounts) ASSETS 1997 1996 ---- ---- Investments in local limited partnerships, at equity $ 27 $ 92 Cash and cash equivalents 493 323 -------- -------- $ 520 $ 415 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accrued expenses and accounts payable $ 16 $ 21 Accounts payable - affiliates 199 132 -------- -------- 215 153 Partners' capital: General Partners: Capital contributions 1 1 Cumulative net losses (69) (70) Cumulative distributions (5) (5) Limited Partners ($1,000 per Unit; 15,000 Units authorized; 8,746 Units issued and outstanding): Capital contributions, net of offering costs 7,679 7,679 Cumulative net losses (6,864) (6,906) Cumulative distributions (437) (437) -------- -------- Total partners' capital 305 262 -------- -------- $ 520 $ 415 ======== ======== The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF OPERATIONS For the years ended December 31, 1997, 1996 and 1995 (In thousands, except per Unit amounts) 1997 1996 1995 ---- ---- ---- Revenues: Interest income $ 26 $ 14 $ 23 Other income from local limited partnerships 121 84 221 ------- ------- -------- 147 98 244 Expenses: Management fees 199 199 199 General and administrative 89 81 89 ------- ------- -------- 288 280 288 ------- ------- -------- Operating loss (141) (182) (44) Partnership's share of local limited partnerships' income 184 157 174 ------- ------- -------- Net income (loss) $ 43 $ (25) $ 130 ======= ======= ======== Net income (loss) per Limited Partnership Unit $ 4.85 $ (2.82) $ 14.75 ======= ======== ======== Cash distributions per Limited Partnership Unit $ - $ 20.00 $ 20.00 ======= ======== ======== The above net income (loss) and cash distributions per Limited Partnership Unit are based upon the 8,746 Limited Partnership Units outstanding during each year. The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended December 31, 1997, 1996 and 1995 (In thousands) General Limited Partners Partners Totals -------- -------- ------ Balance at December 31, 1994 $ (71) $ 582 $ 511 Cash distributions (2) (175) (177) Net income 1 129 130 ------- ------ ------ Balance at December 31, 1995 (72) 536 464 Cash distributions (2) (175) (177) Net loss - (25) (25) ------- ------ ------ Balance at December 31, 1996 (74) 336 262 Net income 1 42 43 ------- ------ ------ Balance at December 31, 1997 $ (73) $ 378 $ 305 ======= ====== ====== The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996 and 1995 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 43 $ (25) $ 130 Adjustments to reconcile net income (loss) to net cash used in operating activities: Other income from local limited partnerships (121) (84) (221) Partnership's share of local limited partnerships' income (184) (157) (174) Changes in assets and liabilities: Accrued expenses and accounts payable (5) (1) 8 Accounts payable - affiliates 67 132 - ------ ------- -------- Total adjustments (243) (110) (387) ------ ------- -------- Net cash used in operating activities (200) (135) (257) ------ ------- -------- Cash flows from investing activities: Distributions from local limited partnerships 370 310 435 ------ ------- -------- Net cash provided by investing activities 370 310 435 ------ ------- -------- Cash flows from financing activities: Distributions to partners - (177) (177) ------ ------- -------- Net cash used in financing activities - (177) (177) ------ ------- -------- Net increase (decrease) in cash and cash equivalents 170 (2) 1 Cash and cash equivalents, beginning of year 323 325 324 ------ ------- -------- Cash and cash equivalents, end of year $ 493 $ 323 $ 325 ====== ======= ========
The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP NOTES TO FINANCIAL STATEMENTS December 31, 1997 1. Organization and Nature of Operations ------------------------------------- Paine Webber/CMJ Properties, LP (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in December 1982 for the purpose of investing in a portfolio of interests in local limited partnerships owning apartment projects which received governmental assistance in the form of low rate mortgages and rent subsidies. All of the properties owned by the local limited partnerships were developed by Corcoran, Mullins, Jennison, Inc. ("CMJ") or its affiliates. The initial capital was $2,000, representing capital contributions of $1,000 by the General Partners and $1,000 for one unit (a "Unit") by the Initial Limited Partner. The Partnership authorized the issuance of a maximum of 15,000 Partnership Units of which 8,745 were subscribed and issued between May 25, 1983 and April 30, 1984. The Partnership originally invested the net proceeds of the public offering, through local limited partnerships, in six apartment projects which receive governmental assistance in the form of low interest rate mortgages and rent subsidies. The Partnership's original investment objectives were to invest the net cash proceeds from the offering of limited partnership units in rental apartment properties receiving various forms of federal, state or local assistance with the goals of providing: (1) tax losses from deductions generated by investments; (2) capital preservation; (3) potential capital appreciation; and (4) potential future cash distributions from operations (on a limited basis), or from the sale or refinancing of the projects owned by the local limited partnerships, or from the sale of interests in the local limited partnerships. The Partnership has generated tax losses since inception. However, the benefits of such losses to investors have been significantly reduced by changes in federal income tax law subsequent to the organization of the Partnership. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1997, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and the majority of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Given the improvements in cash flow and the strong operating performances of the investment properties in recent years, management had instituted a program of regular quarterly distributions in 1994 at an annual rate of 2% on original invested capital. Effective for the fourth quarter of 1996, due to an unexpected decline in the level of cash flow distributions from the local limited partnerships, distributions to the partners were suspended until further notice. In the future, to the extent there is distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership plans to make an annual distribution payment. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final sales of its investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. Because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the General Partners of the local limited partnerships, which receive management fee revenues from the properties, to attempt to sell any of the properties in the near term. As discussed further in Note 4, as a limited partner in the local limited partnerships, the Partnership's ability to influence major business decisions, including any decision to sell the properties, is restricted under the terms of the agreements. 2. Use of Estimates and Summary of Significant Accounting Policies --------------------------------------------------------------- The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of December 31, 1997 and 1996 and revenues and expenses for each of the three years in the period ended December 31, 1997. Actual results could differ from the estimates and assumptions used. The accompanying financial statements include the Partnership's investments in six local limited partnerships which own operating properties. The Partnership accounts for its investments in local limited partnerships using the equity method. Under the equity method, the investment is carried at cost adjusted for the Partnership's share of the local limited partnerships' earnings and losses and distributions. In accordance with the equity method of accounting for limited partnership interests, the Partnership does not record losses for those limited partnership investments whose equity method basis has been reduced to zero, recognizing future income from these entities only when it exceeds the previously unrecorded losses. Distributions received from investments in limited partnerships whose basis has been reduced to zero are recorded as other income in the Partnership's statement of operations. See Note 4 for a description of the local limited partnerships. For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less when acquired. The Partnership's cash reserves are invested in financial instruments which potentially subject the Partnership to concentrations of credit risk. The Partnership currently invests primarily in investment-grade rated commercial paper with overnight maturities. Management believes that no significant concentration of credit risk exists with respect to these cash investments as of December 31, 1997. The carrying amount of cash and cash equivalents approximates their fair value as of December 31, 1997 due to the short-term maturities of these instruments. No provision for income taxes has been made, as the liability for such taxes is that of the partners rather than the Partnership. The cumulative difference between the book basis and tax basis of the Partnership's investment in local limited partnerships is approximately $17,811,000 as of December 31, 1997 due to the losses on investments recognized on the tax basis in excess of the book basis. 3. The Partnership Agreement and Related Party Transactions -------------------------------------------------------- The General Partners of the Partnership are PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. Distributable cash, as defined, if any, for each fiscal year shall be distributed annually in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds will be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities, to administer the day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee of .5% of invested assets for these services. Invested assets is the sum of the amount invested by the Partnership in each local limited partnership plus a proportionate interest in the mortgage debt initially incurred by the local limited partnerships. The Adviser earned management fees of $199,000 for each of the three years in the period ended December 31, 1997. Accounts payable affiliates at December 31, 1997 consists of management fees of $199,000 payable to the Adviser. In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to 1% based on the selling price of the property, subordinated to the payment of certain amounts to the Limited Partners. Included in general and administrative expenses for the years ended December 31, 1997, 1996 and 1995 is $35,000, $32,000 and $32,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership. The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins"), an affiliate of the Managing General Partner, for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $2,000, (included in general and administrative expenses) for managing the Partnership's cash assets during each of the three years ended December 31, 1997. 4. Local Limited Partnerships -------------------------- The Partnership has investments in six local limited partnerships. These local limited partnerships are accounted for on the equity method in the Partnership's financial statements. Condensed combined financial statements of these local limited partnerships follow: Condensed Combined Balance Sheets December 31, 1997 and 1996 (In thousands) Assets 1997 1996 ---- ---- Current assets $ 1,964 $ 2,060 Restricted deposits and funded reserves 1,816 1,877 Operating investment property, net 24,629 25,621 Other assets 1,004 1,046 -------- -------- $ 29,413 $ 30,604 ======== ======== Liabilities and Capital Current liabilities and tenant security deposits $ 1,290 $ 1,461 Due to general partner 2,508 2,508 Long-term mortgage debt, less current portion 32,279 32,847 Partnership's share of combined partners' deficit accounts (3,511) (3,104) Local partners' shares of combined partners' deficit accounts (3,153) (3,108) -------- -------- $ 29,413 $ 30,604 ======== ======== Condensed Combined Summary of Operations For the years ended December 31, 1997, 1996 and 1995 (In thousands) 1997 1996 1995 ---- ---- ---- Rental revenues, including government subsidies $ 9,963 $ 9,949 $ 9,864 Other income 130 112 130 -------- -------- ------- 10,093 10,061 9,994 Property operating expenses 5,834 5,733 5,701 Interest expense and mortgage insurance 2,904 2,964 3,005 Depreciation and amortization 1,389 1,347 1,294 -------- -------- ------- 10,127 10,044 10,000 -------- -------- ------- Net income (loss) $ (34) $ 17 $ (6) ======== ======== ======== Net income (loss): Partnership's share of operations $ (37) $ 32 $ (15) Local partners' share of operations 3 (15) 9 -------- -------- ------- $ (34) $ 17 $ (6) ======== ======== ======= Reconciliation of Partnership's Share of Operations (In thousands) 1997 1996 1995 ---- ---- ---- Partnership's share of operations, as shown above $ (37) $ 32 $ (15) Losses in excess of basis not recognized by Partnership 221 278 234 Income offset with prior year unrecognized losses - (153) (45) ------ ------ ------- Partnership's share of local limited partnerships' income $ 184 $ 157 $ 174 ====== ====== ======= Reconciliation of Partnership's Investments (In thousands) 1997 1996 ---- ---- Partnership's share of combined partners' deficit accounts, as shown above $ (3,511) $ (3,104) Accumulated losses in excess of basis not recognized by Partnership 2,324 2,103 Cumulative distributions in excess of investment basis 1,199 1,078 Excess basis in local limited partnerships 15 15 -------- -------- Investments in local limited partnerships, at equity $ 27 $ 92 ======== ======== "Investments in local limited partnerships, at equity" is the Partnership's net investment in the local limited partnerships. These local limited partnerships are subject to regulatory agreements and partnership agreements which determine the distribution of available funds, the disposition of the limited partnership's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the local limited partnership. As a limited partner of the local limited partnerships, the Partnership does not control property disposition decisions. The partnership agreements state that the limited partner may cause the sale of the assets of the local limited partnerships subsequent to June 30, 1995, but not earlier than one year after it has given written notice to the operating general partner of its intent to cause such sale, and only if, during such one year period, the operating general partner does not cause the sale of such assets. If the operating general partner has not caused the assets of the partnership to be sold within such one year period the limited partner may cause such sale, but only after it has offered to sell such assets to the operating general partner, and either the operating general partner does not accept such offer within 90 days of receiving it, or the operating general partner does not complete the sale in accordance with such offer after accepting the terms. "Investments in local limited partnerships, at equity" on the balance sheets is comprised of the following local limited partnership investments, at the balances indicated (in thousands): 1997 1996 ---- ---- Fawcett's Pond Apartments Company $ 6 $ - Quaker Meadows Apartments Company - - South Laurel Apartments Limited Partnership - - Marvin Gardens Associates - - Colonial Farms Ltd. - - Holbrook Apartments Company 21 92 ------ ------ Investments in local limited partnerships, at equity $ 27 $ 92 ====== ====== The Partnership received cash distributions from the limited partnerships as set forth below (in thousands): 1997 1996 1995 ---- ---- ---- Fawcett's Pond Apartments Company $ 24 $ 24 $ 24 Quaker Meadows Apartments Company 90 50 66 South Laurel Apartments Limited Partnership - - 63 Marvin Gardens Associates 4 - 27 Colonial Farms Ltd. 27 27 40 Holbrook Apartments Company 225 209 215 -------- ------ ------- $ 370 $ 310 $ 435 ======== ====== ======= The investments in Quaker Meadows Apartments Company, South Laurel Apartments Limited Partnership, Marvin Gardens Associates and Colonial Farms Ltd. at December 31, 1997 do not reflect accumulated losses therefrom of $1,234,000, $785,000, $176,000 and $129,000, respectively, because the equity method carrying values of such investments have been reduced to zero. Future income from these entities will not be recorded until it exceeds the previously unrecognized accumulated losses. A description of the local limited partnership properties and the terms of the local limited partnership agreements is summarized below: a) Village at Fawcett's Pond - Hyannis, Massachusetts -------------------------------------------------- On June 30, 1983, the Partnership acquired a 95% limited partnership interest in Fawcett's Pond Apartments Company, an existing Massachusetts limited partnership ("Fawcett's Pond"), that owns and operates a 100-unit housing project in Hyannis, Massachusetts. The Federal Housing Administration (FHA) contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants. The agreement expires August 19, 2002. Total rent subsidies received by the limited partnership during 1997, 1996 and 1995 were $752,000, $756,000, and $768,000, respectively. Such amounts comprised approximately 76%, 77% and 79%, respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 95% interest was $879,606, comprised of cash and notes payable to the seller (including an acquisition fee of $63,025 payable to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan due April 1, 2024 from the Government National Mortgage Association (GNMA) with an outstanding balance at December 31, 1997 of approximately $4,232,000, payable in monthly installments of $30,746 including principal and interest at 7.5%. The partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions and incentive management fees are limited by agreements between the limited partnership and HUD to 6% of the initial equity investment. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $1,105,725 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. The remaining proceeds will be distributed to the local general partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 5% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $6,000 were paid to an affiliate of the local general partners for each of the three years ended December 31, 1997. b) Quaker Court and The Meadows - Lynn, Massachusetts -------------------------------------------------- On June 30, 1983, the Partnership acquired a 95% limited partnership interest in Quaker Meadows Apartments Company, an existing Massachusetts limited partnership ("Quaker Meadows"), that owns and operates two apartment complexes in Lynn, Massachusetts. There are a total of 104 apartment units in the two complexes. FHA contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants. The agreement expires in May 2002 and has two five-year renewal options. Total rent subsidies received by the limited partnership during 1997, 1996 and 1995 were $1,313,000, $1,320,000 and $1,335,000, respectively. Such amounts comprised approximately 81%, 82% and 82% of the limited partnership's total revenues in each of such years. The aggregate investment by the Partnership for the 95% interest was $1,378,906 (including an acquisition fee of $104,525 paid to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan payable to the Massachusetts Housing Finance Agency (MHFA). The mortgage loan is due September 1, 2013 with an outstanding balance at December 31, 1997 of approximately $5,095,000, payable in monthly installments of $62,930 including principal and interest at 12.5%. The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and MHFA to the extent funds available for distribution as defined by MHFA. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $1,739,424 of proceeds from the sale or refinancing of the investment properties will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 4% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $69,000, $29,000 and $45,000 were paid to an affiliate of the local general partners for the years ended December 31, 1997, 1996 and 1995, respectively. c) Villages at Montpelier - Laurel, Maryland ----------------------------------------- On June 30, 1983, the Partnership acquired an 85% limited partnership interest in South Laurel Apartments Limited Partnership, an existing Maryland limited partnership ("South Laurel"), that owns and operates a 520-unit housing project in Laurel, Maryland. FHA contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants for 20% of the rental units. The subsidy agreement expired on July 31, 1997, and management did not apply for an extension of the agreement. The property is currently in the process of transitioning to a 100% market rent facility. Based on the market conditions, management believes that the units previously designated as low-income units will be re-leased at market rates which would keep the total revenues of the local limited partnership relatively unchanged from the previously subsidized level. In addition, if the market for conventional multi-family apartment properties remains strong, the expiration of the rental subsidy agreement at The Villages at Montpelier Apartments and the conversion of the property to 100% market-rate apartments could enhance the property's marketability for a potential sale by increasing the pool of interested buyers. However, there are no assurances that such market conditions will remain strong, and the ability of the Partnership to cause a sale of the property will remain restricted by the terms of the limited partnership agreement discussed further above. If conditions were to deteriorate, The Villages at Montpelier Apartments could experience extended declines in occupancy and revenues as a result of the expiration of the subsidy agreement. Total rent subsidies received by the limited partnership during 1997, 1996 and 1995 were $506,000, $686,000 and $677,000, respectively. Such amounts comprised approximately 12%, 17% and 17%, respectively, of the limited partnership's total revenues for each of such years. The aggregate investment by the Partnership for the 85% interest was $2,446,135 (including an acquisition fee of $186,725 paid to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan due December 1, 2023 with an outstanding balance at December 31, 1997 of approximately $11,845,000, payable to GNMA in monthly installments of $86,395 including principal and interest at 7.5%. The restated partnership agreement generally provides that the Partnership will receive 85% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 15% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and HUD to the extent of surplus cash, as defined by HUD. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributable in that year. Generally, the first $3,107,104 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 5.25% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $1,000 were paid to an affiliate of the local general partners for 1995. No incentive management fees were earned for the years ended December 31, 1997 and 1996. d) Marvin Gardens Apartments, Cotati, California --------------------------------------------- On July 29, 1983, the Partnership acquired a 95% limited partnership interest in Marvin Gardens Associates, an existing California limited partnership that owns a 37-unit apartment complex project in Cotati, California. The apartment complex operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the Federal Department of Housing and Urban Development (HUD). The agreement expires in July 2003 and has two five-year renewal options. Total rent subsidies received by the limited partnership during 1997, 1996 and 1995 were $329,000, $324,000 and $337,000, respectively. Such amounts comprised approximately 77%, 77% and 81%, respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 95% interest was $379,581 (including an acquisition fee of $27,800 paid to the Adviser of the Partnership). The Partnership's interest was acquired subject to a permanent nonrecourse mortgage loan due June 1, 2013 with an outstanding balance at December 31, 1997 of approximately $1,611,000, payable to the California Housing Finance Agency (CHFA) in monthly installments of $15,310, including principal and interest at 8.15%. The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and CHFA to $20,151 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $462,336 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners who in turn hired an unaffiliated management agent to provide management services on their behalf. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $12,000 were paid to an affiliate of the local general partners for the year ended December 31, 1995. No incentive management fees were earned for the years ended December 31, 1997 and 1996. e) Colonial Farms - Modesto, California ------------------------------------ On July 29, 1983, the Partnership acquired a 95% limited partnership interest in Colonial Farms Ltd. an existing California limited partnership that owns a 100-unit apartment project in Modesto, California. The apartment complex operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the Federal Department of Housing and Urban Development (HUD). The agreement expires in July 2002 and has two five-year renewal options. Total rent subsidies received by the limited partnership during 1997, 1996 and 1995 were $579,000, $613,000 and $586,000, respectively. Such amounts comprised approximately 71%, 76% and 74%, respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 95% interest was $623,351 (including an acquisition fee of $48,125 paid to the Adviser to the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan due June 1, 2013 with an outstanding balance at December 31, 1997 of approximately $2,713,000, payable to CHFA in monthly installments of $27,411, including principal and interest at 9.15% The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and CHFA to $35,299 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $800,928 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners who in turn hired an unaffiliated management agent to provide management services on their behalf. An incentive management fee will also be paid to the affiliate of the local general partners on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $7,000, $7,000 and $16,000 were paid to an affiliate of the local general partners for the years ended December 31, 1997, 1996 and 1995, respectively. f) Ramblewood Apartments - Holbrook, Massachusetts ----------------------------------------------- On August 30, 1983, the Partnership acquired an 85% limited partnership interest in Holbrook Apartments Company, an existing Massachusetts limited partnership that owns and operates a 170-unit housing project in Holbrook, Massachusetts. FHA contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants. The agreement expires July 1, 2001. Total rent subsidies received by the limited partnership during 1997, 1996 and 1995 were $1,565,000, $1,577,000 and $1,587,000, respectively. Such amounts comprised approximately 74%, 75% and 75% respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 85% interest was $1,250,583, (including an acquisition fee of $94,500 paid to the Adviser of the Partnership). The Partnership's interest was acquired subject to a nonrecourse first mortgage loan due February 1, 2023 with an outstanding balance at December 31, 1997 of approximately $7,352,000, payable to GNMA in monthly installments of $54,207 including principal and interest at 7.5%. The restated partnership agreement generally provides that the Partnership will receive 85% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 15% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and HUD to the extent of surplus cash, as defined by HUD. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $1,571,956 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 4.75% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $146,000, $134,000 and $138,000 were paid to an affiliate of the local general partners for the years ended December 31, 1997, 1996 and 1995, respectively. INDEPENDENT AUDITORS' REPORT To the Partners Fawcett's Pond Apartments Company We have audited the accompanying balance sheets of Fawcett's Pond Apartments Company as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fawcett's Pond Apartments Company as of December 31, 1997 and 1996, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman -------------------------- REZNICK FEDDER & SILVERMAN Baltimore, Maryland January 22, 1998 Fawcett's Pond Apartments Company BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 353,884 $ 323,202 Accounts receivable 2,011 1,617 Prepaid expenses 12,581 13,556 ---------- ---------- Total current assets 368,476 338,375 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 21,461 25,439 Mortgage escrow deposits 67,627 35,682 Reserve for replacements 265,204 251,321 ---------- ---------- 354,292 312,442 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,192,094 and $2,037,707 3,378,778 3,454,822 DEFERRED FINANCING COSTS, net of accumulated amortization of $122,110 and $113,948 214,645 222,807 ---------- ---------- Total assets $4,316,191 $4,328,446 ========== ========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 53,320 $ 49,479 Accounts payable and accrued expenses 54,347 22,673 Accrued interest payable 26,453 26,762 Rent deferred credits 488 807 ---------- ---------- Total current liabilities 134,608 99,721 LONG-TERM LIABILITIES Mortgage payable, less current maturities 4,179,174 4,232,494 Due to general partner 277,400 277,400 Tenants' security deposits 20,447 20,680 ---------- ---------- Total liabilities 4,611,629 4,630,295 PARTNERS' DEFICIT (295,438) (301,849) ---------- ---------- Total liabilities and partners' deficit $4,316,191 $4,328,446 ========== ========== See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF OPERATIONS December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Revenue Rental income, net $ 941,478 $ 942,059 $ 940,355 Financial revenue 25,534 19,420 16,052 Other income 16,701 16,066 16,371 ---------- ---------- ---------- Total revenue 983,713 977,545 972,778 Expenses Operating expenses Marketing 1,756 1,090 804 Administration 59,354 55,198 53,043 Utilities 30,591 33,018 35,578 Management fee 47,098 47,114 46,933 Maintenance and repairs 126,573 79,914 129,259 Salaries 76,232 85,196 73,337 Payroll taxes 7,648 7,252 - Insurance 25,206 22,073 21,667 Real estate taxes 67,717 66,913 65,567 ---------- ---------- ---------- Total operating expenses 442,175 397,768 426,188 Nonoperating expenses Interest 319,161 322,748 326,076 Mortgage insurance premium 21,275 21,515 21,737 Depreciation and amortization 162,549 153,348 144,403 Incentive management fee 6,303 6,303 6,303 Miscellaneous financial expenses 625 633 632 ---------- ---------- ---------- Total nonoperating expenses 509,913 504,547 499,151 ---------- ---------- ---------- Total expenses 952,088 902,315 925,339 ---------- ---------- ---------- EXCESS OF REVENUE OVER EXPENSES $ 31,625 $ 75,230 $ 47,439 ========== ========== ========== See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1997, 1996 and 1995 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1994 $(75,564) $(298,526) $(374,090) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 2,372 45,067 47,439 -------- --------- --------- Partners' deficit, December 31, 1995 (74,453) (277,412) (351,865) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 3,762 71,468 75,230 -------- --------- --------- Partners' deficit, December 31, 1996 (71,952) (229,897) (301,849) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 1,581 30,044 31,625 -------- --------- --------- Partners' deficit, December 31, 1997 $(71,632) $(223,806) $(295,438) ======== ========= ========= Profit and loss sharing percentage 5% 95% 100% = == === See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Cash flows from operating activities Rental income received $ 941,319 $ 942,011 $ 938,666 Interest received 15,978 12,900 9,468 Other income received 16,600 15,939 15,625 Administrative expenses paid (97,068) (88,517) (83,865) Management fees paid (47,098) (47,114) (46,933) Utilities paid (28,522) (32,268) (35,266) Maintenance and repairs expenses paid (171,100) (133,004) (160,520) Real estate taxes paid (33,859) (66,913) (65,567) Payroll taxes paid (7,648) (7,252) (7,107) Property insurance paid (8,275) (9,614) (10,191) Other taxes and insurance paid (16,038) (12,074) (11,664) Interest paid on mortgage (319,470) (323,035) (326,342) Mortgage insurance paid (21,193) (21,440) (21,667) Miscellaneous financial expenses paid (625) (633) (632) (Increase) decrease in mortgage escrow deposits (31,945) (858) 378 Mortgagor entity expenses paid (6,303) (6,303) (6,303) Net security deposits received (paid) 3,745 (1,529) (138) ---------- ---------- ---------- Net cash provided by operating activities 188,498 220,296 187,942 ---------- ---------- ---------- Cash flows from investing activities Additions to property and equipment (78,343) (43,567) (41,945) Deposits to reserve for replacements (22,092) (21,948) (21,948) Withdrawals from reserve for replacements 17,312 - - ---------- ---------- ---------- Net cash used in investing activities (83,123) (65,515) (63,893) ---------- ---------- ---------- Cash flows from financing activities Repayment of mortgage payable (49,479) (45,914) (42,607) Distributions (25,214) (25,214) (25,214) ---------- ---------- ---------- Net cash used in financing activities (74,693) (71,128) (67,821) ---------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 30,682 83,653 56,228 Cash and cash equivalents, beginning 323,202 239,549 183,321 ---------- ---------- ---------- Cash and cash equivalents, ending $ 353,884 $ 323,202 $ 239,549 ========== ========== ========== See notes to financial statements Fawcett's Pond Apartments Company STATEMENTS OF CASH FLOWS (CONTINUED) December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Reconciliation of excess of revenue over expenses to net cash provided by operating activities Excess of revenue over expenses $ 31,625 $ 75,230 $ 47,439 Adjustments to reconcile excess of revenue over expenses to net cash provided by operating activities Depreciation 154,387 145,186 136,241 Amortization 8,162 8,162 8,162 Interest earned on reserve for replacements (9,103) (6,520) (6,584) Changes in assets and liabilities Increase in accounts receivable (394) (399) (746) Decrease (increase) in prepaid expenses 975 460 (118) (Increase) decrease in mortgage escrow deposits (31,945) (858) 378 Increase (decrease) in tenants' security deposits - net 3,745 (1,529) (138) Increase in accounts payable and accrued expenses 31,674 627 5,263 Decrease in accrued interest payable (309) (287) (266) (Decrease) increase in rent-deferred credits (319) 224 (1,689) -------- -------- -------- Net cash provided by operating activities $188,498 $220,296 $ 187,942 ======== ======== ========= See notes to financial statements Fawcett's Pond Apartments Company NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Fawcett's Pond Apartments Company (the Partnership) was formed as a limited partnership under the laws of the State of Massachusetts on June 30, 1983, for the purpose of constructing and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 100 units located in Hyannis, Massachusetts, and is currently operating under the name of Fawcett's Pond Apartments. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions and incentive management fees are limited by agreements between the Partnership and HUD to 6% of the initial equity investment. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost which approximate fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1997 and 1996, the Partnership maintained tenant security deposits of $21,460 and $25,439 in interest-bearing escrow bank accounts and U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held to maturity and is carried at cost which approximates fair value. The Partnership also has a reserve for replacements and escrow funds totaling $332,831 and $287,003 at December 31, 1997 and 1996, respectively, on deposit with Reilly Mortgage Group, Inc. These funds are held in interest-bearing bank accounts and U.S. Treasury Bills, which are carried at cost and approximate fair value. NOTE C - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a permanent mortgage from the Government National Mortgage Association (GNMA) which is insured by the Federal Housing Administration (FHA) and is collateralized by a deed of trust on the rental property. The mortgage, which is due April 1, 2024, is payable in equal monthly installments of principal and interest totaling $30,746 and bears interest at a rate of 7.5%. Interest incurred during December 31, 1997, 1996 and 1995 amounted to $319,161, $322,748 and $326,076, respectively. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1997, are as follows: December 31, ------------ 1998 $ 53,320 1999 $ 57,459 2000 $ 61,920 2001 $ 66,727 2002 $ 71,907 Management believes it is not practical to estimate the fair value of the mortgage payable insured by HUD because programs with similar characteristics are not currently available to the Partnership. NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- The FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants for all units. The agreement expires August 19, 2002. Total housing assistance payments received during 1997, 1996 and 1995 were $751,930, $755,658 and $768,409, respectively. NOTE E - RELATED PARTY TRANSACTIONS - ----------------------------------- Due to General Partners - ----------------------- At December 31, 1997 and 1996, due to general partner consisted of unpaid developer advances of $277,400. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the project after certain priority payments, as defined in the Partnership agreement. Management Fees - --------------- Management fees of 5% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as managing agent to the project pursuant to a management agreement approved by HUD. Such fees amounted to $47,098, $47,114, and $46,933 for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, CMJ Management Company received incentive management fees of $6,303 for each of the three years ended December 31, 1997. Reimbursed Costs - ---------------- CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting services, direct marketing and insurance costs) on behalf of the Partnership, which are reimbursed the following month. NOTE F - TAX BASIS INCOME - ------------------------- The reconciliation of the excess of revenue over expenses reported in the accompanying statements of operations with the income (loss) reported on the Federal income tax basis follows: 1997 1996 1995 ---- ---- ---- Excess of revenue over expenses per statements of operations $ 31,625 $ 75,230 $ 47,439 Additional depreciation and amortization on tax basis (56,395) (65,916) (75,550) (Decrease) increase in deferred rental income (328) 224 (1,689) --------- -------- --------- (Loss) income for Federal income tax purposes $ (25,098) $ 9,538 $ (29,800) ========= ======== ========= NOTE G - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risks exists with respect to these cash balances as of December 31, 1997. INDEPENDENT AUDITORS' REPORT To the Partners Quaker Meadows Apartments Company We have audited the accompanying balance sheets of Quaker Meadows Apartments Company as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quaker Meadows Apartments Company as of December 31, 1997 and 1996, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman -------------------------- REZNICK FEDDER & SILVERMAN Baltimore, Maryland January 27, 1998 Quaker Meadows Apartments Company BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 215,117 $ 263,637 Accounts receivable 43,303 2,572 Other receivables 48,428 15,092 Prepaid expenses 8,483 9,785 ---------- ---------- Total current assets 315,331 291,086 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenant security deposits 18,113 18,787 Mortgage escrow deposits 13,369 12,774 Reserve for replacements 210,559 297,906 ---------- ---------- 242,041 329,467 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,057,912 and $3,787,391 3,768,007 3,979,215 DEFERRED FINANCING COSTS, net of accumulated amortization of $62,526 and $58,461 67,625 71,690 ---------- ---------- Total assets $4,393,004 $4,671,458 ========== ========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 119,880 $ 106,768 Accounts payable and accrued expenses 40,379 55,280 Accrued interest payable 60,082 60,082 Rent deferred credits 4,013 3,787 ---------- ---------- Total current liabilities 224,354 225,917 LONG-TERM LIABILITIES Mortgage payable, less current maturities 4,974,964 5,094,845 Due to general partner 1,072,952 1,072,952 Tenants' security deposits 16,472 16,617 ---------- ---------- Total liabilities 6,288,742 6,410,331 PARTNERS' DEFICIT (1,895,738) (1,738,873) ---------- ---------- Total liabilities and partners' deficit $4,393,004 $4,671,458 ========== ========== See notes to financial statements Quaker Meadows Apartments Company STATEMENT OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Revenue Rental income $1,600,492 $1,592,837 $1,596,066 Vacancies (1,774) (6,464) (5,331) Financial revenue 24,836 26,166 26,799 Other income 1,718 371 1,035 ---------- ---------- ---------- Total revenue 1,625,272 1,612,910 1,618,569 Expenses Operating expenses Administration 116,675 106,695 122,910 Management fees to affiliate 63,958 63,511 63,546 Utilities 136,254 125,632 125,584 Maintenance and repairs 287,880 252,230 310,136 Insurance 14,026 15,286 15,416 Real estate taxes 50,624 43,376 65,161 ---------- ---------- ---------- Total operating expenses 669,417 606,730 702,753 Nonoperating expenses Interest 641,632 660,698 671,237 Depreciation and amortization 274,586 265,184 261,148 Incentive management fee to affiliate 68,655 29,375 45,390 Social services expenses 32,757 16,387 23,062 ---------- ---------- ---------- Total nonoperating expenses 1,017,630 971,644 1,000,837 ---------- ---------- ---------- Total expenses 1,687,047 1,578,374 1,703,590 ---------- ---------- ---------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $ (61,775) $ 34,536 $ (85,021) ========== ========== ========== See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1997, 1996 and 1995 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1994 $(323,862) $(1,242,095) $(1,565,957) Distributions (3,494) (66,396) (69,890) Excess of expenses over revenue (4,251) (80,770) (85,021) --------- ----------- ----------- Partners' deficit, December 31, 1995 (331,607) (1,389,261) (1,720,868) Distributions (2,627) (49,914) (52,541) Excess of revenue over expenses 1,727 32,809 34,536 --------- ----------- ----------- Partners' deficit, December 31, 1996 (332,507) (1,406,366) (1,738,873) Distributions (4,753) (90,337) (95,090) Excess of expenses over revenue (3,089) (58,686) (61,775) --------- ----------- ----------- Partners' deficit, December 31, 1997 $(340,349) $(1,555,389 $(1,895,738) ========= =========== =========== Profit and loss sharing percentage 5% 95% 100% = == === See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF CASH FLOWS Years ended December 31, 1997 and 1996 1997 1996 1995 ---- ---- ---- Cash flows from operating activities Rental income received $1,558,213 $1,591,659 $1,572,590 Interest received 6,268 9,327 3,163 Other income received 16,194 - 10,547 Administrative expenses paid (149,432) (123,082) (122,910) Management fees paid (63,958) (68,922) (63,546) Utilities paid (137,125) (123,121) (119,506) Maintenance and repair expenses paid (301,910) (240,803) (315,873) Real estate taxes paid (50,624) (43,376) (65,161) Property insurance paid (12,724) (14,677) (16,081) Interest paid on mortgage (641,632) (660,698) (670,747) Incentive fees paid (68,655) (29,375) (68,452) (Increase) decrease in mortgage escrow deposits (595) 4,164 (547) Net security deposits received (paid) 529 1,947 (1,148) --------- ---------- ---------- Net cash provided by operating activities 154,549 303,043 142,329 ---------- ---------- ---------- Cash flows from investing activities Acquisition of land, building and equipment (59,313) (32,288) (23,969) Decrease (increase) in reserve for replacements 58,103 (14,208) (7,313) ---------- ---------- ---------- Net cash used in investing activities (1,210) (46,496) (31,282) ---------- ---------- ----------- Cash flows from financing activities Repayment of mortgage payable (106,769) (94,935) (84,413) Distributions (95,090) (52,541) (69,890) ---------- ---------- ---------- Net cash used in financing activities (201,859) (147,476) (154,303) ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (48,520) 109,071 (43,256) Cash and cash equivalents, beginning 263,637 154,566 197,822 ---------- ---------- ---------- Cash and cash equivalents, ending $ 215,117 $ 263,637 $ 154,566 ========== ========== ========== See notes to financial statements Quaker Meadows Apartments Company STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ (61,775) $ 34,536 $ (85,021) Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation and amortization 274,586 265,184 261,148 Interest earned on reserve for replacement (18,568) (18,345) (18,880) Changes in assets and liabilities (Increase) decrease in accounts receivable (26,255) 1,222 (10,806) (Increase) decrease in mortgage escrow deposits (595) 4,164 (547) Decrease (increase) in tenants' security deposits - net 529 1,947 (1,148) Decrease (increase) in prepaid expenses 1,302 609 (175) (Decrease) increase in accounts payable and accrued expenses (14,901) 12,458 341 Increase (decrease) in rent deferred credits 226 1,268 (2,583) -------- -------- --------- Net cash provided by operating activities $ 154,549 $303,043 $ 142,329 ========= ======== ========= See notes to financial statements Quaker Meadows Apartments Company NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Quaker Meadows Apartments Company (the Partnership) was formed as a limited partnership under the laws of the State of Massachusetts on February 1, 1982, for the purpose of constructing and operating a rental housing project under Massachusetts Housing Finance Agency's (MHFA) housing program. The project consists of 104 units located in Lynn, Massachusetts, and is currently operating under the name of Quaker Meadows Apartments. All leases between the Partnership and tenants of the property are operating leases. Under a regulatory agreement with MHFA, the project is regulated as to cash distributions. Cash distributions, incentive management fees and resident council fees are limited to funds available for distribution as defined by MHFA. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost which approximates fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. The Partnership provides for depreciation by use of the straight-line method over estimated useful lives of the assets as follows: buildings, 30 years, and equipment, 3-8 years. Deferred Financing Costs - ------------------------ Deferred financing costs, which consist principally of financing fees are amortized by the straight-line method over the life of the related debt. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1996 financial statements have been reclassified in order to remain consistent with the 1997 financial statement presentation. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1997 and 1996, the Partnership maintained tenant security deposits of $18,113 and $18,787, respectively, in interest bearing escrow bank accounts and U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held to maturity and is carried at cost and approximates fair value. The Partnership also has a reserve for replacements and escrow funds totalling $223,928 and $310,680 at December 31, 1997 and 1996, respectively, on deposit with MHFA. These funds are held in interest bearing bank accounts which are carried at cost and approximate fair value. NOTE C - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a permanent mortgage from the Massachusetts Housing Finance Agency (MHFA), due September 1, 2013, and payable in equal monthly installments of $62,930 (principal and interest) at an interest rate of 12.5%. The terms of the permanent mortgage also require monthly escrow deposits for real estate taxes and a replacement reserve. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1997, are as follows: December 31 ----------- 1998 $119,880 1999 $135,044 2000 $151,877 2001 $170,808 2002 $190,640 Management believes it is not practical to estimate the fair value of the mortgage payable to MHFA because programs with similar characteristics are not currently available to the Partnership. NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- The Federal Housing Administration (FHA) has contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants. The agreement expires May 2002, and has two five-year renewal options. Total housing assistance payments received during 1997, 1996 and 1995 were $1,312,610, $1,319,893 and $1,335,437, respectively. NOTE E - RECONCILIATION OF FINANCIAL STATEMENT EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES TO TAX BASIS (LOSS) INCOME - ------------------------------------------------------------------------------- The reconciliation of the excess (deficiency) of revenue over expenses reported in the accompanying statement of operations with the (loss) income reported on the Federal income tax basis follows: 1997 1996 1995 ---- ---- ---- Excess (deficiency) of revenue over expenses per statement of operations $(61,775) $34,536 $(85,021) Decrease in depreciation 26,048 22,002 8,071 Increase (decrease) in deferred rental income 226 1,268 (2,583) -------- ------- -------- (Loss) income for Federal income tax purposes $(35,501) $57,806 $(79,533) ======== ======= ======== NOTE F - RELATED PARTY TRANSACTIONS - ----------------------------------- At December 31, 1997 and 1996, due to the general partner consists of development advances totaling $1,072,952. These advances are non-interest bearing and payable from proceeds upon the sale or refinancing of the project as defined in the Partnership agreement. Management fees of 4% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the project, pursuant to a management agreement approved by MHFA. Such fees amounted to $63,958, $63,511 and $63,546 for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $68,655, $29,375 and $45,390 for the years ended December 31, 1997, 1996 and 1995 respectively. CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE G - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1997. INDEPENDENT AUDITORS' REPORT To the Partners South Laurel Apartments Limited Partnership We have audited the accompanying balance sheets of South Laurel Apartments Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Laurel Apartments Limited Partnership as of December 31, 1997 and 1996, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman -------------------------- REZNICK FEDDER & SILVERMAN Baltimore, Maryland January 27, 1998 South Laurel Apartments Limited Partnership BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 234,973 $ 155,483 Accounts receivable 33,057 64,339 Other receivables 11,258 9,324 Prepaid expenses 152,302 158,653 ---------- ----------- Total current assets 431,590 387,799 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 111,904 107,903 Mortgage escrow deposits 160,348 183,239 Reserve for replacement 115,619 144,890 ---------- ----------- 387,871 436,032 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $6,871,824 and $6,404,117 8,546,454 8,876,209 DEFERRED FINANCING COSTS, net of accumulated amortization of $185,596 and $173,434 325,130 337,292 ---------- ----------- Total assets $9,691,045 $10,037,332 ========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 153,608 $ 142,542 Accounts payable and accrued expenses 81,431 139,704 Accrued interest payable 74,028 74,919 Rent deferred credits 11,392 23,237 Deferred income - laundry 35,000 40,000 ---------- ----------- Total current liabilities 355,459 420,402 LONG-TERM LIABILITIES Mortgage payable, less current maturities 11,690,911 11,844,519 Due to general partner 645,989 645,989 Tenants' security deposits 111,904 104,816 ---------- ----------- Total liabilities 12,804,263 13,015,726 PARTNERS' DEFICIT (3,113,218) (2,978,394) ---------- ----------- Total liabilities and partners' deficit $9,691,045 $10,037,332 ========== =========== See notes to financial statements South Laurel Apartments Limited Partnership STATEMENT OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Revenue Rental income $4,298,989 $4,246,199 $4,188,172 Vacancies (306,701) (223,408) (210,793) Financial revenue 18,629 16,422 27,955 Other income 109,369 98,411 87,625 ---------- ---------- ---------- Total revenue 4,120,286 4,137,624 4,092,959 Expenses Operating expenses Marketing 148,625 73,482 56,439 Administration 334,976 375,096 368,243 Utilities 485,153 505,851 556,935 Management fee 214,497 213,145 215,298 Maintenance and repairs 810,621 1,031,681 783,968 Salaries 484,608 481,739 471,061 Insurance 79,520 89,852 68,236 Real estate taxes 260,632 259,349 264,590 ---------- ---------- ---------- Total operating expenses 2,818,632 3,030,195 2,784,770 Nonoperating expenses Interest 893,305 903,638 913,226 Mortgage insurance premium 59,553 60,243 60,882 Depreciation and amortization 479,869 467,072 445,511 Incentive management fee - - 806 Miscellaneous financial expenses 3,750 3,710 4,142 ---------- ---------- ---------- Total nonoperating expenses 1,436,477 1,434,663 1,424,567 ---------- ---------- ---------- Total expenses 4,255,109 4,464,858 4,209,337 ---------- ---------- ---------- EXCESS OF EXPENSES OVER REVENUE $ (134,823) $ (327,234) $ (116,378) ========== ========== ========== See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1997, 1996 and 1995
Special Class A Class B General Limited Limited Limited Partners Partners Partner Partners Total -------- -------- ------- -------- ----- Partners' deficit, December 31, 1994 $(101,603) $(1,257,548) $ (614,534) $(486,903) $(2,460,588) Distributions (742) (2,967) (63,065) (7,420) (74,194) Excess of expenses over revenue (1,164) (4,655) (98,921) (11,638) (116,378) --------- ----------- ----------- --------- ----------- Partners' deficit, December 31, 1995 (103,509) (1,265,170) (776,520) (505,961) (2,651,160) Excess of expenses over revenue (3,272) (13,089) (278,150) (32,723) (327,234) --------- ----------- ----------- ---------- ----------- Partners' deficit, December 31, 1996 (106,781) (1,278,259) (1,054,670) (538,684) (2,978,394) Excess of expenses over revenue (1,348) (5,394) (114,600) (13,482) (134,824) --------- ----------- ----------- ---------- ----------- Partners' deficit, December 31, 1997 $(108,129) $(1,283,653) $(1,169,270) $ (552,166) $(3,113,218) ========= =========== =========== ========== =========== Profit and loss sharing percentage 1% 4% 85% 10% 100% = = == == ===
See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Cash flows from operating activities Rental income received $4,011,723 $4,023,207 $3,970,997 Interest received 15,309 13,441 21,737 Other income received 102,435 94,716 82,130 Administrative expenses paid (671,622) (624,524) (616,037) Management fees paid (214,497) (213,145) (215,298) Utilities paid (492,180) (516,504) (543,544) Maintenance and repairs expenses paid (1,113,418) (1,286,408) (1,026,412) Real estate taxes paid (260,467) (252,822) (265,876) Payroll taxes paid (39,245) (45,010) (45,663) Property insurance paid (44,875) (47,772) (46,696) Other taxes and insurance paid (34,645) (42,796) (36,565) Mortgage insurance paid (59,158) (60,243) (1,465) Interest paid on mortgage (894,196) (904,465) (913,993) Miscellaneous financial expenses paid (3,750) (3,710) (4,142) Decrease (increase) in mortgage escrow deposits 22,891 (24,153) 11,980 Mortgagor entity expenses paid - - (806) Net security deposits received 3,088 1,129 10,659 --------- ---------- --------- Net cash provided by operating activities 327,393 110,941 381,006 --------- ---------- --------- Cash flows from investing activities Additions to property and equipment (137,952) (141,563) (270,501) Deposits to reserve for replacements (52,520) (52,520) (52,520) Withdrawals from reserve for replacements 85,111 88,357 91,859 --------- ---------- --------- Net cash used in investing activities (105,361) (105,726) (231,162) --------- ---------- --------- Cash flows from financing activities Mortgage principal payments (142,542) (132,273) (122,744) Distributions to partners - - (74,194) --------- ---------- --------- Net cash used in financing activities (142,542) (132,273) (196,938) --------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 79,490 (127,058) (47,094) Cash and cash equivalents, beginning 155,483 282,541 329,635 --------- ---------- --------- Cash and cash equivalents, ending $ 234,973 $ 155,483 $ 282,541 ========= ========== ========= See notes to financial statements South Laurel Apartments Limited Partnership STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Reconciliation of excess of expenses over revenue to net cash provided by operating activities Excess of expenses over revenue $(134,824) $(327,234) $ (116,378) Adjustments to reconcile excess of expenses over revenue to net cash provided by operating activities Depreciation 467,707 454,910 433,349 Amortization 12,162 12,162 12,162 Interest earned on reserve for replacements (3,320) (2,981) (6,218) Changes in assets and liabilities Decrease (increase) in tenant accounts receivable 31,282 33,847 (30,976) Decrease (increase) in accounts receivable - other (1,934) 1,305 (495) Decrease in prepaid expenses 6,351 12,513 43,106 Decrease (increase) in mortgage escrow deposit 22,891 (24,153) 10,659 (Decrease) increase in accounts payable and accrued expenses (58,273) (11,299) 4,990 Decrease in accrued interest payable (891) (827) (767) Tenants' security deposits received - net 3,087 1,129 11,980 (Decrease) increase in rent - deferred credits (11,845) (33,431) 24,594 Decrease in deferred laundry income (5,000) (5,000) (5,000) --------- --------- ---------- Net cash provided by operating activities $ 327,393 $ 110,941 $ 381,006 ========== ========= ========== See notes to financial statements South Laurel Apartments Limited Partnership NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- South Laurel Apartments Limited Partnership (the Partnership) was formed as a limited partnership under the laws of the State of Maryland on June 30, 1983, for the purpose of constructing and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 520 units located in Laurel, Maryland, and is currently operating under the name of Villages at Montpelier. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and HUD to the extent of surplus cash as defined by HUD. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost which approximates fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1997 and 1996, the Partnership maintained tenant security deposits of $111,904 and $107,903 in interest-bearing escrow bank accounts which are carried at cost and approximate fair value. The Partnership also has a reserve for replacements and escrow funds totaling $275,967 and $328,129 at December 31, 1997 and 1996, respectively, on deposit with Reilly Mortgage Group, Inc. These funds are held in interest-bearing bank accounts and a money market account which are carried at cost and approximate fair value. NOTE C - MORTGAGE PAYABLE - ------------------------- The mortgage is insured by the Federal Housing Administration (FHA) and collateralized by a deed of trust on the rental property. The mortgage, which is due December 1, 2023, is payable in equal monthly installments of principal and interest totaling $86,395 and bears interest at a rate of 7.5%. Interest incurred during 1997, 1996 and 1995 amounted to $893,305, $903,638 and $913,226, respectively. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of partnership assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1997, are as follows: December 31, ------------ 1998 $153,608 1999 $165,533 2000 $178,384 2001 $192,232 2002 $207,155 Management believes it is not practical to estimate the fair value of the mortgage payable insured by HUD because programs with similar characteristics are not currently available to the Partnership. NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants for 20% of the rental units. The agreement expired July 31, 1997, and management has not applied for an extension of the agreement. Total housing assistance payments received during 1997, 1996 and 1995 were $506,366, $686,293 and $677,108, respectively. NOTE E - RELATED PARTY TRANSACTIONS - ----------------------------------- Due to General Partner - ---------------------- At December 31, 1997 and 1996, due to general partner consists of unpaid development advances of $645,989. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the project after certain priority payments as defined in the Partnership agreement. Management Fees - --------------- Management fees of 5.25% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the project pursuant to a management agreement approved by HUD. Such fees amounted to $214,497, $213,145 and $215,298 for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $-0-, $-0- and $806 for the years ended December 31, 1997, 1996 and 1995, respectively. Reimbursed Costs - ---------------- CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE F - TAX BASIS LOSS - ----------------------- The reconciliation of the excess of expenses over revenue reported in the accompanying statement of operations with the loss reported on a Federal income tax basis follows: 1997 1996 1995 ---- ---- ---- Excess of expenses over revenue per statements of operations $(134,824) $(327,234) $(116,378) (Decrease) increase in deferred rental income and laundry income (16,844) (138,431) 19,593 Additional depreciation and amortization (166,665) (186,827) (181,224) --------- --------- --------- Loss for Federal income tax purposes $(318,333) $(652,492) $(278,009) ========= ========= ========= NOTE G - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1997. INDEPENDENT AUDITORS' REPORT To the Partners Marvin Gardens Associates We have audited the accompanying balance sheets of Marvin Gardens Associates as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marvin Gardens Associates as of December 31, 1997 and 1996, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman -------------------------- REZNICK FEDDER & SILVERMAN Baltimore, Maryland January 28, 1998 Marvin Gardens Associates BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash $ 30,259 $ 21,173 Accounts receivable 3,024 1,020 Accounts receivable - tenant subsidy 1,441 - Prepaid expenses 4,022 6,532 ---------- ---------- Total current assets 38,746 28,725 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenant security deposits 9,989 9,682 Real estate tax impound fund 7,190 6,290 Replacement reserve fund 118,306 138,463 Insurance impound fund 10,794 5,771 Interest income receivable - impounds 1,665 1,206 ---------- ---------- 147,944 161,412 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,112,978 and $1,038,242 1,308,333 1,376,899 DEFERRED FINANCING COSTS, net of accumulated amortization of $20,945 and $19,572 25,424 26,797 ---------- ---------- Total assets $1,520,447 $1,593,833 ========== ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Current maturities of mortgage payable $ 54,555 $ 50,299 Accounts payable 15,073 15,506 Accrued expenses 5,063 3,947 Deferred rental income 366 264 ---------- ---------- Total current liabilities 75,057 70,016 Mortgage payable, less current maturities 1,556,072 1,610,628 Due to general partner 194,019 194,019 Tenants' security deposits 7,217 7,105 ---------- ---------- Total liabilities 1,832,365 1,881,768 PARTNERS' DEFICIT (311,918) (287,935) ---------- ---------- Total liabilities and partners' deficit $1,520,447 $1,593,833 ========== ========== See notes to financial statements Marvin Gardens Associates STATEMENT OF OPERATIONS December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Revenue Rental income $410,401 $410,364 $409,395 Vacancies (1,496) (1,639) (1,533) Financial revenue 7,742 6,815 7,817 Other income 8,405 4,321 3,174 -------- -------- -------- Total revenue 425,052 419,861 418,853 Expenses Operating expenses Administration 25,512 17,356 15,866 Utilities 29,201 23,833 27,992 Management fee 17,738 17,533 17,052 Maintenance and repairs 75,504 51,999 73,953 Salaries 56,766 59,441 57,141 Insurance 8,102 8,378 7,839 Real estate taxes 22,556 22,271 21,824 -------- -------- -------- Total operating expenses 235,379 200,811 221,667 Nonoperating expenses Interest 133,514 137,438 141,056 Depreciation and amortization 76,109 75,338 74,377 Incentive management fee - - 12,090 -------- -------- -------- Total nonoperating expenses 209,623 212,776 227,523 -------- -------- -------- Total expenses 445,002 413,587 449,190 -------- -------- -------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $(19,950) $ 6,274 $(30,337) ======== ======== ======== See notes to financial statements Marvin Gardens Associates STATEMENTS OF PARTNERS' DEFICIT December 31, 1997, 1996 and 1995
Special General Limited Limited Partners Partners Partner Total -------- -------- ------- ----- Balance, December 31, 1994 $(8,282) $(67,248) $(160,129) $(235,659) Distributions (282) (1,129) (26,802) (28,213) Excess of expenses over revenue (303) (1,214) (28,820) (30,337) ------- -------- --------- --------- Balance, December 31, 1995 (8,867) (69,591) (215,751) (294,209) Excess of revenue over expenses 63 251 5,960 6,274 ------- -------- --------- --------- Balance, December 31, 1996 (8,804) (69,340) (209,791) (287,935) Distributions (40) (161) (3,832) (4,033) Excess of expenses over revenue (199) (798) (18,953) (19,950) ------- -------- --------- --------- Balance, December 31, 1997 $(9,043) $(70,299) $(232,576) $(311,918) ======= ======== ========= ========= Profit and loss sharing percentage 1% 4% 95% 100% = = == ===
See notes to financial statements Marvin Gardens Associates STATEMENTS OF CASH FLOWS December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Cash flows from operating activities Rental income received $405,562 $409,972 $409,707 Interest received 1,256 1,011 1,797 Other income received 8,405 4,321 3,074 Administrative expenses paid (25,512) (17,356) (15,866) Management fees paid (17,738) (17,533) (16,952) Utilities paid (28,085) (23,833) (26,892) Salaries and wages paid (52,567) (46,384) (43,690) Maintenance and repairs expenses paid (75,937) (51,326) (74,165) Real estate taxes paid (22,556) (22,271) (21,824) Payroll taxes paid (4,199) (13,057) (13,281) Property and other insurance paid (5,592) (8,267) (8,436) Interest paid on mortgage (133,514) (137,438) (141,056) (Increase) decrease in real estate tax impound fund (900) (162) 191 Incentive management fee paid - - (12,090) Increase in insurance impound fund (5,023) (1,581) (288) Net security deposits paid (195) (296) (189) -------- -------- -------- Net cash provided by operating activities 43,405 75,800 40,040 -------- -------- -------- Cash flows from investing activities Additions to property and equipment (6,170) (7,425) (32,836) Deposits to reserve for replacements (16,128) (16,128) (16,064) Withdrawals from reserve for replacements 42,312 - 29,398 -------- -------- -------- Net cash provided by (used in) investing activities 20,014 (23,553) (19,502) -------- -------- -------- Cash flows from financing activities Repayment of mortgage payable (50,300) (46,375) (42,757) Distributions (4,033) - (28,213) -------- -------- -------- Net cash used in financing activities (54,333) (46,375) (70,970) -------- -------- -------- NET INCREASE (DECREASE) IN CASH 9,086 5,872 (50,432) Cash and cash equivalents, beginning 21,173 15,301 65,733 -------- -------- -------- Cash and cash equivalents, ending $ 30,259 $ 21,173 $ 15,301 ======== ======== ======== See notes to financial statements Marvin Gardens Associates STATEMENTS OF CASH FLOWS (CONTINUED) December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ (19,950) $ 6,274 $ (30,337) Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation 74,736 73,965 73,037 Amortization of deferred financing costs 1,373 1,373 1,340 Interest earned on reserve for replacements (6,027) (5,796) (6,020) Changes in assets and liabilities: (Increase) decrease in accounts receivable - tenant subsidy (1,441) 3,221 (185) Increase in accounts receivable (2,004) (183) (25) Increase in interest income receivable -impounds (459) (8) (100) Decrease (increase) in prepaid expenses 2,510 111 (597) (Increase) decrease in real estate tax impound fund (900) (162) 191 Increase in insurance impound fund (5,023) (1,581) (288) (Decrease) increase in accounts payable - trade (433) 967 803 Increase (decrease) in accrued expenses 1,116 (294) 355 Decrease (increase) in deferred rent credits 102 (1,791) 2,055 Net security deposits paid (195) (296) (189) --------- -------- ---------- Net cash provided by operating activities $ 43,405 $ 75,800 $ 40,040 ========= ======== ========== See notes to financial statements Marvin Gardens Associates NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Marvin Gardens Associates (the Partnership) is a California limited partnership which commenced operations in February 1983. The Partnership owns and operates a 37-unit rental housing project (the Project). The Project operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the U.S. Department of Housing and Urban Development (HUD). The agreement expires in July 2003, and has two five year renewal options. For the years ended December 31, 1997, 1996 and 1995, rental subsidies for the Project totaled $328,830, $324,129, and $337,072, respectively. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and the California Housing Finance Agency (CHFA) to $20,151 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment - ---------------------- Property and equipment are carried at cost. The Partnership provides for depreciation by use of the straight-line method over estimated useful lives as follows: buildings, 30 years and equipment, 3-8 years. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized by the straight-line method over the life of the related debt. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1997 and 1996, the Partnership maintained tenant security deposits of $9,989 and $9,682, respectively, in an interest bearing escrow bank account and a certificate of deposit which are carried at cost and approximate fair value. The Partnership also has a reserve for replacements and escrow funds totalling $137,955 and $151,730 at December 31, 1997 and 1996, respectively, on deposit with CHFA. These funds are held in interest bearing bank accounts which are carried at cost and approximate fair value. NOTE C - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a mortgage from the CHFA which is due on June 1, 2013, and is collateralized by a deed of trust on the rental property and the CHFA has been granted a security interest in rental subsidies. The terms of the mortgage require monthly principal and interest payments of $15,310 and bear interest at the rate of 8.15%. Interest charged to operations during 1997, 1996 and 1995 amounted to $133,514, $137,438 and $141,056, respectively. Terms of the mortgage agreement also require monthly escrow deposits to be made to fund real estate tax, insurance, and a replacement reserve account. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1997, are as follows: December 31, ------------ 1998 $54,555 1999 $59,171 2000 $64,178 2001 $69,908 2002 $75,498 Management believes it is not practical to estimate the fair value of the mortgage payable to CHFA because programs with similar characteristics are not currently available to the Partnership. NOTE D - RECONCILIATION OF FINANCIAL STATEMENT INCOME (LOSS) TO TAX BASIS LOSS - ------------------------------------------------------------------------------ The reconciliation of the excess (deficiency) of revenue over expenses reported in the accompanying statements of operations with the loss reportable on a Federal income tax basis for the years ended December 31, 1997, 1996 and 1995, are as follows: 1997 1996 1995 ---- ---- ---- Excess (deficiency) of revenue over expenses per statements of operations $ (19,950) $ 6,274 $ (30,337) Additional depreciation for tax purposes (11,448) (13,924) (12,556) Deferred rental income adjustments 102 (1,790) 2,055 ---------- --------- --------- Loss for Federal income tax purposes $ (31,296) $ (9,440) $ (40,838) ========== ========= ========= NOTE E - RELATED PARTY TRANSACTIONS - ----------------------------------- At December 31, 1997 and 1996, due to developer/general partner consisted of development advances of $194,019. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the Project after certain priority payments as defined in the Partnership agreement. The Partnership has a contractual management agreement with CMJ Management Company, Inc., an affiliate of the general partner, to provide property management services for the Project. CMJ Management Company, Inc. has hired an unaffiliated management agent to provide those services on its behalf. Total management fees paid for each of the years ended December 31, 1997, 1996 and 1995 were $17,738, $17,533 and $17,052, respectively. Effective September 1994, CMJ Management Company, Inc. receives 30% of the monthly fee which totaled $5,321, $5,112 and $5,082 for the year ended December 31, 1997, 1996 and 1995, respectively. In addition, CMJ Management Company, Inc. received incentive management fees totalling $12,090 in 1995. No incentive management fees have been incurred for 1997 and 1996. NOTE F - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1997. INDEPENDENT AUDITORS' REPORT To the Partners Colonial Farms, Ltd. We have audited the accompanying balance sheets of Colonial Farms, Ltd. as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Colonial Farms, Ltd. as of December 31, 1997 and 1996, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman -------------------------- REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 6, 1998 Colonial Farms Ltd. BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 72,579 $ 136,724 Rents receivable 12,634 4,624 Prepaid expenses 3,021 9,446 --------- ---------- Total current assets 88,234 150,794 RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 23,520 22,193 Real estate tax impound fund 13,228 12,435 Replacement reserve fund 235,940 227,316 Insurance impound fund 16,164 9,510 Reserve fund for operations 41,172 41,139 Interest income receivable - impounds 3,631 2,349 ---------- ---------- 333,655 314,942 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,938,862 and $1,812,966 2,164,787 2,269,317 DEFERRED FINANCING COSTS, net of accumulated amortization of $35,863 and $33,586 39,904 42,181 ---------- ---------- Total assets $2,626,580 $2,777,234 ========== ========== LIABILITIES AND PARTNERS' DEFICITS LIABILITIES Current maturities of mortgage payable $ 84,159 $ 76,827 Accounts payable 21,127 31,634 Accrued expenses 27,789 33,494 Deferred rental income 464 372 ---------- ---------- Total current liabilities 133,539 142,327 Mortgage payable, less current maturities 2,628,942 2,713,101 Due to general partner 318,115 318,115 Tenants' security deposits 18,166 17,238 ---------- ---------- Total liabilities 3,098,762 3,190,781 PARTNERS' DEFICIT (472,182) (413,547) ---------- ---------- Total liabilities and partners' deficit $2,626,580 $2,777,234 ========== ========== See notes to financial statements Colonial Farms, Ltd. STATEMENT OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Revenue Rental income $785,784 $786,180 $785,378 Vacancies (7,410) (9,462) (24,535) Financial revenue 17,490 15,910 16,256 Other income 23,694 19,315 10,237 -------- -------- -------- Total revenue 819,558 811,943 787,336 Operating expenses Administrative 34,428 29,578 22,779 Utilities 34,619 32,942 31,659 Management fee 42,640 38,060 39,600 Maintenance and repairs 155,984 129,475 144,185 Salaries 79,871 73,791 65,249 Insurance 12,135 12,794 12,074 Property taxes 41,368 40,322 39,762 -------- -------- -------- Total operating expenses 401,045 356,962 355,308 Nonoperating expenses Interest 244,011 258,803 264,913 Depreciation and amortization 128,173 124,258 119,893 Incentive management fee 7,060 7,060 16,435 Earned surplus reimbursement 69,666 2,610 63,571 -------- -------- -------- Total nonoperating expenses 448,910 392,731 464,812 -------- -------- -------- Total expenses 849,955 749,693 820,120 -------- -------- -------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $(30,397) $ 62,250 $(32,784) ======== ========= ======== See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1997, 1996 and 1995
Special General Limited Limited Partner Partner Partner Total ------- ------- ------- ----- Balance, December 31, 1994 $(22,211) $(92,943) $(257,320) $(372,474) Distributions (846) (1,269) (40,186) (42,301) Excess of expenses over revenue (656) (983) (31,145) (32,784) -------- -------- --------- --------- Balance, December 31, 1995 (23,713) (95,195) (328,651) (447,559) Distributions (565) (846) (26,827) (28,238) Excess of revenue over expenses 1,245 1,868 59,137 62,250 -------- -------- --------- --------- Balance, December 31, 1996 (23,033) (94,173) (296,341) (413,547) Distributions (565) (847) (26,826) (28,238) Excess of expenses over revenue (608) (912) (28,877) (30,397) -------- -------- --------- --------- Balance, December 31, 1997 $(24,206) $(95,932) $(352,044) $(472,182) ======== ======== ========= ========= Profit and loss sharing percentage 2% 3% 95% 100% == == === ====
See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Cash flows from operating activities Rental income received $770,456 $778,056 $751,795 Interest received 5,597 5,311 5,901 Other income received 23,694 19,315 10,237 Residual receipts reimbursement paid (69,666) (2,610) (63,571) Administrative expenses paid (34,427) (29,578) (22,779) Management fees paid (42,640) (38,060) (39,500) Utilities paid (40,324) (32,942) (33,372) Salaries and wages paid (67,643) (64,278) (56,258) Maintenance and repairs expenses paid (166,492) (120,190) (141,608) Real estate taxes paid (41,368) (40,322) (39,762) Payroll taxes paid (12,228) (9,513) (8,116) Property and other insurance paid (5,710) (13,451) (12,658) Interest paid on mortgage (244,011) (258,803) (264,913) Incentive management fee paid (7,060) (7,060) (16,435) (Increase) decrease in reserve fund for operations (33) (358) 2,697 (Increase) decrease in real estate tax impound fund (793) 2,083 (1,007) Increase in insurance impound fund (6,654) (2,487) (1,852) Net security deposits (paid) received (399) 241 (407) --------- -------- --------- Net cash provided by operating activities 60,299 185,354 68,392 --------- -------- --------- Cash flows from investing activities Purchases of equipment (21,366) (25,928) (37,922) Deposits to reserve for replacements (22,404) (22,404) (22,384) Withdrawals from reserve for replacements 24,391 37,933 13,139 --------- -------- --------- Net cash used in investing activities (19,379) (10,399) (47,167) --------- -------- --------- Cash flows from financing activities Repayment of mortgage payable (76,827) (70,134) (64,024) Distributions (28,238) (28,238) (42,301) --------- -------- --------- Net cash used in financing activities (105,065) (98,372) (106,325) --------- -------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (64,145) 76,583 (85,100) Cash and cash equivalents, beginning 136,724 60,141 145,241 --------- -------- --------- Cash and cash equivalents, ending $ 72,579 $ 136,724 $ 60,141 ========= ========= ========= See notes to financial statements Colonial Farms, Ltd. STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ (30,397) $ 62,250 $ (32,784) Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation 125,896 121,981 117,616 Amortization of deferred financial costs 2,277 2,277 2,277 Interest earned on reserve for replacements (10,611) (10,681) (10,189) Changes in assets and liabilities (Increase) decrease in tenant accounts receivable (8,010) 1,337 (2,275) Decrease (increase) in prepaid expenses 6,425 (657) (584) (Increase) decrease in interest income receivable - impounds (1,282) 82 (166) Net tenants' security deposits (paid) received (399) 241 (407) (Increase) decrease in real estate tax impound fund (793) 2,083 (1,007) Increase in insurance impound fund (6,654) (2,487) (1,852) Increase in reserve fund for operations (33) (358) 2,697 (Decrease) increase in accounts payable (10,507) 9,525 (5,615) (Decrease) increase in accrued expenses (5,705) (242) 406 Increase in rent deferred credits 92 3 275 ---------- --------- ----------- Net cash provided by operating activities $ 60,299 $ 185,354 $ 68,392 ========== ========= ===========
See notes to financial statements Colonial Farms, Ltd. NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Colonial Farms, Ltd. (the Partnership) is a California limited partnership which commenced operations in February 1983. The Partnership owns and operates a 100-unit residential project (the Project) located in Modesto, California. The Project operates under Section 8 of the National Housing Act and therefore, receives monthly rental subsidies from the U.S. Department of Housing and Urban Development (HUD). The agreement expires June 2002, and has two five-year renewal options. For the years ended December 31, 1997, 1996 and 1995, rental subsidies for the Project totaled $579,485, $613,093 and $586,267, respectively. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and the California Housing Finance Agency (CHFA) to $35,299 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash, money market accounts and U.S. Treasury bills, with a maturity of three months or less when acquired, stated at cost which approximate fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. The Partnership provides for depreciation by using the straight-line method over estimated useful lives. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized by the straight-line method over the life of the related debt. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1997 and 1996, the Partnership maintained tenant security deposits of $23,520 and $22,193 in an interest bearing escrow bank account and a certificate of deposit which are carried at cost and approximate fair value. The Partnership also has a reserve for replacements and escrow funds totalling $310,135 and $292,749 at December 31, 1997 and 1996, respectively, on deposit with CHFA. These funds are held in interest bearing bank accounts which are carried at cost and approximate fair value. NOTE C - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a permanent mortgage from the CHFA which is due on June 1, 2013, and is collateralized by a deed of trust on the rental property and the CHFA has been granted a security interest in rental subsidies. The terms of the mortgage require annual interest of 9.15% and monthly principal and interest payments of $27,411. Interest charged to operations during 1997, 1996, and 1995 amounted to $244,011, $258,803, and $264,913, respectively. Terms of the loan agreement require that monthly escrow deposits be made to fund real estate tax, insurance and replacement reserve escrow accounts. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1997, are as follows: December 31, ------------ 1998 $ 84,159 1999 $ 92,191 2000 $ 110,990 2001 $ 110,637 2002 $ 121,186 Management believes it is not practical to estimate the fair value of the mortgage payable to CHFA because programs with similar characteristics are not currently available to the Partnership. NOTE D - RECONCILIATION OF FINANCIAL STATEMENT OF EXCESS (DEFICIENCY) TO TAX BASIS INCOME (LOSS) - ------------------------------------------------------------------------------- The reconciliation of the excess (deficiency) of revenue over expenses reported in the statements of operations with the (loss) income reported on a Federal income tax return for the years ended December 31, 1997, 1996, and 1995 follows: 1997 1996 1995 ---- ---- ---- (Deficiency) excess of revenue over expenses $ (30,397) $62,250 $(32,784) Additional depreciation for tax purposes (19,460) (20,336) (17,603) Deferred rental income adjustments 90 3 275 --------- ------- -------- (Loss) income for Federal income tax purposes $ (49,767) $41,917 $(50,112) ========= ======= ======== NOTE E - RELATED PARTY TRANSACTIONS - ----------------------------------- At December 31, 1997 and 1996, due to developer/general partner consisted of development advances of $318,115. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the Project after certain priority payments as defined in the Partnership agreement. The Partnership has a contractual management agreement with CMJ Management Company, Inc., an affiliate of the general partner, to provide property management services for the Project. CMJ Management Company, Inc. has hired an unaffiliated management agent to provide these services on its behalf. Total management fees for the years ended December 31, 1997, 1996, and 1995 were $42,640, $38,060 and $39,600, respectively. CMJ Management Company, Inc. also is entitled to receive an incentive management fee. For the years ended December 31, 1997, 1996 and 1995, incentive fees charged for the project totaled $7,060, $7,060 and $16,435, respectively, in accordance with the terms of the supplemental management agreement. NOTE F - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1997. INDEPENDENT AUDITORS' REPORT To the Partners Holbrook Apartments Company We have audited the accompanying balance sheets of Holbrook Apartments Company as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Holbrook Apartments Company as of December 31, 1997 and 1996, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman -------------------------- REZNICK FEDDER & SILVERMAN Baltimore, Maryland January 23, 1998 Holbrook Apartments Company BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 507,878 $ 631,608 Accounts receivable 3,296 2,153 Other receivables 9,640 28,548 Prepaid expenses 16,022 17,641 Other current assets - 475 ----------- ----------- Total current assets 536,836 680,425 RESTRICTED DEPOSITS AND FUNDED RESERVES Mortgage escrow deposits 76,359 61,069 Reserve for replacements 458,768 444,420 ----------- ----------- 535,127 505,489 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,160,211 and $3,905,567 5,462,169 5,664,784 DEFERRED FINANCING COSTS, net of accumulated amortization of $222,158 and $208,617 331,793 345,334 ----------- ----------- Total assets $ 6,865,925 $ 7,196,032 =========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 102,574 $ 95,185 Accounts payable and accrued expenses 33,168 179,824 Accrued interest payable 45,949 46,543 Rent deferred credits 11,559 15,274 ----------- ----------- Total current liabilities 193,250 336,826 LONG-TERM LIABILITIES Mortgage payable, less current maturities 7,249,207 7,351,781 ----------- ----------- Total liabilities 7,442,457 7,688,607 PARTNERS' DEFICIT (576,532) (492,575) ----------- ----------- Total liabilities and partners' deficit $ 6,865,925 $ 7,196,032 =========== =========== See notes to financial statements Holbrook Apartments Company STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Revenue Rental income $2,079,319 $2,068,855 $2,062,798 Vacancies (4,727) (1,985) (486) Financial revenue 35,842 27,267 34,734 Other income 8,608 7,176 6,381 ---------- ---------- ---------- Total revenue 2,119,042 2,101,313 2,103,427 Expenses Operating expenses Marketing 1,789 366 208 Administration 132,704 126,269 120,673 Utilities 112,614 85,403 77,662 Management fee 98,776 99,025 98,221 Maintenance and repairs 173,586 200,197 195,276 Salaries 195,869 198,148 170,174 Insurance 34,981 49,036 40,196 Real estate taxes 181,311 182,616 197,441 ---------- ---------- ---------- Total operating expenses 931,630 941,060 899,851 Nonoperating expenses Interest 554,700 561,600 568,003 Mortgage insurance premium 36,979 37,438 37,865 Depreciation and amortization 268,185 261,682 248,580 Incentive management fee 146,297 133,795 137,695 ---------- ---------- ---------- Total nonoperating expenses 1,006,161 994,515 992,143 ---------- ---------- ---------- Total expenses 1,937,791 1,935,575 1,891,994 ---------- ---------- ---------- EXCESS OF REVENUE OVER EXPENSES $ 181,251 $ 165,738 $ 211,433 ========== ========== ========== See notes to financial statements Holbrook Apartments Company STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1997, 1996 and 1995
General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1994 $ (566,946) $ 195,960 $ (370,986) Distributions (37,846) (214,459) (252,305) Excess of revenue over expenses 31,715 179,718 211,433 ---------- ---------- ----------- Partners' deficit, December 31, 1995 (573,077) 161,219 (411,858) Distributions (36,968) (209,487) (246,455) Excess of revenue over expenses 24,861 140,877 165,738 ---------- ---------- ----------- Partners' deficit, December 31, 1996 (585,184) 92,609 (492,575) Distributions (39,781) (225,427) (265,208) Excess of revenue over expenses 27,188 154,063 181,251 ---------- ---------- ----------- Partners' deficit, December 31, 1997 $(597,777) $ 21,245 $ (576,532) ========= ========== =========== Profit and loss sharing percentage 15% 85% 100% == == ===
See notes to financial statements Holbrook Apartments Company STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Cash flows from operating activities Rental income received $2,069,734 $2,083,642 $2,059,803 Interest received 15,185 13,786 14,645 Other income received 28,030 - 9,418 Administrative expenses paid (182,895) (173,537) (166,891) Management fees paid (98,776) (99,025) (98,221) Utilities paid (119,299) (88,920) (88,787) Maintenance and repairs expenses paid (446,319) (197,997) (303,582) Real estate taxes paid (181,311) (182,616) (197,441) Payroll taxes paid (14,705) (15,854) (16,316) Property insurance paid (14,811) (26,982) (18,192) Other taxes and insurance paid (18,631) (21,339) (22,335) Interest paid on mortgage (555,294) (562,152) (568,516) Mortgage insurance paid (36,899) (37,367) (37,797) (Increase) decrease in mortgage escrow deposits (15,290 (18,174) 10,330 Mortgagor entity expenses paid (146,297) (133,795) (137,695) ------------ ---------- ---------- Net cash provided by operating activities 282,422 539,670 438,423 ------------ ---------- ---------- Cash flows from investing activities Additions to property and equipment (52,029) (111,023) (86,045) Deposits to reserve for replacements (40,920) (40,720) (40,680) Withdrawals from reserve for replacements 47,190 91,862 - ------------ ---------- ---------- Net cash used in investing activities (45,759) (59,881) (126,725) ------------ ---------- ---------- Cash flows from financing activities Repayment of mortgage payable (95,185) (88,328) (81,964) Distributions paid to partners (265,208) (246,455) (252,305) ------------ ---------- ---------- Net cash used in financing activities (360,393) (334,783) (334,269) ------------ ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (123,730) 145,006 (22,571) Cash and cash equivalents, beginning 631,608 486,602 509,173 ------------ ---------- ---------- Cash and cash equivalents, ending $ 507,878 $ 631,608 $ 486,602 ============ ========== ========== See notes to financial statements Holbrook Apartments Company STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Reconciliation of excess of revenue over expenses to net cash provided by operating activities Excess of revenue over expenses $181,251 $165,738 $211,433 Adjustments to reconcile excess of revenue over expenses to net cash provided by operating activities Depreciation 254,644 248,141 235,039 Amortization of deferred financing costs 13,541 13,541 13,541 Interest earned on replacement reserves (20,618) (8,912) (20,089) Changes in assets and liabilities (Increase) Decrease in tenant accounts receivable (1,143) 6,087 (2,200) Decrease in accounts receivable - HAP - - 570 Decrease (increase) in accounts receivable - other 18,908 (11,745) (7,103) Decrease (increase) in prepaid expenses 1,619 786 (263) (Increase) decrease in mortgage escrow deposits (15,290) (18,174) 10,330 Decrease in other assets 475 - - (Decrease) increase in accounts payable and accrued expenses (146,656) 134,075 (1,443) Decrease in accrued interest payable (594) (552) (513) (Decrease) increase in rent-deferred credits (3,715) 10,685 (879) -------- -------- -------- Net cash provided by operating activities $282,422 $539,670 $438,423 ======== ======== ========
See notes to financial statements NOTES TO FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Holbrook Apartments Company NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Holbrook Apartments Company (the Partnership) was formed as a limited partnership under the laws of the State of Massachusetts in July 1981, for the purpose of constructing and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 170 units located in Holbrook, Massachusetts, and is currently operating under the name of Holbrook Apartments. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and HUD to the extent of surplus cash as defined by HUD. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost, which approximates fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method for financial reporting purposes. For income tax purposes, accelerated lives and methods are used. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ The Partnership has a reserve for replacements and mortgage escrow deposits totaling $535,127 and $505,489 at December 31, 1997 and 1996, respectively, on deposit with WMF/Huntoon, Paige Associates Limited. These funds are held in interest-bearing money market accounts and are carried at cost, which approximates fair value. NOTE C - MORTGAGE PAYABLE - ------------------------- The mortgage is insured by the Federal Housing Administration (FHA) and collateralized by a deed of trust on the rental property. The mortgage, which is due February 1, 2023, is payable in equal monthly installments of principal and interest totaling $54,207 and bears interest at a rate of 7.5%. Interest incurred during December 31, 1997, 1996 and 1995, amounted to $554,700, $561,600 and $568,003, respectively. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate annual maturities of the mortgage payable for the five years following December 31, 1997, are as follows: December 31, ------------ 1998 $102,574 1999 $110,538 2000 $119,119 2001 $128,366 2002 $138,331 Management believes it is not practical to estimate the fair value of the mortgage payable insured by HUD because programs with similar characteristics are not currently available to the Partnership. NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants. The agreement expires July 1, 2001. Total housing assistance payments received during 1997, 1996 and 1995 were $1,565,374, $1,577,392, and $1,587,132, respectively. NOTE E - MANAGEMENT AGREEMENT - ----------------------------- Management fees of 4.75% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the Project pursuant to a management agreement approved by HUD. Such fees amounted to $98,776, $99,025 and $98,221 for the years ended 1997, 1996 and 1995, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $146,297, $133,795 and $137,695 for the years ended December 31, 1997, 1996 and 1995, respectively. CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE F - TAX BASIS INCOME - ------------------------- The reconciliation of the excess of revenue over expenses in the accompanying statements of operations with the income reported on a Federal income tax basis follows: 1997 1996 1995 ---- ---- ---- Excess of revenue over expenses per statement of operations $ 181,251 $ 165,738 $ 211,433 Additional amortization of deferred costs 8,393 8,393 8,393 Increase (decrease) in deferred rental income (3,715) 10,688 (879) Additional depreciation 138,197 (32,751) (126,502) ---------- ---------- ---------- Income for Federal income tax purposes $ 324,126 $ 152,068 $ 92,445 ========== ========== ========== NOTE G - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements, with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1997. EX-27 2 ARTICLE 5 FDS FOR THE YEAR ENDED 12/31/97
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the quarter ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 DEC-31-1997 493 0 0 0 0 493 27 0 520 215 0 0 0 0 305 520 0 331 0 288 0 0 0 43 0 43 0 0 0 43 4.85 4.85
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